Hackett Group Inc (HCKT) 2009 Q4 法說會逐字稿

Good evening and welcome to The Hackett Group fourth quarter earnings. 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 call are Mr. Ted Fernandez, Chairman and CEO and Mr. Rob Ramirez, Chief Financial Officer. Mr. Ramirez you may begin.

Thank you, operator. Good evening, everyone, and thank you for joining us to discuss the The Hackett Group's fourth 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, Rob Ramirez, CFO. A press announcement was released over the wires at 4:10 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 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, uncertainties, and assumptions that are difficult to predict and which may not be accurate. Actual results may vary. These forward-looking statements should be considered only in conjunction with the detailed information particularly risk factors, contained in our SEC filings. At this point I would like to turn it over to Ted.

Thank you Rob and welcome everyone to The Hackett Group's fourth quarter earnings call. As we normally do, I will start by providing some overview and highlights of the quarter. I will turn it back over to Rob and ask him to comment on operating results, cash flow and on outlook. Rob will then turn it back over to me to provide some commentary on the market and strategic overview and then we will open it up for Q&A. Let me start with the overview and highlights of the quarter.

For the quarter we reported revenues of $35 million and a pro forma loss of $0.02 which was unfavorably impacted by loss recognized on a large technology implantation. With the exception of the $0.04 loss that we recognize on this engagement the quarter and our results were as expected. More importantly the increased diagnostic or Phase 1 activity that I discussed in our Q3 earnings call, materialized into pipeline and engagement wins that are driving the strong sequential revenue guidance we have provided for Q1 of 2010. A strong focus for us throughout the year was to make sure that we did not let the challenging environment prevent us from being aggressive relative to the pursuit of new channels and acquisitions that could improve our ability to grow and expand the value proposition that we offer our clients.

A key part of that goal was the acquisition of Archstone Consulting. On November 10, we closed the acquisition which we have been tracking and negotiating to acquire throughout the year. Once we closed the acquisition we decided we had to fully consolidated all of our functional support activities by year end. This was an important goal since we wanted to start 2010 focused on our client and what we hope would be an improving market opportunity. This was achieved and we believe this effort is already paying off as we have already successfully integrated the expanded capability of Hackett and Archstone on several of our early 2010 wins.

Last quarter we mentioned how the skills, that Hackett brought -- that Archstone brought to Hackett would enhance our ability beyond our well known cost reduction and working capital capabilities. Our new capability to serve clients and the strategy and operations area which include both supply chain and procurement capabilities and enterprise performance management transformation areas strongly enhances the value propositions we now offer our clients. As I've said on our third quarter call, when we look at the number of strategic touch points that Archstone will impact we are excited about the prospects for this acquisition and the ability that it can have on our growth in 2010 and also how it allows us to leverage our SG&A infrastructure.

Financially Archstone exceeded their Q4 revenue in operating margin forecast. The group is expected to be accretive in Q1 as planned. We also said that we believe the Archstone -- that Archstone could add $35 million to $40 million in revenues and be increasingly accretive throughout 2010. All operating and financial progress to date confirms our initial expectations. Additionally when you consider the 3.5 million shares issued and earned for the acquisition compared to the 2.6 million shares that we were able to acquire as part of our share repurchase program during did year, we are happy that we were able to acquire the asset with limited dilution on a year-over-year basis. We expect to continue buy back shares during the year and offset any additional earn out in performance shares that may be earned throughout 2010.

Although 2009 was clearly more challenging than anticipated, we are pleased that we remained on the offensive during the year. These efforts will allow us to start 2010 with much improved prospect. We continue to invest in our people and expand our capabilities while remaining profitable on a pro forma basis. Our plan was to do whatever we could to exit the year as a better company than we were when we started the year. I believe we have done so. I will comment further on market conditions and specific go to market initiatives. First let me ask Rob to provide details on our operating results, cash flow and also comment on outlook. Rob?

