Hackett Group Inc (HCKT) 2002 Q4 法說會逐字稿

Good evening and welcome to the Answerthink fourth quarter conference call. Your lines have have been placed on a listen-only mode until the question-and-answer section. Please be advised that this call is being recorded. Your hosts for today's call are Mr. Ted Fernandez, chairman and CEO, and Mr. Jack Brennan, CFO. Mr. Brennan, sir, you may begin.

Thank you very much. Good afternoon, everyone. Thank you for joining us today to discuss the Answerthink fourth quarter results. Speaking on the call today and here to answer your questions are Ted Fernandez, chairman and CEO of Answerthink, and myself, Jack Brennan, CFO.

The press announcement was released over the wires at 4:12 p.m. eastern time. For a copy of the release, please visit our web site at www.answerthink.com.

Before we being, I would like to remind you in the following comments and in the question-and-answer session we may be making statements about expected future results which may be forward-looking statements for the purposes of federal securities laws. These statements relate to our current expectations, estimates and projections and are not a guarantee of future performance. They involve risks, uncertainties and assumptions that are difficult to predict and which may not be accurate. Actual results may vary. These forward-looking statements should be considered only in conjunction with the detailed information, particularly the risk factors, contained in our SEC filings.

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

Good afternoon, everyone. As were accustomed to doing, I will open the commentary with a few comments. I will then turn it back over to Jack so that Jack can comment on some of our operating results, balance sheet highlights and also comment on outlook. I will then come back and make some market and strategic overview comments and then finally we will open it up for questions and answers.

So let me start now first with my overview comments. First, we are pleased to report results in line with our previously provided guidance. During the quarter, we continued to experience the cautious spending behavior from our clients that has characterized all of 2002. However, we did experience improved activity in our Hackett Group and in our business transformation area, which today directly benefits from our Hackett sales activity. This was offset by some softness in our technology implementation-related offerings. We believe that as we rearchitect our core Hackett offerings and create new ones that drive direct demand to our technology implementation practices, that our Hackett growth strategy can more directly impact our technology implementation services the way it currently impacts our business transformation services.

During the quarter we discontinued our interactive marketing business, which after the internet spending contraction, experienced a significant decrease in demand and created very limited strategic linkage to our other core offerings. We believe this move results in a more focused organization, which directly leverages our very unique and proprietary business process, intelligence, intellectual capital. This move also led to further restructuring decisions, primarily driven by our decision to relocate our offices in New York City to something which was more consistent with our needs and significantly more efficient on an operating basis.

In spite of the demand backdrop in our restructuring decisions, we had very strong cash flow from operations which totaled more than $6 million. And we increased our cash position to over $66 million. This figure is net of our stock buyback activity during the quarter, which will continue in this quarter.

Most importantly, during the quarter, we aggressively invested in expanding our sales resources and creating a more powerful, renewable based offering for our Hackett Group. Additionally, we continue to make our most significant investment in our business process intelligence implementation tools. We believe that we are creating a strong value proposition, by developing implementation tools that utilize the Hackett best practice knowledge to help design optimal business process for clients and allows us to configure enterprise software in a much smarter and efficient way.

On the client side, we continue to diversify our client base and reduce our dependency from any one client. This has been a -- our -- has been the single largest transition in 2002 for us and we believe we've made the necessary changes to adapt to this transition. We also believe that our prospects to continue to work with this client in 2003 continue; however, they will be -- we believe there will be a new area other than in our traditional PeopleSoft implementation.

As I have mentioned throughout the year, our results and our progress speaks volumes about the commitment and quality of our people. Given the extent of the suppressed demand environment, we have continued to make progress across all aspects of our business. This could not take place without the outstanding commitment of our people.

All in all, we believe that we're continuing to build a unique value proposition in our offerings and improve our focus and execution. Let me now turn it over to Jack to provide details on our operating results, our balance sheet and to also comment on outlook. Jack?

Thank you, Ted. I plan to cover our financial results for the fourth quarter and highlight some balance sheet items and then conclude with a discussion of our financial outlook for the fourth quarter.

