Q3 2021 Hackett Group Inc Earnings Call
Welcome to the Hackett Group third quarter earnings Conference call. Your lines happened placed on a listen only mode until the question and answer session. Please be advised the conference is being recorded hosting tonight's call or Mister Ted Fernandez, Chairman and C E O and Mr Robber mirrors, Chief Financial Officer.
Mr. Ramirez you may begin.
Good afternoon, everyone and thank you for joining us to discuss the heck of groups third quarter results speaking on the call today in here to answer your questions for Ted Fernandez, Chairman and Chief Executive Officer of the Hacker group and myself, Robert mirrors, Chief Financial Officer.
A press announcement was released over the wires at four O five P M Eastern time.
For a copy of the release please visit our website at Www Dot hack a good dot com.
We will also place any additional financial or statistical data disgust on this call that is not contained in the release on the Investor Relations page of our website.
[noise] before we begin I would like to remind you that in the following comments and in the question and answer session. We won't 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.
Four months, they involve risks uncertainties and assumptions that are difficult to predict which may not be accurate, especially in light of COVID-19.
Actual results May vary. These forward looking statements should be considered only in conjunction with the detailed information, particularly the risk factors contained in our SEC filings.
At this point I would like to turn it over to test.
Thank you, Rob and welcome everyone to our third quarter earnings call as we normally do I'll open the call with 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 comments after which we will open it.
The Q&A.
Although it appears that COVID-19 related activity is truly tapering I would like to continue to acknowledge those dedicated health care providers, who continue to work nonstop and under difficult circumstances in many cases to support all of us during this pandemic.
Consistent with our comments since the end of the second quarter of last year, we continue to experience increased client engagement and demand for our services throughout the court.
It is clearly evident that organizations have recognized the need to embrace digital transformation as a requirement to remain competitive.
And at a rate and the rate of digital innovation and related change is truly unprecedented.
Correspondingly. This afternoon, we've reported net revenues of 71.4 million and pro forma earnings per share of 32 says both above our quarterly guidance and that strongly on a year over year basis.
Excluding are large S. P software sales in queue to revenues were up 5% sequentially silver.
The results are consistent with the strong demand recovery that as I said, we've experienced where we have been experiencing throughout the year and.
And it's also nice to note that it's above Prepandemic clubs.
Use sequential revenue growth, including the large Q2 software cell was up 7% sequentially and up 27% when compared to the third quarter of last year.
The results were driven by the strong performance of both our strategy and business transformation as well as R. E. A R. P M.
ERP and analytics group across nearly all of our U S practices of special note was the continued sequential improvement of our strategy business transformation group, which has now grow sequentially for five quarter quarters in a row, reflecting the accelerated demand for digitally digitally enabled transformation.
Without a doubt the COVID-19 packed demick has accelerated the deployment of digital technologies to support cloud enabled transformation, which has resulted in the improved demand across nearly all of our practice groups. We are encouraged with the increasing activity in the U S and the prospects in Europe.
The investments we have made to fully digitize all of our IP in the development of our digital platforms, including quantum leap our state of the art global benchmarking platform and our proprietary package digital transformation platform or DTP allow us to highly differentiate expand our offerings and are important drivers of our.
Long term growth.
We also continue to explore add or invested rapidly growing cloud work flow automation and process mining technology providers across all areas of the enterprise. We believe these new and potential relationships are key to digital track to our digital transformation strategy and are important components of our growth strategy.
On the balance sheet side, our ability to generate strong cash flow from operations has allowed us to increase our dividend and or buyback and our buyback program. We also continued to have strong cash balances and fully available credit facility to fund acquisitions, we identify while continuing to invest in our business.
With that said, let me ask about to provide details on our operating results cash flow and also comment on outlook I will make additional comments on the strategy and market conditions.
Following Rob's comments, Rob thanks.
Thank you Ted is.
I typically do walk over the following topics. During this portion of the call I'll cover an overview of our 2021 third quarter results along with an overview of related key operating statistics.
I will cover an overview of our casual activities during the quarter and that will that conclude with a discussion on our financial outlook for the fourth quarter of 2021.
For purposes of this call I will comment separately regarding financial results of our strategy and business transformation group or SVT or EPSN ER.
ERP analytic solution group or EEA, our international group and the total company.
