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The Hackett Group, Inc. (HCKT)

Q1 2014 Earnings Call· Tue, May 6, 2014

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Transcript

Operator

Operator

Welcome to the Hackett Group First Quarter Earnings Call. Your lines have been placed on 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.

Rob Ramirez

Management

Thank you, operator. Good afternoon everyone and thank you for joining us to discuss The Hackett Group's first quarter results. Speaking on the call today and here to answer your questions are Ted Fernandez, Chairman and CEO of The Hackett Group; and myself, Rob Ramirez, CFO. A press announcement was released over the wires at 4:09 p.m. 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 that are contained in our SEC filings. At this point, I would like to turn it over to Ted.

Ted Fernandez

Management

Thank you, Rob. And welcome everyone to The Hackett Group's first quarter earnings call. As we ordinarily do, I'll kick off the quarter with some overview and highlights on the quarter. I'll then turn it back over to Rob and ask him to comment on detailed operating results, our cash flow and also provide details related to our outlook. And Rob will then turn it back over to me so that I can make some market strategic overview comments and then we will open it up for Q&A. This afternoon we reported revenues of $55 million in pro forma earnings per share of $0.08 in our first quarter of 2014, both at the high end of our revised guidance. As expected strong North American Hackett performance was impacted by the continuing weak performance from our European operations. The year-on-year difference in our European results resulted in an unfavorable $0.06 pro forma variance in the quarter. More importantly, during the quarter we made the necessary changes in our European operations to recapture our momentum and contribution in the region as quickly as possible. As a result of these actions and The Hackett North American momentum as well as the Application Management Services acquisition that we made in the quarter, we now have the opportunity to meet or exceed last year's Q2 results. This is in spite of having only neutralized the European contribution impact at this point. Our results in the first quarter were as expected Hackett North America excluding the acquisition grew an 11% rate as we saw growth across nearly all of our groups. This quarter mark the third consecutive quarter of double digit growth for Hackett in North America. This has resulted from an increased level of cross-selling amongst our practice groups. Consistent with the first quarter Europe was down significantly as expected with the weakness in Europe coming from longer sales cycle and deferred project conversions. On the balance sheet side, we continue to be active with our stock repurchase program throughout the quarter. On the investment front, we are pleased and very excited about the highly strategic and complimentary capability which we brought on Board with our EPM application management services acquisition of Technolab. This acquisition brings the ability to have a strategic and continuous relationship with our client principally our EPM technology client which is consistent with our Executive Advisory and Hackett performance exchange strategy. Additionally, we continue to develop and attract talent, expand our brand and intellectual property, not only through the development of the Hackett performance exchange but also through the data capture that results from our benchmarking and the research and inquires that we support to our executive advisory offerings. I'll comment about these opportunities in more detail in my strategic overview section of our call. I'll also comment further on market conditions and specific go-to-market initiative but let me first ask Rob to provide detailed on our operating results, cash flow and also comments on outlook. Rob?

Rob Ramirez

Management

Thank you, Ted. As I typically do I'll cover the following topics during our call, an overview of our 2014 first quarter results, along with an overview of related key operating statistics and overview of our cash flow activities during the quarter, and I will then conclude with a discussion on our financial outlook for the second quarter of 2014. For purposes of this call, any references to Hackett Group will specifically exclude ERP Solutions, correspondingly, I will comment separately regarding the financial results of the Hackett Group, ERP Solutions and the total company. Please note that our references to gross revenue in my discussion represent net revenues plus reimbursable expenses. Additionally, references to pro forma results specifically exclude non-cash stock compensation expense, intangible asset amortization expense, results of discontinued operations, acquisition related charges, restructuring charges and assumes normalized tax rate of 38%. In terms of our first quarter results. For the first quarter of 2014, total company gross revenue were $54.9 million, a 1% increase on a year-over-year basis. As we discussed during our previous call overall revenue was impacted by the decline in European revenues. Gross revenues for the Hackett Group which excludes ERP Solutions were approximately $46.1 million in the first quarter of 2014 or up approximately 6% on year-over-year basis. Hackett U.S. revenues were up 21%, 11% excluding the Technolab acquisition. The increase in Hackett U.S. revenues were offset by 32% decline in Hackett European revenues. Hackett Group annualized gross revenue for professional was $336,000 in the first quarter of 2014 as compared to $332,000 in the first quarter of 2013 and $329,000 in the previous quarter. Gross revenue for our ERP Solutions group which now consist of our SAP Implementation Group, totaled $8.8 million, a year-over-year decrease of 18% as expected. ERP Solutions' hourly gross…