As we discussed during our December call, we have discontinued our Interactive Marketing business, which we acquired in our merger with Think New Ideas in 1999. Consequently, all prior periods have been restated to exclude our Interactive Marketing business from continuing operations. The results of that business are reflected as one line item in our statement as a discontinued operation. My discussion as follows will generally conclude the discontinued operations. Also my discussion will focus on gross revenues as opposed to net revenues and any references to bill rates and operating margins will be calculated using gross revenues. We are making this change to be consistent with the generally accepted accounting definition of revenues.

For the fourth quarter, our reported revenues were 39.4 million. Which was within the range of guidance that we previously provided. This represents a 5% sequential decrease from the third quarter. Our pro forma net loss for the fourth quarter was $367,000 or one-cent per share, which, again, was within the range of guidance that we previously provided.

On a GAAP basis our net loss from continuing operations was 22 cents per diluted share. Our GAAP loss included restructuring charges of 10.9 million, related to reducing facility costs and to a much lesser extent, severance. About 85% of the charge related to vacating office space principally in New York City. Although most of our New York office space was related to the operations of Think New Ideas, the charges recorded in continuing operations at that facility was being shared with other Answerthink practices. We also recorded a net loss from discontinued operations of 4.6 million or 10 cents per share, approximately 3.4 million of this loss related to restructuring charges, principally related to lease termination costs. And $1.2 million related to the operating losses in the fourth quarter.

In the fourth quarter, our business applications group represented 60% of total revenue and on a sequential basis was down 2%. Technology integration represented 23% of our total revenue and was down 20% sequentially. Technology integration was primarily impacted by continued low demand for custom web development initiatives. Business strategy represented 17% of our total revenue and was up 12% sequentially. Business strategy benefited from conversions of Hackett clients to follow on consulting engagements.

If you break down our business across verticals, our largest vertical continues to be utilities which represented 26% of our revenue. Other key verticals are manufacturing which was 25% of our revenue. Telecommunications at 10% of revenue. Financial services at 8%, media and entertainment at 7%, pharmaceuticals at 6% and retail at 5%. These percentages were fairly consistent with the third quarter, with manufacturing gaining some increased share, from both the media and entertainment and retail sectors.

In the fourth quarter, our revenue concentration from our top five and top ten customers was 43%, and 56% respectively. Compared to 40%, and 50% respectively in the third quarter. The revenue concentration from our single largest client in 2002 was 12%, which was the same as last quarter. We expect that this client will drop to about 8 to 9% of our revenues for the next few quarters, as that client has cut back on some of its IT related spending as part of the 2003 planning process.

Consultant head count at quarter end was 620, with represents a net decrease of 115 during the quarter. 39 of which were related to the discontinuance of our Interactive Marketing business. Consulting utilization ran at 60%, down slightly from 61% in the third quarter. Voluntary turnover in the quarter was 20%, up from 15% in the third quarter. Our per hour realized bill rate was 182 this quarter, up slightly from 180 last quarter. Both of these rates are calculated using gross revenues, which is a change from our previous method which was net revenue. We would have seen a slight increase on a net basis as well.

Although the rate continues to be competitive, it appears that rates have bottomed and we expect our billing rates for the first quarter 2003 to be comparable with the fourth quarter. Our gross margins as a percentage of revenues were 28% in the fourth quarter, compared with 31% last quarter. This decrease was primarily attributable to the impact of holidays and vacation usage which traditionally impacts utilization. Our SG&A as percentage of revenue was 30% in the fourth quarter down from 32% in the third quarter. Actual SG&A spending decreased 1.2 million or 9% sequentially. This decrease can be attributed to an across the board continued cost containment measures.

I would now like to take a moment to discuss the tax impact of the discontinuance of Think New Ideas and its impact on the fourth quarter tax provision. As we stated on our December call, we believe that discontinuing Think New Ideas will generate a substantial tax deduction, in the range of $70 to 85 million, as we plan to claim several deductions in our 2002 tax return. The precise amount of this deduction will be known in about three months when we finalize our basis study. A small portion of that deduction will help us secure a $9.7 million refund from the IRS for taxes paid in prior years; however, most of that deduction should result in a carry-forward benefit that we will use in feature years to offset future taxable income. We are working with tax advisors on all aspects of securing the tax deduction. We do believe that the IRS will review a deduction of this size; however, our tax advisors believe that we should be entitled to this deduction.

