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The Hackett Group, Inc. (HCKT)

Q3 2016 Earnings Call· Mon, Nov 7, 2016

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Transcript

Operator

Operator

Welcome to The Hackett Group third quarter earnings conference call. 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.

Robert Ramirez

Management

Thank you, operator. Good afternoon, everyone, and thank you for joining us to discuss The Hackett Group's third 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 the 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 in the Risk Factors that are included in our SEC filings. At this point, I would like to turn it over to Ted.

Ted Fernandez

Management

Thank you, Rob, and let me welcome everyone to our third quarter earnings call. As we normally do, I will start by providing some overview or highlight comments on the quarter. I will turn it back over to Rob asking him to comment on operating results, cash flow, update on our credit facility and then provide his comments on our fourth quarter guidance. Rob will then turn it back over to me so that cam provide further comments on market and any strategic related comments, and then lastly we will open it up for Q&A. So then let me go ahead and start with me our overview and highlight comments, and again welcome everyone to our third quarter earnings call. This is another very strong quarter. This afternoon we reported revenues of $74.1 million, up 10%, and pro forma earnings per share of $0.25, was up 25%, both above the high end of our guidance. Solid Europe demand drove our results as our momentum continued across most of our U.S. practices. As expected we also saw improving European results led by our EPM business, which we have been building over the last couple of years. The quarter included the seasonal increase of vacation days in both the U.S. and Europe. Revenue in the U.S. was up nicely and was further boosted by the results from our SAP group. In Europe, we had improved results led by our APM group as our prior year investment had started to pay off. We continue to believe that our revenue and earnings per share growth is a direct result of several key strategies. First, our very uniquely branded, Benchmarking and Best Practices Advisory offerings, that leverage our intellectual property and provide strategic access to leading global companies. In both of these offerings we have…

Robert Ramirez

Management

Thanks Ted. As I typically do, I'll cover the following topics during this portion of the call. In overview of our 2016 third quarter results along with an overview of related key operating statistics, I'll go through our cash flow activities during the quarter, and I will then conclude with a discussion on our financial outlook for the fourth quarter of 2016. For purposes of this call, any references to Hackett Group will specifically exclude ERP solutions. Correspondingly, I will comment separately regarding financial results of The Hackett Group, ERP Solutions and the total company. Please note that all references to gross revenues in my discussion represent revenues including reimbursable expenses. Accordingly, references to pro forma results specifically exclude non-cash stock compensation expense, intangible asset amortization expense, acquisition related charges and gains, and assumes a normalized long-term cash tax rate of 30%. As Ted stated, for the third quarter of 2016, total company gross revenues were $74.1 million, and above our third quarter's guidance. This represents a year-over-year growth of 10% or 11% when adjusting for constant currency. Gross revenues for The Hackett Group, which excludes ERP Solutions, were $62.6 million in the third quarter of 2016, an increase of 8% on a year-over-year basis. Hackett U.S. growth was 9% and international, which is primarily Europe, was essentially flat on a reported basis, but up 3% on a constant currency basis. Hackett Group annualized gross revenue per professional was $360,000 in the third quarter of 2016, as compared to $396,000 in the third quarter of the previous year and $397,000 in the previous quarter reported. This was primarily due to increased hiring activities and lower than expected consultant turnover on a year to date basis. Gross revenue from our ERP Solutions group, which consists of SAP reseller, Implementation and Application…

Ted Fernandez

Management

Thank you, Rob. As we look forward, as I have been commenting over the last several quarters, I think it's important to come back and speak more broadly about the demand environment that we have been experiencing and more importantly that may just be emerging. The rapid development and move to cloud along with the extended mobile functionality being introduced into the marketplace by software and technology providers is dramatically influencing the way businesses compete and deliver their services. This will disrupt entire industry at an accelerated pace forcing organizations to fundamentally change and adapt these new capabilities in order to remain competitive. The speed of change will only be limited by the ability of technology providers to deliver on their functionality and performance promise. But regardless of their delivery limitations, the mere threat or opportunity promise will lead to one of the most significant enterprise transformation periods of our lifetime. This will redefine the traditional sequential and linear based business models and activities to fully network the dynamic automated workflows and events with enhanced analytics that will finally deliver predictive analytics and artificial intelligence, as promised years ago. This so called digital transformation era is very attractive to our organization, since we believe our clients will increasingly turn to us to provide them with best practice insight on what technology can actually deliver on its promise and what changes in business models actually work and will justify significant investments. On a near-term basis, we expect continued growth in Q4 from our U.S. businesses, although it will be tempered by the temporary disruption due to the Oracle's integration of its EPM sales group into their ERP sales channel. Having said that, we are now back to normal channel activities, so we don't expect a long-term growth rate range of 5%…

Operator

Operator

[Operator Instructions] Our first question is coming from George Sutton of Craig-Hallum, Sir your line is open.

