The Hackett Group, Inc. (HCKT) Q1 2021 Earnings Report, Transcript and Summary

Welcome to the Hackett Group First Quarter Earnings Conference Call. [Operator Instructions] The conference is being recorded. Hosting tonight’s call are Mr. Ted Fernandez, Chairman and CEO; Mr. Rob Ramirez, Chief Financial Officer. Mr. Ramirez, you may begin. Thank you.

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, Robert Ramirez, CFO. A press announcement was released over the wires at 4:06 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 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, especially in light of COVID-19. 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. As we normally do, I will start with quarterly overview comments and then ask Rob to comment on operating results, cash flow and also provide his comments on outlook. The call will then return to me for some market strategic-related comments, and then we will open it up for Q&A. Let me again start by welcoming everyone to our first quarter earnings call. Although circumstances are improving, I would like to continue to acknowledge those dedicated individuals who continue to work nonstop and under very difficult circumstances to support all of us during the pandemic. Also, I want to acknowledge our associates and clients that quickly and successfully adapted to the remote delivery requirements around the globe. Consistent with our comments since the end of the second quarter, we continue to experience increased client engagement and demand for our services through this quarter. It is clearly evident that organizations are increasingly recognizing the need to embrace digital transformation as a requirement to remain competitive. Correspondingly, this afternoon, we reported net revenues of $63.4 million and pro forma earnings per share of $0.27, up 17% sequentially and equally important, up 12.5% from the prior year. Although net revenues were down 3% in the prior year, they were up 7% sequentially, which is consistent with the demand recovery we have been experiencing and expected now to continue into the second quarter. U.S. sequential revenue growth was up 8% and flat on a year-over-year basis, which was comparing itself to a mostly pre-pandemic quarter. This was led by the continued bounce back of our Strategy and Business Transformation Group. In our EEA Group, the sequential growth was primarily driven by our Oracle ERP and SAP practices as well as strong growth in our emerging OneStream practice. The pandemic has accelerated the deployment of digital technologies to support cloud-enabled transformation, which has resulted in the growth of these practices. We are also further encouraged by the increasing activity in the U.S. and the sequential improvement expected in Europe into the second quarter. Of special note is the noticeable improvement we are now seeing in the second quarter in our Oracle EPM business. As many of you know, this group has adversely impacted our year-over-year growth over the last several years as we have transitioned that group from on-premise to cloud implementations. We believe that our on-premise to cloud transition is now behind us, which should result in improving revenue growth going forward. The investments we have made to fully digitize all of our IP and the development of RFP-as-a-service platforms, which include Quantum Leap, our state of the art global benchmarking platform and our proprietary Hackett Digital Transformation Platform, better known as DTP, are highly differentiating our offerings and continue to be important drivers of our growth for many years to come. Additionally, our partnerships in rapidly growing e-procurement, EPM, and other cloud and workflow automation providers also continue to be a key part of our digital transformation strategy, and are important future drivers of growth as well. On the balance sheet side, our ability to generate strong cash flow from operations has allowed us to increase our dividend and buyback stock. We have strong cash balances and a fully available credit facility to fund acquisitions we identify, while continuing to invest in our business. It is important to reiterate that it’s a – that it was at the start of last year having that strong cash position with no outstanding debt provided us with the ability to properly manage the demand disruption we faced. With that said, let me ask Rob to provide details on our operating results, cash flow and also comment on outlook. I will make additional comments on strategy and market conditions following Rob’s comments. Rob?