[INAUDIBLE] This resulted in an effective tax rate of 13% in the fourth quarter. This low rate reflects the fact that we provided a valuation allowance on the Think New Ideas tax deduction that can be carried forward to future years as well as on our net deferred tax assets that existed at the end of the year. We thought the establishment of these reserves was prudent in light of the taxable losses that we sustained during past two years. For 2003 the company's effective tax rate should be zero, as we plan to use our tax loss carry-forwards to offset future taxable income.

Turning to the balance sheet, our cash balances grew to 66.3 million, from 61.4 million at the end of last quarter. Our cash flow from operations was approximately 6.4 million in the quarter. Cash flow from operations benefited from improved working capital management. Our quarter end DSOs were 60 days, down from last quarter's 61 days. We also used cash of $720,000 to repurchase our stock during the quarter. Since the inception of our share repurchase program, we have purchased 1.1 million shares of our common stock at an average cost of $1.93. Of our $5 million authorization from our board of directors, $2.8 million is currently available for future purchases.

I would now like to address the expected cash impacts of our restructuring charges. As I previously mentioned, the combined fourth quarter restructuring charges for both continuing and discontinued operations are 14.2 million. Of this charge, 1. -- actually 1 million was spent in the fourth quarter for severance costs and $5.2 million of recent improvements have been written off, which leaves approximately $8 million accrued on our year-end balance sheet. Of that amount we expect approximately $2 million of this accrual to be spent in the first quarter for primarily severance costs. The remaining accrual relates to expected lease buyouts for losses on subleases where it is difficult to project the timing of cash flow.

I would now like to address our future outlook. The environment continues to be challenging, which is no different than what we've been saying for sometime now. We have yet to see any sustainable change in buyer behavior. Companies to continue closely review their spending priorities, along with project hours and it's not uncommon for project decisions to be deferred or chopped into smaller phases where ROI can be assessed.

Our strategy is to continue to leverage Hackett best practices knowledge to further differentiate ourselves from our competitors. We are launching new benchmark and collaborative learning products and plan to increase our investment in Hackett sales and product development. These personnel increases should result in an approximate $1 million increase in SG&A spending in the first quarter.

We continue to focus on better integrating the Hackett and consulting teams to increase our opportunity to convert follow-on work. We believe that consulting engagements increase as the number of Hackett products sold increase. We will also continue to invest in our business process intelligence or BPI implementation tools. These tools allow our consultants to deliver proven best practices in the configuration of software packages like Oracle, PeopleSoft and Lawson. We have already invested 20,000 consulting hours to develop these BPI tools. We'll continue to invest further in the development of these tools as well as in BPI training for our delivery and sales resources.

Despite a very challenging 2002, we have grown our cash position from $59.9 million at the start of the year to $66.3 million at the end of the year. Our operating discipline has been strong and we plan to continue to manage costs tightly. We also plan to run at higher utilization levels. This tighter operating philosophy will allow for increased investments into the Hackett sales channel and product development.

For the first quarter, we expect our gross revenues to be in the range of $36.5 million, to $39 million. More specifically, we anticipate lower revenues from our largest client, which impacts our PeopleSoft practice, and lower revenues in our custom web development practice. These decreases should be partially offset by increased revenue from Hackett. Diluted pro forma earnings per share in the first quarter should be in the range of a loss of one cent to income of one cent. This pro forma estimate includes a normalized tax rate of 40%. Our gross margin percent should be higher in the first quarter as we plan to run at utilization levels in the mid to upper 60s, which compares to 60% in the fourth quarter.

By the end of the first quarter, we expect our net consultant head count to be down about 55 positions, to an ending number of 565 consultants. Most of these reductions have already been affected. SG&A spending should be slightly higher compared to the fourth quarter levels due to additional Hackett sales and product development costs and the full quarter impact of the SAP reseller business that we acquired in December. These affects should be partially offset by lower facility and administrative costs.

At this point, I would like to turn it back to Ted to cover our market outlook and strategic priorities.

Thanks, Jack.

As Jack mentioned, although we have yet to see any change in demand environment, we have not seen a worsening in the environment from what we have experienced throughout the year. We continue to see the prolonged economic cycle driving more companies to address operating efficiencies initiatives. We believe this focus creates more demand for our Hackett offerings and specifically our business transformation services. We must now drive the strategic value of our new BPI implementation tools to our client and further expand our Hackett offerings to more strongly embed our technology enablement intellectual capital. These acts have to have a direct impact on all of our technology implementation consulting services.

