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The Hackett Group, Inc. (HCKT)

Q3 2022 Earnings Call· Fri, Nov 11, 2022

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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 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

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 Rob Ramirez, Chief Financial Officer. 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 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, 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.

Ted Fernandez

Management

Thank you, Rob, and welcome everyone to our third-quarter earnings call. As we normally do, I will open the call with some overview comments on the quarter. I will then turn it back over to Rob to review our detailed operating results, cash flow and provide our quarterly guidance. We will then review our market strategy-related comments, after which we will open it up for Q&A. This afternoon, we reported total revenues of $72 million and revenues before reimbursements of $71 million, and adjusted earnings per share of $0.37, which was above our quarterly guidance, and up 19% on a year-over-year basis. Our results were driven by 11% growth in revenues before reimbursements from our Global S&BT Group, which also reported the year-over-year segment profit growth of 18%. This growth was driven by our strong S&BT consulting performance and by the growth and increasing revenue mix of our higher-margin Research Advisory and IP-as-a-service offering. This highlights the reasons, why we have accelerated our investments in this area. The quarter benefitted from the growth of our IPaaS revenues as our contract we discussed last quarter continued to ramp. We also continue to be actively engaged in contract and pilot discussions with other several large software and service companies to help them bolster their value-selling and value-realization efforts. Our results also benefited from the growth of our research advisory business. During the quarter, we launched our first of three new market intelligence programs that we plan to launch by year-end. These programs allow us to compare the differentiating capabilities of software and services providers, which should help them strategically, support their sales and marketing efforts. The Global S&BT or Strategy and Business Transformation segment revenue growth was partially offset by the results of our Oracle and SAP segments, which were down as…

Rob Ramirez

Management

Thank you, Ted. As I typically do, I'll cover the following topics during this portion of the call. I'll go through an overview of our third quarter results, along with an overview of related key operating statistics. I'll go over an overview of our cash flow activities in the quarter, and I'll conclude with a discussion on our financial outlook for the fourth quarter of 2022, as well as make some comments in relation to the Dutch. Before moving to our results, I'd like to comment on the Form 10-KA that was filed this evening. Based on common letters and discussions with the staff of the SEC, the company concluded that we had material weakness in our internal control on financial reporting, as it relates to segment disclosures. It is important to note that, the omission of additional segment disclosures did not result in material misstatement of the company's financial statements. Effective in the third quarter of 2022, the company has reorganized its operating and internal reporting structure to better align with its primary market solutions. Due to this reorganization, the company is expanding its reporting to three segments; one, Global Strategy and Business Transformation or Global S&BT; two, Oracle Solutions and three SAP Solutions. As a result, I will comment separately regarding the revenues of our Global S&BT, our Oracle Solutions Group, our SAP Solutions Group and the total company. Our Global S&BT Group includes the results of our North America and international IP-as-a-service offerings, our research advisory programs and benchmarking services our OneStream offerings, and our business transformation groups. Our Oracle Solutions and our SAP Solutions segments, include the results of our North America Oracle and SAP offerings respectively. Please note that, we will be referencing both total revenues and revenues before reimbursements in our discussion. Reimbursable expenses…

Ted Fernandez

Management

Thank you, Rob. As we look forward, let me share our thoughts on the near and long-term demand environment and on the growth opportunities it offers to our organization. Digital innovation in enterprise cloud applications, analytics and infrastructure, workflow automation and process mining are dramatically influencing 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. Clients understand that that payback from digital transformation projects are critical to their long-term competitiveness and as they evaluate the Fed's aggressive attempts to slow down the economy and the impact on their respective businesses as well. With that said, although, digital transformation demand remains strong, it is being impacted by extended decision-making, as organizations assess competing priorities created by the increasing interest rates. During the quarter we experienced a disruption of a meaningful project and noticed clients reassessing their spending priorities. However, we also saw other large projects going forward as we exited the quarter. During the quarter we also saw some of our clients rebalance their spend with productivity and strategic cost-reduction efforts which are also core to our offerings. On the talent side, competition for experienced talent continues, but we saw turnover moderate during the quarter and expect that trend to continue. Long term, we have transitioned to a hybrid sales and delivery model, which provides us with effective access to our clients and their respective teams. This hybrid model provides our associates with greater personal flexibility to perform their defined responsibilities which is very valuable to them. This should also allow us to attract and retain talent that we have struggled to retain, because of the demanding historical travel requirements of our industry. Strategically, we are accelerating…

Operator

Operator

Thank you. [Operator Instructions] Our first question is from Jeff Martin with ROTH Capital Partners. You may go ahead.