George Sutton

Analyst

Thank you. Guys relative to guidance, you're suggesting there are 8% fewer days in Q4 versus Q3. Your guidance is right in line with that expectation. Can you discuss what was different in 2014 and 2015 relative to that statistic?

Ted Fernandez

Management

George, first let me make sure you understand that last year the most significant different is that last year or this year we were not up against a 23 or plus percent Hackett U.S. growth or 30 plus percent growth in our EPM business. Secondly, we did lose a little of momentum if you want to compare last year to this year at oracle transition at sales force integrated those two teams together. I would say those are really the two most significant once. Rob, also pointed out that we lose 2% purely on the year-on-year comparison simply on the software sales, which is just the timing of when those SAP sales take place, so I would say those are the most significant differences. And as I commented once we had the chance so kind of just ramp to the kind of growth that we've been experiencing over the first nine months of the year into the fourth quarter, but then we said, as we look at 2017 we continue to expect to grow our business 5% to 10% on a long term basis and if we stay at the higher end of that 7.5% to 10%, we expect to provide 15% to 20% EPS growth on that numbers that remains unchanged.

George Sutton

Analyst

Got you. I wanted to make sure I understood one thing you were talking about the lower revenue per employee this year versus last year, but that was due to increased hiring which I get, but then also lower turnover from consultants, can you run through these?

Ted Fernandez

Management

Yes, let me comment on both. Because those are two, that's another excellent question. First of all, we started the quarter with more headcount than we needed, but we were answering to right hyper growth that's we got to the first half of the year. What's really surprised us not the fact that we were adding headcount to that and we knew that guided the third quarter knowing that. Our turnover in this very demanding high travel business over the last three to four quarters is now to low single digits. It is a number we have never encountered in throughout our entire career, so I am delighted that our people are incredibly happy to be with us and even with all the challenges and demands we put on them have no desire to leave us to go anywhere else. But we simply could not plan on that low level of turnover that we have gotten. So with that said we knew that going into the third quarter it did compromise our revenue per professional. We knew we're probably giving away a couple cents into the third quarter, it probably is costing us the same because we will be operating at less than optimal revenue per professional target than we want. But that's what we experience and as you know these things are variable and obviously what our EPM guys would say you don't have the analytic information to forecast both of these numbers a little bit more accurately, our COO would say we do an excellent job, but we don't know it’s going to perfect, but still overall strong results and it demonstrated in the profitability in both of the quarters.

George Sutton

Analyst

Okay, lastly if I could relative to ADP you mentioned developing plans to add additional platforms that would migrate to Vantage, I just want to make sure I understood what you're referring to there and you define it as becoming noticeable in next year's result, so I just want to quantify what noticeable might look like?

Ted Fernandez

Management

When I say noticeable I really refer to all of the alliance efforts that we have right now, but it really fits with the efforts we have with ADP and the CGBS certification and training alliances. So first with ADP, original agreement was driven around the sale of Vantage HCM new labels, so all of the total contract value we've accumulated with them has been as a result of that opportunity. We've always believed that opportunity as narrow and if you looked at a couple of things that we've been really aggressively pursuing them on, there is also migrations that they have when they move people from existing platforms onto Vantage. We had not had an opportunity to pursue those clients and we believe that will be in place by the time we get it into our fiscal 2017. There are also platforms where they are continuing to help very sophisticated clients that we jointly believe could really benefit from the Hackett best practice advisory effort that we build for Vantage. So we expect to launch programs to support existing platforms that are not either new Vantage clients or migrations from existing platforms to Vantage, but rather for clients that will remain in one of their other platforms and we believe we will do that at least in one of those platforms before the beginning of 2017. Those opportunities what I referred should expand our opportunities with ADP as we launch 2017.

Ted Fernandez

Management

Okay, thanks for the clarity.

Operator

Operator

Thank you. [Operator Instructions] Our next question is from Morris Ajzenman of Griffin Securities. Your line is open.

Morris Ajzenman

Analyst

Hi guys.

Ted Fernandez

Management

Hi Morris.

Morris Ajzenman

Analyst

Just a follow up to previous question, ADP or just alliances overall becoming noticeable in 2017, will you be able to give us not necessarily specific to any one alliance, but the alliances in total as the first quarter, second quarter, third quarter as we progress to the year what the benefit has accrued from the alliances in total either on a revenue on a EPS manual, will we able to get some sort of clarity as there is this first ramp up and you start seeing some sort of momentum going forward?