During 2002, we continue to prove that we can manage through an extended weak IT spending environment; however, our focus since the beginning of the year, has been to execute on our strategies that will provide us our ability to resume our growth. Let me comment on those strategic priorities. Our first strategic priority was to integrate our Hackett best practice knowledge into our implementation solutions. As we've mentioned throughout the year, our single largest investment in 2002 has been the development of our business process intelligence implementation tools. Let me try to add greater context to the nature of the tools and our efforts during this quarter.

During the fourth quarter we formally launched our tools and initiated our organizational training. Our plans for 2003 will be to expose our clients to our tools, and to continue to build on the number of modules and functional processes that can impact -- that we can impact along with broader training to our associates. Our development of these rich -- content-rich implementation tools help clients evaluate and specifically decide whether a best practice should be applied to their specific circumstance with detailed reference and guidance to how specific software provider can enable that specific practice. This has received very favorable market reaction. We have made very significant progress in the development of these tools and have specifically targeted our efforts, as Jack mentioned, in PeopleSoft, Oracle, SAP and Lawson. We have also started to extend the tools to other enterprise applications like Hyperion and KRONOS. Our tools bring to clients a very specific configuration guidance relative to these best practices, and, again, specifically by software provider.

Our second initiative is to accelerate the growth of our Hackett Group with new and expanded renewable-based offerings. As you may recall in the third quarter, we brought in a new president, with a very strong leverage content, sales and marketing experience to lead our Hackett Group. During the quarter, we got an initial reaction of how effective our new sales resources would do -- would do selling our Hackett services and the initial reaction was very favorable. In fact, we experienced the strongest quarterly unit activity and pricing improvement since our inception.

During the fourth quarter we also initiated a product architecture review on our base benchmarking products which resulted in the creation of a new product offering which we now refer to as BVI, or business value index, which builds on and positions our traditional benchmark offerings to assist clients over a multi year period. We are now working to further enhance these benchmarking offerings by adding new functionality that will allow us to track the clients progress as they pursue their specific performance improvement target. We think these enhancements will allow to us strengthen the value proposition we deliver to our clients and will also allow to us work more closely with our clients throughout their total operating efficiency improvement efforts. Our plans are to add these enhanced monitoring capabilities for two of our Hackett offerings by the beginning of the second quarter.

Our strongest leverage may come when we expand the Hackett offerings to specific enterprise software assessments which are currently underway. A great example of this effort is our plan to launch an ERP optimization set of offerings within Hackett. This offering will allow us to assess how well a client has implemented or has leveraged their specific software investment. Hackett has been known for its unmatched enterprise benchmarking offering but when we exit 2003, we also wanted to be known for helping clients continually measure and implement best practice strategies that help them achieve and maintain targeted operating efficiencies. To this end, we want to bring unparalleled business process and related technology-enablement knowledge to bear.

Our third initiative is to create a new VPO advisory channel for our core limitation skills. As we have mentioned throughout the year, this will require us to enter into a meaningful relationship with one or two VPO partners. We expect our VPO partners to leverage our business process intelligence tools to enhance the assessment of the VPO transformation opportunity and provide a stronger assessment from which to develop the type of contract and pricing that makes sense for that situation. We continue to discuss this strategy with several possible partners and we also continue to believe that our value proposition to a large VPO provider is very strong. We believe that our value to a partner is only enhanced by the improvements in our Hackett offerings and BPI tools that we continue to invest in. Our desire is to make sure that we get a true agreement with real commitment that is acceptable given our significant investments and the leverage we think we will bring to bear.

Our fourth initiative is to expand our blended offshore offerings. The need to offer clients an offshore blended solution under certain circumstances continues to grow. Our ability to bring deep business knowledge to strategic design, architecture and construction and augment our resources with lower cost offshore development support is becoming increasingly important to our clients. Although our revenues in this area have been relatively small to date, we continue to see an increasing number of proposals that include our offshore partner and expect the blended offshore revenues to expand during 2003. Over the last several months we started to include offshore component for many of our large ERP and technology integration implementation proposals. This will allow us to be more competitive with pricing while protecting or increasing our margins. This resource model has also resulted in reduced head count in some of our development centric resources in both our business application and technology integration area.