Thank you, Ted, and good evening, everyone. I will cover the following topics during tonight's call. In overview of our 2009 fourth quarter results along with an overview of related key operating statistics. A break down of our 2009 fourth quarter revenue and an overview of our cash flow activities during the quarter. I will then conclude with a discussion on our financial outlook for the first quarter of 2010.

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 discussion represent net revenues plus reimbursable expenses. Additionally references to pro forma results specifically exclude non-cash stock compensation expense and intangible asset amortization expense and assumes a normalized tax rate of 40%. For the fourth quarter, pro forma results also exclude acquisition related restructuring charges and one-time costs.

I will now discuss our fourth quarter results. For the fourth quarter of 2009, the Company's gross revenues were approximately $34.6 million, which include approximately $5 million attributable to Archstone. This represents a year-over-year decrease of 29%. Our pro forma net loss for the fourth quarter totaled $899,000 or $0.02 per diluted share. Pro forma net loss excludes non-cash stock compensation expense, intangible asset amortization expense, and restructuring and acquisition related charges and assumes a normalized tax rate of 40%.

Fourth quarter 2009 earnings were unfavorably impacted by approximately $0.04 due to losses recognized on a technology implementation project. This project is a fixed price engagement which required us to recognize a loss in the quarter. Based on our most currently revised estimates, direct costs required to deliver our contractual obligations are in excess of the contracted fixed price. This contract will also unfavorably impact our Q1 guidance by $0.01 as we complete the project in early Q2.

Our GAAP net loss for the fourth quarter totaled $8.6 million or $0.22 per diluted share. GAAP net loss for the fourth quarter includes acquisition related restructuring charges and other one-time charges totaling $5.9 million. Non-cash stock compensation expense of $913,000 and amortization expense of $555,000. Acquisition related restructuring charges which we discussed on our November 10, 2009 earnings call were late to the rationalization of lease obligations and severance costs primarily relating to the acquisition of Archstone in the fourth quarter. These charges were higher than our previous estimate of $3 million to $4 million primarily as a result of lease buy out opportunities that presented themselves as we began our consolidation as well as additional integration related severance costs.

Pro forma cost of sales which exclude stock compensation expense is up sequentially from Q3 by approximately $2.7 million as a result of the incremental cost of sales relating to Archstone and the recorded losses attributable to the technology implementation project previously discussed. Offset by the expected reduction of holiday and vacation related accruals. On a year-over-year basis, pro forma cost of sales decreased by approximately $2 million primarily due to cost reduction actions that were taken throughout 2009 as well as lower bonus accruals.

On a Total Company basis, our pro forma gross margin which excludes non-cash stock compensation expense was 30% of net revenue fourth quarter of 2009 as compared to 45.9% in the fourth quarter of 2008. Gross margins were unfavorably impacted primarily due to decreased revenues, the technology contract loss discussed, and the timing of the Archstone acquisition which was unfavorably impacted by holiday and vacation usage in Q4. The Hackett Group pro forma gross margin on net revenues was 37.5% in the fourth quarter of 2009 as compared to 49.4% in the fourth quarter of 2008. Our annualized gross revenue per professional was $284,000 in the fourth quarter of 2009 as compared to $409,000 in the comparable period of 2008.

We decided to absorb the unfavorable impact of lower Q4 utilization in light of the expected sequential revenue increase in Q1. Pro forma SG&A was approximately $10.8 million or 35% of net revenues in the fourth quarter of 2009 as compared to $13.4 million or 31% of net revenues in the fourth quarter of 2008. SG&A decreased by approximately $2.6 million on a year-over-year basis primarily as a result of lower bonus accruals and commission expenses due to revenue decreases as well as the benefit of other cost reduction actions taken during 2009. As of the end of the fourth quarter of 2009, the Company had approximately $53 million and $15 million of income tax loss carry forwards remaining in the US and in foreign tax jurisdiction respectively.

