Q2 2020 Hackett Group Inc Earnings Call
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Welcome to the second quarter's earnings conference call.
That's in place I didn't listen only mode until the question answer session. Please be advised the conference is being recorded hosting todays call are Mr., Ted Fernandez, Chairman and CEO and Mr., Robert Myris, Chief Financial Officer, Mr. Ramirez you may begin.
Thank you operator, good afternoon, everyone and thank you for joining us to discuss that's a groups second quarter results.
No the call today, you're getting up to your questions, Jeff Fernandez, Chairman and CEO American group and myself Ramirez Chief Financial Officer.
Oh personnel, who is over the water at full five PM eastern time.
For a copy of release, please visit our website at Www Dot the Hackett group Dotcom.
Also please any additional financial or statistical data discussed on this call does not contain the middle East from Investor Relations page on our website.
Before we again I would like to remind you that as a follow on Collins and in the question answer session. We will be making statements about expected future results, which may be forward looking statements for the purposes for the federal Securities laws.
These statements relate to our current expectations estimates and projections and are not guarantees of future performance.
Pulp risks uncertainties and assumptions are difficult to predict which may not be accurate, especially in light of coking thing team.
Actual results may there.
Forward looking statements should be considered only in conjunction with the detailed information, particularly the risk factor there contain interestingly filings at this point I would like to turn it over to check.
Thank you, Rob and welcome everyone to our second quarter earnings call.
As we normally do I will open the call what some overview comments on the quarter.
I will then turn it back over to Rob to comment on the detailed operating results.
Cash flow as well as comment on outlook.
We will then review our market strategy related college.
And then we will then proceed to today.
Please allow me to start the call by acknowledging the incredible work and commitment of our health care providers first responders and those dedicated individuals who have continued to work nonstop.
And under some circumstances very dangerous conditions to support all of us during this pandemic.
I would also like to acknowledge our associates and clients that quickly and successfully adapted to the remote delivery requirements around the globe.
In spite of the limited notice and variance circumstances, I commend, they're focused to their respective planned initiatives and in allowing substantially all of our engagement to continue.
As I've said lifestyle.
We eagerly wait for the conditions to exist, where all of us around the globe are able to return to our normal lives. However that is ultimately defined.
Just to provide a little background on the quarter.
Let me go back to March as I said last quarter, we started the year by aggressively adding associates and strategic hires consistent with our 2020 growth prospects as we started to feel the effects of the pandemic in early March and nowhere entering a challenging period, but with a strong cash position we.
Quickly decided to make the safety and well being of our associates our top priority.
That meant that only making sure that we were taking all necessary precautions to ensure our associates safety, but to avoid any layoffs directly resulting from the pandemic through the end of our second quarter.
We believe this would provide our associates with very important peace of mind to weather. The storm, while we gained critical market information from which to make any further decisions.
On our first weekly Corona virus global update call on March Twentyth, we shared our commitments with our associates and we can me communicated that we were prepared to forego profitability in this second quarter as long as we did not weekend.
Our strong cash position.
We also informed our associates that we would update our employee related decisions as we better understood the impact of the economic disruptive disruption on our client decision, making and address any required changes prior to the beginning of the third quarter.
Consistent with this approach as we saw that pandemic volatility continuing into Q3, we've communicated our associate reductions prior to but effective at the end of our second quarter.
This resulted in a $5 million severance restructuring charge.
This chart should allow us to significantly improve our sequential quarterly results.
Fully fund, our operating actions as well as our dividend without any need to use our credit facility and also continuing to maintain.
The high cash balances were used to operating with.
Now onto our operating results.
This afternoon, we reported net revenues of 52.6 million and pro forma earnings per share of success.
It was clear from the onset of the quarter that the economic disruption would be significant.
In both the way, we engage clients and delivered our services as we expected that technology related implementation services, which already had significant remote delivery in place where least affected.
And in our business transformation services, which require more client executive interaction where most effective.
Most importantly, as the virus impact lengthen.
We have seen clients start to adapt to current circumstance and increase their engagement.