Our fifth and last initiative is to continue to pursue strategic acquisitions. Although, the SAP acquisition had no impact on our results this quarter, we believe it was a strategic acquisition that will improve our ability to augment our services in the SAP area in 2003. We also continue to believe that the extended economic cycle will result in further consolidation and that we should be beneficiaries of this activity, given our very strong balance sheet, and distinct value proposition.

In summary, though we would like to see improved economic activity, we continue to protect our financial position and to invest in our strategic priorities. We believe our strategies provide Answerthink with a unique and highly differentiated value proposition that strengthen our business model and enhance our ability to assume our ability to grow.

I have no further comments, so I will now turn it over to Q&A.

Thank you, sir. At this time, we'd like to begin the question-and-answer session of the conference. If you would like to ask a question, please press star 1. You will be announced prior to asking your question. To withdrawal your question, please press star 2. Once again if you would like to ask a question, please press star 1. The first question comes from Mr. Ed Castle with Wachovia Securities. Mr. Castle, you may ask your question.

Jack, was there any revenue at all from the Condor SAP business recorded in Q4.

You mean from the reseller business.

Right. Right.

Actually, no there was no revenue. We did have a -- a transaction shortly after a software -- a software sale shortly after we closed the deal, but -- because that was pretty far along at the time of the deal, we actually set that up, as an asset on our acquisition balance sheet. So in effect it just reduces goodwill.

Okay. And any earnings impact in Q4?

Yes, a light negative for -- for the SG&A costs that we carried.

Okay. Any -- was there any revenue from the joint venture with HCL?

Yeah there was revenue and it ran pretty much break-even in the quarter. Revenue really being equal to the total operating expense of that venture.

It is not reflected in top revenue.

We just record the net amount in SG&A. It's pretty small.

And is there expected to be further losses on discontinued Ops line?

No. We have wound it down. We believe that the reserves we provided are adequate and we don't anticipate any further loss in the discontinued lines.

The next question comes from Mr. John Mahoney with Raymond James. Mr. Mahoney, you may ask your question.

Hi, it's John. I had a little trouble getting to the 367 of the operating pro forma net income. Can you help me get there?

Yes.

I'm going to add stuff back. But just taking out the --

Yeah, we have a table in our press release.

I see that, but if you're -- I can probably do that.

Start with our reported income loss, before income taxes, and before the loss and discontinued operations and affect the change in accounting. You're starting with about $11.6 million loss. You add back the restructuring charge, which it was $10.9 million, and you effectively end up with a pro forma loss of $612,000. And when you put a normalized tax rate it ends up with $367,000 net loss.

You had -- you said the gross margins going to go up in the first quarter. Can you give us a little more detail there.

Yeah. John what we are -- we do anticipate to run at higher utilization.

Mm-hmm.

And I would say that that's the primary reason. I mean, rates we anticipate to be flat. You've got higher utilization. Our average cost per person will be up, because we do, in the first quarter, you know, have about a 7% sequential increase in cost per person in Fica, state, unemployment and Medicare taxes but it's really the utilization that will be driving the higher margin.

And the SG&A is going to go up $1 million?

No, it will go up slightly. You've got -- incrementally you have -- again, we're planning that the investment in Hackett will be incrementally $1 million add to SG&A. We had talked earlier about the impact of the restructuring charge in facility costs. That will be about $1 million costs that are taken out as a result of the restructuring charge. And so -- I mean, in in essence you are looking primarily flat. We have the full quarter impact of the SAP seller business, so it will be -- again, we are planning that it will be slightly up. Slightly up.

Any guidance as to business aps what percentage of revenue it might contribute in the first quarter?

Our sense is that it -- as a percentage of our total revenue, our sense --.

Well, how about -- will it grow sequentially?

No, our sense is it will be down.

And this is the largest client.

Yes.

Will it be be down double digits.

I really don't want to provide any more guidance beyond what we have provided.

Okay. Well, I -- I'll avoid questions about the growth then. That's it. Thanks a lot.

Okay, John.

Once again, if you would like to ask a question, please press star one. One moment, please. Once again, if you would like to ask a question, please press star one. One moment, please. The next question comes from Mr. Charles Zangier, a private investor. Sir, you may ask your question.

