Hackett Group Inc (HCKT) 2010 Q2 法說會逐字稿

Welcome to The Hackett Group second quarter earnings conference. Your lines have been placed on a listen-only mode until the question-and-answer session. Please be advised that the conference is being recorded. Hosting tonight's call are Mr. Ted Fernandez, Chairman and CEO; and Mr. Rob Ramirez, Chief Financial Officer. Mr. Ramirez, you may begin.

Thank you, operator. Welcome, everyone, and thank you for joining us for The Hackett Group's second 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, CFO. 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 our 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. The actual results may vary. These forward-looking statements should be considered only in conjunction with the detailed information, particularly the risk factors, contained in our SEC filings.

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

Thank you, Rob. As we ordinarily do, I will start the session by trying to provide an overview or highlights on the quarter. I will then turn it back over to Rob and ask him to comment on operating results, details of cash flow, and also comment on outlook. Rob will turn it back over to me and give me an opportunity to speak about some of the market or strategic initiatives we have underway, and then we will open it up for Q&A.

Having said that, let me welcome everyone to our second quarter earnings call. Q2 was a very strong quarter, as we recorded improved results across virtually all of our practices, which resulted in organic sequential growth of 15%. Correspondingly, we reported revenues of $53.7 million, which exceeded the high range of our guidance. This also resulted in pro forma EPS of $0.08, which was at the high end of our guidance, and that was in spite of $0.01 unfavorable impact due to foreign currency fluctuations. We attribute our results to improved US demand and greater-than-expected cross-selling synergies from the Archstone acquisition. The Hackett Brand provides us great market permission and access to senior executives by broadening our capabilities in enterprise performance management and operations improvement, two areas that are experiencing strong demand during the volatile economic recovery. We have clearly expanded our ability to serve clients.

Of special note was the performance of our Technology Solutions team, which experienced very strong organic sequential growth. Specifically we had experienced strong market receptivity from the combination of our enterprise performance management transformation capability in our technology teams. This enhanced skill combination, along with our ability to extend Hackett relationships into meaningful enterprise performance management engagement, has been a significant part of the success. It's clear our ability to invest in our brand and our associates and broaden our offerings with the Archstone acquisitions in 2009 has resulted in a better-than-expected first half for 2010. It also sets up favorable conditions for the balance of the year. We also see strategic opportunities to further expand our sales reach and leverage our unique enterprise benchmarking and best practices intellectual capital in new ways. I will comment about these opportunities in more detail in my strategic overview comments later on.

Regardless of its strength, we believe an economic recovery is underway. However, the current economic environment will require organizations to remain focused on their market and improve their operational execution. We feel that our offerings are well-aligned with market conditions. I will comment further on the market conditions and then specific go to market initiatives. Let me ask Rob to provide details on our operating results, cash flow, and a comment on outlook. Rob?

Thank you, Ted. As usual, I will cover the following topics during the call -- an overview of our 2010 second quarter results along with an overview of the key operating statistics, a breakdown of the 2010 second quarter revenue, as well as the overview of the cash flow activities in the quarter. I will then conclude with a discussion on our financial outlook for the third quarter of 2010.

For purposes of this call, any references to The Hackett Group will 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 assume a normalized tax rate of 40%. This quarter's pro forma results also exclude the impact of non-cash acquisition earnout remeasurement gains.

For the second quarter of 2010, the total company gross revenues were approximately $53.7 million, an increase of 15% on a sequential basis and above our quarter's guidance. The quarter benefited from improved client demand across virtually all service groups. Year-over-year growth was 55%, reflecting the impact of Archstone acquired in the fourth quarter of 2009. Total company international gross revenues accounted for 21% of total company revenues in the second quarter of 2010, as compared to 24% in the second quarter of 2009.

