Hackett Group Inc (HCKT) 2011 Q1 法說會逐字稿

Welcome to The Hackett Group first quarter earnings conference call. (Operator Instructions) Please be advised that the conference is being recorded. Hosting tonight's call are Mr. Ted Fernandez Chairman and CEO and Mr. Robert 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 2011 results. Speaking on the call today and here to answer your questions are Ted Fernandez Chairman and CEO of Hackett Group and myself Robert Ramirez CFO. A press announcement was released over the wires at 4.05PM 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 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. Consistent with prior quarters I will open up with some overview comments about the quarter. I will then turn it back over to Rob and ask him to comment on the quarter's operating results, detail on cash flows and also will provide his comments relative to guidance. Rob will then turn it back over me which will allow me to make some comments relative to the market condition and also comment on some of our strategic priorities and we will then open it up for Q&A.

Let me start first with our quarterly highlights. We are pleased we were able to report revenues up $52.9 million which was above our guidance. With pro forma EPS of $0.07 which was at the high end of our guidance. As we mentioned on our last quarter's call, after a slow start in January we expected to gain momentum through the rest of the quarter. We actually exceeded this activity which is allowing us to report a 9% quarterly sequential revenue increase with year-over-year growth of 13%. More importantly given our improving quarter end revenue exit rate we expect the strong sequential growth to continue from Q1 to Q2.

Consistent with previous quarters our strong results continue to emanate from our solid US activity, servicing our advisor client-based more broadly, cross-selling synergies from the Archstone acquisition, and for the first time improving activity in Europe and more recently Asia Pacific. It was also nice to see the ramp in client activity during the quarter across most of our practice groups. In addition it is clear that our efforts to expand our brand permission from helping clients define it's performance improvement opportunity to assisting that client implement our recommendation continues to expand.

Our technology solution teams continue to show improvement and build on the momentum established in 2010. This momentum was in both our EPM and ERP groups across both Oracle and SAP.

It is clear that our investments in our brand and our associates and our expanded offerings that resulted from the Archstone acquisition, which paid off strongly in 2010, have established a strong base for us to leverage into 2011. We are also excited about the opportunity to further expand our business model through the introduction of our new cloud-based performance dashboard offerings. I will comment about these opportunities in more detail in my strategic overview section of our call.

We continue to believe an economic recovery is underway. Even though we expect to continue to see volatility from the ever growing and complex Global economy. This volatility requires organizations to remain focused on improved decision making as well as operational execution. We feel that our offerings are well aligned with these market conditions. I will comment further on the market condition and specific go-to-market initiatives. But let me first ask Rob to provide details on our operating results, cash flow and also comment on outlook.

Thank you Ted and welcome everyone. Consistent with prior quarters I will cover the following topics during the call. An overview of our 2011 first quarter results along with an overview of related key operating statistics, an overview or our cash flow activities during the quarter, and I will then conclude with a discussion, on our financial outlook for the second quarter of 2011.

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 assume a normalized tax rate of 40%.

Now turning to our first quarter results. For the first quarter of 2011 total Company gross revenues were approximately $52.9 million and above our quarters guidance. This represents year-over-year growth of 13% and sequential growth of 9%. Total Company international gross revenues accounted for 20% of total Company revenues in the first quarter of 2011 as compared to 21% in the first quarter of 2010. Gross revenues for The Hackett Group which excludes Technology Solutions were $36.2 million a sequential increase of 10% and essentially flat from prior year even with a slow run rate ramp at the beginning of the first quarter. Hackett Group revenues represented 68% of total Company revenues in the first quarter of 2011 as compared to 78% of Company revenue in the prior year.

Hackett Group annualized the gross revenue for professional was $368,000 in the first quarter of 2011 as compared to $360,000 in the first quarter of 2010. Sequentially Hackett Group annualized revenue per professional was up 13% primarily due to additional available billing dates in Q1 as compared to Q4.

