Hackett Group Inc (HCKT) 2002 Q1 法說會逐字稿

Hello, and welcome to the Answerthink first quarter 2002 earnings teleconference. At the request of Answerthink, this conference is being recorded for purposes. At this time, I would like to introduce Mr. Jack Brennan, Chief Financial Officer. Sir, you may begin.

Thank you. Good afternoon everyone and thank you for joining us today to discuss Answerthink's first quarter results. Speaking on the call today and giving answers to your questions is Ted Fernandez, Chairman and CEO of Answerthink and myself, Jack Brennan, CFO. The press announcement was released over the wires at 4:19 p.m. Eastern time. For a copy of the release, please visit our Web site at www.answerthink.com.

Before we begin, I'd 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. forward looking statements for the purposes of . These statements interrelate 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 information, particularly risk factors, contained in our SEC filings. At this point, I'd like to turn it over to Ted.

Thank you Jack and good afternoon everyone. I will start, as I normally do, with the quarterly overview and highlights and turn it over to Jack for comments on operating results, balance sheet changes and and then I will finalize it by commenting on market overview, on our outlook, and then we'll open it up to Q&A.

Let me first start with the Q1 overview highlights. Consistent with all of 2001, we are pleased that we were able to report the results in line with our previously-provided guidance. During the quarter, we experienced to experience cautious spending behavior from our clients and targets which led to some growth but slowed decision making. However, we have started to see improved decision making and more willingness to move forward on on a more timely basis over the last thirty days.

Which leads us to be more optimistic about the balance of the year. The question will now be the sustainability of this behavior. In fact, notwithstanding the anticipated reduced spending from our largest clients, we had a small sequential revenue decline. We also continued to enhance our cash position with our cash position continuing to increase and now stands at $62.7 million. Most importantly, we're doing more than protecting our balance sheet.

We continue to take steps across many dimensions of our business to endure that we fully leverage and expand our business model so that we can optimize the market opportunity when normalized demand resumes. I will speak for specific initiatives during my outlook-related comments.

During the quarter, we continued to experience the unique perspective that we bring to clients through our offering and how it differentiates virtually all of our implementation services. We are doing a better job of articulating to our clients how to improve their business by implementing better practices, much more smartly configure their ERP applications to optimize business profits and practices, and how to achieve best practice performance when their base ERP system does not properly address the functionality they need.

No other organization has this database to help quickly diagnose and address business improvement opportunity, and to evaluate how well a base ERP package will help them do it. It is a major differentiating point for us. Just this week, we won a major ERP at a large consumer goods company, by being able to demonstrate to our client how uniquely this knowledge will help them fully realize the value of their ERP applications and their related organizational initiative.

During the quarter, we were able to quickly see the leverage of a recent epic acquisition as we converted one of our first clients to attack a benchmark, and then to a follow along, multimillion dollar implementation engagement. We also experienced a sequential growth in our business transformation line for the first time in over a year, and we expect this trend to continue into Q2.

We see this as a possible early indicator to improve decision making and market conditions. Over the last 18 months, we have seen more strategic transformation initiative put on the back burner in favor of more tactical implementation . We have recently seen increased activity in this area, which leads us to these comments. On a favorable side, we still have not seen improvement on the interactive, or web development, demand side.

In summary, even though market conditions were slightly than we anticipated during the quarter, we continued to demonstrate that we can successfully compete for global 2000 clients, differentiate and expand our source offering, and protect and enhance our financial position. All which lead to improved competitive position, improved visibility in the target clients and strategic , and strongly about the strength of our business model and the result and quality of our people.

Let me turn over to to provide on our operating , our and also comment on guidance.

Thanks, Ted. results for the first quarter, items to wrap up with a discussion of our financial outlook for second quarter. Our financial results at first were included in . One would be adoption of number 142, which related to and other intangible assets. And the other adoption of new rules relating to the reporting growth trend as required by the merging issues task force.

