Hackett Group Inc (HCKT) 2009 Q1 法說會逐字稿

Good evening, and welcome to The Hackett Group first quarter earnings. (Operator Instructions). Please be advised that this conference is being recorded. Hosting tonight's call are Mr. Ted Fernandez, Chairman and CEO; and Mr. Rob Ramirez, Chief Financial Officer.

Mr. Ramirez, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us to discuss the Hackett Group's first quarter results. Speaking on the call today and here to answer your questions are Ted Fernandez, Chairman and CEO of The Hackett Group; and myself, Robert Ramirez, Chief Financial Officer.

A press announcement was released over the wires at 4:05 pm Eastern time. For a copy of the release, please visit our website at www.thehackettgroup.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 the question and 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, uncertainties and assumptions that are difficult to predict and which may not be accurate. Actual results may very. 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.

Thank you, Rob. And welcome everyone to The Hackett Group's first quarter earnings call. For the quarter, we reported revenues of $39.5 million, and pro forma EPS of $0.03, both in line with our guidance. As expected, the results reflect the impact from the volatile economic environment which our clients are experiencing across the US and European markets that we serve. As we noted in February, when we provided our Q1 guidance, although pipeline activity is healthy clients are taking longer to make decisions and they are also doing what they can to reduce the size of their commitments to external providers.

Overall, client indecision is reducing the pace at which we normally convert pipeline to active contracts, and report revenues. As we entered the year, our plans assumed that Q1 would be a bottom relative to revenues. But given the volatility and client decision-making and the lack of broad market improvement reflected in GDP from Q4 to Q1, we are now hoping to see client activity bottom in Q2 and for revenues to stabilize in Q3. With the revised plan in mind we have taken cost-reduction actions that will allow us to continue to invest in our people, in our offerings while maintaining an appropriate level of profitability during the year. If revenues stabilize in the second half of the year, these actions will provide the opportunity to show noticeable improvement in our operating results in the second half of the year. We also believe that these actions will provide sustainable operating leverage when our growth re-emerges.

As expected in Q1, our Hackett Technology Solutions was impacted more significantly by the market environment. We continue to see good pipeline activity, but experience the same client indecisions as we experienced in our other offerings. In this environment, it is more difficult for clients to make decisions on initiatives with longer benefit realization time frames. Having said that, current client activity is such that an equal opportunity exists for our Technology Solutions Services to stabilize in Q3 as it is for our non-technology offerings. As I mentioned last quarter, we will continue to ensure that our clients understand that our unique best-practice intellectual capital in implementation expertise allow them to accelerate the change they must make to improvement their performance especially in this environment. Although we are planning for challenging 2009 environment, we are also making sure that we build on the great momentum we've created over the last several years. We will continue to expand our brand permission and improve in all aspects of our go-to-market execution so that we can be responsive to our client's needs regardless of the economic environment that they face.

As we tell our clients, standing still is not an option, it is important to take the necessary actions to ensure that your competitive position is strengthened during this period. I will comment further on the market conditions and our specific go-to-market initiatives, but let me first ask Rob to provide details on our operating results, cash flow and also comment outlook.

Thank you, Ted, and good evening, everyone. I plan to cover the following four main topics this evening. An overview of our 2009 first quarter results along with an overview of related key operating statistics, a breakdown of our 2009 first quarter revenue, an overview of our cash flow activities during the quarter and I will then conclude with a discussion on our financial outlook for the second quarter of 2009. For purposes of this call any references to Hackett Group will specifically exclude Hackett Technology Solutions. Correspondingly, I will comment separately regarding the financial results of The Hackett Group, Hackett Technology Solutions and the total Company. Please note that all references to gross revenues in my discussions represent net revenues plus reimburseable expenses. For purposes of today's call, I will provide most of my comments on net revenues or revenues before reimbursements.

