Hackett Group Inc (HCKT) 2003 Q3 法說會逐字稿

Good evening, and welcome to the Answerthink third quarter conference call. Your lines have been placed on a listen-only mode until the question/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, Chief Financial Officer. Mr.Brennan, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Answerthink's third 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. Press announcement was released at 4;13 p.m. eastern time. For a copy of the release visit our web site at www.Answerthink.com. You 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 web site of the before we begin, I would like to remind you that the following comments and in the question-and-answer session 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, 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'd like to turn it over to Ted.

Good afternoon, everyone. As we normally do, I will open the call by providing an overview of the quarter, mention some of our highlights. I will turn it back over to Jack to comment on operating results, balance sheet highlights, and comment on outlook. Jack will turn it back over to me, I will try to provide an update on our strategic priorities, and perhaps further market insight. Then we will open it up to Q & A. So having said, that let me start with the -- my overview comments. We were pleased to report revenues and pro forma EPS results within our previously provided guidance. During the quarter we made significant progress on all aspects of our strategy, and in spite of the economic backdrop our proforma operating profits, gross revenue was 6%, and drove cash flow from operations of $3.6 million. The 6% pretax profit percentage is our highest in nearly two years. We continue to launch new Hackett coverings and more importantly we continue to experience increasing sales activity in Hackett. A very important component of the Hackett activity was the level of multiyear sales that we closed during the quarter with approximately 25% of our total sales volume extending beyond 12 months. This was a combination of the introduction of our new business advisory subscription-based offering, and clients buying multiyear performance improvements benchmarking packages. This new sales activity bodes well for long-term growth prospects and for the transition to multiyear and subscription-based relationships. We also continued to see our best practice implementation go to market message stride strong sequentially growth in our business transformation consulting group. Leveraging our best practice insight is another key component of our strategy. It speaks to our market permission in this area, it also points to the increased need for our clients to know how to optimize existing organizational and IT investment. This is an area that is at the heart of our best practice intellectual capital. On the flip side, and expected our traditionally strong Peoplesoft group continued to be impacted by the completion of several large projects. This was offset by improved performance by our SAP Oracle and business intelligence groups, which included the recently acquired Beacon Analytics acquisition. On the demand side, we continue to believe that organizations are having an increasing difficult putting off necessary business and technology initiatives. This is being reflected in improved buying activity, and decision making, although pricing continues to favor the buyer. We are also seeing increasing number of companies evaluating broad business transformation initiative which to us indicates both their pressing need to improve current business performance, along with their improved perception of market conditions.

Lastly, we announced a very important strategic alliance with Accenture that we believe could open the door to many new Hackett users and give our implementation group the ability to team with Accenture and compete with the most demanding consulting and business process outsourcing opportunities that we may encounter. As I have previously mentioned, we have been strongly tested during this economic cycle, and our performance speaks volumes about our people. They have remained focused on great client service, as well as making noticeable contributions to our strategic and cost management initiatives. I want to thank them and recognize their outstanding commitment to the organization. This was definitely a very important quarter on many fronts. We continued to execute on our strategic priority, demonstrate strong operational discipline, and be responsive to the changing market demands. Having said, that let me turn it over to Jack to provide details on our operating results, our balance sheet and also comment on outlook. Jack?

