The Hackett Group, Inc. (HCKT) Q2 2021 Earnings Report, Transcript and Summary

Welcome to the Hackett Group Second Quarter Earnings Conference Call. [Operator Instructions] Please be advised, 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.

Thank you, operator. Good afternoon, everyone and thank you for joining us to discuss the Hackett Group’s second 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, Chief Financial Officer. A press announcement was released over the wires at 4:05 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 in Q&A 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 that are 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 normally do, I’ll open the call with some overview comments. I will then turn it back over to Rob to comment on detailed operating results, cash flow as well as comment on outlook. We will then review our market strategy and related comments after which we will open it up to Q&A. Given the recent rise in Delta variant infections, I would like to continue to acknowledge those dedicated healthcare providers who continue to work nonstop and selflessly to support us all during this pandemic. Consistent with our comments since the end of the second quarter of last year, we continued to experience increased client engagement and demand for our services throughout the quarter. It is evident that organizations have recognized the need to embrace digital transformation as a requirement to remain competitive. Correspondingly this afternoon, we reported net revenues of $73 million and pro forma earnings per share of $0.39 both in excess of guidance. Of note is a $5.3 million SAP software sale transaction, which also increased our pro forma, which increased our pro forma EPS by $0.09. Excluding this software sale, our net revenues exceeded the high end of our guidance and were up a strong 7% sequentially and up 29%, when compared to the COVID impacted second quarter of last year. The results are consistent with the strong demand recovery we have been experiencing since the end of the second quarter of last year. It is also important to note that we are now operating above pre-pandemic revenue and clearly profitability levels. U.S. sequential revenue growth, excluding the software sale was up 7% sequentially and up 28% when compared to the second quarter of last year. The results were driven by the continued recovery of our S&BT group, our strategy and business transformation group and 10% sequential growth in our EEA group, excluding the impact – which excludes the impact of the SAP software sale. Excuse me. All groups within EEA were up sequentially. Of special note, it’s the sequential improvement we experienced in our Oracle EPM practice. As many of you know, this group has adversely impacted our year-over-year growth over the last several years, as we transitioned that group from on-prem to cloud implementations. We believe that our Oracle on-prem to cloud transition is now behind us, which should result in improving revenue growth for our organization. Just to put that transition in perspective, we have lost an excess of $60 million in Oracle on-prem revenue, and that replaced it with a much broader based Oracle Cloud ERP and EPM revenues and with a rapidly growing OneStream business. I would be remissed if I didn’t also comment on the strong performance of our SAP group, which again, we can attribute that $5.3 million transaction as a result of the incredible expertise that they have in life sciences and specifically in pharma and biotech, which allowed that transaction to be facilitated and realized by our organization. The pandemic has accelerated the deployment of digital technologies to support cloud enabled transformation, which has resulted in the growth in these practices. We’re also further encouraged with the increasing activity in the U.S. and with the sequential growth that we experienced in Europe during the second quarter. The investments we have made to fully digitize all of our IP and development of our ideas as a service platforms Quantum Leap, our state-of-the-art global benchmarking platform and our proprietary Digital Transformation Platform, or DTP are highly differentiating our offerings and continue to be important drivers of our long-term growth. Additionally, as I mentioned last quarter, our partnerships with rapidly growing e-procurement, EPM, and cloud and workflow automation providers also continue to be key in 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, our buyback program, as well as our buyback program. We also continue to have strong cash balances and a fully available credit facility to fund acquisitions, we identify while continuing to invest in our business. 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 the strategy and market condition following Rob’s comments. Rob?