R. B T group includes the results are in North America Ipso service offerings are executive advisory programs, and benchmarking services and our business transformation practices.
R. E solutions group includes the results of our North America, Oracle Sappy solution and one stream practices are international group includes the results of our <unk> and our EEA resources that are based primarily in Europe.
In addition, please note that all references to net revenues represent.
Represents revenues, excluding reimbursable expenses.
<unk> expenses are primarily project travelling expenses pass through to our clients and have no associated impact to a marginal profitability given the limited amount of business travel through the pandemic, we encourage investors to focus on that revenues to assess revenue growth and margin trends.
During our call today will reference certain non-GAAP financial measures, which we believe provide useful information to investors. We've included reconciliation of GAAP to not get financial measures in our press release filed earlier today.
Additionally, my comments today are based on results from continuing operations.
For the third quarter of 2021, our net revenues increased to 71.4 million up 24% when compared to the prior year, which is above the high end of our revenue guidance range.
We continued to see an increase in quite engagements throughout the quarter.
This is also up 7% when you compare it to the pre Covid third quarter of 2019.
The Q3 Reimbursable expense ratio on net revenues was 0.7% as compared to three.
3% when compared to the prior year.
Reimbursable expenses have been significantly reduced in 2020, and 2021, two to COVID-19, which requires a transition where remote salute service delivery model.
R U S operations, which represented 90, 92% of our total company net revenues in the third quarter of 2021.
27% when compared to the third quarter of the prior year.
Net revenues for our SNB, T-group, where 27 6 million an increase of 24% when compared to the same period in the prior year, reflecting the continued demand for enterprise digital transformation initiatives.
Net revenues for our EEA solutions group, where $38 $2 million, an increase of 29% when compared to the third quarter of the prior year to year over year increase was driven by growth across all of our EEA practices.
Net revenues for our international group, where five $6 million a decrease of 5% on a year over year basis is expected.
Total company International net revenues accounted for 8% of total company net revenues as compared to 10% in the third quarter of the prior year.
A recurring revenues, which include our executive advisory IP as a service multiyear benchmarks and am's groups accounted for approximately 19% of our total company net revenues and approximately 43% of our total company practice contributions in the quarter.
Total company pro forma cost of sales excluding reimbursable expenses.
Totaled $43.6 million or 61% of net revenues in the third quarter as compared to 37 8 million or 65, 4% of net revenues in the previous year.
Total company consulted head count was 1049 at the end of the third quarter as compared to total company consult the head count of 1001 in the previous quarter and 923 at the end of the third quarter of 2020.
The year over year increase was primarily a result of hiring activities and increased utilization of subcontractors, resulting from higher demand.
Total company pro forma gross margin on net revenues was 39% in the third quarter up when compared to the prior year of 34, 6%.
<unk> gross margins on net revenues were 44, 3% in the third quarter of 2021.
As compared to 42, 4% in the third quarter of the prior year. The margin increases primarily due to increased revenues, partially offset by increased head count and increased incentive compensation accruals commensurate with improving demand.
E. A gross margins on net revenues was 34.9% in the third quarter of as compared to 22007, 5% in the third quarter of the prior year, but.
Market increases primarily due to increased revenues, partially offset by incremental use of subcontractors and increased head count commensurate with improving demand.
International gross margins on net revenues were 41.4% up as compared to per year or 47%.
Pro forma SG&A was $13 6 million or 19.1% of net revenues in the third quarter as compared to $12.7 million or 22% of revenues and the per year.
The year over year absolute dollar increase was primarily due to increase sales commissions and incentive compensation accruals associated with increased company performance.
Pro forma EBITDA was $15 1 million or 21.1% of net revenues in the third quarter as compared to $8 2 million or 14.1% of net revenues and the previous year, primarily resulting from increasing revenues.
Total company pro forma net income for the third quarter of 2021 totaled 10, 7 million or 32 cents per diluted share, which represents a year over year increase of 88% and pro forma diluted earnings per share and is above the high end of our guidance range.
This compares to pro forma net income of $5 4 million or 17 cents per diluted share in the third quarter of 2020.
Pro forma diluted earnings per share in the third quarter is up 19% when compared to the pre COVID-19 third quarter of 2019.
Gap diluted earnings per share was 25 cents in the third quarter of 2021 as compared to nine in the third quarter of the previous year.
