Hackett Group Inc (HCKT) 2003 Q1 法說會逐字稿

Good evening and welcome to the answerthink incorporated First 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 tonight's call are Mr. Ted Fernandez, Chairman and CEO; and Mr. Jack Brennan, CFO. Mr. Brennan you may begin.

Thank you. Good afternoon everyone and thank you for joining us today to discuss answerthink’s first quarter result. 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 4:23 pm eastern time. For a copy of the release please visit our website at www.answerthink.com. We will also place any additional financial or statistical data discussed on this call that is not contained in the release on the Investor Relations page of our website.

Before we begin, I would like to remind you that in the following comments and in question-and-answer session, we will be making statements about expected future results which may be forward-looking statements for the purposes of The Federal Securities Laws. These statements relate to our current expectations, estimates and projections, and are not a guarantee of future performance. They involve risks, uncertainty, 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, Ted will cover our first quarter highlights.

Good afternoon everyone and welcome to our first quarter call. As we normally do, I will provide some overview comments. I will then turn it back over to Jack to give you some detailed comments on our operating results, also comment on our balance sheet, and provide commentary regarding outlook. I will come back and provide some comments relative to the market conditions and our strategy, and then we will open it up for Q&A. Well, now let me start with the quarterly overview.

We are pleased to report results within our previously provided guidance. During the quarter, we continued to experience the cautious spending behavior from our clients that characterize all of 2002. Our hopes of seeing an improved demand environment driven by the New Year budget cycle, we believe, was disrupted by the geopolitical uncertainty and our clients desire to know the impact, if any from these events. We continue to believe that organizations are putting off necessary business and technology initiatives and are only addressing their most important initiatives. We also believe that nearly all our new projects are addressing operational efficiency priorities that have quick or very visible ROI assigned to them.

Initiatives that have broader strati-- that address rather strategic areas that would drive meaningful growth and less volatility especially in the commercial solutions based sector. We believe will come only after corporate America decides to spend or better said, is willing to invest beyond their must have initiatives. These projects are larger, with longer delivery timelines, and also tend to have longer and therefore less certain ROI payback.

Relative to our services, we continue to experience improved activity in our Hackett group which directly impacted our business transformation service line. Our existing Hackett offerings are most closely tied to business profit improvement initiatives which are at the core of our business transformation service line. This activity was offset principally by softness in our business application area as clients continued to either delay or reduce the scope of the larger initiatives. During the quarter, we continued our aggressive investment in broadening our Hackett group, best practices focused offering. Additionally and consistent will all of 2002, we continued our aggressive investments in our business process intelligence tools.

Our BPI implementation tools, as we call them, directly relate proven Hackett best practices to process redesign improvements and software configuration, architecture, and design decisions. These tools are propriety and cannot be replicated by our competitors without access to our Hackett best practices knowledgebase which obviously they do not have. We understand our unique value proposition in everything we are investing in emanates from this strategic position.

During the quarter we also continued our expansion of our Hackett Group sales force. Additionally we announced the completion of our first multiyear business value index benchmark offering or BBI as we call it. Our new benchmark offering is intended to support our client's initiative to target world class process management. Given the size of the operational improvements involved, these initiatives require clients to make a multiyear commitment to these programs. Simply said, world class performance is not achieved overnight. We are aligning all of our Hackett offerings to that end. We believe we have a very unique value proposition by establishing best practice standard to our Hackett Group and then developing implementation tools that utilize these best practice knowledge to help design business processes and they implement business software for client.

On the client side we continue to diversify our client base and reduce our dependency from any one client. As many of you know, this was the largest transition we dealt with in 2002. Although, relationship with this client continues, but dependency from anyone client has been substantially reduced. As I previously mentioned, during the challenging economic period our performance speaks volumes about the quality and effort of our people. They have remained focused on helping clients achieve superior performance as well as making noticeable contributions to our cost management initiative. This clearly could not take place without the outstanding commitment of our people.

In summary, in spite of the demand back drop, we continue to maintain our strong operational discipline, which is allowing us to aggressively invest in our strategy while continuing to strengthen our financial ability to aggressively invest and expand when the right opportunities emerge and when the timing is right. Let me turn over to Jack, to provide details on our operating results, our balance sheet, and also comment on outlook. Jack.

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

In the first quarter our total revenues were $36.8m, which was within the range of guidance that we previously provided. This represents a 7% sequential decrease from the fourth quarter. Our pro forma net loss for the first quarter was $554,000 or 1 cent per share, which was also within the range of guidance that we previously provided. On a GAAP basis our net loss was 2 cents a share. Primary difference between our pro forma earnings and our GAAP earnings was a use of a normalized tax rate for pro forma earnings. On the GAAP basis we provided a full valuation allowance on our first quarter tax benefit.