First, I will discuss our first quarter 2009 results. We are pleased to report gross revenues, and pro forma earnings per dilutive share that are line with our quarterly guidance range. For the first quarter of 2009, the Company's gross revenues were $39.5 million, a year-over-year decrease of 10%, or 7% adjusting for constant currency. On a net revenue basis, Hackett Group revenues decreased 7%, or 2% adjusted for constant currency, and Technology Solutions revenues decreased 12%, as compared to the comparable period in the previous year. s we discussed last quarter, we experienced delays in client decision-making at the end of the fourth quarter of 2008 and in January 2009 that impacted our momentum as we moved in to the new fiscal year. On a total Company basis, our pro forma gross margin, which excludes stock compensation expense was 39.7% of net revenues in the first quarter of 2009, as compared to 42.5% in the first quarter of 2008.

Hackett Group gross margin on net revenues was 46% in the first quarter of 2009, as compared to 50% in the first quarter of 2008. Our annualized gross revenue per professional was $357,000 in the first quarter of 2009, or $369,000 after adjusting for constant currency, as compared to $415,000 in the comparable period of 2008. Pro forma SG&A which excludes non-cash stock compensation and amortization of intangibles was approximately $12.6 million, or 34.9% of net revenues in the first quarter of 2009 as compared to $11.8 million, or 30.1% of net revenues of the first quarter of 2008. The increase is primarily due to a $1.5 million impact of unfavorable foreign currency fluctuations which resulted from an FX loss in the first quarter of 2009 of approximately $400,000, as compared to a gain of approximately US$1.1 million in the first quarter of 2008. Excluding the unfavorable foreign currency impact pro forma SG&A for the first quarter of 2009 would have decreased by approximately 6% from the first quarter of 2008. Our pro forma net income totaled $1 million, or $0.03 per dilutive share for the first quarter of 2009. Pro forma net income excludes non-cash stock compensation expense and intangible asset amortization expense and assumes a normalized tax rate of 40%.

As expected, first quarter pro forma earnings per dilutive share were unfavorably impacted by approximately $0.02 as a result of a fluctuations in foreign currencies, as compared to the first quarter of 2008. On a GAAP basis earnings per share for the first quarter of 2009 were $0.02 per dilutive share, as compared to $0.09 per dilutive share in the first quarter of 2008. First quarter GAAP earnings per dilutive share were also unfavorably impacted by approximately $0.02 as a result of the fluctuations in foreign currencies previously discussed. GAAP net income included tax expense in the quarter of $63,000. As of the end of the first quarter of 2009, the Company had approximately $52 million and $12 million of income tax loss carry forwards remaining in the US and in foreign tax jurisdictions, respectively. Breaking down our first quarter revenue for 2009.

Gross revenue for the Hackett Group was $27 million, representing a year-over-year decrease of 9%, or 5% in constant currency. On a net revenue basis, Hackett Group revenues decreased 7%, or 2% after adjusting for constant currency. International gross revenues, which are primarily based on where the contracting entity is domiciled accounted for 32%, or 34% in constant currency of Hackett Group revenues in the first quarter of 2009, as compared to 34% in the first quarter of 2008. Our Technology Solutions Group gross revenues totaled $12.2 million which represented a year-over-year decrease of 12%. For the Technology Solutions Group, our hourly gross realized billing rate per hour was $156 for the first quarter of 2009, as compared to $160 in the first quarter of 2008. Consultant utilization was 61% for the first quarter of 2009, as compared to 66% in the same period of last year. Our annual utilization target, which is calculated based on 2,080 hours per year continues to be in excess of 70% for this business.

The Company's total consultant headcount was 532 at the end of Q1, down from 547 in the previous quarter, and 536 at the end of the first quarter 2008. During the first quarter we reduced our headcount to conform to current market demand in several practices. Additionally, we also transitioned certain delivery and SG&A support roles to our facility in Hyderabad, India. The benefit of these actions will be partially realized in the second quarter of 2009 due to the impact of severance and other transaction costs and will be fully realized in the third quarter. Now moving on to cash balances. The Company's cash balances including marketable investments of $1.3 million held in Bank of America's Columbia Strategic Cash account and including restricted cash were $26.3 million at the end of the first quarter of 2009, as compared to $34.4 million at the end of the fourth quarter of 2008.

