Hackett Group Inc (HCKT) 2002 Q2 法說會逐字稿

Good evening and welcome to the Answerthink, inc. second quarter conference 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 today's call are Mr. Ted Fernandez, Chairman and CEO and Mr. Jack Brennan, Chief Financial Officer. Mr. Brennan, you may begin.

Thank you. Good afternoon everyone and thank you for joining us today to discuss Answerthink's second quarter results. Speaking on the call today here to answer your questions are Ted Fernandez, Chairman and CEO of Answerthink myself, and Jack. The press announcement was released over the wires at 8 p.m. Eastern Time. For the copy of the release, please visit our web site at www.answerthink.com. Before we begin, I 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 and the purposes of the Federal Securities Laws. These statements relate to our current expectations, estimates, and projections, and are not of future performance. There are 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 risk factors contained in our SEC files. At this point, I like to turn over to Ted.

Good afternoon everyone. As we customarily do, I will open with our quarterly overview and highlights. I will then ask Jack to comment on our operating results, provide some commentary on balance sheet highlights, and also provide a deep financial outlook. I will then come back, make some comments relative to our market and strategic overview and then will open it up for Q&A. Let me start with the quarterly overview.

We are pleased we were able to report results within the range of our previously provided guidance. During the quarter, we continued to experience the cautious spending behavior from our client to characterize the first quarter of this year. Although we experienced better decision making in the beginning of the quarter, this behavior was not consistent throughout the quarter. This leads us to be more cautious about the balance of the year, given the traditional seasonality of the second half of the year. Having said that, it is also important to note that this quarter excluding the anticipated 5.5 million in reduced revenues from our largest client, we had a sequential quarterly revenue increase of over 5 percent. Our cash position also remained very strong at 61 million and up slightly from the 58 million dollars at year end when we communicated our desire to remain cash flow neutral through the first half of the year. During the quarter, we continued to contract sizable new commitments from some of our largest clients. These wins came in our core offerings which include our business profits transformation efforts enabled by complex ERP implementation, insufficient support, and enterprise portal applications. These are key wins because it demonstrates that those who know the best continued evaluate the best of our talents and the value of our unique prospective that we bring to bear in our core offering. Equally important, we continued to aggressively execute on our strategies in order to ensure that we fully realize the potential of our business models.

We have never been more bullish about the leverage that our Hackett Business Profit Best Practices Intellectual Capital provides to us. We are continuing to improve our ability to use this Intellectual capital to differentiate our existing implementation offering. During the quarter, we continued to make sizable investments in building design and implementation tools that allow us to strategically integrate our best practice knowledge base. Investments in the identification of the highest impacted practices and how they can be enabled by ERP or other business profits management software configuration decisions had been our priority.

We have also started to sell our best practice research on an annual subscription basis via our recent EPIC acquisition. However, the real potential to this offering will be fully understood when we start launching new programs using our deep Intellectual Capital and start aggressively to sell these programs to our 2000 Hackett benchmarking participants. Our subscription offering is a new initiative, which has the potential to significantly improve the revenue and profit characteristics of our business model. I will speak to our other strategic initiatives and further expand on these comments during my market and strategic overview comment. Lastly, we announced a 5 million dollar share repurchase program. Very few companies in our sector can say that they have generated meaningful cash from operations over the last six quarters and have further increased their cash positions since the beginning of this year.

When we see our stock traded about one quarter of the value on an enterprise value basis. That we could acquire much smaller private company in our sector 4. We decided we could not ignore the opportunity to buy back stock. We feel strongly about our ability to not only whether the cycle, but about our future prospects in the long term underlying value of our franchise. In summary, even though the market conditions slightly less favorable than we anticipated during the quarter, we continued to execute on our strategies, look for ways to differentiate our core service offerings, launched new offering that have a different profile than our traditional rate base services and continued to sign new and meaningful works with some of our largest clients. We believe these efforts lead to improved mind share with target client and strategic partners and most importantly speaks volume about the resolve and the quality of our people. This is not a fun environment, but we are holding our own extremely well. Let me turn it over to Jack to provide details on our operating results, our balance sheet highlights, and also comment on guidance.