In the first quarter our business application represented 55% of total revenue, in our sequential basis was down 50%. Our PeopleSoft implementation practice was impacted by the completion of two sizeable initiatives. Technology integration represented 24% of our total revenue and was down 2% sequentially. Business transformation represented 14% of our total revenue and was up 1% sequentially. The Hackett Group represented 7% of our total revenue it was up 71% sequentially. As we mentioned on past calls, during the last six months we have embarked on a strategy to aggressively grow the Hackett Group, which has shown early success. The Hackett Group benefited from higher pricing of our re-architected bench mark product and additional investment in the sales channel. We believe that the growth in the Hackett benchmarking and collaborative learning customer base will lead to additional downstream opportunities for our implementation teams.

If you break down our business across industry verticals, the largest vertical this quarter was manufacturing, which represented 38% of total revenue. Other key verticals were utilities, which was 19% of our revenue; telecommunications at 10% of revenue; and financial services at 9%. Manufacturing increased in the last quarter mainly as a result of the ramp up in projects that we won towards to the end of last year. Utilities decreased as a result of the completion of some large initiatives and a couple of our large utility customers. In the first quarter, our revenue concentration from our top five and top ten customers was 38% and 51% respectively, compared to 43% and 56% respectively in the fourth quarter.

The revenue concentration of our single largest client in 2003 was 10%, which was down from 12% last quarter. Consultant headcount at quarter end was 540. This represents a net consulting decrease of 80 during the quarter. Most of these reductions were on the PeopleSoft implementation and technology integration groups in an effort to align resources with demand. The reductions were higher than what we anticipated at the beginning of the quarter and will require to achieve our goal of running at higher utilization levels. Consulting utilization in the quarter was 68%, up from 60% in the fourth quarter. As we mentioned last quarter, this increase in margin was ear-marked increase in investment in Hackett product development and the sales channel. Our per-hour realized billing rate was $184 this quarter, up from a $182 last quarter. During the quarter, our rates did benefit from a shift in business away from lower rate business application's projects the higher rate in Hackett consulting offering.

Overall the rate environment continues to be very competitive and we do not expect rate pressures to ease off in the near term. For our business, rates have been fairly stable over the last four quarters. I would expect our rate per hour to continue to stay in the low to mid 180s for the second quarter of 2003. Our gross margins as a percent of gross revenues with 31% in the first quarter compared with 28% last quarter. Gross margins benefited from higher rates and better utilization. Our average cost per consulting was slightly higher in the first quarter compared with the fourth quarter. This increase resulted from 630,000 of severance expense in the first quarter and higher FICA and unemployment taxes, which are frontloaded towards the beginning of the year.

Salary increases which go into affect January 1 were very selective and averaged less than 1%. Our SG&A percentage of gross margin is 34% in the first quarter up from 30% in the fourth quarter. Actual SG&A spending increased $700,000 or 6% sequentially. This increase can be attributed to $600,000 of severance in the first quarter and an increase in the Hackett Group SG&A primarily for additions to the sales force and product development. These impacts were partially offset by lower real estate cost and reductions in back office expenses.

Turning to our balance sheet. Our cash balances were $61m compared to $66.3m at the end of the last quarter. Our cash use from operations was approximately $3.4m in the quarter. This usage was primarily driven by the timing of our payroll cycle, which had a $3.2m impact. In the payment of the $1.7m in accrued restructuring cost. These impacts were partially offset by improved DSOs. Our quarter-end DSOs were 57 days down from last quarter's 60 days. We also used cash at $1.7m to repurchase our stock during the quarter. Since the instruction of our share repurchase program, we have purchased $1.9m shares of a common stock at an average cost of $2.8. Of our $5m optimization from our board of directors, $1.1m was available for future purchases as of the end of the first quarter. Our cash position at the end of the second quarter is expecting to be $7-10m higher than the end of the first quarter excluding any impact from our share repurchase program. This increase includes an expected second quarter income tax refund of $8.5m. This refund is expected in the second quarter but there is a possibility it could be received in the third quarter.

