Hackett Group Inc (HCKT) 2011 Q2 法說會逐字稿

Welcome to the Hackett Group Second Quarter Earnings Call. Your line have been placed on a listen-only mode until the question-and-answer session. Please be advised that the conference is being recorded.

Hosting the call are Mr. Ted Fernandez, Chairman and CEO, and Mr. Rob Ramirez, Chief Financial Officer. Mr. Ramirez, you may begin.

Thank you, operator. Good afternoon everyone. Thank you for joining us to discuss the Hackett Group second quarter results.

Speaking on the call and here to answer your questions, are Ted Fernandez, Chairman and CEO of the Hackett Group, and myself, Rob Ramirez, CFO. Our press announcement was released over the wires at 4.05 PM eastern time. For a copy of the release, visit our website at www.thehackettgroup.com.

We will also place any additional financial or statistical data discussed on this call not contained on 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 our second quarter earnings call. As we customarily do, I will open the call with some overview comments relative the quarter. I will then turn it back over to Rob, and ask him to comment on operating results, cash flow, and also provide details on our guidance. Rob will turn it back over to me, this will allow me to make market related comments, and also speak to some of our strategic priorities. Having said that, let me go ahead and provide the overview.

We are pleased we were able to report revenues of $58.8 million, which was above our guidance with pro forma EPS of $0.09, which was at the high end of our guidance. Consistent with our second quarter guidance, which referred to the improved momentum exiting Q1, we were pleased to report a sequential revenue increase of 11%. Equally important is that we have the opportunity to maintain momentum into Q3, even though we expect to have five fewer available workdays in Q3 as compared to Q2 as a result of the increase in personal days off, due to summer vacations. Our strong results continue to emanate from improved demand, servicing our advisory client base more broadly, cross selling synergies from our EPM or enterprise performance management, and strategy & operations teams into technology groups, and from the success of our new operations in Australia.

We now expect to see this improved activity carry in to Q3, across almost all of our practice groups. It is clear that our efforts to expand our brand permission from helping a client to find his performative improvement opportunities, to assisting that client implement our recommendations continues to expand. This is most notable in the increase in meeting counts we experienced in the first half of the current year, as compared to last year.

Our technology solutions team continues to show strong improvement in building the momentum established in 2010, this momentum was in our EPM and ERP across Oracle and SAP. Our investments in our brand and associates including our expanded offerings that resulted from the Archstone acquisition, paid off strongly in 2010, and have established a strong base for us to leverage in to 2011. We are also excited about our opportunity to further expand our business model through the introduction of our new Hackett Performance Exchange Offerings. I will comment about these opportunities in more detail in my strategic overview section of our call.

We continue to belief that a gradual but volatile economic recovery is underway. That the current stock market volatility will not change our clients need to stay focused on operating excellence. The complexity and volatility of a global economy 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 conditions in specific go to market initiatives, but let me ask Rob to provide details on of our operating results, cash flow, and also comment on outlook. Rob?

Thank you, Ted. As I usually do, I will cover the following topics during the call, overview of our 2011 second quarter results, along with an overview of the related key operating statistics, an overview of our cash flow activities during the quarter, and I will then conclude with a discussion on our financial outlook for the third quarter of 2011.

Before I begin my discussion on results, I would like to address organizational realignment that we made during the quarter. As we have previously mentioned in our calls, the acquisition of Archstone Consulting in late 2009, brought a strong EPM transformation group to Hackett. This allowed us to group acquired EPM skills with our existing EPM technology group, which has been one of our Hackett group growth drivers since the acquisition. The transformation and technology groups both adopted the Hackett Group brand in 2010, and during 2011 moved to a combined incentive plan. In order to best reflect this integration of brand and go to market focus, and our reporting, we decided to recast the results of the EPM technologies group which will previously reflected under technology solutions, in to the Hackett group service line.

SAP and Oracle related implementation services will now be referred to as ERP solutions for purposes of our earnings release, we have shown the gross revenues and related statistics as they would have appeared, before and after this realignment for transition purposes. As a result, any references to Hackett Group will specifically exclude ERP Solutions. Correspondingly, I will comment regarding the financial results of the Hackett Group, ERP 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 on to second quarter results. For the second quarter of 2011, total Company gross revenues were $58.8 million, and above our quarters guidance. This represents year-over-year growth of 10%, and sequential growth of 11%. Total company international gross revenues accounted for 22%, of total Company revenues in the second quarter of 2011, as compared to 21% in the second quarter 2010. Gross revenues for the Hackett group which exclude ERP Solutions were $46.8 million, sequential increase of 9%, and a year-over-year increase of 4%. Excluding the impact of the EPM technology realignment discussed, gross revenues would have reflected a 7% sequential increase and a year-over-year decrease of 2%.