The company's cash balances were $52 $9 million at the end of the third quarter as compared to $52.5 million at the end of the previous quarter.
Net cash provided by operating activities in the quarter was six $8 million, which was primarily driven by net income adjusted for non-cash activity, partially offset by increases in accounts receivable and decreases in accrued expenses and deferred revenues.
Our GSO or days sales outstanding at the end of the quarter was 63 days as compared to 59 days at the end of the previous quarter the.
The company is $45 million credit facility remain unused during the third quarter of 2021.
During the quarter, we repurchased 121000 shares of the company stock for an average of $18.74 per share at a total cost of approximately $2 3 million.
Ah remaining stock repurchase authorization at the end of the quarter was 11.5 million.
At its most recent meeting the company's board of directors declared the third quarterly dividend of 10 cents per share for shareholders of record.
On December 17th 2021 to be paid on December 30th 2021.
Before I moved to guidance for the fourth quarter I'd like to remind everyone of those seasonality of our business spin.
Specifically the increased holiday and vacation time that has historically taken in the fourth quarter will decrease are available billing days for approximately 8% when compared to the third quarter.
As Ted mentioned in his comments.
Although economic uncertainty from the pandemic continues the company's current estimates suggest that net revenue for the fourth quarter of 2021 will be in the range of 64.5% to 66.5 million, we expect year over year total revenues to be up 9% to 12% with all three practice areas.
Also up.
We estimate pro forma diluted earnings per share in the fourth quarter of 2021 to be in the range of 28 to 30.
We expect pro forma gross margin on net revenues to be approximately 39% to 40%.
We expect pro forma SG&A, an interest expense for the fourth quarter to be approximately 13.5 million.
We expect fourth quarter pro forma EBITDA on net revenues to be in the range of approximately 20% to 21%.
We expect cash balances to be down sequentially.
Primarily due to net vesting activities associated with the expected settlement of outstanding stock appreciation rates, which expire in February of 2022. The company is settling these stock appreciation rates in equity and net vesting to satisfy the related tax obligations will result in the repurchase of approximately one.
Million shares and will reduce the company's outstanding weighted average shares by approximately 3% in 2022 and will require approximately 21 to 23 million of available cash balances.
At this point I would like to turn it back over to Ted to review, our market outlook and strategic priorities for the commitments.
Thank you Rob as we look forward, let me share our thoughts on the near and long term demand environment and on the growth opportunity. It offers our organization, although the pandemic created unprecedented demand disruption. It also created heightened awareness for digital technology and as a resulted in accelerated demand for digital <unk>.
Information initiatives.
This means that digital innovation and enterprise cloud applications analytics and infrastructure work flow automation and process mining are dramatically influencing the way businesses compete and deliver their services.
Little transformation is redefining all activities at an accelerated pace, forcing organizations to fundamentally change and adopt these new capabilities in order to remain competitive.
We continue to experience increased client engagement and demand for our services. This increased demand as resulting in competition for experienced talent. Unlike we have seen in a very long time with that said, we also believe that a new more flexible work from home delivery model will evolve, which will enhance our ability to attract and.
[noise] retained resources for our organization.
The emerging service delivery model helps us address our most challenging retention issue of our industry, which is the amount of travel required to serve clients.
The increasing momentum since the end of Q2 of last year has continued throughout 2021. This.
Dispositions as well to finish the year and should allow us to return to our target long term growth and profitability lumps.
In order to increase our revenues across all of our IP led offerings, we will continue to invest in our IP platforms and to increase our sales and marketing resources. This will include our Ips service offerings to partners that desire to license, our IP and brand permission to bolster their business case.
Development and value selling as well as delivery efforts we.
We continue to have over 10, such opportunities with formal proposals pilots launching or in contract negotiations.
We also continue to believe these opportunities should further benefit our future results.
Strategically we will we will focus our focus will remain the same which is to continue to build our brand around our new offerings and capabilities focused on digital transformation around are fully digitised and unmatched IP and benchmarking and best practices intellectual capital platforms. This she.
Allow us to serve clients strategically increasingly remotely and whenever possible continuously.
Specifically, we will continue to redefine our global benchmarking leadership through enhancements in quantum leap or digital benchmark software as a service solution. This platform allows us to deliver more information with significantly less client effort. It also allows clients to leverage our IP and track the transformation initiatives over the life of their respective.