I would now like to address future outlook. The environment continues to be challenging which is no different that what we have been seeing for some time now. Corporate budget or planned spending continues to be at depressed levels. Clients continue the second guess at IT spending plan and many continue to reschedule or postpone IT initiatives. We believe that corporate buyers have been somewhat distracted by the war with Iraq, which exacerbated in already inconsistent decision-making process. Most large opportunities continue to be highly competitive and principally include the large systems integrators. Our strategy is to continue to leverage our Hackett best practices knowledge to differentiating ourselves from our competitors. We believe there are competitive position continues to improve with the Hackett intellectual capital and continued roll out of our Business Process Intelligence tools, which deliver proven base practices in the configuration of software packages, like Oracle, PeopleSoft, SAP, and Lawson.

We believe these tools offer a value preposition that our other competitors do not have. On the Hackett front, we will continue to launch new benchmarking in collaborative learning products. We believe as the Hackett Group continues to grow new client opportunities also increase. For our second quarter, we expect gross revenues to be in the range of $31m-$33.5m. Diluted pro forma earnings per share in the second quarter should be in the range of loss of 1 cent to income of 1 cent. This pro forma estimate includes normalize tax rate of 40%. On a GAAP bases, our diluted earning per share should be in a range of loss of 2 cents to income of 2 cents. Our GAAP estimate includes general affective tax rate. Our gross margin percent should be higher in the second quarter reflecting lower headcount and lower average cost per consultant. A lower average cost per consultant reflects primarily less expected severance and lower expected vacation accruement build up compared with the first quarter.

We plan to run at utilization levels in the second quarter that are comparable to the first quarter. By the end of the second quarter, we expect our net consultant head count to be down about 60 positions to an ending number of 480 consultants. Most of these reductions have already been affected. SG&A spending should decrease from first quarter levels but is slightly higher as a percentage of revenue. At this point I'd like to turn back with Ted to cover our market outlook and strategic priorities.

Thanks Jack. I spoken Jack -- I felt Jack and I have mentioned we have yet to see a meaningful change in the demand environment. At the ultimate, our results are being primarily impacted by individual client decision to go forward with budgeted and known ROI initiatives.. We believe that many strategic projects that continue to be put on hold will have an opportunity to remerge when organization have the right level of confidence to invest in their businesses instead of trying to simply muscle improvements into their organizations. We believe our focus on the implementation of best practices as a way for company's to achieve world class performance strongly positions us during the cycle.

We also believe that the operational efficiency focus will continue as the economy improves and more companies realize the need to make long-term commitments if they want sustainable world-class performance in their business models. We also believe that as we continue to roll out new Hackett offering and our sales and delivery associates become more familiar with the application of our new BPI tools that the real power of our strategic focus will become more evident across all areas of our business. You must keep in mind that we expanded our Hackett offering as we entered the fourth quarter and we rolled out our BPI tools and the training also in the fourth quarter. So we now got one full quarter with both of these new initiatives under our belt.

Given that backdrop, let me up date you on the strategic priorities in our progress during the quarter. Our first priority was to integrate our Hackett best practice knowledge into our implementation solutions. As I mentioned on our fourth quarter call, we launched our new Business Process Intelligence tools and initiated organizational training program during the fourth quarter. We continued to expose our clients to our new tools and we are receiving very favorable reaction. We are also continued to expand the number of modules and functional processes our BPI tools cover within our base application implementation partners, which include PeopleSoft, SAP, Oracle, Lawson, and a few others. Additionally, we are also receiving increasing request from our software partners to participate in our recently launched Hackett best practices certification program.

These request for certification from software vendors as a perceived symbol of say a good house keeping seal starts to validate for us the power of our Hackett intellectual capital and our ability to measure the capability of specific software using our new BPI tools. This ability to assess how complete a specific software module provides for the configuration of best practices and correspondently how significant the operational efficiencies is targeted can be achieved is very important to software vendors since they want to make sure that their value proposition is clearly understood. Client's ability to determine ROI is well understood and the completeness of the functionality of the product is understood. From the client's perspective, many of these same tools are used to also assess how effectively a client has actually implanted these software packages.

So, not only are we able to evaluate the completeness and the capability of these software, but we also -- given that knowledge, we are also come in and help client assess how well they have actually configured the software and to help them understand why they are realizing the benefits that they are currently receiving. Keep in mind that our BPI tools help clients to evaluate and specifically decide whether the best practice should be applied to their specific circumstance with detailed reference and guidance on how a specific piece of software must be configured to enable that practice. The level of detail of our tools and the correlation of the best practice to a configuration decision are extremely powerful.

