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Acquity Group Limited (NYSEMKT:AQ)

Q4 2012 Earnings Conference Call

March 20, 2013 4:30 p.m. ET

Executives

Paul Weinewuth - Chief Financial Officer

Chris Dalton - Chief Executive Officer

Tom Smith - Investor Relations

Analysts

Jason Helfstein - Oppenheimer & Co.

Neil Doshi - Citigroup

Leo Kulp - Citigroup

Bhavan Suri - William Blair & Co.

Jared Traile - Rock Castle Partners

Craig Nankervis - First Analysis Securities Corp.

Operator

Good afternoon, ladies and gentlemen. Welcome to the fourth quarter earnings call of Acquity Group Ltd. This call will be conducted by the Chief Executive Officer of the Company, Chris Dalton, and the Chief Financial Officer of the Company, Paul Weinewuth. At this time all participants are in a listen-only mode. Later we will facilitate a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder today's call is being recorded for replay purposes.

Now I will turn the call to Tom Smith, Acquity Group Investor Relations.

Tom Smith

Good afternoon everybody. Thank you for joining us today to discuss the results for the 2012 fourth quarter ended on December 31, 2012. Before we get started with performance details, I’d like to address the forward looking statements. This conference call follows our earnings release issued this afternoon which is available on our website at acquitygroup.com by clicking on the Investors tab. Before we begin our formal remarks, I must remind everyone that the discussion today may include forward-looking statements. Except for historical information, certain matters to be addressed are forward-looking statements that involve certain risks, uncertainties and assumptions. These statements are not guarantees of future performance. actual results may differ materially from those contained in the forward looking statements and therefore undue reliance should not be put upon them. We refer you to our filings with the SEC, including our registration statement on Form F1 for a more detailed discussion of the risks that could impact future operating results and financial conditions.

During this call we will make references to non-IFRS financial measures and these non-IFRS measures are not prepared in accordance with the international financial reporting standards. Management believes these measures will help illustrate underlying trends in the business. these non-IFRS measures are intended to be used in conjunction with the recorded actual results. Please refer to the reconciliation of non-IFRS financial measures in the tables that are included in the press release.

At this time I will turn the call over to Chris Dalton.

Chris Dalton

Thanks Tom. Welcome everyone to our 2012 fourth quarter earnings conference call. To frame out my comments for today’s call, I’m first going to address some of the highlights for our fourth quarter and then I’m going to talk to the performance for the year. I’ll highlight some of our current activities driving our business and then before turning it over to Paul to discuss the detailed financials, I’ll offer some visibility on our outlook moving forward.

To begin, let’s talk about what we saw in the fourth quarter. This afternoon Acquity Group released fourth quarter results, revenues increasing by 10.3% to $33.8 million. IFRS operating profit was $3.1 million and non-IFRS operating profit was $3.7 million, which represents non-IFRS operating margin of 11%.

While this quarter was challenged by a number of factors, including macroeconomic conditions and fiscal cliff concerns, we were able to deliver strong annual performance with revenues of $141 million, which represents an increase of 32% year over year and a 20% EBIT of contribution.

Some of the highlights from the quarter included our second consecutive recognition as partner of the year for software providers Adobe Systems and Hybris Software. These designations represent an important role that we’re having in their partner channel as to the quality of our expertise in these platforms. Both of these companies have seen tremendous growth over the past year and Acquity Group has been instrumental in helping them deliver upon services which come from the demand of the success that they’re seeing.

We opened up two new markets in Toronto and Atlanta with senior leadership that we were able to attract into our business and these new leaders bring with them a wealth of knowledge on our services as well as add to our expertise in growing significant revenue opportunism within these regions. We launched new websites for prestigious brands such as such as T-Mobile, Blue Cross, Blue Shield Association, Hoover’s and Alamo Rent-a-Car. We also added 12 new clients during the quarter that we anticipate will have positive contributions to our goals in 2013.

We continue to be pleased with the quality of the brands that we’re engaging with our company to partner with them o their e-business initiatives. Our market leading capabilities around digital strategy, marketing and technology are essential services needed to maximize their online objectives. As we’ve indicated on previous calls, our business continues to expand with opportunities in both business to consumer and business to business customers. We continue to maintain significant relationships in the automotive, industrial supply, manufacturing and distribution industries along with our extensive role in retail consumer package goods and business service sectors.