Pepper, we believe there is no comparable platform in the market.
We also continue to enhance our digital transformation platform to further differentiate are unique IP unrelated solutions assigned capabilities DTP allowed us to fully digitize, our IP and align proven software configuration and organizations to loose solutions to help us drive transformational change DTP is of course.
To our Ipass digital transformation as well as our cloud implementation practice.
Practices and 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 both of these platforms.
Lastly.
Even though we believe that we have the client base and the offerings to grow our business. We continue to look for acquisitions and alliances that strategically leverage our IP in that scope scale and capability with that which can accelerate our growth as always let me close by asking our associates to remain safe and thank them for their tireless efforts and always urgent.
Stay highly focused on our clients and our people, especially in light of the short term challenges, which we may encounter.
Those conclude my comments, let me then turn it over to the operator, and let us move onto the Q&A section of our call operator.
Yes, Sir it is now time for the question and answer session of today's call. If you would like to ask a question over the phone. Please press star followed by one please make sure that your phone is on muted record. Your name clearly when prompted our first question comes from Jeff Martin from Roth Capital Partners. Your line is open Sir.
Thanks I.
Hope you're doing well.
Ted I wanted Ted to dive into the IP the service or.
Are you do you have line of sight for what the benefit.
B in 2022 from some of these relationships it sounds like to continue to mature and advanced care.
The answer is.
Yes, we do and we believe that as we said when we started.
And brought on our first line is that the impact of them should be meaningful to our future results.
Okay, great and as you exit the year at double digit net revenue growth rate.
How should we be thinking about 2022 in terms of net revenue growth is is double digit growth sustainable.
Or we can still thinking in that 5% to 10% organic growth range.
While we we've always you know we've always used to 5% to 10% reference I think we stayed with that we believe we're in a demand environment that.
Should allow us to operate a towards the high end of that up probably the most meaningful information that I could share is that when we look back at our business over the last four years and fully exclude the impact of our Oracle on prime business.
We believe that our car.
Compounded annual growth rate.
Was again towards the high end of that range that we provide so that's what we're targeting.
Okay, and then wanted to touch on the the EPS the pro forma EPS in the third quarter here <unk>.
<unk> b relative to what I think was consensus of 29 is an outsize be easily come in the Penny Aircell ahead.
What were the primary contributing factors to that type that size of of outperformance in the corner.
When we look at it. It's obviously, we have stronger the demand continued at a slightly stronger pace that we expected. So we have pretty strong performance across the groups. We also saw the value added seller activity.
Help us with part of that if you want to call it.
Beat for lack of a better term.
We're continuing to see.
More of those.
Related deals not in an amount that's anywhere near the one we had in queue too, but at a little higher pace than we've had in the past year, so that helped us a little bit.
Okay, Great and then last one for me is I missed the first part of the call I don't know if you've already gave this in your prepared remarks, but in terms of your east coast expansion strategy.
Particularly with the cloud business was curious if you could provide an update their.
Well as you know the the ones that we targeted one was acquired and the other one.
Bird any decision.
We continue to look for an opportunity in east coast I think it's worth noting that the Oracle APM business.
Performed very strongly.
This quarter. So as I mentioned also in second quarter, even without the acquisition our pace has picked up.
Across the country, including the East coast. So the urgency is not quite the same it does not mean that if we saw if we had a group that we thought culturally fit and.
The value was reasonable to both sides that we would aggressively pursue a transaction like that I can tell you that we are continuing to look for.
Oracle related acquisitions.
Whether or not they end up.
Specifically addressing the east coast gap so.
We're expanding let's put like we're expanding our scope.
To make sure that if we see something we really like that culturally fits it's in an area. We believe it's supply growth.
We will attempt to acquire.
Okay. Thanks for your time.
Thank you Jeff.
Thank you at this time I show no further questions I will now turn the call back over to Mister Hernandez.
Thank you operator I note that we had a couple of analysts that said that they would have trouble, making it tonight. So we'll hope that you will join US next time, but let.
Let me thank everyone for participating in our third quarter earnings call and we'll look forward to catching up again, when we report the fourth quarter and fiscal year.
Thank you.
Thank you that does conclude today's conference you may disconnect at this time and thank you for joining.