Ted Fernandez

Management

As you know Morris, I've been very consistent saying I didn't want to get ahead of myself and that we expect to do that as we get into 2017, so I would expect to do that with first quarter either guidance or results, I haven't finalized that decision. I guess, noticeable to me obviously would be adding penny and may be that would grow throughout the year. I will simply say that a 1.5% increase in our revenue growth if it results from these IP as a services alliance in 2017 as you know because of the incremental margin would represent over 3% of core services growth just to give you a mention of the leverage. But do I know those enough to provide that guidance now, no what we do know as you know is two things, one that we fulfilled the 18 months total annualized contract value that was guaranteed by ADP by the end of the second quarter. So if you take that number and estimated some growth for that for the second half of the year, remember that they have to be sold and implemented for us to get revenue so it's a little bit tricky distinguishing the two, but you will be able to get some idea and I will be able to provide context around that as we get into Q1. With CGBS alliance it's a little different because what we've said is that we’ve got now over 100 companies more than that in total, but 100 we believe are clients that both are piloting and good result and having a larger relationship with us in 2017 whenever did they complete their pilot and do so in 2017. But we would like to see what that conversion is, so the only thing we've said…

Morris Ajzenman

Analyst

Thank you, just moving back to incremental higher end activity, lower turnover so compromised revenue versus profit, sounds like it’s continuing to the fourth quarter, do you expect that to reverse in Q1 of 2017?

Ted Fernandez

Management

Yes, we think we've got it a little bit tighter as we went into Q4 than we started Q3 with and we will simply going to work with these new turnover numbers until we see otherwise. So by definition we have just adjusted the variables and have adjusted accordingly and yes it will be much closer in line to our historical targets as we kick off 2017.

Morris Ajzenman

Analyst

Last question and I'll get back in queue here. Modest revenue growth fourth quarter versus last year, the reasons you've clearly explained, but EPS growth $0.23 to $0.25 versus $0.21 as pre-material, I presume the bulk of that is gross margin expansion?

Ted Fernandez

Management

It is, it is growth margin expansion, so as you know, I mean, the relative like I said we put up some pretty good numbers in third quarter and we are telling you right we lost revenue per professional, we lost leverage, but the leverage of our business model is very significant, you can see it as we have executed it basically flat SG&A for about five to six quarters and you are seeing that percentage margin drop to the bottom. And in the fourth quarter it’s a different impact right, it's a function of large vacation taken off, so the gross margin is protected from people taking some of the vacations in the fourth quarter. So I think it's primarily seasonal, but great leverage in our business model and yes it shows through to the bottom line pretty strongly.

Morris Ajzenman

Analyst

Thank you.

Operator

Operator

Our next question is from Jeff Martin of Roth Capital Partners. Your line is open.

Ted Fernandez

Management

You there Jeff?

Jeff Martin

Analyst

Could you elaborate more on the Oracle sales integration, when that started when it ended and if you have an idea of the revenue impact it may have had and is that entirely the ERP side of the business?

Ted Fernandez

Management

Well, they did it post or end of the fiscal year, so it was effected during the summer. It impacted, what makes third quarter little tricky is that you get quite a few days off both in U.S. and Europe from quite a bit of vacation that's taken before, some of the student, some of the kids go back to school. So you always have what you think is more inefficient whether you want to call later July and to later of August kind of period in U.S., you get almost the entire month in Europe. But what we experienced is that integration for us as they brought those two teams together and basically ended up with some new peoples either in some new roles that we lost a little bit momentum in the September, October month. We saw ourselves back at normal activity and utilization levels in November, so those are the facts. Could have been something else? I mean that's the only thing we can attribute it to.

Jeff Martin

Analyst

Okay and then on the updated benchmarking offering if I recall correctly that was at least on the last quarter’s call you mentioned that was going to be rolling out for yearend now that’s sounds like that’s going to be sometime in first half of 2017 or so, something that affected that rollout?

Ted Fernandez

Management

Yes, we’re being incredibly conservative with the rollout of that product, having said that we expect to go to the market and announce its capability in the first quarter and try to have a full launch to be consistent with our U.S. best practice conference. So yes, we wanted to do a little bit more work, have so many other priorities that we’re working on with the IP of service alliances so I’ve got some of my teams that are doing multiple work for that as well as these existing and some of the new things that we’re trying to develop that team for a little bit more time. It may sense, I can tell you having said that that I’ve been through a full detailed demo of the offering, it makes what we’ve dramatically better. So, I’m very eager to get it out in the marketplace and I’m pushing my team hard and they’re just begging me for little more time, so I back it.