Hackett Group annualized gross revenue for professional was $377,000, in the second quarter of 2011, as compared to $370,000 in the second quarter of 2010. Sequentially, Hackett Group annualized revenue per professional was up 5%, and 3% as previously presented.

Our ERP Solutions Group gross revenue totaled $12 million, a sequential increase of 20% and year-over-year increase of 41%. We continue to experience increases in both of our ERP implementation practices. Excluding the impact of the EPM realignment, gross revenues would have reflected a sequential increase of 21%, and a year-over-year increase of 41%. ERP Solutions hourly gross realized billing rate per hour was $143, for the second quarter of 2011, as compared to $128 in the previous quarter, and $123 in the second quarter of 2010. This includes the impact of our offshore resources which approximate nearly 40% of our ERP implementation resources.

Consultant utilization was 77% for the second quarter of 2011, as compared to 79% in the previous year. Total Company pro forma cost of sales excluding reimbursable expenses and stock compensation expense totaled $32 million, or 61% of net revenues, as compared to $28.7 million, or 60% of net revenues in the previous year. This year-over-year increase is primarily a result of increased consultant head count as well as increased usage of sub contractors and our ERP Solutions practices in the quarter.

Total Company consultant head count was 735, at the end of the second quarter of 2011, as compared to 691 in the previous quarter, and 655 at the end of the second quarter of 2010. The sequential and year-over-year increase was primarily attributable to increased hiring activities and selected practices commensurate with market demand. Total company pro forma gross margin which excludes non-cash stock compensation was 39% of net revenues in the second quarter of 2011, as compared to 40% in the second quarter 2010. The decrease in gross margin is primarily due to higher ERP Solutions revenue mix as well as increased use of sub contractors on ERP Solutions engagements.

Hackett Group gross margin on net revenues was 40% in the second quarter of 2011, as compared to 41% in the second quarter of 2010. ERP Solutions gross margin on net revenues was 36% in the second quarter of 2011, as compared to 37% in the previous year. Pro forma SG&A was approximately $14 million, or 27% of net revenues, in the second quarter of 2011, as compared to $14 million, or 29% of net revenues in the second quarter of 2010. This decrease as percentage of net revenues is primarily due to expanded SG&A leverage resulting from increased revenues. Total Company pro forma net income for the second quarter totaled $3.6 million, or $0.09 per diluted share and was at the high ends of our guidance.

This performance compares to our pro forma net income of $3.3 million or $0.08 per diluted share in the second quarter of 2010. On a year-to-date basis, total Company pro forma diluted earnings per share is $0.15 as compared to $0.12 in 2010, an increase of 25%. Total Company pro forma net income for the second quarter of 2011 excludes non-cash stock compensation expense of $1.3 million, intangible asset amortization expense of $204,000, and assumes normalized tax rate of 40%, or $2.4 million. As of the end of the second quarter 2011, the Company had approximately $46 million and $15 million, of income tax loss carried forward remaining in the US and foreign tax jurisdictions respectively.

Pro forma EBITDA in the second quarter of 2011 was $6.5 million, or 12.4% of net revenues as compared to $5.9 million or 12.2% of net revenues in the second quarter of 2010. On a year-to-date basis pro forma EBITDA has expanded 100 basis points from 10.6% to 11.6% of net revenues. Total company GAAP net income for the second quarter of 2011, totaled $4.4 million, $0.10 per diluted share. This compares to $4.4 million or $0.10 per diluted share in the second quarter of 2010, which included a non-cash acquisition earn out re-measurement gain of $784,000, that represented $0.02 per diluted share.

Now moving to cash balances, the Company's cash balances were $19.5 million at the end of the second quarter of 2011, as compared to $18 million at the end of the first quarter of 2011. Net cash provided by operating activities was $6.9 million for the second quarter, which was offset by capital expenditures and stock buy back activity. Capital expenditures for the quarter were $2.1 million, of which $1.1 million was attributable to the rollout of new laptops for all consultants, which occurs every three to four years.