Our Technology Solutions group gross revenues totaled $16.7 million a year-over-year increase of 65%. We experienced increases in all our technology practices on a year-over-year basis. Sequentially Technology Solutions was up 6%.

For the Technology Solutions group our hourly gross realized billing rate was $159 for the first quarter of 2011 as compared to $154 in the previous quarter and as compared to $107 in the first quarter of 2010. Consultant utilization was 76% for both the first quarter of 2011 and 2010.

Total Company pro forma cost of sales excluding reimbursable expenses and stock compensation expense totaled $29.5 million or 62.8% of net revenues as compared to $26.1 million or 62.4% in the previous year. This year-over-year increase is primarily a result of increased consultant headcount as well as increased utilization of subcontractors and our technology solutions practices in the quarter. Total Company consultant headcount was 691 at the end of the first quarter of 2011 as compared to 663 in the previous quarter and 623 at the end of the first quarter of 2010. The sequential and year-over-year increase was primarily attributable to increased hiring activities in selected practices commensurate with market demand.

Total Company pro forma gross margin which excludes non-cash stock compensation expense was 37.2% of net revenues in the first quarter of 2011 as compared to 37.6% in the first quarter of 2010. The decrease in gross margin is primarily due to higher Technology Solutions revenue mix as well as the increased use of subcontractors on Technology Solutions engagements.

Hackett Group gross margins on net revenue was 41% in the first quarter of 2011 as compared to 42% in the first quarter of 2010. This was primarily due to a slower client ramp up in the first quarter of 2011 when compared to 2010. Technology Solutions gross margins on net revenue was 30% in the first quarter of 2011 as compared to 21% in the previous year. This is primarily due to increased revenue across our technology businesses as well as the first quarter 2010 impact from a fixed price technology project that we discussed last year which depressed revenues and rate per hour.

Pro forma SG&A was approximately $12.8 million or 27.3% of net revenues in the first quarter of 2011 as compared to $12.5 million or 29.9% of net revenues in the first quarter of 2010. This decrease as a percentage of net revenues is primarily due to expanded leverage resulting from increased revenues.

Total Company pro forma net income for the first quarter totaled $2.8 million or $0.07 per diluted share and it was at the high end of our guidance. This performance compared to pro forma net income of $1.9 million or $0.05 per diluted share in the first quarter of 2010. Total Company pro forma net income for the first quarter of 2011 excludes non-cash stock compensation expense of $926,000. Intangible asset amortization expense of $200,000 and assumes a normalized tax rate of 40% or $1.8 million. As of the end of the first quarter of 2011 the Company had approximately $50 million and $12 million of income tax was carry forwards remaining in the US and in foreign tax jurisdictions respectively.

Pro forma EBITDA in the first quarter of 2011 was $5.1 million or 11% of net revenues as compared to $3.7 million or 9% of net revenues in the first quarter of 2010. Total Company GAAP net income for the first quarter of 2011 totaled $3.3 million or $0.08 per diluted share. This compares to $2.7 million or $0.07 per diluted share in the first quarter of 2010 which included a non-cash acquisition earn out remeasurement gain of $943,000.

Now turning to our cash balances. The Company's cash balances were $18 million at the end of the first quarter of 2011 as compared to $27 million at the end of the fourth quarter of 2010. Net cash used in operating activities was $5.2 million for the first quarter of 2011 which was primarily attributable to the payout of 2010 performance bonuses and the timing of US payroll cycles.

Our DSO or day sales outstanding at the end of the first quarter of 2011 was 59 days as compared to 59 days at the end of the fourth quarter of 2010 and 63 days at the end of the first quarter of 2010. We continue to target DSO's below 50 days as our overall Company goal.

During the first quarter of 2011 cash was utilized to repurchase approximately 673,000 shares of the Company's common stock at an average price of $3.58 for a total cost of $2.4 million. At quarter end we had approximately $2.1 million remaining in our stock repurchase program authorization. As a result at last Friday's Board of Directors meeting the Board authorized an additional increase to the Company's share buyback program of $5 million.