We believe that our expertise across these diverse types of online experiences sets us apart from our completion and offers us an opportunity to expand our market share at a pace multiple times faster than our competitors. Although there are a number of positives that came out of the quarter, the fact remains that we experienced softer performance than we had anticipated which we attribute to market conditions that I explained earlier. For the first three quarters of the year, we had operated at or above our optimal utilization targets which were 78% to 82%.

As we ended the fourth quarter, we’re still operating to the high end of that optimal range and this continued through the middle of the quarter with the sharpest decline impacting us in December. We planned for December to be a seasonably lower utilization month given the number of holidays and vacations. However, this year the economic conditions exacerbated the situation with a number of clients choosing to defer or cancel engagements in the middle of the quarter, which was uncharacteristic for this period. The net result was that our utilization in December dipped significantly and effectively diminished what was expected to be a conservative quarter. We feel that this impact will be isolated to a relatively short period of time and are taking the necessary actions to address cost containment activities necessary to allow us to reach strong profitability for the year and preserve our opportunity to maintain strong double digit revenue growth.

We continue to see significant opportunities in both B2B and B2C where clients are asking us for help to shape and evolve their digital channels to drive performance. Chicago based Argo Tea recently engaged Acquity Group to evolve its digital offering in store and online to be more accurately reflective of the brand’s promise across the channel. Industrial supply and manufacturing clients such as Mine Safety Appliances and Veolia Environmental Services are engaging with us to help operationalize their e-business channel to achieve significant revenue growth over the coming years and this trend continues with our automotive customers such as General Motors that have engaged us to assist with both global digital initiatives as well as leading edge mobility solutions.

These types of activities are large in scale, complex and represent the intended evolution of our business to deliver long term contracted revenue for the company. We’ll have more discussion on these activities as we get further into the year.

As it relates to our outlook in the future, we remain conservative on our first quarter performance. While we’re anticipating that we’ll need this quarter to allow the impact of the economic challenges to subdue, we have factored this into our projections for 2013 and are seeing positive signs that the recovery is underway and our pipeline is starting to yield positive results.

At this point I’d like to ask Paul Weinewuth, our Chief Financial Officer to discuss the financial results in more detail as well as the company guidance for the first quarter of 2013.

Paul Weinewuth

Thank you, Chris. Let me start by highlighting revenue metrics related to our fourth quarter and yearend performance. Fourth quarter revenues were $33.8 million compared to $30.6 million for the fourth quarter of 2011, which represents a 10.3% increase on a year over year basis. Full year revenue was $141 million, which represents 32.2% growth relative to 2011.

Our overall growth was primarily driven by an increase in demand for our services and organic growth of our staff over the course of the year. A significant influencer of our growth is the increasing size of our engagements and the number of key accounts, which is denoted by accounts that spend in excess of $0.5 million annually. The number of key accounts in 2012 increased by 22% year over year, with an overall revenue contribution from these accounts increasing by 41%.

As Chris indicated, our fourth quarter performance was softer than projected due to approximately $3.8 million in forecasted revenue that did not start within the quarter as planned. The primary factor for these deferrals was economic conditions that were impacting our clients during this period. We have continued to pursue a majority of these opportunities and to date we’ve been able to start nearly half of those engagements in the first quarter of this year.

Throughout the course of the year, we maintained a focus on growing our project personnel to meet our demands. Our ending project personnel headcount for 2012 increased by 155 when compared to the ending account of 2011, with 35 of those personnel joining us in the fourth quarter to meet our projected demand.

Our utilization for the full year of 2012 was 81.3% compared to 80.5% of 2011. Our fourth quarter utilization was 75.4% compared to 84.3% for the fourth quarter of last year. Looking at monthly utilization, we had utilization of 81, 80 and 64% for the months of October, November and December respectively, which illustrates the impact of the slowdown during this period.