During the second quarter of 2011, cash was utilized to repurchase approximately $830,000 shares of the Company's common stock at an average price of $4.38 for a total cost of $3.6 million. On year-to-date basis, the Company has repurchased 1.5 million shares for a total cost of $6 million. At the end of the second quarter, the Company had approximately $3.5 million remaining in stock repurchase program authorization. Our DSO, or day sales outstanding at the end of the second quarter 2011, was 57 days compared to 59 days at the end of the first quarter. We continue to target DSO levels below 50 days as our overall goal.

I will now turn to our guidance for the third quarter. In Q3, we expect the impact of the additional US holiday and typical increase in vacation utilized in both US and Europe to unfavorably impact available days in the third quarter by approximately 5%. Despite this impact, we expect total Company gross revenues for the third quarter of 2011, to be in the range of $57 million to $59 million. We expect our pro forma diluted earnings per share in the third quarter of 2011, to meet a range of $0.07 to $0.09 per diluted share. 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 be reasonably consistent as we expect the third quarter to benefit from the seasonal reductions, and US payroll related taxes, resulting from reaching FICA limits, and utilization of vacation accruals, offset by higher costs relating to head count increases, and higher incentive compensation related accruals. As a result of our revenue guidance, we expect pro forma gross margin on net revenues to be approximately 37% to 39% in Q3. We expect pro forma SG&A to be approximately $14 million, consistent with the second quarter.

Given our current introductory pricing strategy on performance exchange initiative, we expect increased depreciation and selling cost to reduce pro forma EPS in the second half of 2011, by approximately $0.01 to $0.02 per diluted share. We expect pro forma EBITDA on net revenues to be in the range of approximately 11% to 13%. We expect our cash balances, excluding impact of stock buy back 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.

At the macro economic level, we continue to expect to see solid demands in the US and international markets that we serve. As I previously mentioned, gradual but volatile global growth is favorable for our services. Geographically, we continue to expect healthy demand in the US, and gradual but improving demand in Europe. This also assumes the recent stock market volatility does not change our clients buying behavior from what we experienced to date.

Correspondingly, we expect to see the pipeline and revenue ramp momentum we built throughout the second quarter or really, the first half of the year, to carry in to the third quarter. With that demand overview as a back drop, let me 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 way, we can improve revenue growth along with the predictability and profitability of our operating results. Using unique intellectual capital, delivered in easy to use way, coupled with broader transformation offerings, would also allow us to increase our client base as well as our revenue per client. The best example of this strategy has been the revenue leverage we have experienced from our executive advisory clients.

As we have mentioned, we worked hard during 2010 to innovate ways to develop recurring revenue offerings that leverage our intellectual capital as well as create an opportunity to serve clients more broadly. In the second quarter, we initiated the sale of our first two FAP based automated dashboard offerings of our new Hackett Performance Exchange with very positive feed back from our clients. This initial marketing communication was to a targeted list of clients offering them to see our demo and included an invitation to become a charter member of our new exchange.

Our goal is to rapidly grow our user base through aggressive introductory pricing in order to drive adoption. We have now signed up 17 clients across 30 modules, and we have built a pipeline that should allow us to continue to build on these numbers during the third quarter. These charter clients will start to utilize the performance exchange dashboard offering during the third quarter. The majority of the clients signed multi year contracts which provide them the right to cancel at no cost after a six month trial period, or continue with their contractual relationship. Others have the right to a six month trial period with the option to transition to a paid relationship, with agreed-to pricing.

As I previously mentioned, our goal is simple. The more clients that use our offering increases the value of our database, as well as give us initial feed back on how best to enhance the overall experience, and the value of our overall offering. As I mentioned last quarter, this new offering, if successful, could help enhance our business model by creating a powerful and continuous relationship with our client. Although there is much to learn about our new offering, we believe it could mean a new revenue stream, a significant increase in data capture and operating insight, as well as a continuous way to monitor, and or benchmark a client's performance in critical business areas that could only help our consulting growth as well.