Unidentified Analyst

Analyst

And then could you walk us through the ADP revenue recognition versus – it sounds like you’re amortizing that initial 18 months minimum is that correct?

Ted Fernandez

Management

The term of the ADP contract did take the recognition of the revenue, so I think I’ve mentioned in previous quarters, the overwhelming majority of the contracts we’ve signed with ADP, a five year contract and that means that we amortize the total contract value over that five year period and that amortization is triggered once the clients reaches a go-live point. So, we’ve quite a few that have been sold, we’ve quite a few that are in process to be fully implemented in go-live and we continue to sell new – we’ve continued to add new clients in the quarter.

Unidentified Analyst

Analyst

Is it accurate to say that the contribution from that has been immaterial to-date?

Ted Fernandez

Management

Yes. Yes, I would say it’s immaterial to-date just because of how long it takes for the total numbers to fully ramp up. But, as you get to, since we’ve already got let just go back to the June numbers, once the total annualized contract value which is the only number I provided in June quarter I said it had exceeded $6 million just to give you an idea once that $6 million is rolled out if you divide that over five years that would be $1.2 million per year and we continue to add to that number that had that annualized contract value in June and will do so here till the fourth quarter and beyond. And we’ll add new programs to that when we start our fiscal 2017.

Unidentified Analyst

Analyst

Okay, great, thank you. And then last question on the CIMA, how long is an pilot program?

Ted Fernandez

Management

Well, we’re looking that it’s varying by client so it just depends when the client feels comfortable enough that a number of the totality of the soon. The larger the pilot, the longer it takes, the smaller the pilot in many cases that will go through a little quicker, but three to six months, three on the short side, six on the long side.

Unidentified Analyst

Analyst

Okay, great, thank you Ted.

Operator

Operator

Thank you. Our next question is from Vincent Colicchio of Barrington, your line is open.

Vincent Colicchio

Analyst

Yes, Ted, I missed what was the international contribution in the quarter?

Ted Fernandez

Management

A 30% of total revenues.

Vincent Colicchio

Analyst

And I realize you’re considerably better, but I’m curious is there any cautiousness out there tied to Brexit that you could sense?

Ted Fernandez

Management

You would think if we did, we would be experiencing it already, so we haven’t seen a change of activity. What we’re seeing is an increasing demand for the EPMK stability which we had invested in now for over two years and we’re starting to see the traction, I think that’s the most noticeable to the changing European results.

Vincent Colicchio

Analyst

And to be sure I know you’re saying activity is back to normal but is the transition within Oracle complete?

Ted Fernandez

Management

I mean, I can only provide the fact, they’ve integrated their sales force, I mean, I’m sure that they will have who knows, integration, education issues that will take more than the three to four months. All I know is that our activity and our deployment of our people is back to normal activity. So, we have no reason to expect that impact us further, but it could.

Vincent Colicchio

Analyst

And lastly, do you expect new alliances by year end, what’s that look like?

Ted Fernandez

Management

We continue to work on a couple of ideas that we would expect to have by the end of the fiscal year, it could have slipped a little bit, it could, it could slip into the first quarter, but we continue to work on several ideas that I still believe that will result in new offerings and alliances for the organization.

Vincent Colicchio

Analyst

Okay, I’ll go back to the queue, thank you.

Ted Fernandez

Management

Thank you, Vin.

Operator

Operator

[Operator instructions] We have one more question from Morris Ajzenman of Griffin Securities, your line is open.

Morris Ajzenman

Analyst

Just a quick follow up on the previous question, international revenues, you said early in the presentation flat plus 3% on a constant currency basis. Could you kind of give some sort of feel for, what that means in profitability, I know you really want to make a lot of money there but you aren’t losing any more, are we getting any traction on the profit side?

Ted Fernandez

Management

Yes, I mean, to the extent that our flats are up, the profitability does improve, we did, I mean, it’s important to see that the local currency or constant currency in number of 3% was wiped out by the devaluation of the pound versus the dollar. So, on a reported basis we would get the benefit of that but I would say that profitability consistent with the revenue growth. It’s consistent and we expect that they increase.

Morris Ajzenman

Analyst

Thank you.

Operator

Operator

Thank you. At this time I show no further questions, I would now like to turn the call back over to Mr. Fernandez.

Ted Fernandez

Management

Thank you, operator and let me again thank everyone for participating in our third quarter earnings call, we look forward to catching up with everyone again when we report our fourth quarter and fiscal 2016. Thank you again for participating.

Operator

Operator

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