Total company pro forma net income for the second quarter totaled $3.3 million or $0.08 per diluted share and was at the high end of the values. This was achieved even though the second quarter pro forma earnings per dilutive share were unfavorably impacted by approximately $0.01 as a result of foreign currency transaction and translation losses. The performance compares to $0.05 per diluted share in Q1 and $0.02 per diluted share in the second quarter of 2009. Pro forma net income excludes non-cash acquisition of earn-out remeasurement gains of $784,000, non-cash stock compensation expense of $1.2 million. Intangible asset amortization expense of $515,000 and assumes a normalized tax rate of 40%.

Total company GAAP net income for the second quarter totaled $4.4 million or $0.10 per diluted share, and this compares to $2.7 million or $0.07 per diluted share in the first quarter and to $160,000 or [$0.00] per diluted share in the second quarter of 2009. Total company pro forma cost of sales, excluding reimbursable expenses and stock compensation expense totaled $28.7 million, a sequential increase of approximately 2.6 million. The sequential increase is primarily driven by increased headcount and increased incentive compensation accruals. On a year-over-year basis, pro forma cost of sales is up $8.9 million, primarily as a result of the Archstone acquisition in the fourth quarter of 2009. Total company pro forma gross margin, which excludes non-cash stock compensation expense, was approximately 40.1% of net revenues in the second quarter of 2010, as compared to 37.6% in the first quarter and as compared to 36.7% in the second quarter of 2009. This was primarily driven by increased revenue [for] professional.

Pro forma SG&A was approximately $13.8 million, or 29% of net revenues, compared to $12.5 million or 30% of net revenues in the previous quarter. This sequential increase was primarily attributable to increased variable SG&A expenses relating to recruiting and incentive compensation costs as well as foreign currency losses. Pro forma SG&A was $10.4 million or 33% net revenues in the second quarter of 2009. This year-over-year decrease as a percentage of net revenues is primarily due to the efficient integration of the Archstone back office functions as well as lower Archstone selling costs when compared to the Hackett sales model. Pro forma EBITDA on net revenues in the second quarter was 12.2%. We expect further operating margin improvement in the second half of the year. As of the second quarter of 2010, the company had approximately $49 million and $60 million of income tax loss carryforward remaining in the US and in foreign tax jurisdictions respectively.

Now, moving on to additional metrics relating to second quarter, total Hackett Group gross revenues were $39.3 million, a sequential increase of 7% and a year-over-year increase of 60%. The Hackett Group total revenues represented 73% of total company revenues in the current quarter as compared to 71% in the previous year. The Hackett Group annualized gross revenue for professional was $380,000 in the second quarter of 2010, as compared to $327,000 in the second quarter of 2009. Hackett Group gross margins on net revenues was 43.6% in the second quarter of 2010, as compared to 42.5% in the Q1 of 2010 and as compared to 43.4% in the second quarter of 2009. The sequential increase is primarily due to increased revenue for professional, offset by the impact of increased hiring activity and increased incentive compensation accruals.

Our Technology Solutions group gross revenue totaled $14.4 million, a sequential increase of 42%. We experienced increases in all of our technology practices on a sequential and year-over-year basis. For the Technology Solutions group, our hourly gross realized billing rate was $141 an hour for the second quarter of 2010, as compared to $107 an hour in the previous quarter and as compared to $144 in the second quarter of the prior year. As discussed in prior quarters, our hourly billing rates had been negatively impacted by a large fixed-price contract. Our consultant rate per hour is now approaching historical levels as that project is winding down and resources have been deployed to other engagements. Consultant utilization for our technology group is 81% in the second quarter of 2010, as compared to 76% in the previous quarter, primarily due to increased revenue. Total company consultant headcount was 655 at the end of second quarter of 2010, as compared to 623 in the previous quarter. This increase was primarily attributable to escalated hiring activities across all groups commensurate with current market demand.

Now, moving on to cash balances. The company's cash balances were $19.1 million at the end of the second quarter of 2010, as compared to $16.6 million at the end of the first quarter of 2010. Cash increase in the second quarter was due to cash generated from operations of approximately $5.2 million primarily driven by increases in net income, decreases in DSO, and the timing of US payroll. Cash generated from operations was partially offset by the second quarter stock buyback activity, which totaled approximately $2.1 million.

