Q2 2021 Hackett Group Inc Earnings Call
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Welcome to the Hackett Group second 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.
Tonight's call on Mr. Ted Fernandez, Chairman and CEO and Mr. Robert <unk>, Chief Financial Officer, Mr. Ramirez, you may begin.
Good afternoon, everyone and thank you for joining us to discuss the Hackett groups of second quarter results.
Speaking on the call today from here to answer your questions for Ted Fernandez, Chairman and CEO of the Hackett group and myself, Robert Ramirez, Chief Financial Officer.
The press announcement was released of the wires of 4 or 5 P. M Eastern time for.
For a copy of the release please visit our website at Www Dot the Hackett group Dot com.
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.
To begin I would like to remind you that on the following comments and in the 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, and actual results may vary. These forward looking statements should be considered on.
The linked 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 both of them turn it back over to Rob the comment on the 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 for Q&A.
Given the recent rise of Delta variant of infections I would like the continued to acknowledge those dedicated health care 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 <unk> 39.
Both in excess of guidance.
Of note is a $5.3 million SAP software sales.
Transaction, which also increased our pro forma which increased our pro forma EPS by 9%.
Excluding the software sale, our net revenues exceeded the high end of our guidance and were up strong 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.
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 sales.
<unk> 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&P.
<unk> group, our strategy of business transformation group.
And 10% sequential growth in our EEA group.
Excluding the impact which exclude the impact of the SAP software sales excuse me.
All groups within EEA were up sequentially.
Of special note is the sequential improvement we experienced in our Oracle EPS practice as many of you know this group has adversely impacted our year over year growth over the last several years as we transition of that group from on Prem to cloud implementations, we believe that our Oracle on Prem to cloud transition of now behind Us which should result.
On improving revenue growth for our organization just to put that transitioning perspective.
We have losses in excess of $60 million in Oracle on Prem revenue and have replaced it with a much broader based oracle cloud ERP and EPS revenues and with a rapidly growing 1 screen business.
I would be remiss if I did also comment on the strong performance of our SAP group.
Which again is 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 debt 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 were 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 the service platforms quantum leap our state of the art global benchmarking platform and our proprietary packet digital transformation platform or DTP are highly differentiating our offerings and continue to be important drivers of our long.
From growth.
Additionally, as I mentioned last quarter, our partnerships with rapidly growing E procurement EPS.
M.
In cloud and workflow automation providers also continue to be key in our digital transformation of strategy and are important future drivers of growth as well on.
On the balance sheet side of our ability to generate strong cash flow cash.
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 the outlook I will make additional comments on strategy and market conditions.
Following robs comments Bob.
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 purposes of this call I will comment separately regarding the financial results of our strategy and business transformation group for us in beauty, our ERP EPS and analytic solution group or EEA, Our international group and the total company.
Our SMB <unk> group includes the results of our North America IP as a service offerings, our executive advisory programs and benchmarking services and our business transformation practices.
Our EEA solutions group includes the results of our North America, Oracle SAP and 1 street practices.
Our International group includes the results of our SMB team and our EBITDA resources of our based primarily in Europe.
In addition, please note that all references to net revenues represent revenues, excluding reimbursable expenses.
Reimbursable expenses are primarily project travel related expenses passed through to our clients and have no associated impact to a margin of our profitability.
Given the given the limited amount of business travel because of 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 for investors. We included reconciliations of GAAP to non-GAAP financial measures in our press release filed earlier today <unk>.
Additionally, my commentary of additional 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 transactions.
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 continued 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 zero to 2% when compared to the prior year Reimbursable expenses have been significantly reduced due to COVID-19, which required for the transition we're on.
<unk> 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 sales transactions had mentioned were up 7% of on a sequential basis.
And 28% when compared to the second quarter of the prior year.
Net revenues for our F&B to group were $26.4 million of 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 EEA solutions group were $45 million, an increase of 26% on a sequential basis and up 32% when compared to the second quarter of the prior year.
EBITDA net revenues, excluding the SAP software sales transaction were up 10% on the sequential basis, and 15% when compared to the second quarter of the prior year for.
The sequential increase was driven by growth from our 1 screen Oracle and SAP the practices.
Net revenues for our 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 Ips of the service and Ams groups accounted for approximately 19% of our total net revenues and approximately 22% or total company practice contribution in the quarter.
Total company pro forma cost of sales, excluding reimbursable expenses totaled $41.4 million or 56, 8% of the 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.
We're 73, 4% of net revenues from the previous year.
Total company consultant headcount was 1001 at the end of the second quarter as compared to total company head count of 943 of 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.
On a sequential basis from 38% and up as compared to the prior year of 26, 6%.
Excluding the SAP software sales transaction, our pro forma gross margin on net revenues was 38, 9%.
SMB 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 was primarily due to increased incentive compensation accruals commensurate with improving results.