Thank you, Ted. As usual, I plan to cover our financial results for the third quarter. Highlights and balance sheet items then conclude with a discussion of our outlook for the fourth quarter. For the third quarter, our report revenues 32.9 million within the range of guidance that we previously provided. This represents a 5% sequential increase from second quarter. Pro forma net income was 1.2 million, or 3 cents per diluted share. Which was at the upper end of the range of guidance that we previously provided and 3 cents more than consensus estimates. On a GAAP basis, our net income was 2 cents per diluted share. GAAP earnings included non-cash stock compensation expense of 565,000, related to the previously announced granting of restricted stock earlier in the quarter, and amortization of intangible assessments assets of $274,000. The GAAP effective tax rate was zero for federal taxes with nominal accrual for certain state and foreign taxes. In third quarter, Hackette reported 4 million of revenue and represented 12% of total revenue. Business transformation reported 6.4 revenue and represented 19% of our total revenue. Business applications reported 14.4 million of revenue, which represented 44% of our total revenue. Technology integration reported 8.1 million of revenue, and represented 25% of our total revenue. Starting next quarter, we are renaming our technology integration group to business intelligence, given the current focus and composition of resources in that group. The Hackett Group grew 54% sequentially and has grown from 4% of total company revenue a year ago to 12% today. Hackett continues to benefit from rearchitecture and expansion of its offerings and from a larger sales force. Also, as I mentioned last quarter, Hackett had a -- had strong benchmark sales at the tail end of the second quarter, which favorably impacted revenue in the third quarter when work was performed to deliver those benchmarks. This Business transformation grew 26% sequentially and benefited from our improved ability to position our best practices implementation tools which leverage our Hackett IP. Also, at the beginning of an economic recovery we typically see clients in the planning and strategy phase of enterprise transformation initiatives. Revenue for business applications was impacted by decline in Peoplesoft implementation revenue, expected due to the wind down of a couple large projects. At this point the wind down appears to be complete, and Peoplesoft revenue should be fairly stable as we head into the fourth quarter. Our technology integration group benefited from the acquisition of Beacon Analytics earlier in the third quarter accompanying that -- a company that specialized in Hyperion software implementation. Beacon added 1.6 million of revenue in the quarter. If you break down our business across industry verticals, our largest vertical this quarter was manufacturing, which includes consumer and industrial goods. This vertical represented 40% of our total revenue. Other key verticals were utilities, which was 11% of our revenue, telecommunications had 8% of revenue, life sciences had 8% of revenue, media and communications at 7%, and financial services at 6%. The most significant change during the past year has been the emergence of manufacturing as our largest vertical. With our Hackett products and related follow-on consulting services deliver significant value. In the third quarter, our revenue concentration from our top 5 and top 10 customers was 29% and 44% respectively. This concentration is fairly consistent with last quarter, where our top 5 and top 10 customers represented 31% and 42% of revenue, respectively. The revenue concentration of our single largest client in the third quarter was 8%, which was down from 9% last quarter.

Consultant headcount at quarter end was 486. Which represented a net consultant increase of 17 during the quarter. The increase is principally the result of consultants acquired with the Beacon Analytics deal. Consulting utilization for the quarter was 73% up from 65% in the second quarter. This high utilization reflects an increase usage of subcontractors which we treat as 100% utilized. On a full-time equivalent basis we use 52 subcontractors in the third quarter, compared to only 12 in the second quarter. If you exclude subcontractors, our third quarter utilization rate was at our target rate of 69%. Our per hour realized billing rate was 178 this quarter, down from 186 last quarter. Our rates were impacted bit use of offshore subcontractors in the delivery of ERP engagements. Excluding subcontractors, our rates were comparable to last quarter. Our ERP delivery model includes the blending of offshore resources on larger projects, so we would expect subcontractors to impact our rates going forward, although we do expect the use of subcontractors to be less in the fourth quarter compared to the third quarter. Our gross margins as a percentage of gross revenues were 36% in the third quarter, compared with 32% last quarter. Gross margins benefited from an increase in Hackett revenue which is our highest margin business, improved consulting utilization, and lower severance costs, which decreased from 650 last quarter to [200,000] this quarter. Our SG&A as a percent of gross revenue was 31% in the third quarter, down from 35% in the second quarter. Actual SG&A spending decreased [842,000, or 8%] sequentially. This decrease can be attributed to a reduction in back office personnel and companywide cost containment initiatives. Turning to the balance sheet, our cash balances including restricted cash and marketable investments were 64.7 million, compared it 65.4 million at the end of last quarter. Our cash provided by operations was 3.6 million in the quarter, reflecting positive earnings and lower DSOs. Our quarter end DSOs were 63 days, down from last quarter 67 days. We used net cash of 2.8 million during the quarter, as a partial payment to acquire Beacon Analytics, and used 1.2 million to repurchase our stock during the quarter. Since the inception of our share repurchase program, we have purchased 3.6 million shares of our common stock at an average cost of $2.16. Of our $10 million authorization from our board of directors, 233 million was available for future purchases as of the end of the quarter. I would now like to address our future outlook. I would characterize the overall commercial consulting and IT implementation demand backdrop as relatively stable. We are seeing some improved decision making in activity, but for the most part clients continue to be cautious with spending. The types of projects that we are -- that we see being approved today, include those that have a demonstrated payback, or those that can no longer be postponed and are required to support the business. Many clients have cut back spending during the past few years and have reached a point where their legacy or old ERP versions are no longer responsive to the business. We are also seeing enterprise wide transformation initiatives where clients are repositioning and optimizing their infrastructure to drive greater benefit at a lower cost. As Ted mentioned our new alliance with Accenture should provide a new channel to sell our Hackett products. In addition, our consulting and implementation services should benefit by teaming with Accenture in situations where our scale is not adequate for the opportunity or where our Hackett Intellectual Capital is used to win new business. Over the next few months we will refine our reliance plan by developing our joint marketing strategy and cross training our teams. From a timing perspective, we do not anticipate that this alliance will benefit us in the fourth quarter. We expect to see some small benefit towards the end of the first quarter of 2004, then expanding into the second quarter. For the fourth quarter, we expect our gross revenues to be in the range of 30.5 million, to 32.5 million. That expected range would represent a sequential decline of 1% to 7%. This anticipated decrease results from the seasonality of the fourth quarter which results in less billable days.