Net cash used in operating activities was $5.2 million for the first quarter of 2009, which was primarily attributable to the payout of 2008 performance bonuses and the timing of US payroll cycles, partially offset by a reduction in accounts receivable. Our DSO, or days sales outstanding, at the end of the first quarter of 2009 was 50 days, as compared to 51 days at the end of the fourth quarter of 2008. This represents a one-day reduction during the quarter, which is a new Company low. During the first quarter of 2009, cash was utilized to repurchase approximately 1 million shares of the Company's common stock at an average price of $2.08 for a total cost of approximately $2.1 million. At quarter end we had approximately $4.8 million remaining in our stock repurchase program authorization. I would now like to discuss our guidance for the second quarter of 2009. In Q2 2009 we expect foreign currency to unfavorably impact revenues by approximately $2 million as compared to the previous year.

In addition, the current macroeconomic climate has affected client decision-making, as client spend is heavily scrutinized and has resulted in elongated sales cycles. As a result, we expect total Company gross revenues for the second quarter 2009 to be in the range of $34 million, to $36 million. We expect both The Hackett Group and Technology Solutions revenues to be down on a sequential basis. We expect our pro forma diluted earnings per share in the second quarter of 2009 to be in the range of $0.00 to $0.03. This pro forma estimate excludes amortization expense and non-cash stock compensation expense and includes a normalized tax rate of 40%. Sequentially, we expect gross margins to improve slightly as we expect cost of sales to decline by at least $2 million from Q1 to Q2 as a result of the actions we have taken, along with the seasonal reductions in payroll related taxes and vacation accruals as they begin to benefit the second quarter.

We expect pro forma SG&A for Q2 to be down at least $500,000 on a sequential basis to approximately $12 million. From a modeling perspective, we expect that the actions that we have taken will be fully realized in Q3, where we would expect cost of sales to be down by approximately an incremental $1 million from Q2, and our pro forma SG&A to be down by approximately an incremental $500,000 from Q2. As a result, we expect our total operating cost to be down by approximately $1.5 million from Q2 to Q3. As Ted has discussed these actions create operating leverage should revenue stabilize, and will provide an opportunity to improve our operating results from Q2 throughout the balance of the year. We expect our cash balances excluding the impact of any stock buyback activities to be up on a sequential basis consistent with our earnings guidance.

At this point I would like to turn it back over to Ted to review our market outlook and strategic priorities for the coming months.

Thank you, Rob.

As we look forward, first let me comment on 2008. In 2008 we were net winners in an increasingly difficult environment. As I mentioned throughout last year that meant we had more clients turn to us quickly than those who either delayed or made a decision to go it alone. It is clear that the first half of 2009 will be more challenging than what we experienced in the second half of 2008. We continue to believe the demand for our services remain favorable. Companies clearly recognize the need to reduce cost and optimize cash during this period of economic uncertainty. However, they are being more thoughtful and involving more people in these decisions. It is also evident that there is a point where the market demand is so volatile that the client decision-making for our specific offerings is affected. At a macro level, we believe that when GDP goes negative by a significant margin, say more than 2% to 3% negative as we experienced in Q4 and Q1. Clients decision-making becomes less thoughtful and reduced discretionary spend impacts the demand for virtually all services, including ours.

In that environment as we have recently experienced, clients will take actions on their own, regardless of whether the action is the most appropriate or will result in sustainable improvement. Between a negative 2% to 3% and say, a plus 2% to 3% GDP environment, clients stay very focused on sustainable productivity improvements, and in that environment we fair very well as we proved throughout all of 2008. There is also a point on the plus GDP side where the growth opportunity is so strong, say beyond 3% where the clients lose focus on productivity and focus on growth at any cost scenario kicks in. Our plan is now that we will see gradual improvement in both European and North American markets in the second half of the year, and that the client decision-making will improve accordingly.

Although we hope for gradual improvement for the balance of the year, our planning and operating actions will not anticipate any such improvement. We also believe that although we do not the length and extent of the current economic cycle, we know that it will pass, and more importantly, that the long-term prospects for our organization remain unchanged. With that demand overview as a backdrop, let me now comment on some of our strategic priorities. Clearly the focus is on revenue or revenue growth. We understand our largest opportunity to grow will become by extending our special market permission from being the premier bench-marking organization to our other offerings. This means improved go-to-market execution across all dimensions of our business. It's all about making sure clients know why you are special. The market today recognizes our proprietary intellectual property but we are working hard for them to ascribe that same permission to our global implementation expertise where a large amount of our total revenue resides.