Breaking down the fourth quarter revenue for 2009, gross revenue for The Hackett Group was $27 million which included approximately $5 million attributable to Archstone. This represents a year-over-year decrease of 20%. On a net revenue basis, Hackett Group revenues decreased 19%. International gross revenues which are primarily based on where the contracted entity is domicile accounted for 30% of the Hackett Group revenues in the fourth quarter of 2009 as compared to 25% in the fourth quarter of 2008.

Our Technology Solutions Group gross revenue totaled $7.5 million, a year-over-year decrease of 49.6%. As a fourth quarter was significantly impacted by the technology engagement discussed. For the Technology Solutions Group, our hourly gross realized billing rate was $79 for the fourth quarter of 2009 as compared to $139 in the third quarter. This decline in billing rate was primarily attributable to the impact of the fixed price loss contract discussed, Q1 will continue to be impacted by this project but we expect that the consultant rate per hour would normalize to historical levels by the second quarter of 2010.

Additionally the offshore component of our technology capabilities continues to increase on implementation engagements. Consultant utilization was 73% for the fourth quarter of 2009 as compared to 72% in the third quarter. As hours continue to be charged to this fixed price project commensurate with our level of delivery effort. The Company's total consultant head count was 644 at the end of the fourth quarter of 2009 as compared to 497 in the previous quarter. This increase is primarily due to the acquisition of Archstone which occurred during the fourth quarter. Now moving on to cash balances.

The Company's cash balances were $16.5 million at the end of the fourth quarter of 2009 as compared to $23.8 million at the end of the third quarter. Cash decreased in the fourth quarter was primarily due to stock buy back activity, increases in DSO and cash outlays for acquisition related restructuring and other one-time expenses. Our DSO at the end of the fourth quarter of 2009 was 68 days as compared to 54 days at the end of the third quarter. This increase is primarily due to the impact of the Archstone acquisition.

Excluding the impact of Archstone, our DSO for the fourth quarter would have been 59 days an increase of five days on a sequential basis. This increase on a normalized basis is primarily due to the impact of holidays on our fiscal year end date. During the first three days of the new fiscal year we received approximately $2.5 million of client payments which would have made our DSO comparable to our third quarter if they had been received prior to fiscal year end. Archstone has traditionally run higher DSOs than we do. As we migrate Archstone to our contracting and billing practices on new client engagements, we would expect our consolidated DSO to improve throughout fiscal 2010. We continue to target DSO levels below 50 days as our overall goal.

During the fourth quarter of 2009, cash was utilized to repurchase 1.1 million shares of the Company's common stock at an average price of $2.78 for a total cost of $2.9 million. From a year to date perspective the Company has repurchased approximately 2.6 million shares at an average price of $2.43 for a total cost of approximately $6.4 million. Subsequent to the fourth quarter of 2009, our Board of Directors authorize an additional increase to the Company's share buy-back program of $5 million. Approximately $5.5 million remains available under the Company's share repurchase authorization as of today's date.

I will now turn to our guidance for the first quarter of 2010. However, before I provide the Q1 2010 outlook it's important to note a couple of important items. The first item is the seasonality of our business relative to costs as we move from Q4 to Q1. Consistent with Q1 guidance provided in previous years, our first quarter guidance for 2010 will reflect sequential impact of the increase in US payroll related taxes and the sequential build up of vacation accruals which will result in a negative sequential pro forma impact of approximately $0.03.

Secondly as we complete the fixed fee technology project, we will be unfavorably impacted by $0.01 due to our inability to deploy these resources on other engagements at normalized rates. As a result we expect Total Company gross revenues for the first quarter of 2010 to be in the range of $43 million to $45 million. We expect Hackett Group revenues to be up organically by approximately 12% to 14% on a sequential basis which assumes a normalized or total Archstone Q4. We also expect our technology solutions group to be up strongly on a sequential basis.