With regard to client concentration, percentage of revenues coming from our top 10 clients in the fourth quarter of 2012 improved slightly to 46% compared to 47.5% for the fourth quarter of last year. While average spend in this category increased approximately $100,000 to $1.6 million for Q4 of 2012 and over the course of the year our percentage of revenue coming from our top 10 clients decreased 8% to 37% in 2012, despite the fact that average spend in this category increased approximately $400,000 to $5.2 million.

As a percentage of revenue, the cost of revenues increased to 59.5% in the fourth quarter of 2012 from 57.9% in 2011, which is primarily due to lower utilization for the quarter. However, for the year, cost or revenues as a percentage of revenue improved from 56.8% in 2011 to 56.1% in 2012, driven by higher utilization for the year.

Correspondingly, profit margin decreased to approximately 41% for the fourth quarter of 2012 compared to approximately 42% for the fourth quarter of last year. And for the year, gross profit margins improved 70 basis points to 43.9%.

Our selling and marketing expenses for 2012 increased to$9.4 million from $7.8 million in 2011 as we continued to invest in our marketing and business development personnel. However, we were able to gain some efficiencies in these investments, resulting in lower selling and marketing expenses as a percentage of revenue from 7.3% in 2011 to 6.7% in 2012.

Administrative expenses for 2012 increased from $21.3 million in 2011 to $29.6 million as we continued to invest in the growth of our company. This was a slight increase in expense as a percentage of revenues from 20% in 2011 to 21% in 2012. The most significant driver in this marginal increase was the overall investment associated with becoming a public company.

Fourth quarter IFRS operating profit was $3.1 million. Non-IFRS operating profit was $3.7 million, representing 11% of revenue.

Income tax expense was $1.4 million and $1.9 million for the three month periods ended December 31, 2012 and 2011, respectively. Excluding the effect of the impairment loss of the joint ventures in 2012, our effective tax rate was 48.9% and 53.3% for the three month periods ended December 31, 2012 and 2011, respectively

Income tax expense was $9.9 million and $6.5 million for the twelve month period ending December 31, 2012 and 2011, respectively. Excluding the effect of the impairment loss of the joint ventures in 2012, our effective tax rate was 50.9% and 43.7% for the twelve month period ending December 31, 2012 and 2011, respectively. This increase was primarily attributable to the impact of non-deductible costs related to our initial public offering and losses from non-U.S. operations which have no tax benefit.

The company’s IFRS profit in launch attributable to equity holders of the company was a negative $4.9 million, or negative $0.21 per ADS for the fourth quarter of 2012 compared to $1.8 million or $0.10 per ADS for the fourth quarter of last year. Non-IFRS adjusted profit was $1.9 million or $0.08 per ADS for the quarter, compared to Non-IFRS adjusted profit of $2.6 million or $0.14 per ADS for the fourth quarter of last year. Please note that our weighted average share count used for calculating profit or ADS for the 2012 period reflects the additional shares issued as a result of our IPO.

Cash at the end of the quarter is $36.5 million. For 2012 we experienced positive operating cash flow of $10 million and free cash flow of approximately $5.5 million after a capital expenditure of $4.4 million.

With respect to providing guidance, we firmly believe demand for our solutions will continue to increase due to our market leadership position and an increasing demand for our digital services from our partners, prospects and existing customers. our current pipeline remains strong and we are seeing an increase in the number of opportunities converting to book revenue in the coming months.

We have seen daily revenues for our professional services increase 9% from December to January and 6% from January to February of this year. Utilization increased from 65% in January to 73% in February, again of this year. Based on this, we are projecting first quarter revenues to be at or above $33.5 million.

As Chris mentioned, we have taken modest steps in cost improvement, but we have intentionally retained excess capacity, sacrificing short term margins. We believe this will allow us to expedite our return to higher growth. As such, we are guiding that first quarter operating profit, excluding amortization if intangible assets, is expected to be above 7.5%.

Finally, just to add, as planned, we have started the conversion process to U.S GAAP for 2013 and expect a report in the first quarter to be under U.S GAAP.

With that, I’ll turn it back to Chris.

Chris Dalton

Thanks, Paul. To summarize, we’re pleased with our performance and growth in 2012, despite the unexpected impact of the market conditions that we mentioned above. We remain confident in the quality of our pipeline and the demand for our business and anticipate returning to stronger growth trajectory in the remaining quarters of the year.