Ted Fernandez

Management

Thank you, Rob. As we look forward we expect a continued year-over-year growth from our North American Hackett business across nearly all of our groups. Internationally, although there are expectations for improvement as the year unfolds, we expect demand to remain adequate or characterize by inconsistent decision making as compared to the U.S. We believe that some of our international volatility as I discussed last quarter may be as a result of the limited solution offering that we have in Europe when compared to the U.S., a key part of our solid U.S. activity or North American activity is due to very strong enterprise performance and management and business intelligence capability which now represents nearly 50% of our total North American Hackett revenues. Our new European leaders specialize in the EPM area and should help us build out this capability in Europe. Our plan is to expand into this area in Europe throughout 2014, we believe by more closely mirroring our U.S. capabilities in Europe and building on our EPM and business intelligence strength globally, we can improve our ability to grow in Europe and also further strengthen our global delivery capabilities which are important for a large multi national engagements. Beyond our immediate focus in Europe, our strategy is continued to build our brand by building dedicated skill around our unmatched intellectual capital. In order to service clients strategically and whenever possible continuously. We believe that clients that leverage our intellectual capital are more likely to allow us to serve them more broadly. Intellectual capital basis services enhance our opportunities to serve client remotely, continuously and more profitably. Our goal is to use our unique intellectual capital to establish a strategic relationship with client and to further use that entry point to introduce our business transformation and technology consulting…

Operator

Operator

(Operator Instructions). Our first question comes from Morris Ajzenman of Griffin Securities. Go ahead, your line is open.

Morris Ajzenman - Griffin Securities

Analyst

Ted, in the beginning of your call here, you said Europe hurt, and I think you said $0.06 a share. Do you have the impact last year first quarter what the negative impact, if there was, from Europe --?

Ted Fernandez

Management

The negative impact in the fourth quarter was actually approximately $0.07, in the first quarter it was approximately $0.06 unfavorable.

Morris Ajzenman - Griffin Securities

Analyst

So our year-over-year basis the impact was to say having earnings by $0.06 per share

Ted Fernandez

Management

That is correct.

Morris Ajzenman - Griffin Securities

Analyst

Now you did say that Hackett Europe revenues were off 32% in the first quarter, I think you said that.

Ted Fernandez

Management

That's correct.

Morris Ajzenman - Griffin Securities

Analyst

Can you give any sort of guidance, what's happen sequentially, what's the environment? I know you have done a lot of cost cutting. So you can talk about that some more. But what's happening on the landscape in Europe, is it going be any improvement where the decline might be lesser of magnitude going forward?

Ted Fernandez

Management

So we expected to be up sequentially more so hopefully I'll say we stabilize that part of the business we think all of the changes that we are making leadership, offering focus, are strengthening our opportunities in Europe. And as I said in previous call, we have been highly profitable in Europe and clearly we are disappointed with the impact that it had on result in the last quarter. We neutralize that year-on-year impact going into Q2 expected to be up a little bit sequentially and we hope to build up from there. But as you know when we actually experience it then I'll be able to speak to it.

Morris Ajzenman - Griffin Securities

Analyst

And again $0.06 loss per share for Europe in this quarter, you took re-structuring charge, would you care to guestimate what loss in Europe will be going forward? How much that will be diminishing?

Ted Fernandez

Management

We are not able to unfavorable impact and yes Europe was actually not profitable on a fully allocated basis in the quarter. Now we would expect that the changes that we've made will make Europe profitable in Q2.

Morris Ajzenman - Griffin Securities

Analyst

Okay, I'll jump back in queue.

Ted Fernandez

Management

Yes, and that is part of the reason right why you are seeing, I mean it is a combination of things but clearly the changes we have made in Europe and are neutralizing that contribution impact has a big -- has made a big impact in our Q1 to Q2 guidance but also the fact that we continue -- we expect to continue the North American Hackett demand to continue and we expect that group to be more profitable also as we go into Q2.

Operator

Operator

Our next question comes from Bill Sutherland of Emerging Growth Equities. Go ahead, sir, your line is open.

Bill Sutherland - Emerging Growth Equities

Analyst

Thank you. I was wondering if we could, Ted, get little more color on the performance exchange. You know where you are with the marketing, the sales group? I mean what kind of -- what the pipeline is, how it is building?

Ted Fernandez

Management

You know Bill, I hate to be overly hopeful and my investors know this as well, even though obviously we believe in this process for the offering. I think when I would say at this point is that we are building a pipeline, we continue to see the interest in the offering build and I would like to be able to provide more background than that once we actually see meaningful client adoption and sales kick in. But I would characterize that we build momentum during the quarter and I hope to see that realize more fully as we go into in Q2.

Bill Sutherland - Emerging Growth Equities

Analyst

Well, I have to believe there is nothing assumed for Q2 as far as far as what you would have --

Ted Fernandez

Management

That is correct. We will assume that the investments in that offering will cost us money throughout 2014 and hope that one day it will catch up with us and pass right through our current spend and demonstrate of capability but we have to wait until then to be able to share that with you.