Our DSO at the end of the second quarter of 2010 was 54 days, as compared to 63 days at the end of the first quarter and 68 days at the end of 2009. The decrease is primarily due to improvements in Archstone DSO achieved during the quarter as we continued to migrate Archstone to our contracting and billing practices and new client engagements. We continue to target DSO levels below 50 days as our overall company goal. During the second quarter of 2010, cash was utilized to repurchase 682,000 shares of the Company's common stock at the average price of $3.02 for a total cost of $2.1 million. For the year-to-date perspective, the company had repurchased approximately 715,000 shares at an average price of $3, for a total cost of approximately $2.1 million as of the end of the second quarter. At its quarterly meeting, our Board of Directors authorized an additional increase to the company's share buyback program of $5 million, which brings our remaining authorization to approximately $7.4 million as of today.

I will now turn to the guidance for the third quarter of 2010. The second quarter of 2010 benefited from the timing of the July 4 holiday and related vacation taken, which will impact Q3 in the current year. In the prior year, the holiday was on the last day of fiscal Q2, but this year fell on the first day of Q3. In Q3, we expect the impact of the additional US holiday and the typical increase in vacation utilized in both the US and Europe to unfavorably impact the available days in the third quarter by approximately 6%. Despite this impact, we expect total company gross revenues for the third quarter of 2010 to be in the range of $51.5 million to $53.5 million. We expect our pro forma diluted earnings per share in the third quarter of 2010 to be in the range of $0.07 to $0.09.

Sequentially, we expect pro forma gross margins to be reasonably consistent as we expect the third quarter to benefit from the seasonal reduction in US payroll, related taxes resulted from reaching the FICA limits, and the utilization of vacation accruals, offset by higher costs related to headcount increases and higher incentive compensation-related accruals. We expect the pro forma SG&A for the third quarter to be approximately $13 million, or down sequentially by approximately $800,000. We expect the pro forma EBITDA on net revenues to continue to expand as we move into Q3. 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 to Ted to review our market outlook and strategic priorities for the coming months.

Thank you, Rob. Looking forward, our offering are focused on helping organizations achieve sustainable operating improvements. Although the sluggish environment may make the decision making more thoughtful, this should not diminish the need for our unique expertise and intellectual capital. At a macroeconomic level, we continue to expect to see gradual improvement in the US and international markets that we serve in the second half of 2010. Although we know this will vary by geography and client, we expect the environment to remain favorable for our services. Geographically, we expect to see healthy demand in the US. And in Europe, we expect demand to improve even if it's at a more tepid rate than our North American activity that we have experienced, and we expect to experience through the balance of the year.

With that demand overview as backdrop, let me now comment on some of our strategic priorities with emphasis on revenue growth. First, our focus on expanded brand permission. We understand our largest opportunity to grow will come by extending our special brand permission from being a premier global benchmarking organization to our expanded global consultant capability. We continue to invest in making sure our clients understand that we're every bit as good at helping them implement the outcome as we are at sizing the opportunity using our globally recognized benchmarking capabilities.

Executive advisory client leverage. As I repeatedly mentioned for the last few years, our long-term goal is to be able to ascribe an increasing percentage of our total annual revenues to clients who are continuously engaged with us through our executive advisory program. In Q2, we saw our executive members decrease slightly to 600, with client counts remaining virtually flat at 214. In the first half of 2010, over 40% of the total Hackett revenues -- this is excluding Archstone and the Technology Solutions group -- sales came from less than 20% of our advisory client base. We continue to see great loyalty from this client base. Our advisory relationship allows us to maintain a continuous and strategic relationship with the client, and we understand we must continue to serve the clients more broadly.

Cross-selling opportunities. There is also very natural revenue growth opportunity that comes from cross-selling opportunities across our different practices. A great example is the great success that we have had impacting the growth of the EPM transformation group that came with the Archstone acquisition. Leveraging Hackett client and also how the leverage of the EPM group has influenced the success of our Hyperion Technology Group -- we see many opportunities for cross selling to and from our Archstone strategy and operations team, our REL Total Working Capital Group, and the other Hackett Group teams. During the third quarter, we made organizational moves to better align these opportunities and improve on our execution.