EBITDA gross margins on net revenues were 42% in the second quarter of 2021 of sequentially from 31, 2 and up as compared to 34 in the second quarter of the prior year.
The sequential margin increase was primarily due to the software sales transaction, we discussed as well as improved revenue growth.
Gross margins on net revenues, excluding the software sales transaction were $33.5.
International gross margins on net revenues were 42, 2% of sequentially from $38, 2 and up as compared to prior year of 5.1%.
The sequential margin increase was primarily driven by the sequential increase in net revenues I mentioned.
Pro forma SG&A was $14.4 million for $19.
7 percentage of net revenues in the second quarter of 2021 as compared to $12.4 million or 19, 5% of net revenues from the prior quarter and $11.4 million for 21, 7% of the net revenues in the previous year.
The sequential and year over year of absolute dollar increases are primarily due to increased sales commissions and incentive compensation accruals associated with increased company performance.
Pro forma EBITDA was 18 million for 24, 6% of net revenues in the second quarter as compared to $12.6 million or 19, 8% net of net revenues in the prior year prior quarter, and $3.4 million or 6.6% of net revenues in the previous year exclude.
Excluding the second quarter software sales transaction EBITDA was $13.9 million for 25% of net revenues.
Total company pro forma net income for the second quarter of 2020 totaled $12.8 million for 39 cents per diluted share, which represents a sequential increase of 44%.
And is above the high end of our earnings guidance range excluding.
Excluding the impact from the software sales transaction discussed pro forma earnings per share totaled <unk> 30.
This compares to pro forma net income of $1.9 million or <unk> <unk> per diluted share in the second quarter of 2020.
GAAP diluted earnings per share was 32 for the second quarter as compared to 19.
For the first quarter and a net loss per share of <unk> 13 in the second quarter of the prior year.
GAAP results for the second quarter of the prior year included a $5 million or <unk> 13 per share restructuring expense for severance costs related to staff reductions in the use of 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.
It was primarily driven by net income adjusted for noncash items and an increase in accrued expenses, partially offset by increases in accounts receivable.
Our DSO.
Our day sales outstanding at the end of the quarter was 59 days as compared to 55 days at the end of the previous quarter of 64 days from the second quarter of the prior year.
The Companys 45 million.
The credit facility remains unused during the second quarter.
During the quarter, we purchased 491000 shares of the company's stock for an average of $17.5 8 per share at a total cost of approximately $8.6 million a.
Our remaining stock purchase authorization at the end of the quarter was $13.6 million.
In its most recent meeting the company's board of directors declared the third quarterly dividend of 2021 of <unk> 10 per share for the shareholders of record on September 24th to be paid on October 8th.
The 21.
I'll now will 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.
The unfavorably impact available days by approximately 3% on the sequential basis.
As Ted mentioned in his comments, although economic uncertainty from the pandemic continues.
The company's current estimates suggest the 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 we expect sequential revenues for EBITDA to be flat to up we expect sequential revenues for us in the PCB up and for international to be down.
We estimate pro forma diluted earnings per share in the third quarter of 2021 to be in the range of 28 to 30.
We expect pro forma gross margin of on net revenues to be approximately 39% to 40%.
We expect pro forma SG&A on 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% 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 total demand in the quarter.
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 the growth opportunity. It offers our organization.
Although the pandemic created unprecedented demand disruption. It is now clearly evident that has also created heightened the awareness and has accelerated demand for digital transformation initiatives.
This means that digital innovation and enterprise cloud applications analytics and infrastructure of 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.
Consistent with our comments since the end of Q1 during the second quarter, we continued to experience increased client engagement and demand for our services the.
This increased demand as the 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 will evolve, which will enhance our ability to attract and retain resources for our organization.
Most of the 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.
The desire to license, our IP and brand permission and leverage our quantum leap and digital transformation of 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 for launch additional pilots. This quarter. We also continued 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 an in process opportunities should further benefit our 2021 results strategically our focus will remain the same with just the continue to build our brand with our new offerings and capabilities focused on digital transformation around our fully digitized on unmatched IP and benchmarking and best.
<unk> intellectual capital platforms. This should allow us to serve clients strategically increasingly remotely and whenever possible continuously.
Specific specifically, we will continue to redefine our global benchmarking leadership to enhance the quantum leap.
Our digital benchmarking software for 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 for further differentiate our unique IP and related solutions design capabilities DTP allowed us to fully digitize, our IP and align proven software configuration and organizational solutions to help clients drive transformational change DTP as 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 of the client base on the offerings to grow our business. We continue to look.
For acquisitions, and alliances that strategically leverage our IP and add 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 solid financial position allow us to serve the world's largest organizations as well as manage the most challenging macro economic events.
As always let me close by asking our associates to remain safe and the app enter in for thank them for their tireless efforts of the always urge them to stay highly focused on our clients on people, especially in light of the short term challenges we may continue to encounter.
Those conclude my comments, let me turn it over to our operator, and let us move on to the Q&A section of our call operator.