Because of our 445 accounting cycle our year end falls on January 2nd resulting in four more holidays in the fourth quarter compared to the third quarter. We also anticipate that there will be an additional four days lost compared to the third quarter, because of planned vacation usage. These eight days lost result in 12% less billable days in the fourth quarter. This translates into an approximate 4 million revenue loss for the fourth quarter. Based on our guidance we plan to make up a large part of that shortfall with increased activity. Each of our four business groups should experience similar revenue trends in the fourth quarter. Which is flat to slightly down revenue compared to the third quarter. Hackett specifically, fourth quarter is impacted by a greater percentage of recent sales consisting of subscription-based business advisory services, which revenues am amortized over 12 months and multiyear deals which creates a good annuity for us. They are also coming off a phenomenal third quarter. Diluted pro forma earnings per share in the fourth quarter should be in the change of 2 cents to 4 cents. This pro forma estimate includes normalized tax rate of 40%. On a GAAP basis, our diluted earnings per share should be in the range of 1 cent to 4 cents. Our GAAP estimate includes zero effective federal tax rate, and a GAAP estimate also includes noncash stock compensation expense in intangible amortization expense of approximately 900,000. Our gross margin percent in the fourth quarter should be comparable to the third quarter. The anticipated revenue reduction should be offset by a reduction in vacation reserves in a lower accrual for FICA taxes. We expect headcount levels to stabilize at the current level. SG&A spending in the fourth quarter should be comparable to third quarter levels. Excluding our stock buyback program, and assuming stable DSOs, our cash position at the end of the fourth quarter should increase somewhat reflecting positive cash flow from operations. At this point I'd like to turn it back to Ted to cover our market outlook and strategic priorities.

Thank you, Jack. As both Jack and I have mentioned we remain cautious about the overall market environment, but there appear to be stability along with other positive signs emerging. Perhaps most promising for us is our belief that our Hackett growth and best practice implementation focus is enhancing our ability to strategically engage clients and help them with their implementation needs. Our ability to use empirical data to help clients understand how proven best practices enables companies to achieve optimal performance is very unique. To be able to provide actionable insight in a matter of weeks and to be able to do that at the price point that we offer gives us a great opportunity to work with the largest companies -- companies in the world. We also believe this operating performance focus will continue as the economy improves and more companies realize the need to make long-term commitments to initiatives that are necessary to target and achieve sustainable world class performance. As I mentioned last quarter, it is important to fully understand just how significantly our focus on the Hackett leverage has changed how we go to market over the last year. Just one example, just over a year ago our Hackett and business transformation groups represented 14% of our business. This quarter, they represent over -- I'm sorry, 31% of our total business. We are still learning which areas and offerings have the greatest market potential, and we are learning how best to position these opportunities to our clients and to fully leverage the new channels that we are creating. Give than backdrop; let me update you on our strategic priorities and our progress during the quarter. Our first initiative let me first comment on the accelerated growth of our Hackett Group and the expansion of that group in renewal and multiyear offerings. Simply stated, Hackett growth not only provides a growing and very valuable source of new revenue to the organization, but we also know that our certain number of Hackett users will use our implementation services. So increased activity is doubly important to our revenue growth, and given the margin opportunity in that business, and the revenue growth opportunity to our ability to create shareholder value. During the quarter, we continued to experience increasing sales activity and improved pricing in our Hackett Group. We also experienced for the first time our ability to sell multiyear benchmarks, and our new multiyear subscription-based offerings. Our new subscription-based offerings now include our ERP optimization offering as well as other very key area such as invoice to cash, purchase to pay, plan to results, and our shared services optimization offering.

