Q1 2021 Hackett Group Inc Earnings Call
[music].
Welcome to the hockey.
<unk> Group first quarter earnings conference call. Your lines have been placed in a listen only mode until the question and answer session.
Please be advised that the conference is being recorded.
Hosting tonight's call are Mr. Ted Fernandez.
Chairman and CEO, Mr. Rob Ramirez Chief.
The financial Officer, Mr. Mcmillan, 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 486 P. M. Eastern time for a copy of the release. Please visit the website at Www Dot and the Hackett group of Dot com.
We will also place any additional financial or statistical data discussed on this call and that is not contained and the release or and the Investor Relations page of our website.
All of the Investor Relations page of our website.
Before we begin I would like to remind you that of the following comments and the question and answer session.
And we'll 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 the guarantee of future performance.
Paul risks, uncertainties, and assumptions sort of difficult to predict and which may not be accurate, especially in light of COVID-19.
The results May vary.
Forward looking statements.
The only in conjunction with the detailed information.
So the the risk factors contained in our SEC filings.
And I would like to turn over to Ted.
Thank you, Rob and welcome everyone.
We normally do I will start with.
Quarterly overview comments.
And then ask Rob to comment on operating results cash flow and also provide us confidence on the outlook.
The call will then return to me for some market and strategic related comments and then we will open it up for Q&A, Let me begin and start by welcoming everyone of our first quarter earnings call.
All of the circumstances are improving I would like the 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.
It is clearly evident that organizations are increasingly recognizing the need to embrace digital transformation as a requirement to remain competitive.
The corresponding late this afternoon, we reported net revenues of $63 $4 million and pro forma earnings per share of <unk> 27, and.
Up 17% sequentially and.
And equally important over the 5% from the prior year.
Although net revenues were down 3% and the prior year they were up 7% sequentially, which is consistent with the demand recovery, we have been experiencing and expect that 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 and.
And our EEA group of the sequential growth was primarily driven by our Oracle ERP and S&P practices as well as strong growth and our emerging one screening 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 that's.
Sequential improvement expected in Europe into the second quarter.
Of special note is the noticeable improvement we are now seeing in the second quarter and our Oracle APM business.
And as many of you know this group has adversely impacted our year over year of growth over the last several years as we have transitioned that group from on premise to cloud implementations.
We believe that our on premise and cloud transition is now behind us, which should result in improving revenue growth of over.
And the investments we have made to fully digitize all of our IP and the development of RFP as the service platforms, which include the quantum leap our state of the art global benchmarking platform and our proprietary Hackett digital transformation platform that are known as PPP are highly differentiating our offerings and continue to be.
The drivers of our growth for many years to come.
Additionally, our partnerships and rapidly growing E procurement, ETF and other cloud and workflow automation providers.
Also continue to be a key a key part of our.
The digital transformation strategy and are important future drivers of growth as well.
All of 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 all we have.
<unk> cash balances and a fully available credit facility to fund the acquisitions, we identify.
While continuing to invest and our business it is important to reiterate.
That said it was at the start of last debt that it was at the start of last year, having that strong cash position with no outstanding debt.
And that provided us with the ability to properly manage the demand disruptions we faced with.
With that said, let me ask Rob to provide details of our operating results cash flow and also comment on the outlook I will make additional comments on strategy and market conditions, following rob's comments, Rob and thank.
Thank you Ted as I, usually do I'll cover the following topics during the portion of the call and overview of our 2021, the first quarter results along with an overview of related key operating statistics and overview of our castle activities during the quarter.
I'll, then conclude with a discussion of 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 SNB T.
Our ERP <unk> and analytics group or.
Sure.
Our international group and the total company.
Our <unk> group includes the results of our North America Ipos of 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 and SAP solutions and western practices.
Our International group includes the results of our SMB 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.
First of all 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.
So one of our call today, we will reference certain non-GAAP financial measures, which we believe provides useful information to investors.