At this point, Paul and I thank you for your time and now invite any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Jason Helfstein with Oppenheimer. Please proceed.

Jason Helfstein - Oppenheimer & Co.

Three questions. So Chris, can you talk a bit about your pipeline. Clearly you’re always working on new business wins and always talking to customers about their ability to resound on another project. So just talk about how as you look through your pipeline over the next 12 to 18 months, how that plays into the first quarter guidance in particular from basically flat growth. And then I know you’re not giving guidance for 2013, but there’s a big difference between flat and the 32% growth you reported for the year for 2012. Can you give us just some more color about as you start to look past the first quarter which was obviously impacted by the fiscal cliff, what types of spending intentions are you seeing by clients, fully understanding that that’s not a guidance. So I guess that’s one long one question. And then secondly, can you talk about the March 7 press release which talks about strategic options and just maybe elaborate. I think there’s some confusion about whether that relates specifically to the Huaren Kudong joint venture as opposed to the entire company i.e. you guys based in Chicago. So those would be the two questions. Thanks.

Chris Dalton

Okay. Thanks Jason and welcome to the call. As it relates to the pipeline and for those who’ve been following the company for a while, this is a very sales oriented type of business and we’ve maintained a very strong and consistent effort with regards to business development. Our pipeline has actually as we’ve closed off the end of the year, continued to increase and I think one of the conditions that we saw at the back half of the quarter was that the pipeline continued to be strong and demand for the business was growing. But decision making was actually taking longer. We attribute that to the economic conditions and think it’s reasonable that clients were taking a conservative approach during the back half of the quarter and we saw that move into the first half of the first quarter here. We do believe though, that the size of the pipeline and the history that we’ve had with the rate at which it converts and we’ve tracked some pretty strong numbers over the years about the conversion rate that we have in our pipeline.

But those numbers are very favorable for very strong and stable recovery as we get into the second, third and fourth quarters of this year and I think that we’re at least confident that we have enough demand in the pipeline to continue to grow the business and we’ll be doing so as Paul said, convert the opportunities into book revenue and actually then go upon delivering on it. As it relates to guidance, you’re correct. We aren’t providing annualized guidance. We indicated our guidance that we have for the first quarter and then within a short period of time, given the nature of when we’re actually releasing this quarter, we’ll be back talking about the performance for the first quarter and then beyond and looking into subsequent quarters. So I think you’ll get more visibility as we continue to work through the course of the year.

As it relates to the press release on March 7 that you referenced, I think your specific question was related to the fact that we brought in some advisors to entertain some interests that had been shown in the company. The press release actually had two different elements in it. One of them was to discuss what we were doing with regards to the joint ventures and as Paul talked about, we actually started moving away from those ventures and actually winding them down and there was an impairment that impacted the financials in the fourth quarter related to that. The other item that was in there was that we had received interest from third parties outside of the organization into the company as a whole and we secured a strategic advisor to evaluate those. As we indicated in the press release, there really wasn’t anything material in the context of offering additional color or context about those transactions or potential transactions if anything were to come about and would do so at the appropriate time. So yeah, there’s really not much further to comment on that specific item.

Jason Helfstein - Oppenheimer & Co.

So I just have this one quick follow up. So, on the last comment, obviously the majority of the company shares are still privately held to the extent that there was an outside offer for the company, how would the vote of public shareholders plan for that?

Chris Dalton

Well, I think as all public companies, Jason, at the end of the day the board of directors is who drives this process and they’ll give the public shareholders their due course to whatever is appropriate to provide commentary.

Operator

Your next question comes from the line of Neil Doshi with Citigroup. Please proceed.

Neil Doshi - Citigroup

I’m also on the line with Leo Kulp who is our agency analyst as well so he might have a question for you as well. Chris and Paul, can you talk a little bit about your efforts to (inaudible) selling the company back to the U.S and other things on hold, if there is interest from another third party firm. And then going back to Jason’s question about 2013, it looks like this is -- your guidance is flat to down revenue to EBITDA margins has come up quite a bit in Q1. Do you probably expect that we can get back to EBITDA margins where you guys have historically been or is it going to be at a lower margin level for the balance of this year? And then I think Leo might have a question after.