Bill Sutherland - Emerging Growth Equities

Analyst

I guess it would be helpful if we just had a little bit color though in terms of how you think the booking picture might go just based on kind of its level discussions to going on right now

Ted Fernandez

Management

It is too early, Bill, and I consider it immaterial to Q2 guidance so I don't -- again I don't want -- I don’t want to -- I think that I am giving you an update by saying that client interest is increasing, pipeline is increasing and we hope that this kind of activity allows us to achieve the 2014 goal which is to really prove a clear adoption of the offering by a nice group of significant client and then to be able to then go forward from there.

Bill Sutherland - Emerging Growth Equities

Analyst

Okay and what kind of organic growth number is in the guidance, Rob?

Rob Ramirez

Management

For Hackett or for your European?

Bill Sutherland - Emerging Growth Equities

Analyst

European wouldn't be impacted by --

Rob Ramirez

Management

Yes, we said European would be flat, we expect European to be flat, we expect Hackett ex acquisition, Hackett North America to be up approximately 5% to 7%

Ted Fernandez

Management

And what I am leaving now.

Rob Ramirez

Management

Internationally be up sequentially 5%, year-over-year

Bill Sutherland - Emerging Growth Equities

Analyst

So that sequential growth you gave was ex Technolab.

Rob Ramirez

Management

It will include Technolab

Bill Sutherland - Emerging Growth Equities

Analyst

Which one?

Rob Ramirez

Management

Sequential growth

Bill Sutherland - Emerging Growth Equities

Analyst

Oh so that's what I was curious about, Technolab is running about two plus million

Ted Fernandez

Management

Correct

Bill Sutherland - Emerging Growth Equities

Analyst

And I can back into that. So

Ted Fernandez

Management

Yes, if you look at the fact that we reported Hackett 21% up including the acquisition 11% excluding acquisition you can back write into that number, Bill

Bill Sutherland - Emerging Growth Equities

Analyst

It was interesting you provided an annual contract value, I haven't seen for a while for EPM I guess was it just for EPM?

Rob Ramirez

Management

Yes for EPM

Ted Fernandez

Management

Just for application and maintenance services which is primarily the EPM technology application management services that are being provided through our acquisition but it also -- for lack of better return disclosed at the application maintenance service revenue that is part of our SAP ERP group. So the reason that we want to show that is clients continue have an interest in that -- those parts of our business where we have recurring revenue, we wanted to provide some visibility to that specially since we believe as a result of the acquisition, our expectations that we will have an opportunity to grow that amount nicely over the next several years and probably equally important that is provide a continuous relationship for our technology client as well and everything we have been doing, whether it is get executive advisory services, Hackett Performance Exchange and now the Application Management Service investment that we made, we want clients to see that part of our business and how we are investing in growing that as well because we think it will be meaningful to long-term sustainable growth and profit.

Bill Sutherland - Emerging Growth Equities

Analyst

Yes, I agree and I wondered if you would aggregate all the multi -- at least annual contract revenue. What kind of ACV you would have?

Ted Fernandez

Management

It was given it to you in the application management services. We haven't provided it to you in the executive advisory area. And perhaps we should reconsider that moving up forward.

Bill Sutherland - Emerging Growth Equities

Analyst

Right because I think it is an important element of your revenue quality obviously.

Ted Fernandez

Management

It is a nice portion of our revenue obviously because of those two areas and hopefully eventually through the growth of Hackett performance exchange that will have that recurring elements and more importantly for us what we are seeing is that those clients that use those services are appeared to be more loyal in terms of allowing us to broaden our total revenue relationships. So it is important across two fronts.

Bill Sutherland - Emerging Growth Equities

Analyst

What -- based on the steps you took in restructuring, this will be my last question, and I get back in queue. The steps you took in Europe as far as downsizing, what is the -- what's the capacity I guess at this point for a revenue generation over there?

Ted Fernandez

Management

We still have a capacity and we are also building up an EPM group so part of the -- you want to call it retrenchment was -- will be somewhat of reallocation of resource as we invest in the EPM growth in Europe throughout the year. So I assure you that we will be able to keep up -- I hope to have the problem of keeping up with the opportunities. What we didn't want to do is expose our P&L to the kind of quarterly impact that we experienced in last two quarters. I just decided that it is just -- it wasn't warranted and we needed to make changes not only to reinvest but to ensure that it did not diminish the strong performance and profitability outside of the Europe at the moment.

Bill Sutherland - Emerging Growth Equities

Analyst

Are the early indications from your new guy in Europe that it is a selling cycle that probably you won't see the real pick up in bookings and so like fourth quarter or could it be sooner?