This is allowing us to see Inc., an increase in initiatives and projects in our strategy and business transformation group. We're also seeing increasing client activity in our E practices, which is allowing us to build our pipeline and extend existing engagements.
As an example, our meeting counts from April to June increased by over 75%.
Overall, usually results were down 16% sequentially and year on year wit, EA slightly up sequentially offset by the decline in our strategy business transformation group.
On the international from Europe continued to be challenging with our overall results doubt strongly sequentially and year on year.
Correspondingly, we decided we needed to be more aggressive with associates reductions in this region, which accounted for approximately 50% of our total restructuring charge.
The investments we have made to fully digitize all of our IP in the development of our IP as a service platforms, which include quantum leap our state of the our global leading benchmark platform and our proprietary Hackett digital transformation platform for DTP are allowing us to highly differentiate our.
Offerings.
And we'll continue to be important drivers of our growth for many years to come.
Specifically, it's important to note that we have had a significant increase in interest from potential partners desire to license. These platforms to bolster their business case development and value selling efforts over the last six months.
Additionally, our investments with a rapidly growing eight procurement.
End.
And workflow automation groups continue to be key to our digital transformation strategy also and are important for future drivers of our overall aggressive growth strategy.
On the balance sheet side, our ability to generate strong cash flow from operations has allowed us to continue our dividend.
Buyback stock, if we wanted to and fund acquisitions, while continuing to invest in our business.
I cannot tell you how important what's the start the year into finished both the first and second quarters with our strong cash balances and without any outstanding debt.
This has provided us with the ability to properly manage our future during this volatile economic period.
With that said, let me ask dropped to provide details on our operating results cash flow and also comment on outlook.
I will make additional comments on strategy and market conditions conditions following robs comments Rob.
Thank you Ted as I typically do I'll cover the following topics. During this portion of the call an overview of our 2022nd quarter results along with an overview of related key operating statistics.
In order to your cash flow to understand the quarter and other conclude with a discussion on our financial outlook for the third quarter 2020.
For purposes of this call I will comment separately regarding the financial results of our strategy and business transformation for us and beauty.
Our ERP EPM analytic solutions group for EA, and our international group as well as a total company.
Our SBC group includes the results of our North America IP as a service offerings, which include our executive advisory programs and benchmarking services and our business transformation practices.
He solutions group includes the results of our North America, Oracle has certainly solutions and one stream practices.
International Group includes the results of our SVP and our Iot groups 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 that have no associated impact to our margin or profitability.
During our call today, we will reference certain non-GAAP financial measures, which we believe provides useful information to investors.
We have included reconciliations of non-GAAP to GAAP financial measures in our press release filed earlier today.
Additionally, an E com my comments today are based on results from continuing operations.
For the second quarter of 2020, our net revenues decreased.
By 19% sequentially to 52.6 million when.
When compared to prior period, which is aligned with our revenue expectations discussed last quarter.
The Q2 2020 Reimbursable expense ratio on net revenues was <unk>, 0.2% as compared to 8.2% for the second quarter of the prior year net revenues and Reimbursable expenses were both affected as to economic disruption from the cobot 19 pandemic interrupted travel.
And as we transitioned to a remote service delivery model throughout the us in Europe.
Net revenues for each solutions group were 31.4 million in the second quarter of 2020, an increase of 1% on a year over year basis.
This was driven by growth from our S&P Esfour hundred implementation and reseller practices and growth from our Oracle cloud ERP and one stream practices.
Specific to Oracle practice within EPA, we continued to see improved mix of cloud on premise implementation revenue, which is now in excess of 80%.
Net revenues for this should be T. group were 16.8 million in the second quarter of 2020, a decrease of 36% when compared to the same period in the per year.
This group business transformation practice is where much of our Q2 coded 19 pandemic disruption which felt.
Our us operations, which currently represents 92% of our total company net revenues for the second quarter 2020.
We're down 16% on both a year over year and sequential basis.
Net revenues for our International group were 4.4 million in the second quarter 20, a decrease of 59% on a year over year basis as expected and discussed in the previous quarter.