Thank you, Ted. As I usually do, I’ll cover the following topics during this portion of the call. An overview of our 2021 first quarter results along with an overview of related key operating statistics, an overview of our cash activities for the quarter and I’ll then conclude with a discussion on our financial outlook for the second quarter of 2021. For purposes of this call, I will comment separately regarding the financial results of our Strategy and Business Transformation Group, or S&BT, our ERP, EPM and Analytics Group, or EEA, our international group and the total company. Our S&BT group includes the results of our North America IP-as-a-service offerings, our executive advisory programs and benchmarking services and our business transformation practices. Our EEA Solutions group includes the results of our North America Oracle, SAP solutions and OneStream practices. Our international group includes the results of our S&BT and our EEA resources that are based primarily in Europe. In addition, please note that all references to net revenues represent revenues excluding reimbursable expenses. Reimbursable expenses are primarily project travel-related expenses passed through to our clients and have no associated impact to our margin or profitability. Given the limited amount of business travel due to the pandemic, we encourage investors to focus on net revenues to assess revenue and growth trends. During our call today, we will reference certain non-GAAP financial measures, which we believe provides useful information to investors. We included reconciliations of GAAP to non-GAAP financial measures in our press release filed earlier today. Additionally my comments today are based on results from continuing operations. As Ted mentioned, we continued to see an increase in client engagement throughout the quarter, which resulted in a sequential increase in net revenues of 7% to $63.4 million and a 3% decrease when compared to the prior year, which was above the high end of our revenue guidance range. The Q1 2021 reimbursable expense ratio on net revenues was 0.1% as compared to 6.7% when compared to the prior year. Reimbursable expenses have been significantly reduced due to COVID-19, which required the transition to a remote service delivery model. Our U.S. operations, which represented 91% of our total company net revenues in the first quarter of 2021 were up 8% on a sequential basis, and essentially flat when compared to the first quarter of the prior year. Net revenues for our S&BT group were $25.7 million, a sequential increase of 10%, and an increase of 1% when compared to the same period in the prior year, reflecting the improving demand for enterprise transformation initiatives. Net revenues for EEA Solutions group were $32.1 million, an increase of 7% on a sequential basis and flat on a year-over-year basis. The sequential increase was driven by growth from our OneStream, Oracle ERP and SAP practices. It is worth noting that our Oracle EPM practice has started to experience an increase in demand as we finished the first quarter, and is expected to be up on a sequential basis in the second quarter. Net revenues for our international group were $5.5 million, a decrease of 4% sequentially and a decrease of 26% on a year-over-year basis as expected. However, it is worth noting that international is expected to be up slightly on a sequential basis in the second quarter. Total company international net revenues accounted for 9% of total company net revenues as compared to 10% in the prior quarter and 12% in the first quarter of the prior year. Our recurring revenues, which include our executive advisory, IP-as-a-service and AMS groups accounted for approximately 21% of our total company net revenues and approximately 26% of our total company practice contribution in the quarter. Total company pro forma cost of sales, excluding reimbursable expenses totaled $39.3 million or 62% of net revenues in the first quarter of 2021 as compared to $36.8 million or 62.1% of net revenues in the prior quarter and $41.1 million or 63.1% of net revenues in the previous year. Total company consultant head count was 943 at the end of the first quarter of 2021 as compared to total company head count of 928 in the previous quarter and 1,026 at the end of the first quarter of 2020. The year-over-year decrease was primarily as a result of the actions taken in the second quarter of 2020 to reduce our global workforce by approximately 10% in response to the ongoing disruption and pandemic. Total company pro forma gross margin on net revenues was 38%, essentially flat on a sequential basis from 37.9% and up as compared to the prior year of 36.9%. S&BT gross margins on net revenues, was 46.5%, up sequentially from 44.8%, and up as compared to the prior year of 44.5%. The sequential margin increase is due to improved sequential revenue growth. EEA gross margins on net revenues was 31.2%, down sequentially from 31.7% and down as compared to the prior year of 32.5%. The sequential decrease is primarily due to the decrease in SAP software sales in the quarter. International gross margins on net revenues, was 38.2%, down sequentially from 42.7% and up as compared to the prior year of 30%. The sequential margin decrease is primarily driven by the sequential decline in revenues previously discussed. Pro forma SG&A was $12.4 million, or 19.5% of net revenues in the first quarter as compared to $12.5 million or 21.2% of net revenues in the prior year and $13.9 million or 21.3% of net revenues in the previous year. The year-over-year absolute dollar decrease of $1.5 million was primarily due to decreased travel-related selling and marketing activities due to the move to virtual sales and delivery models required by the pandemic. Pro forma EBITDA was $12.6 million from 19.8% of net revenues in the first quarter as compared to $10.8 million or 18.3% of net revenues in the prior quarter and $11 million or 16.8% of net revenues in the previous year. Total company pro forma net income for the first quarter of 2021 totaled $8.8 million or $0.27 per diluted share, which represents a sequential increase of 17%, and pro forma diluted earnings per share and is above the high end of our earnings guidance range. This compares to pro forma net income of $7.6 million, or $0.24 per diluted share in the first quarter of 2020. Cash diluted earnings per share was $0.19 for the first quarter of 2021 as compared to earnings per share of $0.17 in the first quarter of the prior year. The company’s cash balances were $51.1 million at the end of the first quarter as compared to $49.5 million at the end of the previous quarter. Net cash provided by operating activities in the quarter was $5.9 million, which was primarily driven by net income adjusted for non-cash items, and an increase in income taxes payable, partially offset by increases in accounts receivable and decreases in accounts payable. Our DSO, or day sales outstanding, at the end of the quarter was 55 days as compared to 54 days at the end of the previous quarter and 70 days in the first quarter of the previous year. The company’s $45 million credit facility remained unused during the first quarter. During the quarter, we repurchased 244,000 shares of the company stock for an average of $15.18 per share at a total cost of approximately $3.7 million, including purchases from employees to satisfy income tax withholding triggered by the vesting of restricted shares. Our remaining stock purchase authorization at the end of the quarter was $2.2 million. After the end of the quarter, we repurchased an additional 116,000 shares of the company’s stock at an average of $17.17 per share for a total cost of $2 million. At its most recent meeting, the company’s Board of Directors authorized a $20 million increase in the company’s share repurchase authorization. Additionally, the Board declared the second quarterly dividend of $0.10 per share for shareholders of record on June 25, 2021, to be paid on July 9, 2021. I will move to guidance now. As Ted mentioned in his comments, although economic uncertainty from the pandemic continues, the company’s current estimates suggest that net revenue for the second quarter of 2021 will be in the range of $64.5 million to $66.5 million. We expect sequential revenues for S&BT and International to be up, and EEA to be up strongly. We estimate pro forma diluted earnings per share in the second quarter of 2021 to be up sequentially, and in the range of $0.28 to $0.30. We expect pro forma gross margin on net revenues to be approximately 39% to 40%. We expect pro forma SG&A and interest expense for the second quarter to be approximately $13 million. We expect second quarter pro forma EBITDA on net revenues to be in the range of approximately 21% to 22%. And we expect cash balances, excluding the impact of share buyback activity to be up on a sequential basis. At this point, I would like to turn it over to Ted to review our market outlook and strategic priorities for the coming months.