Associate development. We are continuing to invest in our go-to-market training to ensure our market facing associates broaden their knowledge about our expanded offerings and allow them to improve their skills at presenting our key go-to-market messages. This is now more important than ever given our expanded capabilities. Specifically in Q3, we will be hosting US-based and European-based training that will include many of our key market -- as many of our key market-facing associates as possible.

Strategical Alliances. Since the summer of 2009, we have been evaluating strategic relationships with large strategic consultancy. Based on these efforts, we have now launched a pilot program with our global strategic consulting that will last through the balance of the year. This will provide for the joint sale and delivery of our respective offering. As I mentioned last quarter, we have also been collaborating with a large software provider on a potential offering that will leverage our benchmarking intellectual capital. This type of relationship will result in the sale of our IP in conjunction with their software and could provide an entirely new way to grow revenue and our brand in a very exciting way. We will update you on the efforts in more detail as we're closer to the formal launch of this new offering.

Lastly, let me comment on potential acquisitions. We will continue to ensure that we have achieve the targeted benefits from the acquisition of Archstone Consulting. But given our early success, we'll continue to look for other acquisitions that can strongly leverage our existing intellectual capital, the access that our brand provides us, and that also accelerate our growth.

In summary, we are pleased with our improved performance in the first half of the year. Additionally, when you consider a powerful brand along with our unique ability to combine proprietary intellectual capital with terrific talent, coupled with a strong balance sheet with ample cash balances and no debt, we remain very excited about our prospects. As always, let me close by thanking our associates for their tireless efforts, and as always, urge them to stay highly focused on our clients, our people, and the many opportunities available to our organization. Those conclude our comments. We'll now turn it back to the operator and we'll start Q&A. Operator?

(Operator Instructions). Our first question comes from George Sutton. Your line is open.

Good afternoon, guys. Great results.

Thank you, George.

So as we look at what other consultants have been telling us leaving the second quarter, I have not heard the same level of optimism from them that I am hearing from you, frankly, nor have we seen the same results. How much of this is internal from your perspective? How much of what has been driving your business or impacting your business has been external?

Well, obviously, we're experiencing external demand, but as we believe that we have simply gotten better at framing a broader opportunity, we have improved from the acquisition of Archstone, and I think it's improved execution, I think, along with improved demand. We have given this quite a bit of thought. I think part of the issue, George, is we expected the year to be more difficult, and we're very pleased with the first half of the year. It's stronger than what expected, which is what you're saying. We expect clients to be more thoughtful if things become more difficult for them. But we also know that unless clients reach a point where they're literally shutting down all of their activities, let's just say, slower growth, a slower GDP growth will encourage others to take -- to actually look at productivity improvement-related initiatives, which will benefit our business. So we're very cautious, we're very thoughtful, and aware of the fact that many of the clients in some industries expect things to slow down, but we're also seeing activity that is allowing us to maintain momentum. So that is why our comment says we're thoughtful of the volatility in the economy, but we also think our offerings are well-aligned with some of the things these clients are going to have to face.

So to look at some of the things you said in the past with respect to what the ideal demand environment is for you, it's typically a modestly negative GDP to a modestly positive GDP environment. Was that really what you're seeing right now and that is why you're seeing some of the demand that you are from a macroperspective?

After the experience of the end of 2008 and 2009, I don't think I will ever say monthly lower GDP growth. But let's just say that at little to some growth, clients are competing for business very effectively. But they're focused on having a efficient operating platform increases. We think we do well in that environment. So I would not continue to comment on saying slightly negative to slightly positive, but I would say little to some. I don't think it's a bad environment for us. Probably the best would be some GDP growth, but perhaps not enough where they lose sight on highly-efficient operating platforms, what we focus on.

And the last question, looks like you added 32 consultants in the quarter, and I don't remember ever making the statement that you made, which is escalated to hiring across all groups commensurate with demand is what is sort of the current state of business. Can you put some brackets around any kind of increases that you're anticipating in terms of workforce for the rest of the year?