I will now turn to guidance for the second quarter of 2011. We expect total Company gross revenues for the second quarter of 2011 to be in the range of $55 million to $57 million resulting in a sequential increase of approximately 7% to 10% on net revenues. For gross revenue calculations this assumes a reimbursable expense ratio of approximately 11% instead of the 12.6% of net revenues reported in Q1. We expect both Hackett Group and Technology Solutions to be up sequentially.

We expect pro forma diluted earnings per share in the second quarter of 2011 to be in the range of $0.07 to $0.09. Our pro forma guidance excludes amortization expense, non-cash stock compensation expense and includes a normalized tax rate of 40%. Sequentially we expect pro forma gross margins to improve as we expect the second quarter to benefit from higher revenue per professional and small seasonal reductions in payroll related taxes and vacation accruals. Partially offset by higher costs related to additional headcount increases.

As a result of our revenue guidance, we expect pro forma gross margin on net revenues to be approximately 38% to 39% in Q2. We expect pro forma SG&A for the second quarter to be approximately $13.5 million or up sequentially as result of increased variable SG&A, sales and marketing expenses and bonus accrual commensurate with increased Company revenues. We expect pro forma EBITDA on net revenues to be in the range of approximately 12% to 13%. 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 back over to Ted to review our market outlook and strategic priorities for the coming months.

Thank you, Rob. Looking forward at the macroeconomic level we continue to expect to see improvement in the US and international markets that we serve. Gradual growth improvement with expected volatility is favorable for our services. Geographically we expect healthy demand in the US and improving demand in Europe. Correspondingly we expect to see the pipeline and revenue ramp momentum that we built throughout the first quarter to carry into Q2.

With that demand overview as a backdrop, let me now comment on some of our strategic priorities.

We have always believed that if we can combine our global brand with a series of intellectual capital offerings that are used on a continuous basis we can improve revenue growth as well as the predictability and profitability of our operating results. Using unique intellectual capital delivered in an easy way coupled with broader transformation offerings would allow us to increase our client base as well as increase revenue per client. The best example of this strategy has been the revenue increase we have experienced from our executive advisory client as they turn to us for meaningful transformation engagements.

We worked hard during 2010 to innovate new ways to develop recurring revenue offerings that leverage our IP as well create an opportunity to serve clients more broadly. We have now completed our first two SAP based automated dashboard offerings of our new Hackett Performance Exchange with very positive feedback from both our beta participants as well as those clients who have now seen the demo of our new dashboards.

The Hackett Performance Exchange dashboard allows a client to measure, benchmark and estimate the performance improvement opportunity of critical operating processes on a monthly basis. Last quarter I tried to provide some detail on how it works so given the fact that we are still in the launch process let me reiterate those comments. We have developed an application that securely extracts operating information directly from a client's ERP system. The information is then encrypted and transmitted to our database which allows users to measure and compare the performance to Hackett peer and world class standards utilizing our cloud based dashboard solution. Best of all the dashboard is fully automated, takes only a few hours to set up and can be viewed on any laptop utilizing secured web access. Allowing client's to track their performance and to compare the results with peer groups will enable them to quickly address performance opportunities related to service level as well as cost and cash performance.

In mid-March we sent out our initial communication to our targeted list of clients asking if they were interested in seeing the demo of our first two dashboards along with an invitation to become a charter member of our new Hackett Performance Exchange. Our plans are at provide you with the initial feedback from this launch when we report our Q2 results.

Our goal is to rapidly grow our user base to through aggressive, introductory pricing in order to drive adoption. As you can imagine the more operating data we capture and analyze on a monthly basis, the more insight and therefore value we can deliver to our clients. As I mentioned last quarter this new offering if successful could help enhance or business model by creating a powerful and possibly continuous relationship with our client. It would mean a new revenue stream, significant increase in data capture and operating insight as well a continuous way to monitor and benchmark our clients performance in critical business areas that could only help grow our consulting business as well. We believe the Hackett Performance Exchange builds on our desire to expand our brand permission and executive advisory client leverage.