Thank you, Ted. I plan to cover our financial results for the second quarter highlights, balance sheet items and wrap up with discussion of our outlook for the second quarter. For the second quarter, our gross revenues were 48 million. Net revenues were 42.7 million within the range guidance that we discussed in our first quarter conference call and sequentially down 8 percent. This decline was driven by the anticipated reduced revenue level from our largest client

during the quarter. If you the impact of this one client, the remainder of our business grew 5 percent sequentially. All operating statistics which I discuss later on will be on the net revenue basis, which we believe it is the most meaningful way to review our business.

In the second quarter,our Business Applications group represented 55 percent of consolidated net revenue when it was down 10 percent sequentially again due to this large client. Technology integration represented 28 percent of our net revenue and was down 8 percent sequentially. Business strategy represented 17 percent of our net revenue, and was flat sequentially. Business applications the group directly impacted by the reduced spending of our largest client. If you exclude that client, the rest of business applications grew 16 percent sequentially reflecting strength of our ERP offering. This is an area where we are starting to see leverage using Hackett Best Practice as the driver of configuration decisions. Technology integration group continues to be impacted by soft demand for interactive marketing and customer development initiatives, partially offset by continued sequential growth in our business intelligence or enterprise data warehouse often.

We continue to leverage Hackett Intellectual Capital in our core service offerings. This intellectual capital is the key differentiates in our business today. We believe that it will be even more selling in the future. But, most of our competitors rely on either cost or sale to compete. We have a strategic way to deliver value that should protect our margins. About one-half of our strategy business today is the result of converting Hackett benchmarks follow on, profit improvements work. In addition, during the last two quarters, we have made a substantial investment by type Hackett Best Practices and map these activities in carbon resolution decisions into ERP configuration options.

As proof point, it drives many of our recent wins in the package space. What's more efficient to implement as practices, outside in the ERP package, we are identifying business process management software to complete the solution. We believe this will become an increasing area for demand for our technology integration resources. This beginning of the year, we have invested over 10,500 consulting hours on the integration of our best practices into our solutions. If you break down our business across verticals, our largest vertical is utilities which represented 26 percent of our net revenue.

Other key verticals are manufacturing which was 20 percent of our revenue, telecommunications at 13 percent of our revenue, financial services at 9 percent, media and entertainment at 8 percent, retail at 7 percent, and pharmaceutical at 6 percent. In the second quarter, our net revenue concentration from our top five and top ten customers increased to 40 percent and 52 percent respectively compared to 48 percent and 60 percent respectively in the first quarte

As expected the revenue concentration of our single largest client dropped from 26 percent last quarter to 16 percent this quarter. Based on our pipeline review, this client's revenue concentration should drop again to about 10 to 12 percent of our revenue in third quarter and should stabilize at or near that level in the fourth quarter. Consultant headcount by quarter end was 801, which represents a net consulting decrease of 108 during the quarter. This decline was more than anticipated in the beginning of the quarter primarily as a result of the sale of our interactive marketing business in Torrance, California and further reductions in other interactive and web development resources. In the second quarter consulting utilization ran at 59 percent up from 55 percent in the first quarter. Our current utilization continues to run below targeted levels of 68 to 70 percent as we have made a conscious decision to invest in excess resource capacity. We are trying to save as many resources as we can, which will be important to us when demand is less. Voluntary turnover in the quarter was 11 percent slightly up from 9 percent in the first quarter. Accrued realized billing rate was 164 dollars this quarter down about 4 percent from 170 last quarter. We expect our average rate from the third quarter to be down a few more dollars. On a year-over-year basis our rates were only down 6 percent which we believe is significantly better than most of our peer group and reflects the value average rate declines. In certain of our practice areas, where we believe rates have been impacted over a longer period of time. We have recently implemented salary reductions to protect our margins and ensure that we remain competitive for a long run. Our net loss for the second quarter was 1.5 million or 3 cents of diluted share which was within the range of guidance we provided beginning at the quarter. Our gross margins as a percent of net revenue was 29 percent in the second quarter compared with 30 percent in the last quarter. This slight decline was primarily attributable to higher severance cost during the quarter when compared to the first quarter. Severance cost from the quarter was 1.1 million or about 1.5 cents per share. Our SG&A as percentage of net revenue was 36 percent in the second quarter, up from 34 percent in the first quarter. Actual SG&A spending decreased half a million, or 3 percent sequentially. Continued to identify ways to decrease our SG&A while maintaining the level of support for our associates.