On a sequential basis from Q4 as I have already discussed, Q1 will be negatively impacted by approximately $0.03 due to the traditional increase in US payroll related taxes and the seasonal sequential of build up of vacation accruals. Additionally the technology implementation project discussed will negatively drive an additional $0.01 impact. As a result, we expect our pro forma diluted earnings per share in the first quarter of 2010 to be in the range of $0.03 to $0.05. Our pro forma guidance excludes amortization expense, restructuring charges, acquisition related costs and non-cash stock compensation expense and includes a normalized tax rate of 40%. As a result of our revenue guidance we expect gross margin to be approximately 37% to 39% in Q1.

On an annual basis we expect Archstone gross margin to dilute Hackett historical margins by 4 % to 5% and Total Company-wide margins by approximately 2%. We expect pro forma SG&A for Q1 to be approximately $12.5 million or up approximately $1.7 million primarily due to Archstone related SG&A. We expect our cash balances excluding the impact of any stock buy back activities to be down slightly on a sequential basis as a result of restructuring and other acquisition related payments. 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. Looking forward the momentum that we finished the year with and carried into 2010 speaks favorably about our prospects for the coming year. We also believe that our efforts to engage clients more strategically and the design of platforms or service delivery model will allow us to develop larger revenue relationships with our clients. The nature and extent of the demand that we have experienced for our services over the last 75 days validates this belief. Organizations continue to recognize the need to drive sustainable cost reduction and cash improvement as they enter 2010.

They also realize that as the economy recovers, near-term revenue gain and margins may be difficult to come by. This means operating excellence which allows them to sustain the operating leverage that they have achieved in 2009 will be key to their 2010 results. We believe we can play a very important role in helping them achieve this. At a macroeconomics level we continue to expect to see gradual improvement in the US and international markets as we head into 2010. We have clearly noticed this improved - behavior reflected in our North American demand. We also continue to believe that the European recovery will lag the US recovery by more than a quarter or two.

With that demand overview as a backdrop, let me now comment on some of the strategic priorities with emphasis on revenue growth. We now expect to see meaningful organic sequential growth in Q1 and we remain optimistic about a recovery. We saw clients request and promptly evaluate and launch projects as we exited 2009 and this has continued thus far into 2010. We are also seeing the diagnostic or Phase 1 request as we refer to them continue to come into our pipeline. Additionally when we look at the increase from our January 1 -- January Q1 entry run rate as compared to our March or Q1 exit rate, we also know that we are well positioned for this activity to carry into Q2. So unless the current pipeline activity is derailed, we would expect to see improved market conditions and revenue growth in 2010.

Long term we understand our largest opportunity to grow will come by extending our special market permission from being the premier benchmarking organization to our further expanded global implementation capability. We continue to invest in making sure that our clients understand that we are every bit as good at helping them implement the solution as we are at identifying the opportunity to improve, using our strongly branded benchmarking capability. To that point we are planning to continue to invest in sales training and ensuring that our market facing associates continue to improve their skills at presenting -- go to market messages and engaging clients strategically. This is now more important given our expanded Archstone capability.

As I repeatedly mentioned our long-term goal is to be able to ascribe an increase in percentage of our total annual revenues to clients who are continuously engage with us through our executive advisory programs. At the end of the quarter our membership count approximated 634 across 212 clients which is slightly up from last quarter as we saw strong North American renewal activity in Q4. In the quarter approximately 45% of our Hackett Group sales came from 12% of our advisory client base. In 2010 we will continue to increase our investment in advisory dedicated sale team in both US as well as in Europe.

We also continue to see great opportunity to continue expand internationally. During the third quarter we launched our alliance with IQ Business Group in South Africa that will help us introduce our brand in that marketplace. Last month we launched a new Asia strategic alliance with Nomura one of the leading consultancy in the region. We now expect to see this activity further expand in 2010. We have been evaluating a strategic relationships with several large global consultancy and expect to launch a broad initiative was one of them in 2010. Although we will be busy in 2010 ensuring we achieve the benefits from the acquisition of Archstone we will also continue to look for acquisitions that enhance and strongly leverage our existing intellectual capital to drive and accelerate our growth.