So with that in mind let me comment on each in more detail. We always tried to cover our brand permission. We continue to believe that we should meaningfully increase our revenue per client and that this will come by expanding our brand permission from being a premier global benchmarking organization to all of our consulting capabilities. We continue to invest in go-to-market messaging to make sure our clients understand why our benchmarking and best practice insight makes us unlike any consulting organization. Specifically we must make sure that our clients know that we are every bit as good at helping them implement the outcome as we are at measuring and benchmarking their opportunity to improve.

Let me comment on our executive advisory client leverage. Long-term our goal is to be able to ascribe an increasing percentage of our total annual revenues to clients who are continuously engaged with us to our executive advisory programs. These programs will now include our Hackett Performance Exchange. In Q1 our executive advisory members increased to 643 with our clients up now up to 221. More importantly over 50% of our core Hackett -- this excludes Archstone, REL and our Tech Solutions came from sales from less than 15% of our Advisory client base. So we continue to prove that those clients who value our insight and trust on our advisory capability on a continuous basis are turning to us with more frequency and breadth when they have a transformation initiative.

Strategic alliances. Over the last several years we have extended our geographic reach by entering into strategic alliances. We believe these efforts will help us drive incremental growth. In the summer of 2010 we mentioned our pilot alliance launch with a large strategic consulting firm. During Q4 we experienced our first meaningful joint win with his partner. In Q1 we agreed to continue our joint teaming arrangement with this firm through the end of 2011 as we now have several other joint pursuits underway.

Lastly, we continue to look for acquisitions that can strongly leverage our existing intellectual capital to drive and accelerate our growth. In summary, as expected we have started to experience increased activity which is reflected in the sequential revenue increase in Q1 and that we now expect into Q2. We are pleased with how it sets up the first half of 2011 as well as the prospects for the remainder of the year. Our unique ability to combine proprietary intellectual capital with terrific talent, coupled with a strong balance sheet with ample cash balances and no debt continues to bode well for our prospects. As always let me close by thanking our associates for their tireless efforts. And as always urge them to stay highly focused and our clients, our people and the exciting opportunities available to our organization. Those are my comments. Operator, let me then open it up for Q&A.

(Operator Instructions) George Sutton, Craig-Hallum.

You need to give them a conference call best practices. (laughter)

We thought you had just jumped off into the abyss somewhere George. I'm glad to hear your voice. (laughter)

Very nice results. One of the things I'm curious about is, Ted, you've always talked about the perfect environment for your services being kind of where we are now, low growth environment where companies need to focus on costs. Is that part of what you're seeing in the results here?

We're seeing strong activity as I said not only across I'm going to say all of our practices, but all the regions of the world that we serve. US activity is stronger than it is in Europe. As we know we were expecting European activity to improve, but we're seeing that as well. So I would say that as I mentioned in the comments, clearly we are in an environment that is favorable for our services.

So you have this dashboard offering which I would think begins to really push what you've talked about for years which is pushing more of your brand permission into these large companies. Are you starting to see that as you go in to present this demo and engage with those kinds of customers? You mentioned I think you termed it our consulting business can benefit as well. I would think that the cross-selling nature of this could be very significant.

First of all, George, I would say that we've gotten excellent feedback from anyone who's seen the dashboard. I'm hesitant to comment about its prospects only because the proof will be in the pudding. Just to provide you a little bit more detail, that initial communication to our target list of clients went out mid-March. We started setting up meetings and demos for the products in the latter part of April. So we're just getting out in front of clients and giving them a chance to see the product. We're clearly building some activity around the offering and I hope then to be able to provide more tangible insight when we report Q2. But we're still a little bit early.

On the development side as I mentioned on the call we did complete the two dashboard offers. We closed beta on the SAP offerings. We've kicked off beta on the same two dashboards but in the Oracle platform and we think that we can have those done in the next 60 days. So we expect that done by the end of June. We continue to make progress, believe that it has great prospects. But we'll wait until we actually experience that before we comment further.