Thank you, Rob. As we look forward, let me share our thoughts on the short and long-term demand environment and the growth opportunity it offers our organization. Although the pandemic created unprecedented demand disruption, it is now also clearly evident that it has also created heightened awareness and accelerated digital transformation demand and related initiatives. This means that digital innovation and enterprise cloud applications, analytics and infrastructure, workflow automation, process mining and artificial intelligence are dramatically influencing the way businesses compete, deliver their services. Digital transformation is redefining all activities at an accelerated pace, forcing organizations to fundamentally change and adopt these new capabilities in order to remain competitive. Consistent with our comments since the end of Q2, during the first quarter, we continued to experience increased client demand – client engagement and demand for our services. This increased demand is resulting in competition for experienced talent unlike we’ve never seen in a very long time. With that said, we also believe that if the ability to work from home continues then our ability to attract and retain resources to our organization will be improved since our most challenging issue of the – of our industry has always been the amount of travel required to serve clients. Specifically, the increasing momentum since the end of the second quarter of last year has continued into 2021. This should position us well for 2021, if it continues it should allow us to return to pre-pandemic levels of long-term growth and profitability. In addition to improved digital transformation demand, we continue to see an increased interest from potential partners that desire to license our IP and brand permission to leverage our Quantum Leap and digital transformation platforms to bolster their business case development and value selling efforts. We have over 10 opportunities and more than half of them are with former proposals, continue to have near-term pilots launching or are in contract negotiations with several of these opportunities. Although these new opportunities are not expected to impact the current quarter, we believe they should further benefit our 2021 results. Strategically, our focus will remain the same, which is to continue to build our brand with our new offerings and capabilities focused on digital transformation around our fully digitized and unmatched IP, benchmarking and best practices intellectual capital. This should allow us to serve our clients strategically, increasingly remotely and whenever possible, continuously. Specifically, we will continue to redefine our global benchmarking leadership through enhancements in Quantum Leap, our digital benchmarks and software service solution. This platform allows us to deliver more information with significantly less client effort it also allows us to leverage our IP and track transformation initiatives over the life of their respective effort. We believe that there is no comparable platform in the market. We will continue to enhance our Digital Transformation Platforms, or DTP, to further differentiate our unique IP, and related solution design capabilities. DTP allowed us to fully digitize our IP and align proven software configuration and organizational solutions to help clients drive transformational change. DTP is a core asset to our IP-as-a-service, digital transformation as well as cloud applications implementation offerings. As I mentioned on our last call, we have added a 20-minute demo to our Investor Relations page of our website, so that investors can become more familiar with the capabilities of our platforms. Lastly, even though we believe that we have the client base and offerings to grow our business, we continue to look for acquisitions and alliances that strategically leverage our IP, add scope or scale or capability which can accelerate our growth. We are also encouraged to see that the power of our brand and the focus of our offerings, along with the sound financial position allowed us to positively – can allow us to address the most challenging economic events. This validates our focus and the investments we are making. As always, let me close by thanking our associates, by asking them to remain safe for their tireless efforts and always urge them to stay highly focused on our clients and our people, especially in light of the short-term challenges we may continue to encounter. These conclude my comments. Let me turn it over to our operator, and let us move into the Q&A section of our call. Operator?