In summary, the strategy which we put in place several years ago has been favorable to our brand expansion, growth and profitability regardless of the short-term impact that we experienced in 2009 from the global economic crisis, we are certain that the opportunity for our organization remains boundless. We have a powerful brand, proprietary and not to mention intellectual capital, a terrific group of talented associates and a strong balance sheet with ample cash and no debt. Let me close by thanking our associates for the terrific efforts during a very challenging year. And to urge them to stay highly focused on our clients, our people, and the opportunities available to our organization in the new year. Those are my comments. Operator, let's open it up to Q&A.

Certainly. (Operator Instructions) One moment for the first question please. First question does coming from George Sutton. Your line is open.

Good afternoon, guys.

Hi George.

So this fixed fee contract that you had for the IT implementation, I'm not familiar with that having been a common strategy in the past. Can you just discuss are there other potential contracts like this? Is this a typical way for you to price deals?

First of all I think, you've been following us long enough to know that we haven't had a pack implementation of this size obviously conclude like this. So the answer is no. It's not common. But in the middle of the year we made a decision to take on a large global implementation in the Oracle EPM space. Clearly the implementation ended up being more complex than we thought, and we simply have decided to deliver on our commitments regardless of the complexities we have encountered and if we had to do it over again, obviously we would do it differently. It has not happened before so we don't plan on it happening again.

Okay, perfect. With respect, it sounds like you fully integrated Archstone now. It sounds like a much more compelling opportunity to go to a broader audience within a Company now when you are taking your capability and their capabilities together. Can you give us an example of how that is coming together in terms of your pitch to that logical customer?

It's actually coming together across very different dimensions, but clearly there were instances where clients may have kept us from helping them with initiatives because they thought our capabilities were limited to the back office activity and they wanted us to have several things. They wanted to see us have a broader procurement transformation capability, supply chain transformation capability and they also were looking for certain industry capability. All of these things which Archstone brings.

The other side of this is that we have an exceptional finance transformation group, but Archstone brought not only strong finance transformation capability to the Hackett Group but they brought a very strong dedicated group to the enterprise performance management area, the area planning and forecasting and reporting is just a very hot area. As the analytical continues to expand their capabilities.

That is another area where we have just introduced them in several engagements where any one of those objections was brought up and the collaboration either us supporting them or vice versa we have already seen several instances where either opportunities are continuing or where we actually closed business. So it has worked out very nicely.

Rob, lastly just so I understand the terms of the Q1 expectations if I look at Archstone for the full quarter in a more normal quarter it should add an incremental $5 million to $6 million on top of Q4. Is that a correct assumption?

Hello? I think we are having some technical difficulties here.

George, the full Archstone fourth quarter number was approximately $9.5 million. So we are expecting them to actually do something, we are expecting sequential growth on that number in Q1. When we calculated organic sequential growth, we've added in approximately either $9.5 million or $9.6 million for Archstone and calculated numbers on that and that's how we calculated the organic sequential growth that was in our release and that Rob commented on.

I understand. Okay. Perfect. Thanks.

We basically quarterized it, George.

Right. Got you. Okay. Thanks guys.

The next question comes from Mickey Schleien Your line is open.

Good afternoon, Ted and Rob. It's Mickey at Ladenburg.

Hi Mickey.

I just wanted to go quickly back to Archstone and perhaps the comments you already provided answers this question but it looks like in the fourth quarter they came in at about 20% above your expectations when you announced the acquisition. Can you give us some idea what aspect of their business in the fourth quarter were operating above your expectations?

Well, it's two things. One is we wanted to be conservative with the guidance we provided since there were so many moving parts and we were integrating it. But, yes, the Archstone business and specifically the strategy and operations piece performed above the original forecast that we used on the third quarter call when we provided guidance.

Okay. On the fixed price contract, did I hear you correctly when you said that there was not material number or amount of other such types of contracts at Hackett at this point in time?