Our ability to bundle our services, or to provide a menu of options to our clients, that suits their specific performance and program has gotten off to a very promising start. Keep in mind we've been working on our project architecture for nearly a year, and during the quarter we settled on an offering strategy that we believe will best serve our clients and use our unparalleled empirical data. You can expect us to continue to expand our offering as we continue to increase our user base and learn more about our clients' needs. Our second priority was to expand and integrate our Hackett best practice knowledge into our implementation solutions. During the quarter we continued to expand the modules and functional process that is our best practices implementation or BPI tools cover within our base application, implementation partners which today include Peoplesoft, SAP, ORICAL, Lawson and Hyperion. But as I mentioned in my opening comments, we are clearly seeing an increasing number of clients directly attribute their decision to use us due to the tools and the related insight we bring to bear to their specific situation. Our BPI tools help clients evaluate specifically decide how to redesign their business processes, and how to configure their ERP software or analytic software to optimize their efficiency and effectiveness. Most importantly, we provide this advice knowing that these practices are proven and if properly implemented can yield the target operating improvements. Our third initiative is to create a new revenue channel through a strategic alliance. We've been referring this as our BPO channel. By leveraging our Hackett benchmark offering on larger implementation or BPO projects that we would not be able to serve on our own. We were very pleased to be able to reach such an agreement with Accenture. We knew our Hackett IP brought greater leverage than we were able to capture on our own. By teaming with Accenture we can now pursue those opportunities and we believe a large global partner will give the opportunity to expand Hackett at a significantly quicker pace if we were able to use their global sales and delivery channel. We are very optimistic about the opportunity our new alliance brings to our entire organization. We have started to work very diligently with Accenture to put the marketing and alliance plan in place to actively pursue new opportunities. And although we are at a very early, very initial stages of this alliance, we are already developing a list of opportunities that we are planning to jointly pursue. Fourth initiative was to expand the way we leverage offshore in our delivery offering. We continue to increase the way we integrate offshore leverage into our solutions allowing us to be more responsive top client pricing demands. Over the last year we have clearly learned how to leverage this model in the appropriate client solutions given our service offering. This is evident this quarter as the number of engagement that has offshore component increase. This allows us to be more competitive in pricing model enhancing towards the margin.. This resource model has also given us greater capacity flexibility. It is safe to say that we will continue to look for the most effective way to leverage global sourcing model. Our fifth and last initiative is to continue to pursue strategic acquisitions. We continue to believe that the extended economic cycle will result in further consolidation, and that we should be beneficiaries of this activity given our distinct value proposition, which leverage Hackett and our very strong balance sheet and infrastructure that can be utilized to envelope larger service delivery footprint. As we mentioned -- as we have mentioned, acquisitions must be immediately accretive, and/or have high growth prospect that strongly leverage our Hackett best practice intellectual capital and investment in its sales channel.

Our recent Beacon Analytics acquisition is a perfect example. In summary, we continue to be highly focused on building our value proposition, to look for ways to expand our sales channel in order to position the organization for growth, and to enhance our financial position by smartly investing in our strategic priorities. We think this quarter's achievements strongly indicate that we are on the right track. Let me now open it up to Q&A. Monica, if we can open it up to the group.

At this time, if you would like to ask a question, please press star-1. You will be announced prior to asking your question. If you would like to withdraw your question, press star-2. Once again, to ask a question, please press star-1. One moment. Once again, to ask a question, please press star-1. One moment. At this time I show no questions.

All right, well, then let me thank everyone for participating on our third quarter earnings call. I'm sorry, I'm being held up here.

At this time a question comes from Ian Murray with [Inaudible] Management, you may ask your question.

Hi, guys.

Hi, Ian.

I was wondering if you could describe a little bit the terms of the Accenture agreement, as well as discuss what it means -- what are the implications for the furthering of the database of the Hackett product going forward? Will you be able to pick up information and data from Accenture clients?

That's an excellent question, Ian. Yes, I would say, let me start with the last half of your question. I think probably one of the most significant items of this alliance agreement and perhaps long-term the most valuable one is the fact that we will be able to truly enrich our Hackett database with a higher number of global participants and add complexity and volatility beyond what we currently have which we think is very strong. But without a doubt, we know that to expand that Hackett database outside of the U.S, would take us more time. We have -- we have an operation in Europe but it's a maul footprint in Germany and some individuals in London. We think that could be aggressively expanded if we were able to obviously get the Accenture channel to drive that into the marketplace, given our alliance agreement. So not only with that increase the number of users, as we've always said we know there are a certain number of users that ends up utilizing us and in this scenario they can use us or our partner in downstream revenue opportunity. And clearly as the database grow, and client and number of users grow, the value to current and new participants increases, we believe, very substantially.

Uh-huh.

The second piece of that, which is the downstream opportunity --

Yeah, I know the base sick terms, but I'm wondering how you're -- basic terms but I'm wondering, what do you think is the potential for Hackett next year in terms of top line or if you're willing to go there at all?