Jeff Martin

Analyst

Thanks. Good afternoon, Ted and Rob. Hope you are doing well?

Ted Fernandez

Management

Thanks, Jeff.

Rob Ramirez

Management

Thanks, Jeff.

Jeff Martin

Analyst

Ted wanted to see -- you mentioned the disruption of a meaningful contract with S&BT in the quarter. Was curious if that was a temporary disruption or if that's going to continue to impact Q4 and if that was part of the consideration within your guidance for the quarter?

Ted Fernandez

Management

It was certainly part of our consideration. There is a difference between an actual project stopping, which by the way impacted two, three, by probably a penny or two and impacts Q4 by a penny or two. But overall, what we're seeing is the demand and activity for the digital transformation initiatives remain unchanged, but we're seeing clients being challenged in new ways in other ways, which forces them to re-prioritize and rethink their spend and we know we're not unaffected by it. We are benefiting some by some of our benchmarking and strategic cost reduction activity, which comes with some of those clients reassessing their spending priorities. But look we're expecting this extended decision now making to continue until we see it change. So that's what's reflected in our guidance.

Jeff Martin

Analyst

Okay. Great. And then with respect to process mining, could you give us maybe a progress report on what's been done this year to position the business for that market? And if that's contributing to revenue and profitability, I don't know if that is more of a 2023 and beyond sort of an impact driver?

Ted Fernandez

Management

No, it continues to be an area, what we believe is high potential to our business model. But when we looked -- mid-year when we looked at the opportunities, we had with IPaaS growth with the content development and launching of new market intelligence programs, syndicating of our IP, all of which we controlled. We actually stopped the strategic joint venture efforts that we had launched earlier in the year, and moved our time and attention to these other areas, which again, we totally controlled and we really like the prospects of what we were seeing.

Jeff Martin

Analyst

Okay. And then with respect to your target model, which is 5% to 10% revenue growth. I think 15% to 25% earnings growth. I would imagine, you'd be at the low end of that range initially in terms of setting an expectation for 2023. Just curious if you could comment around that?

Ted Fernandez

Management

Well, if you were trying to just crystal ball, we'll just assume that the -- if you want to call it the slowing economy will impact this fourth quarter and impact perhaps the first half of the year. With that said, we would expect if demand remains unchanged. And for the concerns around the economic slowdowns to abate that we would go back to a pretty strong second half of 2023, and that the investments that we're making across all of our new programs and the increased sales investments we're making around our research advisory programs are all of those things for them to contribute to what we would consider our normal long-term growth rate. But what we're seeing is that if we continue this growth, it would come at higher margins. So you're seeing that our operating margins and EBITDA margins are all improving and we would expect that to be on an increasing recurring basis. So we believe that that's where the prospects of our business have its greatest potential. And then just let's go back and talk about our Oracle and SAP Solutions. Even though it was, it's been a rough 2021 -- I'm sorry, 2022 for that group off a pretty decent 2021. Look, we're seeing good activity in those groups. We believe that they should continue to at least contribute growth at the low end of our long-term growth rate in any environment, and we also believe that their margin profiles as we continue to leverage offshore more, which we didn't mention, but if you'll see we are managing -- wage increases are being nicely offset by the continued increase of offshore resources across all of our three segments. All of those things are contributing and creating a margin profile, as you said, if you were to operate anywhere near the high end of our revenue growth rate with a new margin profile, the profitability profile for the business is clearly increasing, which you've seen throughout all of 2022. I mean, it's easy to forget, because we're all getting -- when I say, all of course, our clients and ourselves are getting impacted by these increasing rates along with some of the other challenges that other industries face. But when you consider the very -- the strong first half of the year that we had even with this, let's call it, slowing second half compared with that first half, we still expect our 2022 results to be in excess of our historical record 2021 results.

Jeff Martin

Analyst

That's helpful. That's all I have. Thanks.

Operator

Operator

Thank you [Operator Instructions] Our next question is from Vincent Colicchio with Barrington Research. You may go ahead.

Vincent Colicchio

Analyst

Yes. Ted, the first question is what gives you confidence in an upturn -- on the Oracle and SAP side? I think you said the second quarter of next year.