Total company International net revenues accounted for 8% of total company net revenues in the second quarter of 2020 as compared to 16% in the second quarter of the per year.
Our recurring revenues, which include our executive and best practices Advisory and you Miss groups accounted for approximately 24% of our total company net revenues and approximately 62% of our total company pretax practice profitability in the second quarter 2020.
Total company pro forma cost of sales, excluding reimbursable expenses totaled 38.7 million.
Were 73.4% of net revenues in the second quarter of 2020 as compared to 40.8 million were 60.1% of net revenues for the same period in the prior year.
As we discussed last quarter the company elected to maintain staffing levels through the balance of the second quarter and as a result expected to forgo a significant level of profitability as we were evaluating the impact of the cobot 19 pandemic related disruption.
However, as a response to the ongoing disruption the company implemented plans to reduce its global workforce by approximately 10% in order to continue to protect as many of our associates, while targeting improved levels of profitability throughout the balance of the year.
Total company consultant headcount was 908 at the end of the second quarter of 2020 as compared to 1026 in the previous quarter and 999 at the end of the second quarter of 20 new team.
Total company pro forma gross margin was 26.6% of net revenues in the second quarter as compared to 39.9% in the second quarter of 2019, primarily due to our decision to protect associate staffing levels during the second quarter.
This is the key gross margins on their revenues was 26.4% in the second quarter as compared to 48.7% in the second quarter of the per year.
Margin decrease was primarily driven by the revenue decline so were impacted by the code 19 pandemic disruption.
The gross margins on net revenues was 29.7% in the second quarter of 2020 as compared to 35.1% in the second quarter of the prior year as modest revenue growth was offset by increased utilization of subcontractors and increased hiring in a rapidly growing windstream practice.
Yes.
International gross margins on net revenues was 5.1 person in the second quarter as compared to 32.5% in the second quarter over the prior year, primarily driven driven by revenue volatility as previously discussed.
Pro forma as Gionee was 11.4 million in the second quarter of 2020.
As compared to 15.2 million in the previous year and represented approximately 22% of net revenues in both periods.
The absolute dollar decrease of 3.7 million was primarily due to decreased travel related.
Selling and marketing activities throughout the quarter.
Pro forma EBITDA in the second quarter of 2020 was 3.4 million.
As compared to 12.8 million in the same period of the prior year and represented 6.6% and 18.9% of net revenues respectively.
Total company pro forma net income for the second quarter of 2020 totaled 1.9 million or six cents per diluted share.
This compares to pro forma net income of 8.9 million or 28 cents per diluted share in the second quarter of 2019.
Our pro forma return on equity was 20, 20% for the second quarter 2020.
GAAP diluted loss per share was 13 cents for the second quarter of 2020.
As compared to earnings per share of 22 cents in the second quarter of the previous year.
Results for the second quarter of 2020 include a 5 million or 13 cents restructuring expense for severance costs related to the reduction of staff in the us in Europe.
The company's cash balances with 37.4 million at the end of the second quarter of 2020 as compared to 23.3 million at the end of the previous quarter.
Net cash provided by operating activities in the second quarter of 20 to 20 was 14.5 million.
Which was primarily driven by absolute decreases in accounts receivable aneel and Unbilled revenues of 16.4 million.
Our DSO or days sales outstanding at the end of the second quarter 2020 was 64 days as compared to 70 days at the end of the previous quarter.
Given our high cash balances the company did not.
Need to drawdown on its Chris credit facility during the second quarter, which has approximately 45 million of available funds.
In June 2024 declared a dividend from 9.5 cents per share which was paid in July 2020.
At his most recent meeting the board declared the next quarterly dividend of none have since per share, which will be paid in early October 2020.
Ill now move to.
Our outlook for the third quarter.
As Ted mentioned in his comments, although economic uncertainty from the Cobot 19 pandemic continues to be high.
The company's current estimates suggest that net revenue for the third quarter of 2020 will be in the range of 52 to 54 million.