Ted Fernandez

Management

So we hope that it happens throughout the year. But we don't know that at this point. You got to remember that Europe has been volatile historically or more volatile than U.S. historically but a strong, strong contributor to our overall profitability so there is just in our mind that if our execution is in on point, our offering is right there just there should be just no reason why Europe doesn't return to -- closer towards historical level of contribution. We are quite a bit off that at this point.

Operator

Operator

Our next question comes from George Sutton of Craig Hallum. Go ahead, sir. Your line is open.

Jason Kreyer - Craig Hallum

Analyst

Hey, guys, this is Jason on for George. I got on a little late so I apologize if you already addressed this but I just wanted and see if you could spend some time talking about Technolab and if there is anything in that you could leverage to improve your positioning in the Europe environment and then also if you could talk about other M&A opportunities you are looking at or what you are currently seeing in the market?

Ted Fernandez

Management

Well, I would say one is the Technolab's capabilities; it does have a global client base and in fact significant clients in Europe so it should allow us to grow that client base that we are serving at Uruguay, both from North America as well as Western Europe. So it does do that. All of those AMS services at least for now at the moment were reporting as North American revenues even though that business does have some portion of its revenues that are outside of North America. But it clearly has the global client base. It should help us with improved execution and access in Europe and more importantly, I think it is worth mentioning, we had -- we have a strong transformation and EPM technology implementation group. By adding this we think very strategic, very capable host to implementation support across both applications and infrastructure in an area that client seemed to struggle with. We think it is going to give us a chance to grow all aspects of EPM, so we have very high hopes for that business. And can tell you that even just in the recent quarter, we signed several new clients just sine we close the acquisition. I mean so it is hard for client to find great, high period or Oracle EPM support these days and we think the capabilities that came with Technolab are as good as anyone and they come at a very attractive price point and they come with significantly lower turnover than we experienced today in India. So high growth area and that EPM BI area very strong dedicated capability in an area that we are doing well, and an area we want to invest in Europe so look -- it is an important acquisition. And it is a great group of people that came on board with that acquisition.

Jason Kreyer - Craig Hallum

Analyst

Right and it accelerates your EPM entry into Europe, correct?

Ted Fernandez

Management

It does. It will allow us to again as for serving and can offer those services to European client remotely, yes, it will allow and accelerate our entry into Europe, you are correct.

Jason Kreyer - Craig Hallum

Analyst

Okay and then just lastly any comments you can make on the M&A front? Anything different that you are seeing?

Ted Fernandez

Management

Simply just that there is always activity but as you know we are always cautious because it is combination of things right, it is culture, strategic bit, it is value, a lot of things have to come together for those things to happen but we continue to be aggressive and making sure that we know what's out there, I think people know that we are someone that can move quickly if we like our company that we think strategically fits in with us. So it continuous to be a priority for us. I think that's the best way to say.

Operator

Operator

Our next question comes from Morris Ajzenman of Griffin Securities. Go ahead, your line is open.

Morris Ajzenman - Griffin Securities

Analyst

Hey guys, again, on this time turning to North America, you had the third straight quarter of double-digit growth, where it was up 11%. And I think when you were giving more detail, I'm not sure if this is sequentially or year-over year, you expecting Hackett North America to grow 7%. Is that sequentially or year-over-year?

Ted Fernandez

Management

That was sequential

Morris Ajzenman - Griffin Securities

Analyst

Sequential.

Ted Fernandez

Management

Correct

Morris Ajzenman - Griffin Securities

Analyst

Any comment, any thought? Will that double-digit rate of growth continue?

Ted Fernandez

Management

We don't know but I think look this quarter our business we sincerely hope so but we provide guidance one quarter more, we want to make sure that we are not doing anything that's changing that.

Morris Ajzenman - Griffin Securities

Analyst

Well, the reason I ask is that the first quarter GDP numbers come out a few days ago and it was rather flattish quarter. And whether it was weather or whatever. Things appear to be improving on the landscape companies. How does your pipeline look exiting the first quarter into the second quarter. Again, you gave me a sequential number, but is there a pickup in discussions with clients? How do things play out in Hackett?

Ted Fernandez

Management

Yes, going in for Q1 was good. I think the difference is -- the biggest thing with Q1 is how quickly clients initiate programs when they come off there in vacation and specially if it is something -- it could be funded but it's -- I would say the biggest challenge is making sure that client kick those projects off as quickly as possible. But the overall activity in North America as I said in my comments remains solid and we expect growth in across virtually all of our groups, so whether that result in double digit or not the way we have three quarters, we don't want to get ahead ourselves but suffice to say that we are growing sequentially and we surely hoping it continue that way.

Morris Ajzenman - Griffin Securities

Analyst

Thank you.

Ted Fernandez

Management

Okay, I guess those conclude the Q&A portion of our call. I would like to thank everyone again for participating in our first quarter call. And look forward to updating everyone again and once we report the second quarter. Thank you again for participating in the call.

Operator

Operator

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