To that point during the quarter we worked on expanding our client message around key service delivery expertise with our key service delivery expertise which is an architecting and implementing global GNA service delivery strategy for our clients. In our upcoming US Best Practice Conference, we will have a large group of clients here directly from other clients on how they are managing in a volatile economic environment. This conference, which begins Wednesday, represents our biggest marketing event of the year. Executive advisory leverage, as I have repeatedly mentioned, our long-term goal is to be able to ascribe an increasing percent of our total annual revenues to clients who are continuously engaged with us through our Executive Advisory program. At the end of the quarter our membership counts approximated 730 members across 218 clients, which are down slightly from last quarter. In Q1, 30% of our total sales came from 9% from of our Advisory client base.

At the beginning of the year we invested in a dedicated sales team in both the US and Europe, which we expect to impact the performance in our Executive Advisory base in the second half of the year. This was in addition to the incentive plan changes we made for our Advisory program leaders in 2008 and further enhanced at the beginning of this year. Important to note, all of our client touch points, inquiries, research, webcasts remained very high during the quarter. In our - - in all of our upcoming research and marketing programs, we will further highlight our unique best-practice intellectual property, along with our Global Implementation expertise that resides in our transformation and technology groups. In Q1 we completed our version two of the integration of working capital related questions into our traditional benchmark offering. We have also started to expand the training of our combined Hackett and REL teams which we believe will drive more sale opportunity to our working capital management team.

Just last week, we launched our new global delivery methodology which fully integrates the intelectual capital that resides within our best-practice implementation tools and contacts. This is where a large part of our training focus will be for the balance of the year. We also continue to see a great opportunity to expand internationally. We continue to look for alliance relationships as the most efficient way to make this happen during 2009. This is an area where we see how valuable our intelectual property is to potential partners across the globe. A great example is the recently announced strategic alliance with the shared services and outsourcing network alliance which provides for joint marketing of our research and offerings to their 10,000 petitioner membership base. It also provides a great resource for our intellectual property capture and an expanded research base for our entire organization. We will continue to be active in the alliance area throughout the year.

Lastly, we continue to look for acquisitions that would enhance and strongly leverage our existing intellectual capital to drive and accelerate our overall growth. And then as I have commented on now for several quarters, talent management. We fully recognize the potential of our business model can only be limited by our ability to attract, retain, development and motivate our associates. In the latter part of 2008, we rolled out a new performance management program and introduced the first part of our new training curriculum. In Q1, we continue the expansions of these initiatives and associate development programs and received excellent feedback on these new programs.

In summary, the strategy we put in place several years ago has been favorable to our brand permission, and it was clearly favorable to our growth and profitability in 2008 and 2007, even though obviously it has been disrupted now in the first half of 2009. Regardless of the short-term impact that we experience from the current global economic environment, we are certain that the opportunity for our organization remains boundless. We have a powerful brand, proprietary and unmatched intellectual capital, a terrific group of talented associates, a strong balance sheet and ample cash balances with no debt. In 2008 we proved these attributes were extremely valuable during increasingly challenging economic times, and we continue to believe that they will allow us to optimize our marketing opportunity regardless of the environment that our clients face.

Let me close by thanking our associates for their numerous contributions and tireless effort and urge them to stay highly focused on our clients and our people as I normally do. Let me now open it up for Q&A.

Thank you. (Operator Instructions).

Our first question comes from George Sutton with Craig-Hallum. Your line is open.

Hi, guys. You suggested Q2 should, or could, mark the bottom with stabilization into Q3. Can you give us some specific guide posts that you are looking at that might confirm that suggestion.

It's really - - it's really our ability to convert the current pipeline that we have right now. We have opportunities in front of us, George, that if they convert the way we believe they will, that would allow that to happen. And - - and I think you said right should, or could, is right. I mean, in this environment, obviously, - - everything lacks certainly, but we believe that opportunity is clearly there for us.