Thank you. [Operator Instructions] Our first question will come from George Sutton with Craig-Hallum. Your line is now open.

Thank you and congratulations for – on the nice results. I wondered if you could give us a breakdown of the cloud versus premise on the Oracle side of the business.

We have two dimensions, George. So first, on the – approximately 90% of our revenues are implementation revenues, maybe a little bit of less than 10% is application-managed services revenues. The large portion of the AMS-related revenues is actually on-prem-related applications. That represents a little bit more than half of the remaining on-prem revenues that we have for the entire organization. The pipeline and the implementation side, god, at this point, it is over 90% cloud-related implementations. On the SAP side, it’s probably 90% plus as well. And on the OneStream side, it’s fully cloud.

I wanted to address, I think, kind of a bifurcated message relative to – you mentioned demand for talent on your side is substantially better if people are not required to travel. On the other hand, as we start to open up and remove some of the COVID restrictions that would have a nice positive impact on your growth rate and pipeline. Can you just address that bifurcation?

Well, we actually separate the two. We’ve demonstrated now that our ability to both deliver and sell remotely can happen and happen very efficiently relative to the desire to people to work from home. There is no doubt that we think that a significant amount of the remote delivery that we currently have in place will remain in place for many years to come. The mix will not go back to where we had it pre-COVID. That creates significant efficiencies for us, both in terms of the lifestyle for our people that would normally – a large percentage of them would be traveling 4 out of 5 days a week. Well, when that amount is reduced from, let’s say, 70% of our people to 20% to 25% of our people, that will have a very favorable impact on our ability to attract and retain people who do not – who love the work that they do, but can’t deal with some of the travel demands that they would have experienced under COVID. So right now, we’re expecting – we’re expecting clients obviously to embrace us and have us back here sometime in the near future. We think it will be slow during the remaining part of 2021. So on the sales side, we would bifurcate that and say we would expect those contacts to go back and return to more on-site or in-person-related activity. On the delivery side, George, we really believe that a large, large majority of our work is going to continue to be done remotely. It creates great efficiencies, not only relative to lifestyle, but the ability of some of our senior people to effectively deal with multiple clients on a single day versus – as you can imagine some of our people would be traveling to two or three different places sometimes in a given week, and they were spending quite a bit of time. They would end up having a lot of ineffective time which now is being fully translated to client-related pursuits and client-related delivery. So we think it’s great for us. We think it’s great for the client. We will see where the mix plays out.

Got it. And then lastly, I think that both you and Rob had typos in your script, you referred to improvement in Europe?

We...

I don’t think we’ve heard the word improvement in Europe in the same sentence in many years.

We will go back and look at it – let Rob look at his exact words.

No. No, no. So what we said is the net revenues for international group was $5.5 million, a decrease 4%, but we did say it was worth noting that International is expected to be up slightly on a sequential basis.

Up sequential, correct. That was the term, and that’s fabulous.

The results on a year-over-year basis, George, clearly, are still hurting us significantly. They were down 26%. But we wanted to note that, we think Europe has a chance to turn around and actually start improving into the second quarter. We thought that was worth noting.

Yes. No, that was nice to hear. Thanks guys.

[Operator Instructions] Our next question will come from Jeff Martin with ROTH Capital Partners. Your line is now open.

Thank you. Hi, Ted and Rob. How are you doing?

Hi, Jeff.

Hi, Jeff.

So Ted, wanted to get a sense, EPM improving is also a good thing to hear. Can you point anything specifically driving improved demand there? And what are the implications for the balance of the year? You mentioned in Q2, it’s going to be a tailwind, but you see that carrying forward for the balance of the year?

Several things. One, sheer demand for cloud enterprise applications is clearly strong, and it is extending into EPM. Secondly, we believe Oracle has started to increase its attention on EPM-related initiatives, whether they are part of an ERP deal, which we call multi-tier opportunity or single opportunities. So both the Oracle focus has also been very, very helpful. But it is sheer demand on an application set that is pretty strong and increased focus by the vendor, resulting in improved demand. So as you would know, we – the reason that we wanted to come at it and say it is because we’re experiencing this without gapping the ERP capability that – which we would like to cap in the East Coast and we continue to work on. So we wanted to make sure that it was of note that even without that improvement we want to make in the East Coast resources relative to Oracle ERP. The Oracle EPM group is clearly seeing improvement, and that’s throughout the entire country. So it was worth noting.