Ted Fernandez

Management

Just the activity that we've seen even in the third and what we see in the pipeline going into the fourth quarter. And some of the sizable engagements that we said that we signed as we exit Q3 and enter Q4 impacted one of those two groups. So it's just the activity that's why I didn't back off on the activity or demand around digital transformation. But we know that their clients are facing other considerations, and it will impact pipeline velocity and conversion, and we should plan for it, but the activity itself it remains a very strong impact. We've seen clients in industries that have been that are -- have been incredibly affected by some of both the COVID and geopolitical issues that they faced not only in 2021, but in through 2022 continue to invest in these digital transformation initiatives in spite of those I'll call it headwinds that they're facing. So that's why I continue to say that demand is going nowhere. Look, we're just going to have some headwinds as clients decide how it's impacting their respective businesses and we'll have to manage through that. We think we'll do so successfully.

Vincent Colicchio

Analyst

Could you give us an update on how many IPs or service deals you're currently in negotiations with?

Ted Fernandez

Management

Actually in contracting pilots and the like we're probably -- got another two to four that are active right now. So hopefully, we'll have some of those -- some signed here before the end of the year, and then as I said previously we would hope that we're able to see additional ones in 2023.

Vincent Colicchio

Analyst

And is -- are you seeing increased demand for more offshore in the software implementation side given the economic pressures and could that be a headwind to revenue for those businesses?

Ted Fernandez

Management

No. But anyone who is going to be delivering technology-related services have to have an appropriate blend of offshore resources to compete. I mean, I will bet -- well I'm not going to bet I've got Rob sitting in front of me but our offshore resources are probably approaching 50% of our total resource on our Oracle and SAP Groups and they continue to increase. So not only are they helpful for us in leveraging -- offsetting wage increases for all really across the globe that mix change, but they are making sure that we stay very competitive with any rate related or pricing related issues clients may bring.

Vincent Colicchio

Analyst

Thanks, Ted.

Operator

Operator

Thank you. The next question is from George Sutton with Craig-Hallum. You may go ahead.

George Sutton

Analyst

Thank you. Guys, I'm stunned the question hasn't been asked yet very bold move with the Dutch auction at this time in the economy and this time in the market. So could you just give us some perspective of why now versus say, why not six months ago? What are you seeing that's given you the increased conviction? And by the way I love it.

Ted Fernandez

Management

Okay. First it has been a consideration throughout the entire year. So it's something that we launched in the year that's something that we knew was going to be a strategic alternatives as we considered other strategic alternatives. With that said, we weren't able to get it all done maybe as timely as we hoped, but when we consider the fact -- when we look at the cash flow that we're generating, we've looked at the volatility of our shares, we thought that just continuing to sit on our balance sheet, especially, when you consider I'm going to repeat the comment that I made that the interest expense that we're incurring will be significantly offset by the elimination of the dividends on the shares that are being repurchased and the -- if you want to call it the tax effect interest expense. So our net of dividend and tax interest expense will remain very low for us. So when we took all of those things into consideration we said -- we said on it. I thought -- I personally said on it as we looked at other strategic considerations including acquisitions throughout 2021. I didn't want to let the year go by. Like the strength of our -- operation strength of our earnings cash flow we're generating. So we decided to go forward with it.

George Sutton

Analyst

So in other words you have actively looked at strategic opportunities from an M&A perspective and found that your own shares are the best investment, I guess, that would be the logical summary?

Ted Fernandez

Management

That is correct. Especially, when you look at what we believe are the growth prospects from our research-related offerings, iPaaS licensing all of the above we think it's a great investment.

George Sutton

Analyst

So you mentioned a new research advisory platform to launch in early 2023. Can you just give us some sense of -- of what the incremental adds might be there what's different about that platform?

Ted Fernandez

Management

Well, I'm embarrassed to say that the existing member portal has taken -- our platform has taken a backseat to the significant investments that we made in Quantum Leap and digital transformation over the last three years to four years. It's something that we probably should have -- and did start earlier, but it took a backseat to these other platforms that you know George has turned out to be very important to our current offerings. With that said, when we look at the amount of money we're spending now to growth programs and to grow the sales force around those research programs, we said we better get a state-of-the-art member platform in place as we do that throughout 2023. So knock on the wood let's see if we get that first version out early in 2023. Clearly our members deserve it.

George Sutton

Analyst

Super. Thanks, guys. Appreciate it.

Ted Fernandez

Management

Thank you, George.

Operator

Operator

Thank you. And at this time I show no further questions. I will now turn the call back over to Mr. Fernandez.

Ted Fernandez

Management

Well, I'd like to thank everyone for participating in our third-quarter earnings call. We look forward to updating all of you when we report the fourth quarter. As Rob said, you will see press releases that will be going out tomorrow along with the details of our Dutch tender offer that will go out before the market opens. Thank you again for participating.

Operator

Operator

Thank you. That does conclude today's conference. Thank you all for participating. You may disconnect at this time.