We expect sequential revenue stress and between to be up he revenues to be down in Europe to be flat.
However, as a result of the restructuring actions of the company has taken we estimate pro forma diluted earnings per share the third quarter of 2020 to be up strongly sequentially and in the range of 13 to 15 cents.
We expect pro forma gross margin on net revenues to be approximately 33% to 34%.
We expect pro forma as generic and interest expense for the third quarter to be approximately 12 million.
We expect third quarter pro forma EBITDA on net revenues to be in the range of approximately 13% to 14%.
We expect cash should be neutral when excluding restructuring and dividend payments in the quarter.
At this point I would like to turn it back over to Ted to review, our market outlook and strategic priorities in 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 the growth opportunity. It offers our organization.
It goes without saying that we have entered an unprecedented period, where the demand disruption necessitated to ensure safety has required extreme measures.
But it is now also clearly evident that the digital transformation era is just beginning and it is now being rapidly accelerated by the pandemic.
That this means that digital innovation on enterprise on emerging enterprise cloud applications workflow automation process mining and artificial intelligence is dramatically influencing the weight 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.
Both our strategy and business transformation group as well as our EA groups offerings and technology capabilities are directly and totally focused on this transformation.
On the demand side, the short term environment is improving as our clients now understand that they must continue to transform and thats. The buyers will continue to disrupt our lives until a vaccine has successfully available.
This means they must adapt a highly volatile environment, while we sort through the changes which have resulted from the pandemic. We are encouraged that we're seeing the reverse of Q2 play out Q3, where we are seeing increasing momentum from the first to the second month for the quarter versus the decreasing momentum we saw in Q2.
Strategically.
Our focus will remain the same which is to continue to build our brand with our new offerings and capabilities focused on the digital transformation around our fully digitized and unmatched benchmarking and best practices intellectual capital.
This should allow us to serve our clients strategically increasingly remotely and whenever possible continuously.
Specific specifically, we will continue to redefine our global benchmarking leadership through enhancements in quantum leap, our digital benchmark software service solution. This platform allows us to deliver more information was significantly less client effort. It also allows our clients to leverage our IP.
To track their transformation initiatives over the life of their respective effort. We believe that there is no comparable platform in the market. We also believe these platforms enhance all of the services that we currently take market.
We will also we also continue to refine and improve our digital transformation platform to further differentiate our unique IP and related capabilities.
TP has allowed us to fully digitize, our IP and align proven software configuration and organizational solutions to help our clients to drive transformational change.
DTP as a core asset to both our business transformation in cloud implementation offerings.
Given the success of our existing IP as a service initiatives and the improved functionality, we continue to add to our quantum leap and DTP platforms. We believe we will attract other global brand strategic partners to similar programs. We have launched paid piloted initiatives and have received inbound interest from new potential partners that.
Should allow us to further demonstrate that unique capabilities and unmatched credibility that our brand brings to digital transformation business case assessment as well as implementations.
Lastly, even though we believed that the client base and the offerings to grow a little bit 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 and at scope scale and capability, which we can accelerate our growth.
The trick during this transition will be to understand the short term.
Impact as well as the long term opportunity of those candidates that we focus on and also determining a fair price during this period.
In summary, we continue to believe that we are well positioned to resume our growth as demand disruption subsides.
We're also encouraged to see that the power of our brands and the focus of our offerings along with our strong financial position allows us to positively addressed the most challenging.
Health and economic events. This validates our focus and investments, we're making in our platforms and our cloud applications capability on emerging software partners as well as our IP as a service offerings, which provide us with highly differentiated offerings and strategic access to most of the leading global companies 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 focused on our clients and our people regardless of the short term challenges we encounter.
That concludes my comments, let me turn it over to our operator, and let us move onto the Q and a section of our call operator.
Thank you we will now begin our question answer session.
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Our first question comes from Martin from Roth Capital Partners. Your line is now open.
Thanks, Good afternoon 10, Rob how are you doing good afternoon, Jeff Jeff.