Included reconciliations of GAAP to non-GAAP financial measures and our press release filed earlier today and additional my comments today are based on results from continuing operations.
As Ted mentioned, we continued to see an increase and quality engagement throughout the quarter, which resulted in a sequential increase of net revenues of 7% to $63 4 million and the 3% decrease when compared to the prior year, which was above the high end of our revenue guidance range.
The Q1 2021 of the Reimbursable expense ratio of net revenues was <unk>, 1% as compared to six 7% when compared to the prior year.
First of all expenses have been significantly reduced due to COVID-19, 19, and which required the transition to remote service delivery model.
Our U S operations, which represented 91% of our total company net revenues and the first quarter of 2021.
And we're up 8% on a sequential basis and essentially flat when compared to the first quarter over the prior year.
Net revenues for our SMB group with $25 7 million of sequential increase of 10% and the increase of 1% when compared to the same period of the prior year, reflecting the improving demand from enterprise transformation initiatives.
Net revenues for EEA solutions group were $32 1 million and increase of 7% on a sequential basis and flat on a year over year basis.
The sequential increase was driven by growth from our one stream of Oracle ERP and S&P practices.
It is worth noting that our Oracle ERP and practice have started to experience and increase in demand as we finished the first quarter and is expected to be up on the sequential basis and 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 the international is expected to be up slightly on a sequential basis from the second quarter.
Total company International net revenues accounted for 9% total company net revenues as compared to 10% and the prior quarter and 12% and the first quarter of the prior year.
Our recurring revenues, which include our executive advisory Ip's of service and Ams groups accounted for approximately 21% of our total company net revenues and approximately 26% of our total company practice of contributions in the quarter.
Total company pro forma cost of sales, excluding reimbursable expenses totaled $39 3 million or 62% of net revenues and the first quarter of 2021 as compared to $36 8 million or 62, 1% of net revenues and the prior quarter and $41 1 million.
And we're 63, 1% of net revenues and the previous year.
Yes.
Total company consultant headcount was 943 at the end of the first quarter of 2021 as compared to total company head count of 928, and the previous quarter and 1046 at the end of the first quarter of 2020.
The year over year decrease was primarily the result of the actions taken and the second quarter of 2020 to reduce our global workforce by approximately 10% and response to the ongoing disruption.
Derek.
Total company pro forma gross margin and net revenues was 38% essentially flat on a sequential basis from 37, 9% and up as compared to the prior year of 36, 9%.
SMB gross margin on net revenues was $46 five.
Up sequentially from $44, eight and up as compared to the prior year of 44 five the.
The sequential margin increase was due to improved the sequential revenue growth.
EEA gross margins on net revenues from 31, 2% down sequentially from 31, 7% and down as compared to the prior year of 32, 5%.
The sequential decrease was primarily due to the decrease in the SAP software sales and the quarter.
International gross margins on net revenues was 38, 2% down sequentially from 42, 7% and as compared to the prior year of 30%.
The sequential margin decrease was primarily driven by the sequential decline in revenues previously discussed.
Pro forma SG&A was $12 4 million or 19, 5% of net revenues and the first quarter as compared to $12 5 million or 'twenty, one and 2% of net revenues from the prior year and $13 9 million or 21, 3% of net revenues and 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 and the first quarter as compared to $10 8 million or $18 three percentage of net revenues and the prior quarter and the $11 million or 16, 8% of net revenues from the previous year.
Total company pro forma net income from the first quarter of 'twenty one.
And the one totaled $8 8 million of 27 cents per diluted share, which represents a sequential increase of 17% and pro forma diluted earnings per share and is above behind of our earnings guidance range.
This compares to pro forma net income of $7 6 million and <unk>.
The four cents per diluted share and the first quarter of 2020.
Diluted earnings per share was <unk> 19 per the first quarter of 2021 is coming through earnings per share of <unk> 17.