No, I'm for the -- unfortunately we're not prepared to go there. Jack always reminds me, this has been very well scripted. Especially as it relates to his comments and anything regarding financial information and outlook. Obviously we think the impacts should be favorable, and if it's well executed, you know, very favorable. But the proof will be in the pudding. We know it will take some time to be able to leverage some of the benefit and to put the plans in place that allows us to do so and we plan to work and have started working very diligently with them to make that happen. So, I don't understand that, it we'll restrict our comments for the time being.

Will there be a revenue impact here in the fourth quarter? Fourth calendar quarter?

No, as Jack mentioned, we do not expect the alliance agreement to impact the fourth quarter. Given the nature of the opportunity that we plan to pursue, we think that would be unrealistic and as Jack also mentioned -- but we'd hope to see some of our current and future activity obviously impact us hopefully towards the back half of that first quarter.

Okay. And one last question regarding the business applications. You mentioned, Peoplesoft has been very strong themselves, but you mention you have some work that's coming to an end, and so therefore your Peoplesoft perhaps is declining. What are the prospects of signing up some new large implementations there?

Well, as Jack mentioned, first of all, we expected to stabilize third quarter to fourth. I can only tell you that the Peoplesoft group has traditionally been one of our strongest performing group, in fact if I look out maybe exclude the last 12 months as they've been impacted by the erosion from those -- the completion of those two large client projects it was probably the highest performer, highest performing group for the two years or maybe even three years previous to that. So given the very strong people in that group, the strong [Inaudible] that we have and we know that Peoplesoft software itself, you know; is a strong product, we would expect it to be -- to grow and contribute that no different than the other ERP groups that we support.

Any way to quantify that?

No, I think we'll limit our comments to the quarter and to Jack's comments relative, specific to Peoplesoft, where we would expect it to be stable and no differently impacted than to the fact that we're just losing some available days given our kind of 445 quarterly impact.

Okay, thank you very much.

Okay.

Our next question comes from he had with Edward Caso (ph) of Wachovia Securities. You may ask your question.

Hi, Ed, that will teach you for having such a thorough call.

We thought we lost you Ed.

I'm digging deep here for a question for you guys. Your average share count on a diluted basis went up meaningfully in the quarter. Is that just the stock price and could you also talk a little bit about how your options are rated?

Ed, as you know, we announced earlier this quarter that we granted 3.9 million restricted stock units to let's say our more senior people. That was issued, best over four years with [Inaudible] over two years much it was issued toward the beginning of the quarter, so most of that impact of the 3.9 million shares does affect our average share count. It should go up in the fourth quarter as you get a full quarter impact of the issuance of those restricted stock issues. Relative to the option overhang, at the current price levels, it's he not that significant. It's probably only adding up at these current levels to about, say, 300 to say 400,000 shares, and obviously that would be in addition to whatever shares we have outstanding which now include these restricted stock units.

And is there some level where the options become material? Some stock price level?

Yeah, I mean we've done some sensitivities at different prices. You know, I would say if you take our price up another buck, you probably have about another 200,000 option, shares that will kick in using the treasury stock method. If you use let's say another -- if you increase from the current levels by another, say, $2.5, probably have about another 700,000 shares that will kick in using the treasury stock method.

Thank you.

Our next question comes from Brian Fifer (ph) of Morgan Stanley. You may ask your question.

Hey, guys.

Hey.

Just wanted to ask you on the current staffing levels for sales at Hackett, and if you can comment on where you may expect that to go in the next few quarters.

We expect it to be reasonably stable, but increasing towards the end of the quarter. But our plans are to significantly increase that as we go into the first half of next year. But we're -- we'll be scaling that as obviously we plan for additional growth going into next year. And that targeted growth and those plans would be exclusive of any unnatural expansion that would take place if Accenture was to take us into some region of the world where we're not currently in.

And how many do you have currently?

Jack, do you have that number?

I would say on the Hackett side we probably have close to 20 at this stage. And just relative to the Answerthink sales force, probably have their, probably around 15 at this stage.

Thanks a lot.

Brian that would obviously exclude the individuals, the more senior individuals, in each of the practices that also have some element of a sales quota and sales responsibility as well.

Thank you.

Okay. Thank you

Once again, to ask a question, please press star-1. One moment. At this time I show no further questions.

All right, well, let me first -- say I'm glad I waited at least a couple seconds and give the gentlemen a chance to jump in and ask some questions, but let me thank everyone for participating on the third quarter conference call. We look forward to updating everyone after we close out the fourth quarter and report those results. Look forward to it. Thank you.