Chris Dalton

Neil, I’ll hit both of those. With regard to bringing the company to be domiciled in the U.S, I don’t think we’ve ever really talked about going through that process. What we have talked about are two factors which may be what you’re thinking of, one of which is cleaning up the structure which I think we’re doing with regard to the steps that we’re taking with the joint ventures and then the second of which is currently we are a foreign private issuer. As our ownership transitions to be more domestic, the results will require us to no longer be a foreign private issuer and we expect that ultimately will happen. I don’t think we’ve really projected when we think that will happen, but as our initial investors begun the natural process of exiting their investment, the likely candidate of acquisition of those investments would be U.S and therefore our foreign private issuer status will no longer be something that we have and we’ll have to report as a domestic company. With regards to EBITDA margins, we do fully expect to get back to our in-store EBITDA margins. As you know, utilization is the key driver for that and we’re seeing some good pickup as we go through this quarter. The drop off was pretty quick in December and it’s not going to come back that quick, but we’re making good progress than we expected to get to our historic margins as we go through the year.

Leo Kulp - Citigroup

This is Leo Kulp. Thanks for taking the question. I guess the question I had is more around, when I look at Europe, you’re probably close to Europe. You’ve also seen some topline pressures, but even more broadly the ad agencies they’ve seen some pressures, but overall their growth rates have been up much better. Should we interpret this as really where you’re seeing softness on the e-commerce side and less on the digital advertising side?

Chris Dalton

Leo, this is Chris. I think in general the services sector has obviously been impacted by macroeconomic conditions and I think that’s to be expected given the conservative nature that took place in the back half of the year and certainly in the first part of this year. we firmly believe though that commerce maintained a very strong and vibrant demand to the capabilities that we offer and that is certainly strong and it relates to what we’re seeing in the pipeline. In the areas of our digital marketing or creative services and some of our strategic services, as you know we’re probably different in the fact that we go to market with all of the integrated services together in the execution ability, the e-commerce solutions and content solutions for our clients. So we’re not doing branding exercises.

We’re not doing media buys. We’re not doing banner ads so to speak that you’d traditionally see in the agency realm. So the creative and marketing work that we’re doing and analytic work that’s coming out of our strategy activities are very much tied to the performance increase that we want to see within our e-commerce customers. so we think that we are unique in the fact that we have very complementary services, but they’re all driven by the strong demand for e-commerce in the marketplace.

Operator

Your next question comes from the line of Bhavan Suri with William Blair. Please proceed.

Bhavan Suri - William Blair & Co.

The first question, just to think about as you said decision cycles have slowed down and you felt good about utilization and sequential growth picking up in January and February. Have you seen some of the decision cycles come back to more normal timeframes or are they still elongated?

Chris Dalton

Yeah. We’re actually seeing a strong recovery back to what I’d call normalcy. I think the interesting challenge that we had with this particular economic condition is that it came at the same time that you have seasonality in play with people going through the holidays and vacation time and the general downtime that you can see in the December month. You follow that by people getting back engaged in the business and starting to refocus in January and then subsequently February. The activity level has been strong. Our inside sales reps are getting good response rates in their interactions with customers, new customers that we would be canvassing or targeting. The pipeline like I said has remained strong and I think customers are now making the decisions that were holding up some of the revenue in the previous periods that we talked about. So in general I’m optimistic that we are seeing the right type of trend. And to Paul’s comments, we are very focused on getting the company back into strong profitability as well as back into a strong growth trajectory as we have had in the past.

Bhavan Suri - William Blair & Co.

And when you look at sequential growth, again I know you’re not giving guidance, but as you think about the year, as we have to plan to put an outlook of the year, do you think that it would be safe to say that quarter over quarter sequential seasonality makes sense for your average to close circle pattern this year or should we think of that differently this year?

Chris Dalton

I think, Bhavan, the way I would look at that is maybe not aligned with the seasons of prior -- at least the prior year. Specifically our Q4 to Q1 ’11 to ’12 was huge growth. We’re certainly not projecting that. But I think we can get back to some of the stronger sequential growths that we saw in historic years.