Turning to our balance sheet our cash balance were 61 million at the end of the quarter compared to 62.7 million at the end of last year, a decrease of 1.7 million during the quarter. This reduction is attributable to timing of our apparel cycle of the closing quarter. Quarter-end DSOs were 63 days up from last quarter's record low of 59 days, below the level of 1 year ago of 65 days. DSO levels continue to remain low and are below our targeted level of 65 days due to the high credit quality of our customer base and continued focus in this area. I would now like to address future outlook. Environment continues to be challenging consistent with what we have seen since the beginning of the year. Sales decisions are inconsistent from one client to the next. Many clients are reluctant to launch significant initiatives and we expect that they will continue to be cautious until their business shows stability and begin to grow. continues to be chunked into smaller pieces and all the while reviewed every milestone. Spending priorities continue to be focused on business process improvements to drive greater efficiency and effectiveness, enabled by ERP systems improvements and technology integration work around improved decision support and revenue from it. Based on our pipeline and current market conditions, we expect environment for the second half of the year to be similar to what we have experienced in the first half of the year. In spite of the difficult environment we continue to aggressively pursue our key initiatives. We have already seen the benefit from some of these initiatives but we believe the impact will be more meaningful in 2003.Continued extension of Hackett intellectual capital into the subscription of research business should provide a new revenue channel. We have already seen the benefits of embedding this into best practices into ERP configurations. We continued to look for BPL partner as a new channel for business transformation initiatives. Finally the HCL joint venture is up to slower start from what we planned due to the conflict in India, but the pipelines continues to build. We expect that business to begin to turn a profit by the fourth quarter. Considering the current economic outlook I will give the specific guidance for the third quarter.

In the third quarter, we expect our gross revenues to be in the range of 41 million to 45 and our net revenues could be in the range of 37 million to 40 million. This expected decline from the second quarter is a result of lower exceptive revenue from our largest client in the seasonal impact of the summer months. Diluted earnings per share in the third quarter should be in the range of a loss of 1 cent to income of 1 cent. We should operate cash mutual for slightly cash positive excluding the impact of our share repurchase program. As Ted mentioned the size of our program is authorized for 5 million dollars. Gross margin percent should be high in the third quarter compared with the second quarter. It should benefit lower headcount, lower sale of the cost per person and lower bonus expense.

By the end of the third quarter, we expect our net consulted headcount to decline by about 65 positions, most of which have already been affected. cost in the quarter should be above 1.5 cents and this cost is reflected in our EPS estimates. Destination expending should be low in third quarter due to the reductions with cost is personal; it should be up slightly as a percentage in that revenue. To summarize, we are confident about our our future prospects given the strength of our client base, the new opportunities emanating from our best practice intellectual capital in how efficiently we have managed the business. If you look over the past 18 months during this very challenging environment, we have generated positive cash flow from operations of approximately 15 million. We are launching a stock buyback program, as we believe the marketplace is undervaluing our operating leverage in a normalized IT spending environment. We also believe the marketplace is not fully under stand the underline value of our comparatively Hackett intellectual capital which we believe is unmatched in the industry. At this point, I would like to turn over to Ted who will cover the market outlook and strategic filings.