Last question for me if I could. Your high premium practice has been performing well. I'm wondering if that continued into this quarter?

Yes, it did. Actually all three of our groups continue to show improvement. The tech groups will be up sequentially as will the overall Hackett Group as well. So, yes, we're expecting their progress to continue and we're expecting the Hackett progress to continue as well.

(Operator Instructions) Morris Ajzenman, Griffin Securities.

I need a little more help with the guidance here. Again the first quarter really good and then your revenue projections -- let's look at the low end. $55 million I guess that equates to $0.07 per share in the pro forma basis. If you look at it sequentially from the first quarter $52.9 million goes to $55 million but yet your pro forma EPS would be unchanged. I'm just trying to get -- and you also said sequentially pro forma gross margins improved. I guess all this stuff is SG&A. Why wouldn't pro forma EPS be higher on the low end based on the $55 million if that comes to fruition?

Probably the easiest way to answer your question is that we've always used a $0.03 range. So obviously we're not targeting the low end of the range. We just reported at the high-end of the range. So we prefer that you look at those results and know that we're targeting obviously to be at the higher end versus the lower end of that range. That's really the best way to respond to your question when you look at them just in a purely sequential basis.

Okay. I'm sorry, Ted. Let's look at the $57 million. If you compare that to the previous year that would be about a 6.2% gain year-over-year.

That is correct. If you look at it that way. But when you're in a business like ours you've got to look at the sequential improvement and understand that that really is what denotes the improved activity. Especially when you look more at that you have an opportunity to be up as much as 10% sequentially when the available days are actually going down from Q1 to Q2, that means that our growth from Q1 to Q2 will actually be stronger than the growth that we just reported from Q4 to Q1. So again, maybe beauty is in the eye of the beholder. But we believe that if we're able to report within that range and stay within the upper side of that which is what we normally target, that would provide year-on-year improvement and set up an excellent year for us.

That's a very important point that what are the available days second quarter versus the first quarter? That's an important item to know.

As you can just imagine we don't have the number here top of mind. But as you know in Q1 you have no holidays and very little vacation is taken. When you look at Q2, you end up with your Memorial Day holiday as well the vacation that people start utilizing actually increases pretty nicely. So our available days actually go down some from Q2. Where we actually built available days from Q4 to Q1, the number of available days actually decrease from Q1 to Q2 a few percent.

All right. Can you just talk about the pipeline? What you are bidding on? What's happening right now? Is that same level become more robust, less robust? How does the outlook look from that perspective?

I guess I wasn't as excited as you wanted me to be on my text. But I said that we're experiencing improved demand across all practices as well as the geographic regions that we're serving. We believe it's as I said that the demand environment is favorable. We're going into the quarter with nice momentum and hope that it's not distributed any way the way it was last year. Just to give you a better idea for the year as well, the first half of the year comps favorably for Tech. The second half of the year will comp favorably for Hackett. Which experienced some of the impact from the double dip if you want to call it scuttlebutt that impact our results a little bit in the fourth quarter. No, we think that if we continue to see the clients behave the way they are, and we continue to see the -- both pipeline and revenue deployment go the way it is that prospects for the year for us would be for us to obviously have another very strong year. Thank you.

Bill Sutherland, Boenning & Scattergood.

Did you speak to the sales force in terms of any plans to grow it this year? Or where are you in headcount versus last year?

The headcount is comparable We are adding some headcount here as we launch the Hackett Performance Exchange. We're adding some in the tech areas where you were seeing quite a bit of demand. And added -- both not because your mentioning -- sales force only. But we added some senior talent throughout the second half of last year. Which we believe has the ability to help us a year later than as we go 2011. Our sales force really consists of both the dedicated executives as well as the delivery personnel as well. We believe we're stronger today than we were a year ago.