Bhavan Suri - William Blair & Co.

Okay. And I guess, Paul this one is for you and maybe a little bit for Chris, you guys obviously -- most of the work is project based and you are adding some of the more manned services longer term contracts, but the visibility takes nine months out, not for all of it but for a good part of the revenue. As you look at the visibility, has that changed or is that different than the past? Am I thinking about that correctly?

Chris Dalton

No. I think it’s a key component to our business and one that we spend a lot of time with investors and analysts like yourself talking about. In an ideal world our visibility would be significantly longer than to the future and it would come via retained contracts or annuity based revenue. I think the biggest indicator and Paul started to hit on it is that we’re starting to see larger revenues coming from our clients and that has a very impactful aspect to the business which is larger deals take longer durations of time to implement and give us a more comfortable visibility into the future. As I’ve talked about on some of the segments and sectors in B2B, we’re starting to see larger commitments. Historically the Grainger engagement that we did was a 24 month type of engagement and when we are securing those types of deals, it’s strengthening the visibility that we have into the out quarters and into even possibly subsequent years.

So I think those are all very positive trends the company continues to bring on more and more significant opportunities and as we do that I think we’d be able to provide a little bit better visibility. I think today to do that would be somewhat risky and I think Paul and I and the management team believe that it’s best to at least give the visibility we have on the quarter by quarter basis and as we continue and have larger engagements where we have secured multiple year types of relationships, we certainly will be doing that both in press releases as well as on these earnings calls.

Paul Weinewuth

And just to add to that a little bit, Bhavan, we have seen that number as a percentage of ultimate revenue increase over the last several years.

Bhavan Suri - William Blair & Co.

So could you provide just a little more color A, on the pipeline maybe and then on the revenue of these let’s just say deals over 12 months and deals over 24 months. What was that percentage of the pipeline of revenue two years ago, last year and maybe what could that be?

Chris Dalton

Well, it’s interesting because, I’ll just give you in terms of sheer quantity. It’s a finite number of companies at this stage that are signing up for those types of deals, but in relationship to the pipeline that we’re monitoring, they could be fairly substantial in terms of their sheer size. So we’re encouraged by the impact that they are having and we’re encouraged by the fact that when you secure one, you don’t see a major diminishment of the value of the pipeline and that comes from the fact that even if you have one that’s multiple years and sizeable, above $10 million so to speak, if you have others that are in the 45 million to $10 million range that are behind that, you have a good balance in terms of the larger accounts that are coming into the business.

Bhavan Suri - William Blair & Co.

One quick last one for me. Any change in the competitive environment? And I’ll wrap up after that. But are you seeing anyone else out there, maybe even the agencies starting to do more of this work, the combination of deep technology and creative or is it still pretty limited?

Chris Dalton

No. I think that there are two different aspects of competition that we’re seeing. I think on the low end were entrées that are coming into the market. There seems to be a number of new smaller organizations that are coming online specifically around some of the newer packages such as hybrid. So I think they’ve substantially increased the number of partners that they have in their ecosystem which obviously is something we monitor as is our relationship with Adobe. I think we’re very happy with the fact that we were designated their partner of the year and because of the depth and experience that we have we have certainly stood out in terms of the competencies and the value that we can bring. But there is more competition with smaller firms that are entering the marketplace at the service level. We don’t really get too concerned about it because I think the size and scale that we were talking about earlier in your first question demands that you have a larger type of organization to deliver that level of complexity.

On the enterprise competitors or largest firms out there, whether they’d be of the consulting nature or of the agency nature, we certainly are seeing a lot of activity where the consultancies are very aggressively going at building their interactive groups and expanding their capabilities there and strengthening some of their partnerships in the ecosystem. As well, agencies that are holding companies agencies that are either requiring capability sets on the technology front or grooming and growing some of those within the business. I think everyone, which is exciting to us, sees the opportunity of integrating strategy, creative and technology together in their go-to-market approach. So we believe that the fact that we’ve been in this for over 12 years that we have great recognition from the analysts in the Forrester Gartner arena on the space really sets up apart and I think we will continue to take market share away as we continue to grow.