Thanks Jack. As we look forward as Jack said, we are now planning for the weak economic environment to continue through the balance of the year. Although we have seen good pipeline activity in many of our practive areas, we expect a lack of timely decision making to continue during this period. We believe that our proprietary intellectual capital will also continue to differentiate our services and protect our margins better than most of our competitors during this cycle. Additionally, increased direct sales and marketing efforts to this new value proposition will only enhance our stock or profit.

Let me now comment on our three strategic drivers. We will continue to aggressively look to the ways to grow our business. Specifically, our first strategic initiative, which is to integrate the Hackett intellectual capital into our coofferings is a very smart way to use our market leadership and innovation in this area to differentiate our value proposition for our client. We had made great progress in this area and we have just started to learn how to properly articulate the value to our clients. But the proof points are becoming very evident. We have created a very powerful framework around the definition of a Best Practice in that now catalog and prioritize these activities based on their impact. This defines our proper transformation efforts, and now has been extended to mapping these best practices to specific ERP configuration decision. No one else has this intellectual capital that has that directly ties world-class performance, which we define to our Hackett standards to ERP software and more specifically to a configuration decisions. This direct connects into key enablers have already resulted in some meaningful wins as Jack mentioned. We expect to complete this effort across all of our ERP software that we implement and across all of the functional areas where we capture Best Practice strategy and metrics. Our second initiative is to aggressively grow our newly launched subscription offering. This will allow us to leverage our business model beyond our traditional implementation services and fully realize the proprietary Hackett that is practiced intellectual capital.

In March, we launched our new subscription based offering which resulted from the Epic acquisition. In just four months, we have launched four programs under the new Hackett collaborative learning banner and we have already signed 33 global photos of 4000 clients into one of our four programs.

When you consider that CAPEX, had totally discontinued their sales efforts nearly a year before acquisition and we have done this activity without any dedicated sales function for this offering and when then you further consider, leverage that we will get by integrating Hackett programs. And then sell directly into our 2000 benchmarking participants; you can get a better sense for the potential leverage, of this new offer. We also like the rate the revenue at contracted and sold on an annually renewable subscription basis. In the significant research, leverage that is embedded within our offering. We also believe that the implementation opportunities that will result from the increased sales and marketing efforts from this offering will benefit the rest of our business.

Our third initiative is to create a new BPL advisory channel. This will require us to enter into an exclusive relationship with 1 or 2 large BPL partner that will enable to leverage our profit transformation knowledge and delivery framework to enhance the assessment of the transformation opportunity and result in more qualifiable and predictable performance opportunities in these very large BPL contracts. We are now evaluating several alternatives that we can pursue. One, will be to enter into an arrangement with one provider, the other is to work with more than one partner across in industry or geographic dimensions. We continue to believe, this is a valid strategy as we have mentioned in the past, we were close to having a relationship like this declined in the earlier part of this year, we continue to believe this is something that we should be able to achieve.

Our fourth initiative is to grow offshore JV. We have now started to introduce the offshore-centric application services to our client by teaming HCL technology. We have been introducing these capabilities to our relationship base for the last and have received a very favorable response to the strategy of integrating the front-end skills with HCL 's offshore development capability. As Jack mentioned, we have been slowed a bit by the recent turbulence in India. However, we expect to start realizing some revenue from centric field in Q3 and have further improvement as the year progresses.

Our fifth initiative is to continue to aggressively identify strategic acquisitions, which spread a considerable amount of time in this area in Q2, where we have done so long from very specific strategic and financial growths that we believe must be achieved. We continue to believe that the extended economic cycle will result in further consolidation and we should be beneficiaries of this activity given our strong strategic positioning in the strength of our balance sheet. Although, now we believe that we are continuing to differentiate and expand our business model and improve our focus and execution. You can expect our efforts to continue and further strongly ascertain from more normalized business economic activity reserves.