What is your plans on pricing this year, Ted? I guess on both sides for business?

Probably the best thing I can give you on pricing if you want to consider opportunity is that we're still significantly off from where we were in '08. If we really start seeing pricing leverage -- which we are not counting on in our 2011 plan. I think gradual recovery means that the kind of if you want to pricing does not return back to, if you want to call it an optimal state for some period of time.

We're being if you want to go temperate about our pricing expectations. But believe just the growth in activity with existing pricing expectations would allow us to grow the business. And whatever growth we can put the top line we think that that should be doubled into EPS and bottom line. So the leverage of the business model as you know is pretty substantial. Optimize revenue growth and hopefully we're managing everything the way we believe we can double that percentage growth we should realize on the bottom.

Plans on expanding consultants? I meant to ask that with the sales question.

Yes, we are adding consultants throughout this quarter. Strong demand in tech, but we're also adding internationally and in other practices in the US as well. We will see headcount increase throughout the quarter.

I'm just looking at the metrics. Rob, do you talk about the headcount in terms of consultants on the Hackett site?

No, we don't segregate it out.

You just do total and then consultant refers to both sides, right? Okay. Did you characterize the growth at Archstone, Ted?

No, I did not. Hard to continue to do that. I don't like to piece it out because of the overlap that you end up in the businesses. But I would say in Hackett overall which includes for lack of a better term, core-Hackett, REL and Archstone. We will be adding headcount in that group as well as the tech group and we expect both that group as well as the tech group to be up nicely on a sequential basis.

Okay. Rob, did you give us revenue from non-US as a percent of total?

No, I did not. It's 21% versus 20%. Oh, I'm sorry. Were you asking Q2?

Well ,that's always good. No, I didn't look back actually. So 21%, up a point. Okay.

No, we would hope that international continues to expand with the improving demand that we're seeing in Europe and with the new presence that we have in Asia Pac, Australia principally.

Okay. Then finally I know you're just into the demo phase with the dashboard. But if you sort of centered on how it will be -- what the revenue model will be on that?

Yes. We would expect to have our clients to have an opportunity to sign a multi-year contract with us similar to other if you want to call it software as a service or cloud-based offerings that you may be more familiar with. But right now -- not to get ahead of ourselves -- but right now our focus is with adoption. We think that if we're able to build a nice user base by the end of the year and we were to do that successfully, both the name place and the data significantly improved the prospects for that offering and that it could then have an impact on our results in the second half of 2012.

But you figure you won't get any real commercial sort of sign-ups for -- until quite late this year? Just because people want to -- you're going to give them a few months with it in each case?

We will be as aggressive as we have to gain adoption. So the answer is I think I expect the combination. But in our plan we are planning little to no revenue from this offering in 2011. Because we believe to whatever extent we allow our commercial desire get in the way of adoption that we would be making a mistake on what it could mean to us years out.

So we believe we have the operating results, balance sheet, and cash flow to be able to do this and do this within the kind of goals we've set for ourselves and make the investments do that. So we plan to do both. We plan to continue to grow top and bottom line if the economy allows. And we plan to invest in the adoption of this product with the hopes that it could then have a commercial impact for us in the second half of 2012.

Actually, one last one. On acquisitions, did you touch on what you're seeing out there? Or where that kind of ranks in your capital deployment hierarchy?

We'd love to see more opportunities. We continue to kind of stay in touch, track some. As you know, that's always hit or miss, hard to find the right fit at the right value and the right timing.

But, no. We continue to be very active and look for other ways to identify those opportunities. We've had such great success both culturally and financially from the Archstone acquisition. Obviously we are clearly predisposed to know we have the infrastructure to take more on. But only if it made both cultural and strategic sense.

I'm showing no further questions. I'd now like to turn the call back over to Mr. Ted Fernandez.

I'd like to thank everyone for participating in our first quarter call. We look forward to catching up with everyone again and talk to you about our second quarter results when we report the quarter I believe in early August. So thank you again for participating.

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