Thank you, Ted. As I typically do, I’ll cover the following topics during this portion of the call. I’ll cover an overview of our 2021 second quarter results along with an overview of related key operating statistics, I’ll cover an overview of our cash flow activities during the quarter, and I’ll conclude the discussion with our financial outlook for the third quarter of 2021. For the 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 solution group or EEA our international group and the total company. Our S&BT group includes a 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 used the results of our North America Oracle, SAP, 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 pass through to our clients and have no associated impact to our margin or profitability. Given the limited amount of business travel through the pandemic, we encourage investors to focus on net revenues to assess revenue growth and margin trends. During our call today, we will reference certain non-GAAP financial measures, which we believe provides useful information to investors. We included reconciliations to GAAP to non-GAAP financial measures in our press release filed earlier today. Additionally, my comments are based on results from continuing operations. For the second quarter of 2021, our net revenues increased to $73 million up 15% when compared to the prior quarter and up 39%, when compared to the prior year, which is above the high end of our revenue guidance range. As Ted mentioned, this growth includes a $5.3 million software sales transaction. Our net revenues excluding the software sales transaction were $67.7 million an increase of 7% when compared to the prior quarter and 29% when compared to the prior year, as we continue to see an increase in client engagement throughout the quarter. The second quarter of 2021 reimbursable expense ratio on net revenues was 0.3% as compared to 0.1% when compared to the prior quarter and 0.2%, when compared to the prior year. Reimbursable expenses have been significantly reduced due to COVID-19, which requires a transition for a remote service delivery model. Our U.S. operations, which represented 92% of our total company net revenues in the second quarter were up 16% on a sequential basis and up 39% when compared to the second quarter of the prior year. Our total U.S. revenues excluding the software sale transaction, Ted mentioned were up 7% on a sequential basis and 28% when compared to the second quarter of the prior year. Net revenues for our S&BT group were $26.4 million, a sequential increase of 3% and an increase of 51% when compared to the same period in the prior year, reflecting the continued demand for enterprise transformation initiatives. Net revenues for our EEA solutions group were $40.5 million an increase of 26% on a sequential basis and up 32%, when compared to the second quarter of the prior year. EEA net revenues excluding the SAP software sale transaction were up 10% on a sequential basis and 15% when compared to the second quarter of the prior year. The sequential increase was driven by growth from our OneStream, Oracle and SAP practices. Net revenues for international group were $6 million, an increase of 9% sequentially, and an increase of 36% on a year-over-year basis. Total company international net revenues accounted for 8% of total company net revenues as compared to 9% in the prior quarter and 8% in the second quarter of the prior year. Our recurring revenues excluding the impact of the SAP software sales transaction include our executive advisory, IP-as-a-service and AMS groups accounted for approximately 19% of our total net revenues and approximately 22% for a total company practice contribution in the quarter. Total company pro forma cost of sales, excluding reimbursable expenses totaled $41.4 million or 56.8% on net revenues in the second quarter of 2021 as compared to $39.3 million or 62% of net revenues in the prior quarter and $38.7 million or 73.4% of net revenues in the previous year. Total company consultant headcount was 1,001 at the end of the second quarter, as compared to total company headcount of 943 in the previous quarter and 908 at the end of the second quarter of 2020. The year-over-year increase was primarily a result of increased hiring activities and increased utilization of subcontractors resulting from increased demand. Total company pro forma gross margin on net revenues was 43.2% in the second quarter, up on a sequential basis from 38% and up as compared to the prior year of 26.6%. Excluding the SAP software sale transaction, our pro forma gross margin on net revenues was 38.9%. S&BT gross margins on net revenues were 45.3% in the second quarter down sequentially from 46.5% and up as compared to 25.3% in the second quarter of the prior year. The sequential margin decrease is primarily due to increased incentive compensation accruals commensurate with improving results. EEA gross margins on net revenues were 42% in the second quarter of 2021, up sequentially from 31.2% and up as compared to 30.4% in the second quarter of the prior year, The sequential margin increase is primarily due to the software sales transaction we’ve discussed, as well as improved revenue growth. EEA gross margins on net revenues excluding the software sale transaction were 33.5%. International gross margins on net revenues were 42.2%, up sequentially from 38.2% and up as compared to prior year of 5.1%. The sequential margin increase is primarily driven by the sequential increase in net revenues I mentioned. Pro forma SG&A was $14.4 million or 19.7% of net revenues in the second quarter of 2021 as compared to $12.4 million or 19.5% of net revenues in the prior quarter and $11.4 million or 21.7% of net revenues in the previous year. The sequential and year-over-year absolute dollar increases up primarily due to increased sales commissions and incentive compensation accruals associated with increased company performance. Pro forma EBITDA was $18 million or 24.6% of net revenues in the second quarter as compared to $12.6 million or 19.8% of net revenues in the prior quarter at $3.4 million or 6.6% of net revenues in the previous year, excluding the second quarter software sales transaction EBITDA was $13.9 million or 20.5% of net revenues. Total company pro forma net income for the second quarter of 2021 totaled [Audio Dip] or $0.39 per diluted share, which represents a sequential increase of 44% and is above the high end of our earnings guidance range. Excluding the impact from the software sales transaction discussed, pro forma earnings per share totaled $0.30. This compares to perform a net income of $1.9 million or $0.06 per diluted share in the