As Rob mentioned in his comments, we now expect our efforts with the Hackett Performance Exchange to be slightly dilutive in 2011, and if we get the plan renewal behavior to be accretive in the second half of 2012, given the upside we think these investments are really well justified. We believe the Hackett Performance Exchange builds on our strategic desire to expand brand permission and executive advisory relationship leverage we have already developed. With that in mind, let me comment in more detail about some of the other initiatives. Relative to our expanded brand permission, we continue to believe we should meaningfully increase our revenue per client. This will come by extending our brand permission from being the premier global benchmarking organization to our expanded global consulting capabilities.

We continue to invest in improving our go to market messaging in an effort to help clients understand why our bench marketing and best practices insight makes us unlike any other consulting organization. Specifically, we must make sure our clients know we are as good as helping them implement the outcome as we are at measuring and benchmarking their opportunity to improve. We think that the ultimate -- the successful rollout of Hackett Performance Exchange would only expand on both initiatives.

Our executive advisory client leverage, these are the clients that use our research advisory service on a membership or subscription basis. Long term, our goal is to be able to ascribe an increasing percentage of total annual revenues from clients continuously engaged with us. Right now this is through the executive advisory program, but we hope this will be expanded through the use of our Hackett Performance Exchange as well.

In the second quarter, our executive advisory members increased to 725, with client counts up to 222. Equally important or perhaps more important, nearly 50% of our Hackett second quarter revenues sales came from our advisory client base. Continuing to show a strong relationship leverage. Lastly, we continue to look for acquisitions, and strategic alliances can help us strongly leverage our existing intellectual capital to drive and accelerate our growth.

In summary, we are pleased with our 25% improvement in pro forma earnings per share in the first half of the year, and the momentum it provides for the balance 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 always urge them to stay highly focused on our clients, our people, and the exciting opportunities available to our organization.

Those are my comments. Let me now turn it back over to the operator and move on to the Q&A section of our call.

Thank you, sir.

(Operator Instructions)

One moment for the first question. The first question is from George Sutton. Your line is open, sir.

Thank you, congratulations on the good results.

Thank you, George.

Ted, in your prepared comments you mentioned that there was a nice increase in meeting counts, that's not a term you have used in the past. I wondered if you could expand upon that.

Yes, one of the things we did at the beginning of the year was to expand some of the resources focused on setting up some of the meetings for our account executives, and for our managing directors and principles. We've seen a very significant increase in that activity when we measured the number of meetings that we were able to take in the first half of last year versus this year. Our hope and belief is that increased activity should result in increased momentum for a second half of the year. That's the point that I was trying to make.

Now, you mentioned that the slowdown that we are broadly seeing is not apparent in what you are seeing from your clients. In other words, just to be clear, you are not seeing clients yet pull back on a lot of work for the back half of the year?

That's correct. We have seen no change in the momentum that we started to create, really halfway through the first quarter, to date. And if anything our hope is that the increased meeting counts and the activity we are creating there will either improve or buffer any activity that we see from any, call it, economic uncertainty.

There was a lot of discussion, obviously realigning around EPM group. Can you give us a better sense of what is causing the attachment to the implementation, any specific examples would be helpful.

In fact, at the macro level the actual volatility that we are seeing in for example you want to call it overall market, is creating just an increase demand for clients to improve their decision making. That demand for improved information, and to expand that information from being what has been historically financial information and historical information in to strategic and operating information, has just created significant demand for both our enterprise performance management transformation as well as our technology teams.

We were also influenced by another factor, which is last year we actually had some of the technology sub contractor revenue because it used to flow with the old Archstone acquisition in to Hackett group. So it was also way of aligning last year's numbers to this year's numbers. It gave us two things, strategically the teams go to market together, the overall market demand is together. We said it's important driver of our overall business, and then when we combine their incentives in 2011, of those teams together we just thought that the natural way to report that was with the EPM transformation group that was included in Hackett, and that's why we decided to recast information and show both the new presentation as well as the previously presented information so everybody could see the impact of the change, if any.

Lastly, if I could. Relative to the executive -- the new service that you have got, the dashboard service. The 17 customers and 30 modules -- can you give us perspective of how that might compare with what you have been anticipating? And can you give us a sense of the size of the 17 customers.

Many of the names on that 17 would include Fortune 50 companies you would be proud to be associated with. Let me start with that. We've had some really large and sophisticated companies jump in with us here early on, and have been incredibly helpful in the process. So, no -- It's tracking close to what we wanted. As you know, I always want more, but if we are able, I think if we are able to maintain the momentum we have built here over the last 60 days, because we actually decided to expand the version one beta period because we were getting such great feedback from very large clients.