Let me stop there with the comments and I will now open it up for the Q&A portion of our call.

If you would like to ask a question please press star one on your phone. All questions will be taken in the order they are received. You will be announced by name when you are ready for your question.

Again, if you would like to ask a question, please press star one. All questions will be taken in the order they are received. And you will be announced by your name if you are ready for your question.

Our first question comes from William Wachovia Securities.

Good afternoon guys. Hi, I wondered overall on Hackett, if you could provide, maybe, a little bit more color there on how much more investment is going to be needed in order to integrate that into your core offering? How much more work with the sales force and even may be the receptivity of your clients, the and annual subscription offering.

We are really looking to do, you were asking several questions, but we are really working across many dimensions. One is that, the first element, which is the, in making sure that we know how best to leverage best practices and how we solve the complex problem for our client. The commitment of ours that we have have accounted for, you can expect that we will continue to do that, to at least the balance of the year. I mean, we have learned that the stronger the point we're moving for the client about how we can derive a smarter or a more beneficial PRP implementation or more quickly help them identify or prioritize, major business transformation efforts. It is the reason, why we can win against our larger competitors. So that profits will continue.

Relative to the subscription offering we are really working across many fronts. One includes looking at some outside talent, who have already aggressively grown subscription-based businesses that can come in and really help us turbo-charge our efforts. We are very pleased with the progress we've made with the nature and the number of clients we've signed over the last four months, but currently, we believe that this general intellectual capital relative to best practice research is second to none, and we say that very boldly because we believe that to be true, and the quicker that we can identify and create programs beyond what we've got and build a meaningful dedicated sales effort and marketing effort around the offering. I think you are going to see that kind of revenue growth we have reflected in our results. Today, we believe that we can accomplish that through two things. One, clearly you have seen that we've tightened our belts a little bit and have made some cost reduction actions and made sure that we have provided an outlook that allows us to operate very close to break-even and therefore cash flow positive. We want to make sure that we have the flexibility across our existing business model to make the investments that we'd like into that business models under our current financial constraints. However, we also believe that there is an opportunity for us to spend the current dollars that we have relative to the Hackett Best Practices and Hackett Collaborate Business and look for ways to re-allocate some of those dollars to increase the sales and marketing component of our spend, because we are investing in that area and have invested in that area very significantly. So the question is how we spend our dollars as well as how we can bring in new talents to drive the effort as aggressively as we can. And then your last point, which is the receptivity to the offering. Today, we see a Hackett benchmarking client approximately once every three perhaps every four years, and this includes the best of the best, I mean over the last 12 months, you know, GE has come to us, Citigroup has come to us, Elco has come to us, just to mention a few, when they are looking for someone to provide a powerful diagnostic tool to help them prioritize business transformation efforts. We have just decided that we should be able to help those efforts in the interim period and provide them with research and other customized support on a very efficient basis and for that effort for them to pay us on a subscription basis across the programs that we would launch, similar to what the corporate executive board has done. We believe that we have that kind of opportunity. We clearly believe we have that kind of know how and we have that kind of intellectual capital in place today, we just simply directed our efforts today. The pace of intellectual capital to drive implementation business, which we think, is important and will continue. We just think that there maybe an equal or even greater value in making sure that we are selling some of this research and some of the information that we have to clients on an annual subscription basis as well as providing a very deep benchmark diagnostic for them every three to four years. We think it has been offered, know it differentiates our offering in the market place today. We see no reason why the program shouldn't grow successfully and profitably over the next 12 to 24 months.

Okay and Ted, another subject on your largest client. You expect going into 3Q and 4Q obviously, you've guided that revenue down, do you expect further reconcessions from them in those 2 quarters?

We have. We have made reconcessions to them and have worked for them. So, the answer to your question is yes, and they are reflected obviously in our outlook.

Okay. Jack, I guess, how much of more leverage do you think you have in the SG&A component may be for some cost cutting going into these next 2 quarters?