Operator

Your next question comes from the line of Jared Traile with Rock Castle Partners. Please proceed.

Jared Traile - Rock Castle Partners

I think most of my questions were answered, but two high level ones here. As you exit the JVs or look to do so, could you give us just like a 30,000 foot here what you think the structure of the business looks like in two years maybe?

Chris Dalton

Sure. I think essentially if you look at the organizational structure, generally it’s set up as a tree where the right side typically is represented by the entities that are associated with the joint ventures. As we wind those down or transition out of those positions, those would essentially just go away. Digital imaging is the furthest down that path. We should be able to get to that point maybe even as soon as the second quarter of this year and then as we determine a financial transition for the Cool Sports joint venture that also will be something that would go away.

Jared Traile - Rock Castle Partners

And then looking back to the guidance you gave in Q4, do you think that gives you either A, get a little bit ahead of yourself when giving that guidance or was the commitment actually there and the companies took a step back in their engagement process? Just trying to gauge how we look at that.

Chris Dalton

Yeah. I think that if you think about the call that we did and the timing, it was November 8 just after the election. We gave guidance which was under analyst projections for that particular period in time. It was commensurate with what we anticipated and we measure both revenue, forecasted revenue and projected revenue. So they have varying different weights, when we look at the performance of how the company is operating and what we essentially had was in the latitude categories of forecasted and projected which are things that are planned. We have either verbal commitments with customers. We’re starting to align staffing to meet those demands. Those basically got pushed out and deferred. As Paul highlighted, we continue to stay working with an active number of those accounts and converted them into revenue as we got into the first quarter.

So the deferral is somewhat systemic to the fact that the decision making process took longer. But I think that the very fact that it came strong just after that call and really was unforeseeable at that time really is why we ended up delivering a bit lower than where we had anticipated. And I think if you look at the number, while it wouldn’t have all converted, when Paul indicated that there was about $3.8 million that was subject to that. If you think about that we had the visibility on it. We knew those opportunities were there. We obviously in some cases now have actually turned that into revenue. But right at the time we reported we were still feeling confident about the range that we provided.

Operator

(Operator Instructions). Your next question comes from the line of Craig Nankervis with First Analysis. Please proceed.

Craig Nankervis - First Analysis Securities Corp.

Just following on the last question from the last questioner. Are you thinking that some of those deals that got pushed into Q1 just are not going to come back, they’ve just gone away? Is that what I’m picking up or how do you view?

Chris Dalton

Yeah. Craig, as I said they were either in forecasted or probable and because of the very nature of that, while that is still a very high qualification stage in our terminology, it does have the potential that the initiative never gets started. Some of the customers we just -- a very small number of the ones that were impacted there. We did get some indications that they were just going to put it on hold and not do anything and indefinitely hold their stock. In others really they just want to get out the back end of the quarter and see how the markets reacted. And then again as I said earlier, sometimes the other element that seems to come in play is that people really came to the realization that they’re going to go on holiday and start to take some vacation time. So if it was slipping into the back half of November, early part of December, it was logical that it would be better from a continuity perspective to just pick it up in the first quarter. So I think the impact of just that timing in that particular period in the year, coupled with those events certainly agitated the situation.

Craig Nankervis - First Analysis Securities Corp.

Was there any pattern to the stuff that got pushed? In other words, was it predominantly on the B2C side or was it a pretty reasonable mix of B2B and B2C? Is there anything to be discerned from that perspective?

Chris Dalton

No. It was a pretty reasonable mix and again if you look at the number that we attributed to it, it wasn’t any big material client or engagement that would have had a sizeable impact. I think as we always believe with our clients and these are engagements into our new clients that we’re starting, you’re going to want to get that revenue started and see that grow into a much larger potential. So for these opportunities that we have confidence that the clients are still maintaining their focus on wanting to get this deal done, we’ve not hesitated in maintaining the relationship and keeping the activity going. And as I said or Paul said, half of them have already begun to generate revenue in the first half.

Craig Nankervis - First Analysis Securities Corp.

Is there -- the last, the Q3 call you highlighted a couple large deals that got pushed from Q3 and then you said would likely start to generate revenue later in Q4. Is there any update as to the status of those larger deals?