And 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 and the quarter was $5 9 million, which was primarily driven by net income adjusted for noncash items and an increase and 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 and the first quarter of the previous year.
The companys $45 million credit facility remains unused during the first quarter.
During the quarter, we repurchased 244000 shares of the company's 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 116000 shares of the company's stock at an average of 17.
And <unk> 17 per share of the total cost of $2 million.
And its most recent meeting the company's board of directors authorized a $20 million increase and the company's share repurchase authorization.
The board declared the second quarterly dividend of <unk>.
Per share for the shareholders of record of June 'twenty, five 2021.
To be paid on July 19th of 2021.
I'll move to guidance now as Ted mentioned in his comments, although economic uncertainty from the pandemic continues.
The company's current estimates suggest the net revenue for the second quarter of 2021 will be and the range of $64 five to $66 5 million.
We expect sequential revenues for SMT and the international to be up and EEA to be up strongly.
We estimate the pro forma diluted earnings per share and the second quarter of 2021 to be up sequentially and in the range of 28% to 30.
We expect pro forma gross margin on the net revenues to be approximately 39.
To 40%.
We expect pro forma SG&A and interest expense from the second quarter to be approximately $13 million.
Second quarter pro forma EBITDA and net revenues to be in the range of approximately 21% 2%.
Yes.
And we expect cash balances, excluding the impact of share buyback activity to be up on the sequential basis.
At this point I would like to turn over to Ted for a review of market outlook and strategic priorities for two months and 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 of our organization.
Although the pandemic created unprecedented demand disruption. It is now also clearly evident that 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 and workflow automation and process mining and artificial intelligence or.
Our dramatically influence and the way businesses compete and deliver and deliver their services and 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.
Distant with our comments since the end of Q2 during the first quarter. We continued to experience increased client demand and client engagement and demand for our services and this increased demand as a resulting and competition for experienced talent. Unlike we've never seen and a very long time with that said, we also believe that has the ability.
The work from home continues then our ability to attract and retain the 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.
The end of the second quarter of last year has continued into 2021 and this should position us well for 2021, if it continues and should allow us to return to pre pandemic levels of long term growth and profitability and addition to our group digital transformation demand, we continue to see and increased interest from potential partners.
Net desire to license, our IP and brand permission the leverage our quantum leap and digital transformation platforms to bolster their business case development and value selling efforts.
We have over 10 opportunities of more than half of them well with form of proposals continue to have near term nearer term pilots launching or our and contract negotiations with several of these opportunities all of those these new opportunities are not expect that the impact the current quarter. We believed they should further benefit our 2000.
'twenty one results strategically our focus will remain the same with just the continued 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 and this should allow us to see our COO.
Lions serve our clients of excuse me and strategically increasingly remotely and whenever possible continuously specifically, we will continue to redefine our global benchmarking leadership through enhancements and quantum leap our digital benchmarks of software service solution. This platform allows us to deliver more information, but significantly less client effort.
It also allows us to leverage our IP and track transformation initiatives over the life of the respective effort. We believe that there is no comparable platform and the market. We will continue to enhance our digital transformation platform of our DTP to further differentiate our unique IP and related solution design capabilities.
And the allowed us to fully digitize, our IP and align proven software configuration and organizational solutions to help clients drive transformational change.
<unk> is a core asset to our Ips of 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.
And lastly, even though we believe that we and the client based and offerings to grow our business. We continue to look for acquisitions and alliances that strategically leverage our IP.
As both of our 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.
How does the positive the can allow us to a proud of 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's move into the Q&A section of our call.
Operator.
Thank you to ask a question please press star and wine and you'll be prompted the currently with the point you name for a question and <unk>.
Again star, one and we quite unique.
Our first question will come from George Sutton with Craig Hallum. Your line is now open.
Thank you and Uh huh.
Congratulations for the nice 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 got to two dimensions.
George So first on the <unk>.