Jack, could you provide us some detail relative to the Hackett fourth quarter strategy, please?

The Hackett fourth quarter strategy?

Yeah.

Let me pick that up. I think in general, our intention in the fourth quarter, as we mentioned when we brought in the -- our new leader, was to A,increase the sales force and as we mentioned last time we added 12 new people to that channel during a quarter. And as I mentioned during my comments, that -- that clearly led to an increase in both unit and pricing volume during the quarter. What -- I believe that our real opportunity for Hackett now will be now our ability to continue to transition our product, because we want to -- we want to not only capture increased sales activity, but we want to see that activity being sold in multi year or subscription, as we mentioned renewable products. We think that opportunity exists. And then the strategy down all the way through our implementation offering, we -- we already know the direct impact that it has on our business strategy or business transformation services. We believe that as we expand the Hackett offerings to have a significant more feedback to clients relative to how effectively their specific software decisions are impacting how efficiently they run their business, we think that could have a more direct impact then on our technology centric implementation services. So we're -- we're looking at it as, obviously a very key channel for us in 2003, we think it should aggressively grow in its own right throughout that period. We will probably start sharing what we think that percentage of total revenue is on a quarter by quarter basis as 2003 progresses but obviously we know that it's a very powerful channel strategy. We know that our ability to access and get the client is very powerful. And we know that if we continue to improve and expand the offerings and make them more valuable and, in our view, more renewable with some of these enhanced monitoring capabilities the impact will be felt not only in Hackett, but all the way through the implementation revenues.

Your next question comes from Mr. John Mahoney with Raymond James. Mr. Mahoney, you may ask your question.

Hi, this is John again. I just was looking at -- on the restated results, I was wondering would Jack do the break out on all of those on the quarter.

The break out of what?

All the restated results.

John, what I could do, if it's helpful, is I could actually post on our web site, you know, restated results by quarter for the last two years.

Okay. Well --.

If that would be helpful.

Yeah that would be helpful. I also noticed --.

I'll check -- I will obviously clear that with the attorneys but I'm pretty sure I can do that.

Under the old method, and, again, I haven't transitioned my brain to work under the net revenue basis, you -- you generated a year ago a 40% gross margin, and now it's 31. I know it's all utilization. How quickly can we see something back in the 40% range? This wasn't really the hay day fourth quarter, but it wasn't a pretty time either.

If you're talking about on a net basis, I mean the gross margins that I gave were effectively on a -- on a gross basis. If you look at this on a net basis, our gross margins, we're at about 32% on a net basis.

Right. I -- I know that. I'm just saying -- [INAUDIBLE]

At the beginning of the year they were at about 32% and they've really been in the low 30s all year. And, John, I think -- I mean, obviously when we get to an environment where we see stable to growing revenues, clearly, I believe, we can get -- to the 40% plus range on a net basis. And I think with our philosophy of running tighter utilization as we go into next year as well, that that will help us get no that level.

My comment was just on the restated December '01 results, the 47647 against 28570 of personnel costs during a 40% gross margin as recently as a year ago, and obviously this environment doesn't support that. But is -- is anything dramatically changed, or is your strategy a little out. Will you reach that in the next year or two years?

No. I mean, John, really no changes. I think that -- look, we've done a great job controlling our costs per resource and we've been obviously in this kind of environment very constrained relative to raises and bonuses. I think we've done very well on the cost side. Our rates have held up pretty well. I think we still have that, you know, rate cost difference that can get us back to the -- to the 40% range. And it's really, you know -- you know, John really being able to see stabilized revenue or even growing revenues where, you know, we don't have to, obviously, continue to downsize and -- and kind of behind the eight ball as we go into a quarter. So I think that's the -- you know that's what we need to look for, stable to growing revenue and clearly, I believe we'll get back to the 40% plus range.

What we've also modeled, John, is if we were to run at utilization targets that were also more -- I'll call it more traditional, which is at 70%, that the 40 plus percent margin opportunity would clearly be there.

Okay. Thank you very much.

At this time, Mr. Fernandez, there are no further questions.

Let me then wrap it up right here and thank everyone for participating on our fourth quarter earnings call and we look forward to the next update at the end of our first quarter. Thank you again for participating.