Chris Dalton

Yeah. One of them was apparel retail customer and then particular case they just choose to actually put off the initiative. It’s something that was going to get started in the back half of the year and you’re correctly referencing that I made that comment in relationship to Q3. So it was one of the things that was going to pick up and actually go through our rebuild of that site. They just decided given market conditions that it would be prudent to actually hold off on that expenditure and address it possibly in the new calendar year which will be this 2013 year. that one I guess my confidence factor has fallen off a bit more on. The other is a client today. We are still engaged and dealing with them and there is still an opportunity, a pretty sizeable opportunity on the table. The challenge was that client went through an M&A activity around that same period of time, had a number of different leadership changes and just due to the impact of that, maybe more so than even the economic impact, they have just been slow to actually make the big commitment for the rebuild of that site. So on that particular one we’re still very optimistic and engaged in billing. But really foresee that that can be a big account for us in the 2013 year.

Craig Nankervis - First Analysis Securities Corp.

Thanks for the helpful color. Are you seeing anything somewhat specific on headcount where you ended the year, where you think you expect to end Q1 and in terms of your headcount and what the hiring outlook is for Q2? Anything you can say on these fronts?

Chris Dalton

Yeah. I think we closed out the year at about 654 total employees. As Paul said, on a yearend basis that was an additional 155, up from the calendar year of 2011. We have continued to be hiring aggressively within the first quarter of this year and have added a sizeable number of additional people into the organization. We also have just various performance related issues and some utilization issues to right size various aspects of the business which we think is appropriate and normal under our operations, but the net impact is that we’re probably about 15 to 20 down from that yearend number. But as I said, we hired roughly plus 60 people in the particular period of time and anticipate to add a very sizeable number of additional people in Q2 to not only meet the demand of our current business but as Paul said, make sure that we have the right talent in the organization capable of delivering on these larger engagements which we foresee in our pipeline and foresee coming into the booked revenue.

Craig Nankervis - First Analysis Securities Corp.

So are some of the new hires a devotion towards a mix of what you have in personnel rather than pure net heads? Not to get too into the weeds on this, but is that what I’ve heard?

Chris Dalton

Well, we’re constantly looking at where the demand is within the business. We also have a very active and successful college recruiting program which is adding a number of new entrees coming onto the business. And again, we’ve had a lot of success with getting those individuals engaged on our client opportunity. So I’d say that we’re constantly looking at where demand is for the various services, the pipeline of opportunities, the amount of resource that we have in the various regions and offices. As I indicated, we opened up two new offices in the fourth quarter and plan to obviously continue to grow the resources around those markets. So I’d say that you’ll see us continue to add and grow our resource pool as we go out through the rest of the year.

Craig Nankervis - First Analysis Securities Corp.

My last question is on your recent press release that in part discussed the joint ventures. On the Cool Sports JV, I actually didn’t really understand. You talked about exploring delegation of divestment rights, but retaining rights to proceeds. What are you really saying about Cool Sports and the timing there, is there still potential for a lot from that? I’m just not exactly so clear what you’re saying about Cool Sports.

Chris Dalton

Sure. Craig, maybe some of the confusion is around the fact that this is a PRC entity and they allow a little bit of different structures with regard to equity versus how the allocation of income goes to the various shareholders. So that’s some of the commentary on it. I think generally speaking though, there needs to be -- it is still a going operating entity. And so it is an asset of sorts and how to exit it is something that we’re still spending cycles on. However, given the circumstance we felt it made sense for us to fully impair the investment so that the exposure to future losses would go away. And so that’s what we’ve done as of now and have basically book value of zero. So any potential benefit by divesting that to another entity or selling it to another entity or going through some other transaction would only be additive. We’re at zero now so we can only go up.

Operator

We have exhausted all questions in the queue at this time. I would like to hand the call over to Mr. Chris Dalton for closing remarks.

Chris Dalton

Thanks everyone. Appreciate you taking the time on the call today. Look forward to talking to you again for our first quarter announcement that should be coming up in the near term and thanks for your continued support.

Operator

Ladies and gentlemen, this concludes today’s conference. You may now all disconnect. Good day.

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