second quarter of 2020. GAAP diluted earnings per share was $0.32 cents for the second quarter as compared to $0.19 in the first quarter and a net loss per share of $0.13 in the second quarter of the prior year. GAAP results for the second quarter of the prior year included a $5 million or $0.13 cents per share restructuring expense for severance costs related to staff reductions in the U.S. and Europe. The company’s cash balances were $52.5 million at the end of the second quarter, as compared to $51.1 million at the end of the previous quarter. Net cash provided by operating activities in the quarter was $13.8 million, which was primarily driven by net income adjusted for non-cash items and an increase in accrued expenses, partially offset by increases in accounts receivable. Our DSO or day sales outstanding at the end of the quarter was 59 days as compared to 55 days at the end of the previous quarter and 64 days in the second quarter of the prior year, the company’s $45 million credit facility remained unused during the second quarter. During the quarter, we purchased 491,000 shares of the company stock for an average of $17.58 per share at a total cost of approximately $8.6 million. Our remaining stock purchase authorization at the end of the quarter was $13.6 million. At its most recent meeting, the company’s board of directors declared the third quarterly dividend of 2021 $.10 per share for shareholder record on September 24 to be paid on October 8, 2021. I’ll now be discussing our outlook for the third quarter. Consistent with seasonal third quarter trends, we expect the impact of the additional U.S. holiday, and the typical increase in time off during the summer, vacation in the U.S. and even more meaningfully in Europe to unfavorably impact available days by approximately 3% on a sequential basis. As Ted mentioned in his comments, our economic uncertainty from the pandemic continues, the company’s current estimate suggests that net revenue for the third quarter of 2021 will be in the range of $66 million to $68 million, excluding the impact of the software sales transaction we discussed in Q2. We expect sequential revenues for EEA to be flat to up. We expect sequential revenues for S&BT to be up and for international to be down. We estimate performance diluted earnings per share in the third quarter of 2021 to be in the range of $0.28 to $0.30. We expect pro-forma gross margin and net revenues to be approximately 39% to 40%. We expect pro forma SG&A and interest expense for the third quarter to be approximately $13.7 million. We expect third quarter pro forma EBITDA on net revenues to be in the range of approximately 19% to 20%. And we expect cash balances excluding the impact of share buyback activity to be flat to up on a sequential basis due to estimated U.S. federal tax payments that will be made in court. At this point, I will turn it back 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 on a growth opportunity it offers our organization. Although the pandemic created unprecedented demand disruption, it is now clearly evident that has also created heightened awareness and has accelerated demand for digital transformation initiatives. This means that digital innovation and enterprise cloud applications, analytics, and infrastructure, workflow automation, and process mining are dramatically influencing of the way businesses compete and 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 Q1, during the second quarter, we continue to experience increased client engagement and demand for our services. This increased demand is resulting in competition for experienced talent. Unlike we have seen in a very long time. With that said, we also believe with a new, more flexible work from home delivery model will evolve, which will enhance our ability to attract and retain resources for our organization. The most challenging retention issue of our industry has always been the amount of travel required to serve clients. Specifically, the increasing momentum since the end of Q2 of last year has continued into 2021. This has positioned us well for the balance of the year and should allow us to return to our target long-term growth and profitability levels. In addition to improve, digital transformation demand, we continue to see an increase in interest from potential partners that desire to license our IP and brand permission and leverage our quantum leap and digital transformation platforms to bolster their business case development and value selling as well as their delivery efforts. We closed the meaningful relationship during the quarter and have plans to launch additional pilots this quarter. We also continue to have over 10 opportunities with several of them with formal proposals near term pilots launching or in contract negotiations. We believe the newly signed and in-process opportunities 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 a fully digitized and unmatched IP and benchmarking and best practices intellectual capital platforms that should allow us to serve clients strategically, increasingly, remotely, and whenever possible, continuously. Specifically, we will continue to our global benchmarking leadership to enhance those in quantum leap. Our digital benchmarking Software-as-a-Service solution, this platform allows us to deliver more information with significantly less client effort. It also allows clients to leverage our IP and track transformation initiatives over the life of their respective effort. We believe there is no comparable platform in the market. We also continue to enhance our digital transformation platform to further differentiate our unique IP and related solution design capabilities. DTP allows 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 of our iPass digital transformation and cloud application 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 the offerings to grow our business, we continue to look for acquisitions and alliances that strategically leverage our IP in that scope, scale or capability, which can accelerate our growth. We also are encouraged to see the power of our brand and the focus of our offerings along with our sound financial position, allow us to serve the world’s largest organizations as well as manage the most challenging macroeconomic events. As always let me close by asking our associates to remain safe and to thank them for their tireless efforts and always urge them to stay highly focused on our clients and people, especially in light of the short-term challenges that we may continue to encounter. Those concludes’ my comments. Let me then turn it over to our Operator and let’s move on to the Q&A section of our call. Operator?