The adoption of 142 affected our first quarter in two ways. First, no longer amortized under this new standard. In our prime period, good will amortization expense approximately 1.7 million per quarter. to measure good will. Using the new method to measure impairment, we recorded a 31 cash transitional charge representing a effective change in .

This is largely related to our interactive marketing practice, which we acquired with a merger with . In this quarter, we also adopted new guidance from the merging relating to the presentation of expense reimbursements received from clients. The new guidance requires that be recorded for the amount included in cost of service.

This change only affected our presentation of our income statement and had no effect on the bottom line. To be consistent with and analyst estimates, that referred to statistical comparisons will refer to our presentation of net revenue. In the first quarter, our gross revenues were 52.8 million. Net revenues were 46.4 million.

In a range of guidance that we discussed on our fourth quarter conference call, and sequentially down percent. decline was driven by the anticipated reduced spending level of our largest client. Our net loss before the change for the first quarter was 923,000, or two cents per diluted share. Again, within the range of guidance we provide at the beginning of the quarter.

A cash balance increased point eight million to the 62.7 million at the end of the quarter. As we measured in our last quarter's conference call, we are expecting demand and recovery in the second half of the year. Given our strong cash position and balance sheet, we have decided to operate at level during the first half of this year to protect our associates which will provide us with great leverage when demand resumes.

In our first quarter, our business applications group represented a 56% of the net revenue, down slightly from 58% last quarter. Technology integration represented 28% total net revenue, down from 30% last quarter. And strategy represent 16% of the total net revenue, up from 12% last quarter. On a sequential basis, the business applications group was down 10%, acknowledging integration was down 15%, and business strategy was up 22%.

Results for the quarter pretty much came out as planned, with the business application group being impacted by the completion of large implementation at our large client, and technology integration being impacted by a continued demand for interactive marketing and custom web development initiatives.

Our strategy benefitted from converting benchmarks into process transformation which been a key area . As Ted mentioned, we are very encouraged by this trend. As strategic initiatives could be an early indicator of the market recovery. For the most part, prime spending priorities have not changed and remain focused in our .

We're helping clients to achieve our by redesigning business processes that implementing this applications to practices, coupled with other enabling technologies such as and . We are approach . For the first quarter, our net revenue concentration from our top five and top ten customers remained steady at 48% and 60%, respectively. Net revenue concentration from a large client 29% last quarter to 26 quarter.

We expect our largest client concentration to drum up the in the quarter. Consultant head count at quarter end was 909. net consultant decrease of 102 during the quarter. In the first quarter, consulting utilization ran that 55%, up from 52%, in . The current utilization reflects the fact that we continue to carry excess resource capacity. We do believe that we're at the tail end of this economic downturn .

sources showed . Voluntary turnover in the quarter was nine percent. by standards pride and given an industry wide resource capacity. Our realized was $170 for this quarter, down slightly from $173 last quarter. Although the rate environment continues to be tough, our rates have held up fairly well, have averaged between 170 and 175 for the last six quarters. rate that we'll give to our largest client and most loyal customer.

We expect our average rate for the second quarter to be about three percent below our first quarter rate. Expect that the rate environment will continue to favor buyers in the foreseeable future, and will stay that way until there are normalized utilization in our peer group. A growths margins as a percentage of net revenue were 30% in the first quarter, compared with 36% last quarter. This decline is due to higher personnel costs on a per basis.

The last quarter's earnings call. The first quarter costs impacted by the and the impact of FICA and unemployment factors. Salary increases, which went into effect at the beginning of the year, were very selective in average . We also seen recent hires coming in at lower salary levels compared to our work force. SG&A as percentage net revenue was 34% of the first quarter, up slightly from 33% in the fourth quarter.

Actual spending, SG&A dollars, decreased one million, or six percent in the fourth quarter level. As we continue to cost structure in light of the . According to the balance sheet, a caps balance of 62.7 million at the end of the quarter compared to 59.9 million at the end of last quarter, an increase to 2.8 million quarter. This increase was primarily the result of improved working capital management in an employee stock in our employee stock purchase program.