I wanted to 10 wanted to dive in a little bit on business transformation, how the sales process in adapting and if you think it still require as much.
Thanks interaction on for some of these.
Yes deals in the pipeline to start moving from their alone.
There is no doubt that client interaction and access is key to the service.
What were what we're seeing is where in Q2 clients just simply made.
Deliberate decisions without I'll call. It long term consequences on the head count reductions that they needed to make.
Given just how quickly that pandemic.
Impact was felt into March.
We now also realize that our clients understand two things one that's any reductions that they've made without a long term I'll call. It organizational and technology plan is not sustainable too that the clients understand that they must continue to act even if.
Access and interaction will be hampered by I'll call. It what I am calling Denver lengthening of the pandemic impact into Q3. So I think the combination of the fact that they know they knew they made some of the.
Decisions quickly and without the planning that we normally may.
To the fact that they know the things are not sustainable.
And that.
They must consider some of these transformational initiatives that they had planned and now realize they need by virtue of the changes that they made.
It is data activity, along with meeting count and the fact that we expect that group to be up strongly from Q2 to Q3.
That leads us to believed that the clients are making the adjustments and that we're making those adjustments with.
Okay are there any areas of the business, where remote delivery is a particular challenge or have you successfully migrated all that to remote colibri no that delivery side is not but in some of the significant if you back to some of the significant business transformation initiative some of those.
Significant organizational change thats affected normally would happen in a highly interactive involvement of senior executives along with our team. So obviously, we're having to change that to do that remotely.
So that is the core that is the kind of the key element I would say that's been most disruptive when we look at the impact of Q2 and the activity into Q3 during this pandemic.
Okay, and then wanted to ask other projects that were nearing launch or were perhaps recently launched.
In the February March timeframe that may have gotten pushed out 60 days I think you referred to in the past what's been your experience with those.
Started back up or are they still.
Timeline dependent on the future date curious to kind of get your your.
Input the combination of both.
Because we're obviously, it's some of the activity and momentum where we expect from Q2 to Q3, especially in strategy business transformation.
But no clearly some started and started in it will probably a different scope maybe altered by some of the access and the time that the clients had in the Reprioritization of have taken place during Q2.
Others have started they just simply started.
Late in Q2 are kicking off now into Q3, so the key Thats really what defines the transition on private described which was just.
Everybody adapting to what was required that understanding what helping unaided reengaging with us and then kicking some of those things off even if they are affected in the way that they are delivered or the way their scope.
Or the way that they are contracted because all of those things are happening and those decisions are mean, I mean, I'd give you 10 different stories with tender for clients because they're all client specific but it's a combination of the transition to.
The fact that the circumstance is what it is which is.
There is no debt debt there is no set timeline on vaccine, even though everyone remains optimistic but everyone has to continue to make the change unless they want to take some of the business risk or not be prepared for any recovery and this that up it's that push and pull that's driving our engagements the decline.
Okay and then last question on the IP in service initiative, you mentioned some pilots and started.
Curious the duration of those pilot.
When you'll know if those were actually convert to.
The longer term partnerships and if you can give us an indication what what kind of fields or industries sectors of the room.
All of the above.
It's so we have some that.
Our goal ongoing we have some that have recently launched.
I think for us.
The key difference is the level of interest that we have seen over the last six months from what we would consider to be partners that we that that that we knew could always.
Had this kind of relationship with us so for us that's going to take two decisions.
One is how broad we take the capability across sectors and secondly, how broadly we want to open up our own sector.
Two consultancies and systems integrators and Outsourcers.
But.
I think the most important thing is that that level of interest activity conversation.
I had increased not decreased and those that are those significant opportunities.
In software and other services.
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All of those continue even though I'm going to say, let's say, one and a half.
We have been simply told give us a chance to.
Work through the next quarter or too.
Reset the priorities of but they have not gone away.
Great. Thanks for the detail appreciate it.
As a reminder.
Please press star one.
Sorry.
Our next question comes from George Sutton of Craig Hallum. Your line is open.
It said in Rob This is James on for Dillard's.