No. We have nothing with that kind of exposure or magnitude. We have not had it, we haven't had anything of this scale or of this magnitude impact our results in our history.

Okay. Thanks, Ted.

The next question comes from Morris Ajzenman. Your line is open.

Hi guys. The guidance you gave, let's call the negative impact sequential in the fourth quarter to the first quarter, $0.03 from payroll taxes, vacation accruals, $0.01 remained, from the fixed price engagement $0.04, what sort of negative impact on that same sort of basis did you have in the first quarter of 2009?

The same, exactly the same except that we didn't have the impact of the technology of any technology job carrying over Morris.

So basically it was $.03 in the first quarter last year?

It was $.03. That's correct.

This year it's going to be $0.04?

It's $0.03 for the operating tax and a vacation accrual buildup and $.01 for the technology project that will continue through the quarter.

Another unrelated question here. Part of this is by Archstone but accounts receivable, $28.7 million versus $25.5 million when revenues were down materially year-over-year. If you took out Archstone, what was the accounts receivable? Did they rise or were they down modestly versus revenues being down much more aggressively? What is going on in the accounts receivable?

No, like Rob said, that we were up a few days and those few days were amounts that were collected the next day or two after we came back from the holiday since the timing was in that period -- whether or not some of that cash hits our lock box in time to record for year end. So, in fact, if you go further Morris, if you were to eliminate the impact from the technology job actually, our DSOs were actually very good. So we had the negative impact of we've got an amount outstanding from that job and then we have a little bit of the timing issue. So that we are really -- when we're really looking on a go forward basis, it's really how quickly can we get the Archstone DSOs to run comparable to ours and clearly that will benefit operating cash flow throughout the year.

This implementation project you're referring to starting in the second quarter when you recognized the hit from it so to speak, what sort of probability dynamics are you looking at in this particular implementation?

No, no, no. We recorded a loss. Like Rob said, the amount that we will expend will exceed the contractual amount and we have recorded a loss for that excess.

I understand, but moving out into the second and third quarter of 2010 --

No. It will be gone. We'll have completed this job in early Q2. So it will unfavorably impact Q1 and it will be negligible in Q2.

Okay, last question. The Hackett Group annualized revenues, $284,000 can we expect to see that to start to rise in the first quarter now? What's the trend on that?

Yes. You'll see it start going up strongly in Q1 and we would expect that to continue to climb throughout the year.

Thank you.

(Operator Instructions) One moment for the next question please. The next question comes from Bill DiTullio. Your line is open.

Good evening guys. I am sitting in for Bill Sutherland. My first question is - can you talk about the overall -- give a little more color on the overall sales productivity trend you are seeing and specifically for your advisory services sales group?

Well, specifically in the fourth quarter we actually had the best renewal rates in North America than we've had in the history of our program. So we were delighted to see that because we really expected clients to really remain constrained or shut down through the end of the fourth quarter. So the productivity was high. The renewal rate was good. So we are obviously coming into a year expecting to have improved sales for that group throughout 2010. Since that revenue amortizes in over one to two years, we would expect to see that revenue improvement from the sales -- improve sales activity we would expect 2010 to really start showing up in 2011.

Okay. How large is that group now?

That group has about I'm going to say a $13 million business over 212 clients.

Great. For this upcoming year what did your acquisition pipeline is looking like?

As I commented, we are busy making sure that -- make sure we accomplish everything we want to with Archstone but if we were to run into a great asset, we would clearly pursue it. We don't have anything like that in our pipeline today.

Okay. Good. Thanks guys.

That does conclude the question and answer session. I would now like to go ahead and turn it back over to Mr. Ted Fernandez.

Let me thank everyone for participating in our fourth quarter earnings call and I look forward to updating you again when we report the first quarter. Thank you and have a nice evening.

Thank you for your participation in today's conference call. The call has concluded. You may go ahead and disconnect at this time.