Yes. That’s a good segue into my second question. Do you foresee yourself having an East Coast Oracle ERP group before the end of the year?

We’re certainly working hard at it. So the answer is we will continue to improve and increase those capabilities organically, but we continue to look for that capability on the acquisitions front. It remains a priority.

Okay. And then are there other pieces to the business that you’re looking for actively through acquisitions?

The answer is that we’re looking at other technologies. Look, we’d also love to add to the OneStream group. We will keep an eye, given the strength and the success we’ve had in S/4HANA as well. And the hardest ones for us to identify, and attract our IP-related opportunities. Those seem to be much harder to attract. But you’ll see us continue to be aggressive on the cloud enterprise side through the balance of the year.

Okay. And then finally, on the OneStream practice, are you able to give us a sense of how large that practice is at this point, and how fast that is growing or are you still too early to talk numbers specific to OneStream?

The answer is becoming more meaningful each quarter. The answer is no. We’d rather hold back on that and let that group continue to grow and get a little larger. It’s growing at a very rapid pace. I think you’ve seen, we’ve been named a Diamond Partner, which is the highest level of partnership. We think we are clearly now one of their very top partners, if not number one, then number two. We’re very close thereafter. So it’s an area of focus for us. We’re having tremendous success with it. So you’ll see us to continue to invest and grow that rapidly.

Okay, wonderful. And I also want to commend you on a really nice quarter and exceeding what you set out as expectations for the back half of 2020 and then as we get into 2021. So, nice to see the year-over-year adjusted EPS growth.

Yes. We will tell you, no one’s enjoying it more than us. Obviously, the disruptive was meaningful second quarter of last year to see us out now with profitability in – even though our revenues were slightly below last year’s, but to see profitability above last year’s in Q1 for us was very promising. And then when we look at the sequential opportunity that we provided in guidance into Q2, obviously, that’s promising as well.

Thank you, Ted.

Our next cost will come from Vincent Colicchio from Barrington Research. Your line is now open.

Yes. Ted, I’m curious, is the pandemic disrupting your offshore delivery business in any way or – and if not yet, is that something of concern?

Yes. It has. We’ve got an incredible team, but it has been impacted. We’ve got a great leader. So we’re trying to backfill some of the disruption that they have experienced here recently. But again, we’ve had – that’s been a growing group for us with a very strong leader, a very strong team. So we expect them to pull-through here strongly. But we – it’s been a very challenging time, obviously, for the entire country.

And Rob, in your prepared remarks, I didn’t hear what you said on the EEA business in terms of sequential change for Q2?

For Q2, we didn’t. We just said that’s going to be up strongly.

Okay. And the International changed for the better, is there anything to call out there? Or is it just ebb and flow of business?

So we think it’s just a slower path to what we will call it, recovery in client engagement in the UK than we have experienced in the U.S. but no, other than activity clearly increasing. But the disruption and the lockdown there were longer and more extended. And so – but we – our hope is that they can continue to improve. So it’s nice for us not to think that they can be up even if that’s going to be slightly, we will take it, but it means it’s stabilizing and things that are starting to turn around. That would be great for us as well.

And speaking about your IP-as-a-service business, did I understand you that you expect incrementally for that – for some of those potential partnerships to start contributing at some point this year?

We will be very disappointed if they don’t have – if they don’t contribute to the second half of 2021. But I also wanted people to know that the guidance is not being impacted by what we believe should be the impact that many of those contracts could have for us in the second half of the year.

So you already have some relationships that are contracted so is what you’re saying that you’ll see some incremental revenue from new relationships? Is that your expectation?

We have – the comments I’ve said is that we have several in what we are – we’ve been negotiating and finalizing pilot launches. And we have several also that are in contracting stage so the combination of pilots and the combination of what we hope will be finalizing contract negotiation with several of different parties, we think, should help our second half of 2021.

And then has there been any change in the competitive environment in any of your businesses in terms of pricing?

No. But I can tell you, the attention has gone through resourcing and getting great resourcing. So what it means is that pricing will only improve when you start experiencing this kind of demand.

Okay. Nice quarter, Ted.

Thank you, Vince. Just making sure we are all set?

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

Thank you, operator. Let me thank everyone again for participating in our first quarter earnings call. We look forward to updating you again once we report the second quarter. Thank you.

This will conclude today’s conference. Thank you for your participation on today’s call. Please have a great day. Thank you.