Our second initiative is to accelerate the growth of our Hackett group with new and expanded renewable or multiyear offerings. To that end, we continue to grow our Hackett dedicated sales force during the quarter. We are continuing to see increasing activity as a result of our expanded sales force as well as release of our new offerings. During the quarter we launched our first benchmarking product utilizing our new business value index architecture. This new offering repositions our traditional benchmark offerings so that we can assist and measure a client's performance improvement program over a multiyear period. This the approach also expands the number of data elements we capture and analyze relative to the software and other enabling technologies impacting the area of the enterprise which is being benchmarked.

Our Q2 plan is to get all of our traditional benchmarking offerings which include IT, HR, SG&A procurement and shared services to this new product architecture. We think these enhancements will allow to strengthen the total value proposition we delver to our clients, it will also allow us to work more closely with our clients throughout their total operating efficiency improvement efforts. It requires a commitment to be world class than it requires a program that obviously is done or completed over a number of years in order to achieve and sustain those efforts. In Q2 our plans are to finalize our move to the BBI architecture and we also expect to complete a specific offering focused on ERP optimization. This offering will allow participants to assess how well they have implanted and thereby leveraging specific software investments.

Our third initiative is to create a new business advisory service so that we can actually leverage what has been a pretty meaningful and growth channel for other consulting NSI providers. As we have mentioned throughout the year, this requires us to enter into a meaningful relationships with one or more partners. We believe that the several of the large BPO providers could significantly differentiate their offerings using our knowledge base and BPI tools to access the transformation opportunities and in creating, monitoring and pricing the contracts that they are currently competing for. We continue to discuss this teaming strategy with several possible partners. We also believe that our value to a partner is enhanced by the planned expansion in our Hackett offering and BPI tools that we continue to invest in.

Our fourth initiative is to expand our blended offshore offerings. The need to offer clients and offer a blended solution under certain circumstances as we have discussed over the last couple of quarters does continue to grow. You will continue to see as we look for ways to integrate our offshore partners when appropriate into our solutions. This is clearly happening in more proposal activity. It also allows us to be more competitive with pricing while protecting our increasing margin. This resource model or partnering strategy also has resulted in reduced head count in some of our development centric resources in both business applications and technology integration area. So that if we know that our clients are going to demand these skills and they are going to demand them at a lower rate, we don’t have to carry that resource if it can be provided by our partner at very competitive rates which they do.

Our fifth and last initiative is to continue to pursue strategy acquisitions. We continue to believe that the extended economic cycle will result in further consolidation and that we should be beneficiary of this activity, given our strong balance sheet and infrastructure and even more important our distinct value proposition that we believe can be utilized to envelope in larger service delivery footprint. We have worked hard to accumulate our sizable cash position and believe that targets must be immediately accretive and/or have very high growth prospects for both.

In summary, we will continue to be highly focused on building our value proposition to protect and improve our financial position and to invest in our strategic priorities. These strategies providing answerthink with a unique and highly differentiated value proposition that strengthen our business model and enhance our ability to resume our growth. Having said that those are my comments -- let me now turn it over to the operator to move over to the Q&A session of our call.

Thank you. At this time, we are ready to begin the former question and answer session of today’s conference call. If you would like to ask a question, please press “*” “1” and you will be announced prior to asking your question. To withdraw your question, press “*” “2”. Once again to ask a question please press “*” “1”. Our first question comes from Ed Caso from Wachovia Securities.

Good evening guys and its Clint Fendley for Ed. Ted, I wondered if you can provide a little bit more color on the decreased demand you have seen in the PeopleSoft practice?

Its’ really a combination of two things. One is that we did have some projects that we did mentioned on our last call from one of our large clients that were not -- either discontinued they were pared back some, I think that was part of the expected activity that we have. Also during the quarter, we were finalizing another go-live that our -- and another large implementation where the relationship has continued, but at significantly reduced levels.

Pretty consistent with what we are seeing where, for example, if I take the second example that had been a multiyear relationship, the client is now embarking in new initiatives but all the things that they are doing, they are clearly breaking up into smaller components, which allow them to assess both progress ROI and also give them budget flexibility, which is what we are seeing throughout the-- the market and I would say probably more visibly than we had seen in -- throughout 2002, you know, we noticed more competition in that PeopleSoft pipeline than we have seen in the our call in the prior year. I think that’s probably the most significant change. I would think that clearly we had hoped that the beginning of the year that revenue stabilization was right around the corner, but when we looked at the impact that primarily we have had from our PeopleSoft group, which has been a stellar performer throughout the year.

Has the breakup into the smaller components created increased competition with the internal IT departments?