So just to be clear, the problem is not with your pipeline, your pipeline in your view is as large as its been? It's simply the conversion of the pipeline to business?

Absolutely. Now the real question for us is - - how much of it will ultimately convert or not. Let me give you some color. We went into March with 16 large transactions that at this point - - as we sit here today we have converted 12 of those 16. A portion of them closed in March, but not nearly as many as we hoped. A nice number closed in April, which actually resulted in a pretty decent April sales activity, and obviously we continue to pursue the balance. There's only a couple that we believe have actually gone away. But when - - if you take just that example of those 16 clients, and when the clients decision extends or when it comes in smaller amounts, when their commitments are in smaller amounts. It simply provides for more downtime. It is harder for us to plan. It provides more pockets of non chargeable time and then results in the lower-reported revenue. So that's really what we hope that as the economy recovers, as we see gradual improvement in overall economic behavior, simply clients will go back to making decisions the way we were traditionally accustomed to them making. We clearly didn't see that in March, and we'll have to wait to see how it plays out in Q2. But we know that the activity is there for it to stabilize.

You mentioned your conference coming up soon. Is there a way you can give us a year-over-year comparison in terms of attendees last year versus how many you would anticipate this year.

The attendance will be down on a year-over-year basis, but the seed level participation of clients is actually up. So when we look at the - - I'll call it primary decision makers, we're actually very enthusiastic about the conference. It's going to be very well attended. But there is no doubt that clients are being more cautious in the number of people that may attend from an individual company. So we have clearly seen some - - some reduction in that area.

Lastly for me with respect to the REL business, we track a number of companies that actually sell cash management software and companies that are focused on the working capital from a software perspective, and they are doing extremely well in this environment. I'm surprised that REL specifically is not benefiting from that same trend. Can you just give us a little picture as to why that might be the case?

Well they did benefit and the Q1 results were absolutely solid. So the only question for them is whether or not it gets disrupted. So we'll have to wait and see. But no, as you know they had a strong 2008, and their performance continued into Q1.

Okay. Thanks, guys.

Our next question comes from Mickey Shine from [Landburg]. Your line is open.

Hi, Ted. Hi, Rob. How are you?

Hi, Mickey.

My question is related back to the clients, when we - - during the last call there was a sense that there was clearly a disruption at the end of last year in terms of decision-making, and then things started to improve as the first quarter started to progress at least at the point in time that we had the call. What I want to understand is what happened since then specifically in terms of client behavior that has caused you to become a little bit more cautious about the second quarter.

Well, it is really back to the same comments that I made to George. At the heart of the business or the core of the business where these 16 deals. The best example is for you to go back to the 16 deals. In a traditional environment, especially coming off a pretty good behavior in February, you - - we would have expected, oh, probably 12 of those 16 to actually convert in the month of March, and for many of them to have actually impacted March performance and given us absolutely strong running rate into April. And the decision-making just to use that 16 as kind of a way to paint and respond to your question - - it is simply extended out.

So even though at this point, we have converted, I believe nearly, probably 12 of those 16, it took us much longer to do that. And that resulted in - - in revenue disruption in March and in April that we clearly didn't plan for. And when we look at that even a little further, the opportunity that we were originally tracking when we look at that 16 - - that group of 16, in many of them we closed a contract, but the contract was closed for an amount lower than what we had originally envisioned. Now that doesn't mean that the client relationship will not extend, but any time you have transition points from one phase to another or you need approval, especially in this environment internally from a client, to go from one phase to another, we just know that you need to plan on - - on that to simply take longer. And we're assuming that in Q2 until we see it change as we go in to Q3.

(Operator Instructions). Our next question comes from Bill Sutherland from Boenning & Scattergood, Inc. Your line is open.

Thank you. Hi Ted and Rob. And I apologize in advance for this connection. The - - just a couple of number questions that I noticed. The technology gross billing rate seemed to drop pretty significantly, is that a blip or a trend?

No, that was really when you have look at those - - the groups that reside in that group are the overall balance of our high-peering group relative to the other groups was down on a relative basis. And that was probably the single largest impact just say from one quarter to the other.