Approximately 90% of our revenues.
And our implementation revenues.
Maybe a little bit of a lesson and 10% is.
Application managed services revenues the.
And the large portion of the Ams related revenues is actually on prime related applications that represents a little bit more than half of the.
The remaining <unk> revenues that we have for the entire organization.
The pipeline and the implementation side <unk> got at this point it is.
Over 90% cloud related implementations.
And the SAP side, its probably 90 90 plus percent as well and on the one stream side, it's fully plus.
I I wanted to address the I think kind of a bifurcated message relative to you mentioned demand for talent.
And 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-19 restrictions that would have a nice positive impact on your growth.
Our growth rate and pipeline could you just address that bifurcation.
Well.
And we actually we actually separate the two we've demonstrated now that our ability to both deliver and sale of remotely I can happen and happen very efficiently.
Relative to the desired the people to work from home there is no doubt that a F.
That we think that a significant amount of the.
Remote delivery of work that we currently have in place will remain in place for many years to come and the mix will not go back to where we we had and pre COVID-19 that creates significant efficiencies for us.
Bolt in.
In terms of the lifestyle of our people that would normally a large percentage of them would be traveling four out of five days of 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 of our ability to attract and retain people, who do that nessus, who love the work that they do but can't deal with some of the travel demands that they would've experience under COVID-19. So.
Right now we're expecting the traveling and we're expecting clients, obviously, the embraces and have us back here sometime in the near future. We think it'll be slow during the remaining part of 2021 and so on the sales side, we would bifurcate that and say we would expect that those contacts to go back and return to.
More onsite or in person related activity and 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 the lifestyle, but the ability of some of our senior people to effectively deal.
With multiple clients on a on a single day versus as you can imagine and some of our people would be traveling to two or three different places sometimes in a given the weak and they were spending quite a bit of time. They would end up having a lot of ineffective time, which now as being fully translated the client related pursuits and <unk>.
And related delivery. So we think it's great for US we think it's great for the client we will see what the mix plays out.
Gotcha, and then lastly, I think the Gulf you and Rob had typos in your script.
You referred to improvement in Europe.
I don't think I don't think we've heard the word of improvement in Europe, and the same sentence and Atlanta.
Go ahead, and we'll go back and look at level of Rob look at the exact words and I don't know so what we said is the net revenues for interaction of the was $5 5 million and a decrease of 4%, but we did say it was worth noting the international is expected to be up slightly on a sequential basis off of sequential correct that was the government and that's fabulous the results on a year over year basis George.
Clearly are still hurting us significantly if they were down 26%, but we wanted to note of that.
We think Europe has the chance of turnaround and and actually start improving into the second quarter, we thought that was worth noting.
No. That's my point and that was nice to hear thanks guys.
And as a reminder to ask the question. Please press star one.
Our next question will come from Jeff Martin with Roth Capital Partners. Your line is now open.
Thank you.
And Rob How're, you doing Hey, Jeff Hi, Jeff.
So Ted wanted to get a sense E. P. M. Improving is also a good thing to hear.
Can you point to anything specifically driving improved demand there and one of the implications for the balance of the year you mentioned in Q2, it's gonna be a tailwind, but you see that carrying forward for the balance of the year.
Several things one share of demand for cloud and enterprise applications is clearly strong and it is extending into EPS. Secondly, we believe Oracle has started too.
Up and increase its attention on EPS related initiatives, whether they are part of the 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 and application set that is pretty.
The strong and increased focus by the vendor, resulting in improved demand and so as you would know.
And we well the reason that we wanted to comment and say it is because we are experienced this without gapping the ERP.
The capability that wood, which we would like the GAAP and the east coast and we continue to work on and so we wanted to make sure that.
It was of note that even without that.
Yeah.
That improvement, we want to make and the east coast resources relative to Oracle ERP the.
And the Oracle APM group is clearly seeing improvement and that's throughout the entire country.