[Operator Instructions] Your first question in the queue is from George Sutton with Craig-Hallum. Your line is now open.

Thank you. This is Adam on for George. Ted, great to hear about the closing of the first IP customer, I was hoping you could provide a little more detail on how that deal came to be, what you expected to become in the future?

Well, without providing too many details that haven’t been publicly disclosed by the client, simply to say that it’s taking us into a new area. I had a client in the infrastructure space that believes that the brand permissions that the performance data that they will utilize to go to market with will significantly enhance their ability to close deals and at an accelerated pace. So for us, a great new opportunity, incredible brand and really enhances our data capture reach in an entirely different areas. So very meaningful in different ways.

And then one follow-up for me, you also mentioned at the beginning of the call, how companies are beginning to really recognize the need for digital transformation. Any thoughts or insight you could offer, just specifically what you’re hearing from clients and how do you think the opportunity set has changed for packet when you compare it to before the pandemic?

Without a doubt, the clients are aggressively engaging in conversations on what is the best path for them to prioritize their digital transformation efforts that allows us to engage clients then in evaluating those opportunities, sizing the performance improvement opportunities that would come from those initiatives as well as then implementing, helping them, implement them, if our scale and capability fits. So we look at our clients and we see just how engaged they are, how broad the questions are, how they’re prioritizing and funding these initiatives. We just see that – we see it moving, we see velocity, we see decision-making engagement, all of it at an incredibly high level.

Next question in the queue is from Vincent Colicchio with Barrington Research. Your line is now open.

Yes. And just to follow-up on what you just said, Ted. So are you seeing sales cycles improved versus last quarter?

Well. When you look at 7% sequential, excluding that large software transaction, the answer is no, we were happy just to have them right where they’re at. In fact to some extent, the demand is outstripping resource capability. So for the first time, as long as I can remember having the resources are in place are as important as having a capability and credibility in those capabilities.