It actually delayed the final rollout of version one in to Q3. Our belief is that once we get these companies, in fact, just the 17, we have built a nice pipeline behind them. That once we get some of these logos, with testimonials utilizing our product on a monthly basis, that our ability to then go to the others and talk about the value or have those customers talk about the value, should only allow us to increase momentum in that activity. That is what we have hoped for from day one, as you know, it has been a very ambitious offering, but it also has pretty significant potential for our business model. We think the challenge in the investment we are making is well worthwhile given the impact that it could have on our model in the second half of 2012.

Great, thanks, guys.

(Operator Instructions)

And our next question is from Morris Ajzenman, you may go ahead, sir.

Hey, guys.

Sooner or later they will get that last name of yours right, welcome.

The questions -- couple of questions, the revenue breakdown by group, as previously presented, just walk us through the Hackett Group -- as previously presented? Just help us understand why the revenues were down year-over-year 2%? And on the flip side, you have strong strength in technology solutions, help us on the side -- help us decide further what the modest decline in the strength, what is that reflective of?

I would say two things, one, as you know from our first quarter results, we did not have the kind of January this year we had last year. So it's to some extent we started the year a little bit slower than we liked, even though we reported pretty solid first quarter results. We took that momentum and then in to the year. We entered last year on the Hackett side with strong January and therefore a much stronger -- even a stronger April than we did this year. That is one impact.

The other impact is the fact that Europe still continues to lag a little bit. That opportunity is still there for us to harvest, we do expect the European performance to improve from Q2 to Q3.

On the tech side, the cross selling synergies, in to the ERP groups and really, the resurgence group have really driven a strong year-over-year comparison. If you recall a couple of years ago, we actually turned around our SAP performance group significantly, we are actually experiencing that same kind of success and strong momentum in our Oracle ERP group. That's one of the large drivers in the growth rate that you are seeing, so it's nice to see that the investments we made, and the focus on that team along with the cross selling synergies are paying off so nicely. It is a great problem to have.

The Hackett Group again, very strong comparison in April last year. Kind of 2% decline, looking at the Q3, I know your aren't going to give that much granularity, but how does this comparison play out? Depends how your guidance plays out, but should we expect the Hackett group as previously presented to show growth year-over-year?

Yes. Yes, you can expect both sequential and year-on-year growth as previously presented for Hackett in Q3. As you remember, Q3 last year played out a little bit softer than we hoped, and then the whole double dip discussions at the end of third quarter impacted our fourth quarter a little bit last year. If we don't have a similar disruption than obviously our goal is to continue to improve our E&P performance in the first half of the year in to the second half of the year.

Last question, I think you guys, you said increase in depreciation and selling costs, correct me if I'm wrong, going to impact pro forma EPS by a penny or two in the second half? Am I correct or incorrect?

That's correct. We built a product, putting the product in to production this quarter. We will start depreciating the product, the investment we made in the Hackett Performance Exchange. That's one change.

We built a dedicated sales group for the Hackett Performance Exchange. Not only acquiring the resources to recruiting, but even though we will have -- we've offered clients the six month introductory period, we will be compensating that team for building that -- for bringing on that new business as well. It mixed us little bit, but our hope is that year-over-year overall improvement even with the mix, even with the dilutive impact, will be strong and more importantly, I hope we have a strong new offering that does impact the second half of next year favorably.

What I was getting at, that increase in selling costs, that consultant head count being up 12% year-over-year is that reflection of the business trends you see and types as well as new dashboard and new products you are offering or combination of both?

No, no. The consulting head count is not increases are not part of the Hackett Performance Exchange. Those are head count increases that have been driven by well, you are looking at the growth of our technology businesses, we got an expanding business in Australia, which I commented on earlier. And we still have capacity.

We have great leverage in the model, but we are investing in the areas where we have greenfield opportunities, and the demand is, if you want to call it, is greater than nominal. Which we are reflecting as well.

I'm sorry, so it is the total head count I should be referencing.

That is correct. The total head count does include the additional sales cost and the investments that we made in the sales and marketing area for the Hackett Performance Exchange, that's correct.

Thank you.

Thank you. Thank you Morris.

I show no further questions. I will turn the call back over to Ted Fernandez.

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

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