We expected to hire a few more, if you go back to our second quarter script, in the quarter, but we didn't accomplish some of the hiring that we wanted to do in Europe. So, we expect to continue to add some headcount in Europe as we go into the third quarter and I don't want to comment beyond that.

Okay.

Really, it wouldn't be planned or something that I am actually executing on today.

Understand. Thanks.

(Operator Instructions). Our next question is from Mickey Schleien, your line is open.

Good afternoon, Ted, Rob.

Hi, Mickey.

Just I wanted to ask about the Oracle fixed price contract, just to confirm. Is that completed at this point?

It's not yet completed. We are hopeful that will be completed in the next quarter.

The next quarter meaning quarter one right now?

Yes. It'll be Q3. There is a possibility that it could slide a little further into Q4, but we're trying everything we can to get at it.

But that's still a bit of a headwind in terms of the hourly rate for professionals?

Yes, that's still going to impact our Q3 hourly rate for professional for the Tech business.

In terms of foreign exchange, it was a headwind in the second quarter, but things to have reversed in terms of currencies. Will be it be a tailwind for you in the third quarter?

We're assuming neutral and we'll hope for a tailwind. How's that? We try to cover it as much as possible, hope to plan for neutral. Sometimes it bites us and you're right, hopefully it swings back and sometimes it helps.

Right. But in other words, in your guidance you're assuming no effect.

That's correct.

Long term, I just wanted to confirm -- is your target still $50 million in revenue and EBIT down 20%.

That's our long-term target. Our execution -- how quickly can we get there, obviously we haven't set a timetable. But we know at that scale, our operating margin expands very nicely and we obviously believe it creates great opportunity for our people and shareholders.

Appreciate your time this afternoon. Thank you.

Thank you, Mickey.

Our next question is from Morris Ajzenman. Your line is open.

Okay. Hi, guys.

Hey, Morris.

Europe -- in the first quarter, basically the outlook was pretty grim, and based on some statements here, gradual improvements looking forward. We're seeing headlines coming up in Europe, Germany, et cetera, things starting to improve. I presume that is what you're basing on, the language being different than before to Europe. I'm pretty sure on first quarter -- correct me if i'm wrong, you are not looking for any improvement over the [right]?

No, we did our annual plan expecting Europe to face pretty strong headwind throughout the year. But we hoped that we would see improved activity as the year went on and that is what we're seeing, and that is why we have tried to increase the hiring in that market and hope to do a little bit more than that in Q3.

Fair enough. And just a quick outlook, I am not sure if I got the SG&A number correct. I thought you said $13 million, but is it $14 million for this coming quarter?

No, we're projecting $13 million, Mick.

It is $13 million. So it's down $1.9 million sequentially?

No, we just report -- you have to look at pro forma. That's pro forma. I'm sorry, Morris, my pro forma SG&A this quarter is $13.8 million, going down to $13 million.

Okay. And that was the pro forma number.

Yes, that's the pro forma number, not the GAAP.

It's an $800,000 improvement, of which half of that alone is the FX going from negative to planning on neutral.

Okay. And the cash flow number, you generated about $5 million in cash this quarter.

Yes.

It was a modest amount in the -- I guess looking at the second half, can we expect the second quarter to be duplicated? Are there cash needs that might reduce that cash number? And, again, that makes a presumption in the fourth quarter. Look at the third quarter. Should the cash generation be the same scope?

Yes, if you use the midpoint of the guidance, which is a number similar to the EPS in Q2, you would have that same level of operating cash flow. And I believe, again, excluding buyback, we may have -- in fact, it will be very similar. We still have some restructuring related payments from Archstone that are playing out during the quarter, and that should be it.

Last question. The guidance you gave of $52 million, and you came in at north of $53 million, was the incremental amount coming up in Technology Solutions or was it in both divisions?

It's really across the board and to some extent, as Rob mentioned, we benefited from the last day of the quarter, the July 4 moving the last day of the quarter last year to the first day of the third quarter of this year.