You mentioned the tight labor market, the incremental increase in headcount this quarter. Were those wages up versus what you had to pay in recent quarters?

The answer is the wages are increasing. And in fact, for us going into the third quarter, since we have some movements, if you recall, from what we did in 2020 we actually have compensation increases actually kicking off – kicking-in in this quarter which are – they were planned. But I think they’re also responsive to the market conditions.

And Rob in terms of the guidance, I think he said that excluding the SAP sale, you expect EEA revenue to be flat to up. Can you give me a little more color on where the strength is and where the drag is?

Look, it’s across the board. It’s across the board, Vince. And it comes back to how do you build on in their case, let’s go back 10% sequential increase. So when you consider that we’re coming off 10% sequential increase, you lose 3% available days in the quarter. Sequential increase in EEA would be pretty strong for us.

And then lastly any color on the international, it finally started growing. Now it’s down again, do you have any color on what’s going on there?

A small number now.

Well, it’s 8% of our revenues, but that doesn’t mean it’s not something we expect to grow. I think they’re still experiencing more volatility than we have in the U.S. both in the impact of the pandemic as well as their ability and willingness to put in some of the actions to support some of the recovery related issues. So I think it just results in more volatility. I think it’s also impacted by the fact that our scale is smaller. So we’re relying on fewer clients and fewer people and limited offerings given the size as it compares to the U.S. I mean, when you look at the growth in the U.S. – the year-on-year in the U.S. in the second quarter, I mean, those are just – we haven’t seen numbers like that in a long time. And that’s the growth excluding the large software deal.

One more, if I may. Please remind us, what’s your long-term your target growth goal is. I haven’t heard that number in a while.

Never changed it. 5% to 10% top line results and 15% to 20-plus-percent bottom line growth.

Thank you. Nice quarter.

Thank you, Vince.

[Operator Instructions] Next question in the queue is from Jeff Martin with Roth Capital Partners. Your line is now open.

Thanks. Hi, Rob. Hi, Ted. I apologize for getting on the call a little bit late. I did come on right at the end of your prepared remarks. So I apologize if this is repetitive. But could you give us an update on the efforts to establish an East Coast presence?

They continue. As I mentioned last quarter, we were aggressively pursuing a couple of acquisitions, one which differed and one which went to another party. We continue to talk to the organizations to see if we can find both cultural and strategic fit with that geographic location. So the efforts continue. And I guess, I’ll leave it at that. I don’t know if you have something more specific than that, Jeff.

No. That’s helpful. And then you mentioned last quarter that EPM seeing an increased demand sequentially in Q2. I was curious how that flow through the balance of the quarter and what you’re seeing so far in the third quarter there?

Well, I mean that’s an important follow on to the other question, because if you recall, the reason that – the primary reason for that East Coast acquisition target was to strengthen the combination ERP, EPM capabilities in the East Coast, which we thought we were not leveraging anywhere near the capability that we have. With that said we did see nice sequential growth in that group, including the East Coast part of the business in Q2. And we are expecting those groups to grow sequentially from Q2 to Q3 in spite of the 3% available days loss from Q2 to Q3.

Right. Okay. And then with respect to your partners on the non-Oracle side, I’m curious if you could give us an update there? And are we nearing critical mass with some of the newer technology implementers out there that that you might start to score separately?

Well, in some of them, like OneStream, we clearly are approach and critical mass, and we’ve become one of the leading OneStream implementers globally for that organization. So there we are in the Coupa space we have – we are leading there. Now in some of the other areas that we’re now exploring some of the workflow automations that relate to ServiceNow or Microsoft they are very early stages.

Okay. That’s helpful. Thanks, Ted.

Thanks, Jeff.

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

Well, again, let me thank everyone for participating in our second quarter call and look forward to updating everyone again when we report the third quarter. Thank you for participating.

This concludes today’s call. Thank you for your participation. You may disconnect at this time.