Our quarter end reached an all time low of 59 days, down from 63 days at quarter end. reflects the high credit quality of our customer base, strong execution by project managers and field controllers. I will now . The improving macroeconomic sentiment, and our connectivity and pipeline seemed to indicate that the economy had bottomed, and we are in a period of gradual recovery.

1002 executives that we interact with, the general sustained recovery in their business before they authorize . This means that the IP recovery may lag the macro recovery somewhat. the first quarter continued to be slightly more challenging than we originally anticipated, although it clearly had more stable environment than what we last year.

We are seeing an increasing pipeline, and the most encouraging sign has been more timely and committed decision making during the past 30 days. Clients seem to be opening up their purse strings a bit, and more decisively moving forward on new initiatives. This is giving us moving to the second quarter. It's too early to tell, but this is a sustainable trend, but we are encouraged by the activity.

Trust should further benefit from our joint venture with . Further expansion of our business model for acquisitions, and pick up because of the consulting independence issues with some of the . We're also highly optimistic about our business process intelligence framework to believe it'll help us compete, better compete, increase our rate across all of our .

And now turning to guidance for the second quarter, we expect our growth revenues to be in a range of 48 million to 53 million. We expect our net revenues to be in a range of 42 million to 46 million. This guidance includes a sizeable expected revenue decline from our largest client. We expect our revenue concentration from this client to drop from 26% this quarter to the mid-teens in the second quarter.

To exclude the largest client, that would mean that our expected revenue in the second quarter would be up sequentially by seven percent to ten percent range. Diluted earning per share in the second quarter a range of cents to a loss of three cents, depending upon revenue levels. We will continue to run as we protect our employee base for an eventual recovery. Cross margins should benefit by lower head count.

At the end of the second quarter, we expect our net consulting head count to decline by about 50 positions. in a quarter should be about two cents, and this cost is reflected in our earnings per share estimate. spending should be lower in the second quarter, slightly up in its percentage to net revenue. Our effective tax rate for 2002 should remain at the 40% level. Our cash position at the end of the second quarter should approximate a current level of 63 million.

Capital expenditures in the first quarter was one million, and we expect that to decrease, going into the second quarter. At this point, I would now like to turn it back to Ted to cover our market outlook and strategic priorities.

Thank you, Jack. As we look forward, consistent with our comments over the last quarters, we are planning for the economic environments to continue through the second quarter. However, as both Jack and I have mentioned, we are seeing signs of improved client decision making relative are hopeful that a gradual spending increase has started, and will continue through the balance of the year.

In any event, we plan to remain offensive in our pursuit of market opportunities regardless of the economic activity. Let me comment on our key strategic drivers. In addition to staying highly focused on our service to existing clients, our market share within those clients, we will continue to look for ways to grow our business. Specifically, our first initiative was to expand our business model to offer both application maintenance and offshore application development by teaming a large offshore partner.

As we previously announced, we entered into joint venture agreement with Technologies . We have received a very favorable reaction from our client base about our expanded offering, and we expect to start realizing revenues from this activity in the third quarter. Our second initiative is to continue to aggressively identify strategic acquisitions. We are looking forward to that expand our capabilities in large market areas, strengthen our existing service offering, and bring new relationships to our organization that the same level of growth.

We feel confident about the strength of our infrastructure, and our ability to integrate the team and realize targeted goals. We also believe that the current environment provides for a unique opportunity for us to strengthen our business model in a and strategic manner. You should expect us to be very active in this area through the balance of the year. Our third initiative is to further improve the leverage of our intellectual capital within our benchmarking business.

We have told them how uniquely we believe this everything that we do. In the first quarter, we announced the acquisition of the benchmarking arm of the partners business, which had been previously acquired by . We are continuing to pursue organizations in areas that further as the largest owner of business profit debt practices, intellectual capital, and allow us to leverage this position in a meaningful way throughout our .