Just a revenue mix issue. A change in mix as you look at it second half of 2008 coming in to 2009. But it is a mix that we would expect, because - - we have very high hopes in (inaudible) business. As that business reestablishes its momentum as we hope that it does, that you would see the higher rates that they normally realize blended in with the other two groups increase that overall number. Yes, I have heard that BI is increasingly thought of as a little bit of a nice-to-have in this environment. Is that pretty much the issue?

Clearly, clients understand that having better information is important especially as they are trying to make decisions now. The other thing that is good about that business is that the implementation cycles, and the sale of software come in smaller amounts, which provide for smaller investment and quicker ROI. So we - - we continue to be very hopeful that given the quality of our - - that EPM group, that it will - - that it will - - it will recapture its momentum. Hopefully, in the second half of the year.

The other one was I just noticed the top customer inched up to 8%. Is that the same customer that has been in the top slot for a while?

No. I don't think - - we may have had the top customer there for the second half of the year. But, no, this is actually a different top customer that we had in Q4 of 2008, which by the way was part of the reason why our Q1 was a little softer and that that large current relationship ended at 12/31. And originally that was expected to continue into as late as the latter part of 2001. But some of the reasons for that initiative change and that relationship ended at 12/31. So no, it's a new client.

Is it a Hackett customer?

Actually, it's an REL customer. It's a large working capital engagement - - global engagement that's being done by both our North American and European groups.

So this one would have some duration to it?

The job continues; that is correct.

Okay. Ted, can I get a - - can we get a little color in terms of sequential revenue trend in Q2. If it's - - just more or less if it's balanced between Hackett and Technology.

I think Rob mentioned that Technology was down 12%, and Hackett was down - - I think he said sequentially, 9%.

No, we didn't give the sequential.

Year-over-year but both groups were down, and Tech was down more than Hackett.

(Inaudible)

Sorry Q1 to Q2, or Q4 to Q1.

- - pretty - - pretty - - another significant step down, and didn't know if one group was more impacted than the other.

No, actually we are expecting both groups to be down around that 10% number Q1 to Q2.

Okay.

And I mentioned also that - - because Tech was being more heavily affected in Q1 that, - - we have got an opportunity with the deals we have in place to have our technology group have the same stabilization opportunity that tech - - that we would hope that the non-tech group would have in Q3.

Rob, remind me, does the FX comps stay difficult all - - pretty much through the calendar year?

It will go through Q3, and it will start to level off in Q4.

Okay.

Primarily with the pound was at - - it's kind of record high in Q1 of last year. That weakened in Q2. The euro started off weaker, but then actually strengthened in Q2. So you'll see a lot of the fluctuations that should level off towards the end of the year.

Okay. And Ted, one last one for you. Do you - - are you feeling like - - as far as the acquisition pipeline there's anything that is a little more, - - real at this point, or are you still sort of sitting back and - -

No, there are opportunities for us. It's about making sure that you are doing it at the right value given the opportunity before you. So, we are continuing to be actively - - considering opportunities, but we will only pull the trigger if we strongly believe that will be accretive, highly aligned with our model in both our short and long-term basis. If not, we were pretty happy with the - - I'll call it the full organic performance and profitability that we showed in 2008 and would be comfortable continuing to play that organic hand. But we would love scale, Bill. As you know, we would love scale if we could do that where it makes sense to shareholders, we will do it.

Actually, one more. This example of 16 deals coming into March, was that - - was that a larger number of deals than you would have had last year, or similar?

It was a pretty - - given the - - without getting into details, given the size of the deals, it was a very, very good volume of deals. So, yes, the pipeline activity going into March was - - was good. But getting it through, converting it and converting that into reported revenue was just a heck of a lot tougher than we ever - - than we had experienced in a very, very long time.

Okay. Thanks to you both.

There are no further questions at this time. I will turn the call back to Mr. Hernandez.

Thank you everyone, we look forward to a updating you again when we report Q2. Thank you again for participating. Have a nice evening and afternoon.

Thank you for participating in today's conference call. You may disconnect at this time .