Right, and again, you would have known that looking up to this quarter anyhow.

Yes, yes, yes. The question is how well do we plan for some of that time off and everything else. We saw improved demand. It was across the board. It was a strong quarter. We expected Tech to do well. Did it do slightly better? Yes, surprised at how strongly they did, but we saw good activity across the board as we planned out Q2.

All right, thank you. Good results.

Thank you, Morris.

Thank you, Morris.

Our final question is from Bill Sutherland. Your line is open.

Thanks. Hey, guys. So the pro forma SG&A, Rob. For the second half, is the non-cash comp going to run about the same level for the rest of the year?

I would expect it to.

So, can you -- will the numbers stay around $13 million for the rest -- for the next two quarters?

Yes, remember the non-cash comp has nothing to do with pro forma SG&A.

Right.

That's pro formaed out. So I expect SG&A depending on how the back half of the year runs will really be impacted potentially positively and negatively by compensation. We have tight controls over other spend, so we anticipate this quarter will be slightly up as we articulated last quarter because of the nature of the hiring and recruiting that was going on as well as incentive comp, and obviously we were impacted by FX. So assuming no major swings in FX, the $13 million, it will come close to $20 million.

Okay. The sequential growth in the Hackett Group, the non-tech, was that contributed by both Archstone and the legacy businesses?

The answer is yes, it was both. The Hackett Group sequential growth was actually stronger than the Archstone sequential growth, but theirs was pretty nice as well.

And in the membership advisory, Ted, is -- can you give us some color there? You said the numbers were off a bit for -- ?

Members were off a bit. We saw some -- actually the client count stayed pretty steady. The entire client retention side stayed very steady. We saw some clients consolidate into fewer memberships and that is what we experienced. We, as you know, at the beginning of the year and as we exit the year, we've made investments to that sales force. So the balance of the year is an important one for us, because we will have had a team with a little bit more time, and you know how important the fourth quarter is.

Oh, so that will be when you see the results of that expansion. I get it.

Yes. It takes time to create effectiveness and also you have a larger renewal base that comes up in Q4.

Right. The -- in the Tech Solutions group, if you were to just adjust for the day availability, does it feel like their tone of business is going to be similar to the Q2?

Yes. They have -- this is improved and sustainable momentum that we're seeing across the three teams -- the significant change, if you recall, the tech side was hurt more than the, if you want to call it, strategic consulting side or the Hackett side last year. But it's nice to see how strongly they have come back, and, as we mentioned in my tech, without a doubt that the combination of the EPM team that came over from Archstone coupled with our Hyperion team is giving the EPM technology team just a strong momentum.

You added, did you actually -- I wanted to get more color on that. That was my last question. You added folks from this EPM team to the Tech group?

No. We, we just -- the team had been learning to collaborate more closely since we did the transaction. First of all, the EPM team from Archstone changed over to the Hackett brand immediately after close, which the Strategy and Ops group did not, because we didn't have the permission in the Strategy and Ops side that we had with the CFO and enterprise performance management side. That transition of the brand and that combination of what's now strong consulting capabilities with what we believe is a very strong EPM technology consulting capability that's resided within Hackett has clearly been one of the areas where we have seen a pretty significant improvement in demands and we expect long-term to continue the improved demand.

Does it work both ways? Is it mostly EPM pulling through Hyperion?

It does work both ways but it's -- interestingly, it starts by the Hackett permission and access to client introducing the EPM consulting capability. And then that capability then, instead of introducing just a consulting capability, introducing the consulting and the technology capability right off the bat. That combination of the increased Hackett access to their target buyer, along with the great, great capability in both the transformation side -- the EPM transformation side and our EPM technology side -- has played out really well for us, and we expect that to continue.

Okay. Great, thanks.

Thank you, Bill.

Thank you, Bill.

There are no further questions at this time. I would now turn the call back to Mr. Fernandez.

Thank you, operator. Let me again thank everyone for participating in our second quarter call and we look forward to updating you again when we report for third quarter. Thank you again.

Thank you for participating in today's conference call. You may now disconnect.