Well, we have taken, we have made some back office reductions at the last quarter or second quarter. So we are going to get the full benefit of that in the third quarter. First I will mention what reductions we begin in third quarter. But, you know, to be quite honest, though the headcount has decreased, when I look at the back office functions, it really does require a lower level of support, so you know we kind of follow the philosophy, if you got to reduce billable headcount by 10 percent, you should have that 10 percent opportunity in the nonbillable function as well. So you kind of manage things that way. So I would say, you know, as things continue to decrease, there is clearly opportunities and as we look at the third quarter, again we see again a pretty significant opportunity to lower our SG&A structures as we go into 3Q.

Do you have a total headcount number for us?

Yeah, I mean there is a, to break it down again in quarter, there were 801 billables and there were 145 non-billables.

I would further comment on Jack's comment and say that as the organization has got smaller, we clearly have an opportunity to be flatter and to make sure that some of our most senior people are more actively involved in areas at this side, obviously we know that these are individuals that are capable of doing a lot more. So, we are asking everyone to do more and that has been our pursuit and we have stayed pretty consistent with it.

If you look at our full SG&A, if you look at the, you know, the make up between the fixed and variable, I mean I would argue that probably 25 percent of that was fixed and 75 percent variable. The fixed component being things like public company costs, legal fees, rent, and things like that make sure. So, again it just provided an opportunity, you know, the total headcount goes down and we continue to make cost reduction from back office.

If we execute on our strategy our idea is to be able to acquire scales and breadth across the current infrastructure instead of trying to continue to reduce it however it is Jacks responsibility to know exactly how to do it the other way if need be, but acquiring is a part of our strategy and even though we have spent a significant amount of time going after both from small ends to larger opportunities, we expect that those opportunities will either re-emerge especially if the market conditions continue to remain difficult.

As a reminder, if you would like to ask a question please press star one. Our next question comes from John Mahoney.

Hi guys how are you doing?

Hi, John.

I just have a question, kind of backing in to the numbers, the EPS guidance, if I use the mid point of the revenue guidance which you got 38.5 million dollar and if I assume that SG&A as a percentage goes up from the 35.7 percent with this quarter to say 36 percent of, of the 38.5. Then I guess that would be 13.880 of SG&A and to get a kind of in the middle of the EPS range we need to have that level of gross profit, which would equate to a about 30 almost 36 percent gross margin. Am I doing this completely wrong?

No, probably not John, I think if we look at the guidance that is, that is really what we are guiding to.

You were not going up to some 650 basis points on the gross margin line because of the headcount reductions.

Yeah, we are projecting to have margins in that range and its really coupled with the headcount reductions. It is a fact that we have made a salary reduction in those practices where we see rates really being compressed and the prospects for increasing those rates really diminished in the longer term. We are having a salary reduction and at the same time we are reducing bonus expense in practice as well, but if we look across the board, our cost per employee should be you know sizably lower in the second, in the third quarter as well as the second quarter.

Okay.

What has also changed as part of that equation is the mix.

Right, right, yeah. With regards to the, you mentioned using prior to company acquisition opportunities as 25 percent of your year trading. Were you talking as a multiple of what?

I am talking at, I just say sorry, that all current .

Oh yeah you are right 25 percent of the trading, we are talking about multiples of what ,of..

Revenue multiples, our current, our current values when you take our market cap and we do see cash on hand than the price value. The company that we would like to pursue that are private, that are small, that is strategic, geographic, are probably selling for about 4 times our current net enterprise revenue multiple.

Aren't you guys trading at about 1.3 times of sales right now?

102, you got to pick up the cash.

Yeah I think they are .

You got the cash for trading at the now if you take out the cash 20 percent of the.....

Oh yeah yeah, Okay thank you very much.

Okay, John.

I am sorry no further questions.

All right let me as always thank everyone for your, for your participation. We look forward catching up with you in our third quarter earnings call. Thank you again for your participation.