And also attempt to expand our service offering into the BPO arena to win a strategic partner. Our fourth strategic initiative is our market leadership and innovation in business practices to materialize into a differentiated that we are calling business process intelligence.

As I mentioned last quarter, we continue to believe that the key to 2002 management will not be advent of a new killer ap, but rather how clients can efficiently achieve best practice performance, knowing how best to leverage their base ERP applications, and supplementing it by using architecture and strategies to complement the base ERP app. We expect that our offering, which is being driven and by our to truly resonate in the marketplace.

We have seen some to prove it, and we think we're starting to scratch surfaces in this . Lastly, we expect to benefit from the disruption of relationships that we believe will our related issue. We recently benefitted from one such change, which has resulted in a million dollar . All in all, we believe that we are continuing to improve and expand our business model, our focus, and our execution.

Our people have been terrific throughout this period, and have demonstrated great resolve. We see this on our service deliveries and in the quality of our balance sheet with continuing at record low levels, and our position at an all time high, up $52.7 million. Let's stop here and open it up to Q&A.

Thank you. At this time, begin a question and answer . If you'd like to ask a question, press star one your telephone touch pad. If you're using speaker equipment, you will need to . your question, or if your question has gone unanswered, simply press star two. Once again, star one to ask a question, and star two to answer. One moment while the questions register.

Our first question comes from Barry , with the .

Hi, , thanks for Barry Juberick. Got delayed in deferrals. And if you could just give a on . Second question is, he just progress of the offshore and why is the recognizing revenue. I think.

All right, let me first start with your first comment. I mean, by the time we had a chance to speak to everyone at the end of the fourth quarter, we were experiencing what we considered to be, I'll call it a cautious positioning, and timid decision making throughout client and then market overall. In the, and it reflected what we expected to see in the quarter.

I think the most significant difference over the last days, and probably from a pipeline growth standpoint, it's probably you could probably go back further than that, is that we know that the marketplace at large falsely identified their strategic priority going against last year. We expected the behavior to be better in the first quarter than what we actually experienced. The difference is that we're seeing people with more conviction, and now moving forward some of these initiatives.

And we clearly characterize the last 30 days as being significantly better than what we saw from that kind of behavioral standpoint in the first 40 days or so that we have seen in the first quarter by the time you had the chance to . So that's really a change, the fact that we know that decisions, that a peaceful priorities are. We know that there's are all driven by just, some type of study relative to ultimate economic recovery.

And we've experienced the difference. And our hope is that it's, that's sustainable. And I think that will be key. But also, the offshore transaction. As you can imagine the complexity of the work we're pursing, which would be large application maintenance, or large center of development engagements really require a certain amount of both evaluating the opportunity within clients, breaking that out to the, and being able to then compete, actually win that war.

What we did over the latter part of the first quarter, was to work on our integrated market work on some of the methodologies, and started many of the initial calls to significance of our client base. As I mentioned, as a reaction of the offering and the fact that we're bringing this to table, with clients has been very favorably received.

We would affect that the to increase about this quarter, and for us to actually close . I simply think it's the time lag between adoption of new offering, integrating it, and then actually going to market, competing for work.

start to fill the pipeline with offshore opportunities now.

We're starting to, that's right, respond to the client requirements within our base, and correct.

Okay, great. Thanks.

And then once again, ask a question, and star two to answer it. Our next question comes from Clint with .

Good afternoon, guys. I wondered if you could comment a little bit on the that you've seen, and the strategy. And how much of that you would attribute to being a seasonal pick up coming off of the fourth quarter, and how much of it you could see as actually clients finally their for new work.

Well, you know, season is, has been such a relative term now we've been through such a cycle. I mean, we had seen our in that area just, you know, suddenly decline about 2001. And again, we just see clients move to the top of their lists, that they believe we're kind of quick hit, highly tactical, leveraging existing technology to .