If you talk about any demand trends, you're seeing on a product level system than Oracle solution portfolio and then with two been one stream I got certainly like to same strengths and weaknesses there.
Sort of evolving demand trends.
Let's say the most important thing relative to both.
Oracle and S&P is that their core ERP products are the ones, where the we're seeing the greatest.
Activity.
And.
And then any opportunity for us than.
Emerges from that ERP footprint and expanded into some of the other if you want to call it support areas.
Which could include HCM or M or other areas that some organizations not defined as core.
On the procurement side that that category remains.
In credit.
Very active it did through Q2 that continues into Q3 and.
Okay.
At the if you asked about anyone else of we've mentioned the fact of one stream continues to be.
A relationship which is continues to ramp for us and then.
We also as you know as we've seen.
All of this play out.
It has beg the question.
Whether or not we would expand that enterprise application alliance opportunity what some of the other providers.
That are obviously, having quite a bit of success, so you'll you'll probably see us.
Expand those relationships here through before the balance of the year.
Great and then obviously your clients priorities and certainly changed since the.
And on the Cat.
I guess, how are you seeing engaging clients maybe put in some of the larger projects on the back burner.
Well, let me everyone.
Everyone's agility as be tested so the real question for the client is where they can really do that through brute force or they can do that through some the deployment of technology.
And.
Which would then requires organizational change so I would say that we have we have clients in all of those camps.
But what what can't be ignored by by anyone in includes all of our client base is that there's been tremendous acceleration of the whole digital transformation initiatives within their organizations are they can see it they those that were better prepared.
Our benefited from them those have not are clearly having to prioritize and understand that those investments will not be ignored so.
We expect we expect again digital transformation organizational change and implementation of technology to only accelerate as I'll call. It the immediate pressure and the.
Change in the way, we're engaging and where people go to work and how.
Becomes either more common place or its subsides and we returned to some newly defined normal.
Great and says to me.
Our next question comes from Vincent.
From Barrington Research your line is open.
Yes, Rob Bob did I hear correctly that he revenue will be lower in the quarter Q3, if so is that year over year sequential.
So he is going to be down sequentially.
Yes.
And what will be the Ted just did a nice share reviewing some of the areas of strength.
What would drive that lower revenue anything in particular.
Up some of that has to do with some value added resellers activity in the S&P group that we don't expect to continue at the same level in Q2.
It would be that the other one would be the fact that we have.
Okay and engagement or two that is in transition.
What we can see at EEI, which was my comment around increased activity in the.
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[noise] expansion of existing engagements.
We believe that to whatever extent that.
We let's call it defer any opportunity from Q3 that that should fully benefit Q4.
So it's not lack of activity it will be sequencing.
So I assume the overall EA pipeline improved sequentially is that accurate.
Yet.
The difference the difference is that you start you you used some of the backlog you had going in from Q1 into Q2, so you're doing both year, extending and rebuilding pipeline with that increased activity. So that that has engagements transitioned in place. So it is.
Some of that he will experience during Q3, but if if were correct.
It does not fall into Q3 or start in Q3.
That then you will see it up.
Thank you for.
And.
What's the outlook in Europe, but flat if I heard that correctly for Q3 are we any irene near a bottom there or is it too too early to tell.
We sincerely hope so as you know Europe has been through.
A pretty tough time now here for about the last 12 to 18 month.
So.
We sincerely hope that that this is a plateau a flattening for them and as you as I mentioned.
On the relative cost of our severance charges that were part of a of the reductions that we made up.
50%, even though it was not 50% of the head count 50% of $1.
Resulted from the European reduction in force.
The your top client ticked up pretty nicely here should we can expect that.
It's too to continue in the mix or what's going on there.
Just a mix.
It's just a mix.
Both stable makes that happens from time to time, Vince Theres nothing.
Nothing crazy about them.
Okay.
Thank you.
Okay, there being no other questions from analysts.
Let me then say I. Thank you for participating on the second quarter earnings call and look forward to updating you again, when we report the third quarter.
Thank you.
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