Yes. The phone lines are now open for questions. If you would like to ask a question over the phone. Please press star 1 and record your name if you'd like to withdraw your question Press Star 2 thank you.
The 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.
<unk> 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 I haven't been publicly disclosed by the client simply to say that its taking us into a new area of its a client.
Infrastructure space debt.
<unk> believes that the brand.
The permission that the performance data that they will utilize the go to market with will significantly enhance their ability to.
Close deals and then on an.
Celebrated pace so for us.
Great new opportunity incredible brand.
And really enhances our data capture reach in an <unk> and.
And entirely in an entirely different areas. So.
Very meaningful in different ways.
And then 1 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 can offer just specifically what youre 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.
On.
On the clients are aggressively engaging in conversations on what are the what is the best path for them to prioritize their digital transformation efforts.
That allows us to engage clients than in <unk>.
Evaluating those opportunities.
The sizing the performance improvement opportunities that would come from from those initiatives as well as then implementing helping them implement them.
Our our scale and capability fits.
So.
We look at.
Our clients and.
We see just how.
Engaged they are.
How broad the questions are on.
On how they are 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 the queue is from Vincent Colicchio with Barrington Research. Your line is now open.
Yes, just a follow up for what you just said Ted So are you seeing sales cycles improve.
Versus last quarter.
Well no.
When you look at <unk>.
7% sequential growth excluding that large software transactions. The answer is no. We are happy just to have the right where they're at.
In fact the.
To some extent the demand is outstripping.
Resource capabilities so for.
For the first time as long as I can remember.
Having the resources are in place are as important as having capability and credibility and those capabilities.
You mentioned the tight labor market.
The the incremental increase in head count this quarter.
Were those wages up versus.
What you had to pay in recent quarters.
The answers is the.
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.
The compensation increases.
Actually.
<unk>.
Kicking off of kicking in in this quarter.
Which are they were planned.
But I think Theyre also responsive to the market conditions.
And Rob in terms of the guidance I think you said that excluding the <unk> sale you expect E EEA.
<unk> to be flat to up.
Can you give me a little more color on where the strength is on where the drag is.
Kind of take it Rob.
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% of.
Available the available days in the quarter.
Sequential increase in EBITDA would be pretty strong for us.
And then lastly, any color on the international It finally started growing now it's Dan again.
Can I add the color on what's going on there.
The small number of them.
Well, it's 8% of our revenues, but that doesn't mean, it's not something we expect to grow.
I think they are still experiencing more volatility then.
We have in the U S. Both on the impact of the pandemic as well as their ability and willingness to pay and some of the actions too.
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 of smaller so.
We are relying on for your clients and fewer people in the limited offerings.
Given the size as it compares to the U S. I mean, when you look at the growth in the U S.
A year of growth in the U S. In the second quarter I mean those are just.
Haven't seen numbers like that in the long time, and Thats and Thats the growth excluding.
On the large software deal.
1 more if I may please.
Please remind us what your long term goal.
Target growth coal.
As I haven't heard debt number in a while.
Never changed at 5% to 10% top line result in 15% to 20% bottom line growth.
Thank you nice quarter.
Thank you Vince.
Yes.
And just as a reminder, if you would like to ask a question over the phone. Please press star 1 and record your name.
Next question on the queue is from Jeff Martin.
With Roth Capital Partners. Your line is now open.
Hi, Rob Hi, Ted.
Apologize for getting on the call of a little bit late I did come on right at the end of your prepared remarks I apologize. If this is repetitive but could you give us an update.
Or at least me 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, 1, which deferred and 1 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 the efforts continue on.
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 EPS seeing an increased demand for.
<unk> in Q2 and was curious how that flowed through the balance of the quarter on what youre 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 of the reason that the primary reason for that East Coast acquisition target was to strengthen the combination ERP EPS capabilities in the East coast, which we thought we were.
We were not leveraging anywhere near the the capability that.
That we have but with that said.
We did see nice sequential growth in that group Inc.
Including the East coast.
Part of the business in Q2, and we are expecting all of those groups to grow sequentially from Q2 to 3 Q3.
In spite of the 3%.
Available days loss from Q2 the Q3.
Right right Okay.
And then with respect to your partners on the non Oracle side.
So if you could give us an update there on how are we nearing critical mass with some of the.
The newer.
Okay.
The technology Implementers out their debt.
That you might start to flow in those high volume.
In some of them like 1 screen, we clearly are approaching critical mass and we've become 1 of the leading 1 stream implementers.
Ah globally for that organization.
There we are in the Coupe of space. You know we have we are leading there now on some of the other areas that we're now exploring.
Some of the workflow automation that relate to service.
Service now or Microsoft they are in very early stages.
Okay. That's it for me thanks, Thanks day.
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 on updating everyone again, when we report the third quarter.
Thank you for participating.
Okay.
This concludes today's call. Thank you for your participation you may disconnect at this time.
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