We are not seeing the increased competition from the IT department for the kind of work that we do we are really just seeing you know, what you end up having is longer sales cycles and you have shorter commitments which ultimately results in lower revenues and lower utilization of resource, obviously the longer you can deploy an individual obviously those starts and stops can really impact your activity. But that was I am going -- I will say that really was the principle activity that we saw during the quarter as a way of updating you from the comments we provided during our Q1 call.

And stepping back, you obviously, the quarter was impacted by the uncertainty in Iraq have you seen any change in your client’s attitude or interest levels since the end of the fighting?

As the answer is that it varies by clients specifically, but I would say that the kind of distraction or the kind of impact that we saw may be in the middle of the quarter, yes that level of distraction I believe is not at the level that we saw at the beginning of the quarter.

Okay thank you.

Our next question comes from John Mahoney from Raymond James.

Hi guys. Couple of basic questions. The guidance for the next quarter $31-$33.5m is that comparable to $32.9m this quarter or the $36.8m?

Well this is comparable to the $36.8m; that’s the gross revenue guidance.

Okay and as I was you know kind of running through numbers on the you know I know the number one client declined you know fairly substantially on a sequential basis and that's been expected. What kind of next 9 excluding that client also seemed to have declined about 20%. Yet you know your total revenues declined 13%; so it seems like everybody else -- all of the smaller guys are really taking a lot of small things improving, but you know seems like one through ten or just all shrunk?

Well we clearly had some good activity obviously coming across other venues but it was insufficient to cover the reduced activity. Primarily from the two largest clients which were two significant Peoplesoft projects. So yes what you are seeing is the activity in those two to a lesser extent maybe a third, but then yes you have seen activity others pick up and cover as you have mentioned a god chunk of it but not all.

Now let’s say John as you look at you know our customer counts, they have been pretty steady over the last say four to five quarters down a little bit, but not nearly as much as revenue. So obviously we are seeing smaller project sizes and I think that’s what you are seeing in the market place right now. You are not seeing as many very significant large implementations that you might have seen you know 12 to 24 months ago. Again, you are seeing things kind of chunk in smaller pieces and more tactical investments around ERP, more work around upgrades, consolidations, additional modules. But you know the large opportunities are just -- there are just not as many out there now as we have seen in the past.

By the way John we also believe that those that maybe showing a slightly lower decrease in the -- I will call it in the commercial sector which is our area of focus are probably doing it because they are carving out some consulting and systems integration work for those service lines from large BPO or other outsourcing initiatives. And that is why we continue to work so hard at playing in that field in essence being the partner to support those initiatives for one of those large partners.

And to do so without obviously that being part of that organization or having to make the capital investments necessary to play in that area. And as you know we have been pursuing that now for about a year; the complexity of doing something like that it is clearly high. Having said that we still believe that, that is the best way to tie ourselves to a very large and growing area of the business that I believe is supplementing some of the -- of our larger competitors who have that offering.

Just a question that even if it I guess embedded in the expectations is SG&A likely to I know it went up $600,000 -- $700,000 this quarter. So is it likely to go down remarkably in the second quarter?

Yes John the expectation is that it will be down -- I would say fairly substantially. Again we have $600,000 of severance that was recorded in the first quarter and our severance expectation is very, very low for the second quarter so -- You know right there we have a $600,000 variance. And we continue to make you know reductions in some of the back office areas. And you know we managed the SG&A pretty tightly, I think we have done a good job there. If revenue is falling off and make the appropriate cutbacks in both our salaries and wages in the billable areas as well as our SG&A expense.

Having said that the wouldn’t a gross margin on your net revenue would do to get to break. Wouldn't it be like a 37, 38% growth?

Yes we expect margins to be higher in the second quarter if you look at we are making some pretty substantial head count reductions plan to run at high utilization. Most of the reductions have already been affected so we get to -- obviously, full benefit of that as we go through the quarter, and our average cost per consultant should be down. We have less vacation build up in the second quarter. in the FICA and unemployment taxes is more front-loaded into the first quarter and obviously less severance as we go into the second quarter. So, there is number of things that will benefit the second quarter.

So, one thing we have done, John, is that if we are able to find -- if we are able to stabilize revenue over the next couple of quarters or do something either -- or able to get some benefit from having a BPO channel to come on in order do something on the acquisition side, we will get some pretty meaningful leverage from the decisions we are making today.

Okay, thank you.

Once again to ask a question, please press "*" "1" and you will be announced prior to asking your question. At this time, there are no further questions.

Let me, as always thank everyone for participating on our quarterly earnings call. We obviously look forward to giving you another update at the end of the second quarter. So, as always we continue -- we appreciate the interest and your continued support. Thank you again for participating.