So it was worth noting.
Yes.
That's the good segue into my second question do you foresee yourself Avon and East coast of 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 of it remains the priority.
Okay and then the are there other pieces to the business that you're looking for actively.
And through acquisition.
And the answer of that we're looking at other technologies.
And look we'd.
We'd also love to add to the one stream group.
And we'll keep an eye and given the strength and the success, we've had and S. Four Honda as well.
And the hardest ones for us to identify and attract our IP related.
The opportunities those seem to be much harder to attract.
And Youll see us continue to be aggressive on the cloud enterprise side through the balance of the year.
Okay and.
And then.
Finally on the one stream practice.
Are you able to give us a sense of how large that practices at this point and how fast that is growing or is it still too early to.
The top numbers specific to one strength.
The answer it is becoming more meaningful each quarter of 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.
You've seen we've been named of Diamond partner, which is the highest level of partnership. We think we are clearly now one of their very top partners.
And if not number one and then number two we're very close thereafter.
And so it's an area of focus with us we're having tremendous success with it so youll see us to continue to invest and grow that rapidly.
Okay wonderful and also want to commend you on a really nice quarter and and exceeding you know what.
And what you.
Set out as expectations for the back half of 2020 and then as we get into 2020, one and so nice to see the year over year adjusted EPS growth.
And I will tell you, though is enjoying it more than us obviously, the disruptive was the meaningful second quarter of last year.
And he is now.
And now with profitability and even though our revenues were slightly below last year's but the see profitability of above last year in Q1.
And for US was the.
The very promising and then when we look at the sequential opportunity that we provided the guidance into Q2.
Obviously, thats promising as well.
Thank you Ted.
The same will come from Vincent Colicchio from there.
And Ken Research your line is now open.
Okay.
Yeah Ted.
And I'm curious it depends and it got disrupting your offshore delivery business and any way or and.
And if not yet or is that something new or 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've experienced share recently.
But again, we've had and that's been a growing group for us with a very strong leader of very strong team.
So.
We expect them to pull through here.
But 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 E. The E business in terms of sequential change for Q2.
For Q2, we did and we just said there's going to be up strongly.
Okay.
And with revenue.
The international change for the better is there anything to call out there or is it just the Evans.
And I've been flow of business.
So we think it's just.
A slower path to what we will call it recovery and client engagement and the U K than we've experienced in the U S.
But no other than activity, clearly, increasing but the disruption and the lockdown there were a longer and more extended and <unk>.
And so.
But we are hoping that they can continue to improve so it's nice for us not to think that they can be up even if that's kind of be slightly we will we'll take it puts it means of stabilizing and things are starting to turnaround and that would be great for us as well.
And speaking.
Speaking about your IP as a service.
Business did I did I understand.
And I understand you that you expect to incrementally for that for some of those the potential partnerships should start contributing.
So at some point this year.
We will be very disappointed if they don't have.
Don't contribute to the second half of 2021.
But I also wanted people to know that the guidance.
And is not being impacted by what we believe.
And should be the impact of debt.
Many of those contracts could have force and the second half of the year.
So you already have some relationships that are contracted and so is what you're saying that you'll see some incremental revenue from new relationships is that your expectation.
We have with the comments I've said is that we have several and what we are we've been negotiating and finalizing pilot launches and.
And we have several also that are in contracting stage. So the combination of pilots and the combination of.
What we hope.
I hope, we'll be finalizing contract negotiations with several of.
Of different parties, we think should help our second half of 2021.
And then has there been any change and the competitive environment and any of your businesses in terms of of pricing.
No, but I can tell you that the attention has gone through resourcing and getting great Resourcing. So what it means is that pricing will only improve when you when you start experiencing this kind of demand.
Okay, Thank you and nice quarter Ted.
Thank you Vince.
Okay.
Just making sure of the way we're.
We're all set.
And 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.
And 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.
Okay.