We saw the pipeline in the, in that area overall improve steadily throughout the first quarter, and I would have characterized seeing all the pipeline was seasonal, and consistent with the 2002 budget year. But again, I think to me, there the clear distinction is just a more willingness for clients to move forward with those initiatives, and I think that's one indicator. The around that type of business, we've seen that increase.

And I would say that we're also benefitting from the fact that we will deliver that profits improvement. And it's strictly with many of our large ERP engagements. Especially as we continue to more aggressively roll out our new business offering, which integrates both of those dimensions very closely. So I think it's the combination of pipeline growth from the beginning of the year, a combination of people's willingness to move forward with these initiatives, and I sense an improvement.

And I to just being improved execution because of our new offering.

Yeah, and I will also say that you look at 2001 a lot of our clients were cutting costs and doing that were just taking out of the business. I think now they've gotten to a point of , and in, they're looking at how to get to the next level.

And understanding in order for that, that's why we'll, they're gonna have to really rethink and transfer these, transform some of the processes which then play very well into our hand relative to the high benchmark data. And we have around business process transformation.

Yeah, that is an excellent point.

: Okay, let me actually shift gears a little bit. Where do you think we are in terms of from the disruption we've seen in the accounting and consulting relationships? You've mentioned the million dollar project that you won. Do you think that will pick up in Q3 or Q4, or is that more of an kind of scenario?

we had a chance to visit last week, we had anticipated the activities to really be in the latter part of the year, because of for several . One is that a company needed to take a position of policy decisions on whether or not it was going to retain a relationship or not. A company needs to also then evaluate what process any to disrupt, or phases that they would like to disrupt, or make changes if it adopts such a policy.

And all of those things were meaningful or strategic or, I believe, just take some time going through it and he's evaluating . And I do expect that the shake out will happen before the end of the year, but it will happen primarily in the latter part of year, because decisions have to be made in privacy to be evaluated.

Okay. Could you provide a little bit of an update on the pricing environment? And how is your pricing relative to the big five in the current landscape?

I mean, I think I've mentioned, you know, clearly the pricing of the clients the price favors clients. They know there's a demand side of the imbalance, and, you know, to the extent that they believe that the relationship or the project warrants, for you to be more aggressive, I think at a minimum, they want to talk about it or understand it.

We really had not seen . We had seen it as well, we've really done a great job at managing the rate environment, I think, very well, just because of our values . I think that the most significant fact that Jack mentioned in the current quarter is the fact that, listen, we've got a large cost deduction initiatives that they want to pursue. They'd like to see us that contribution by way of rate investments.

We believe over the long term that's the right thing to do. And that's probably the most single biggest . So we would expect imbalance for the negotiating to remain with the buyer, and as Jack mentioned, until everyone is closer at normalized utilization modes, will continue that way. So we're expecting it for, we expect that leverage to continue throughout the the year.

And final question here. Of your current existing client base, are there any clients that you foresee growing into a greater than ten percent client in the coming quarter?

Greater than ten percent in the coming quarter?

Yes.

I don't believe there is a single client, but we've got several relationships that are clearly going very nicely. Two or three take a look to see if any of those would pass the ten percent hurdle in Q2.

Yeah, I'm looking at relationships. Now there was nobody at ten percent. Everyone was below ten percent in the first quarter. As I look at the second quarter, I would expect everyone to stay at the .

going through as well.

We'll have several that will clearly approach that mark.

And again, that's putting aside our largest client.

That's right, right. Okay, great. Thanks .

Sure.

At this time, I show no further questions and would like to turn the meeting over to Mr. Fernandez.

Well, let me again thank everyone for participating on the call. As we mentioned, we are clearly optimistic about what we see going forward, and will continue to take all of the strategic , take advantage of the . We look forward to updating everyone on our next quarter call. .

Thank you for participating in today's conference call, and have a good day.