Q1 2022 Hackett Group Inc Earnings Call
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Welcome to the Hackett Group first quarter earnings Conference call. Your lines have been placed on listen only mode until the question answer session. Please.
Please be advised the conference is being recorded.
Hosting tonight's call are Mr. Ted Fernandez, Chairman and CEO and Mr. Rob Ramirez, Chief Financial Officer, Mr. Ramirez, you may begin.
Good afternoon, everyone and thank you for joining us to discuss the Hackett group first quarter results.
On the call today and here to answer your questions are Ted Fernandez.
The CEO of the Hackett group.
Yourself, Robert Ramirez, Chief Financial Officer.
A press announcement was released over the wires at four <unk>.
P M eastern time.
A copy of the release please visit our website at Www dot the Hackett good dot com we.
We will also place any additional financial or statistical data discussed in this call that is not contained in the release on the Investor Relations page of our website.
Before we begin I would like to remind you that in the following comments and in the question and answer session. We will be making statements about expected future results, which may be forward looking statements for the purposes of the federal Securities laws.
These statements reflect current expectations estimates and projections and are not a guarantee of future performance. They involve risks uncertainties and assumptions that are difficult to predict and which may not be accurate, especially in light of COVID-19.
Actual results may vary.
Forward looking statements should be considered only in conjunction with the detailed information, particularly the risk factors contained in the rest of the SEC filings at this point I would like to turn it over to Ted. Thank.
Thank you, Rob and welcome everyone to our first 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 detailed operating results cash flow as well as comment on outlook.
Will then review our market strategy related comments, after which we will open it up to Q&A.
Consistent with the momentum we experienced through last year.
Strong demand for our services continued into the first quarter of 2022.
Results across nearly all groups exceeded our expectations organizations.
Organizations recognize the need to embrace digital transformation as a requirement to remain competitive and the rate of digital innovation and related change is unprecedented.
Correspondingly. This afternoon, we reported total revenues of $75 7 million in revenues before reimbursements of $75 1 million and adjusted earnings per share up 38 cents.
Both above our quarterly guidance and a significant significantly on a year over year basis.
U S results were up 16, 5% driven by strong performance of our strategy and business transformation group and the performance of the Oracle and one screen practices.
<unk> business transformation group continued its outperformance trend with increased revenues and gross margins. Additionally.
Additionally, our higher margin research advisory offerings grew at a higher rate than our strategy and business transformation consulting offerings favorably impacting margins.
Our EEA group or ERP, <unk> and analytics group.
<unk> was driven by strong Oracle and one screen growth.
S. I P group is rebuilding its momentum after its strong performance in 2021.
We also saw better than expected results from our European group, which benefited from large cross Atlantic U S engagements some of that over performance will not continue into Q2 unfavorably impacting overall sequential guidance.
In summary, large strategy and business transformation in E. A engagements along with the increasing leverage of our higher margin IP based benchmarking research advisory and IP as a service offerings as well as the efficiencies from our virtual sales and delivery model are favorably impacting our performance.
This increased momentum should allow us to perform it up at the higher end of our long term growth and profitability targets.
Additionally, the investments we have made to fully digitize all of our IP and development of our digital platforms, which include quantum leap our state of the art global benchmarking platform and our proprietary Hackett digital transformation platform or DTP are allowing us to highly differentiate and expand our offerings and are important drivers of our long.
<unk> growth and profitability targets. These.
These platforms are allowing us to develop new relationships and rapidly growing cloud workflow automation and process mining technology providers across all areas of the enterprise. We believe that these new and potential relationships are key to our digital transformation strategy and our <unk>.
The components of our growth strategy as well.
It is worth noting that our reported results were achieved without any additional ipass relationships that we believe should benefit our future results.
On the balance sheet side, our ability to generate strong cash flow from operations has allowed us to increase our dividend and our buyback program.
We also plan to expand our current facility to fund acquisitions, we identify or buy back stock, 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 outlook I will make additional comments on strategy and market conditions following rob's comments Rob.
Ted as I typically do I'll cover the following areas. During this portion of the call an overview of our 2022 first quarter results along with an overview of related key operating statistics.
A review of our cash flow activities during the quarter and I'll, then conclude with a discussion on our financial outlook for the second quarter of 2022.
For purposes of this call I will comment separately regarding the revenues of our strategy and business transformation group worsening buchi, our ERP E P M and analytics solutions group or EEA.
Our international group and the total company.
Our <unk> group includes the results of our North America IP as a service offerings, our research 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 one stream practices.
Our International group includes the results of our SME <unk> and our EEA resources that are based primarily in Europe .
Please note that we will be referencing revenues before reimbursements and our discussion.
Reimbursable expenses are primarily project probable related expenses passed through to our clients and have no associated impact to our profitability.
During our call today.
Also reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of GAAP to non-GAAP financial measures in our press release filed earlier today and will post additional reconciliations based on the discussions on this call to the Investor Relations page of the company's website.
For the first quarter of 2022 as Ted mentioned total revenues were $75 7 million of <unk>.
19% when compared to the prior year.
Our revenues before reimbursements increased to $75 1 million up 18% when compared to the prior year, which is above the high end of our revenue guidance range as we continued to see strong demand for our services throughout the quarter.
The first quarter of 2022 Reimbursable expense ratio on total revenues was 7% as compared to 1%.
Prior year as stated previously Reimbursable expenses have been significantly reduced due to the transition to remote sales and service delivery model.
Our U S operations, which represented 90% below revenues before reimbursements in the first quarter of 2022 were 16, 5% when compared to the first quarter of the prior year.
Revenues before reimbursements for our F&B T group with $29 8 million, an increase of 16% when compared to the same period in the prior year, reflecting the continued sequential growth since the second quarter of 2020, which includes strong growth from our research advisory offerings.
Revenues before reimbursements for EEA solutions group were $37 6 million, an increase of 17% when compared to the same period of the prior year.
The year over year increase was driven by large ERP and APM Oracle engagements continuing growth from a one stream implementation practice.
Partially offset by the transition of a large year end engagements Rev.
Revenues before reimbursements for our International group were $7 7 million, an increase of 39% on a year over year basis, primarily due to U S driven global engagements and strong Hackett Institute sales.
Company International revenues before reimbursements or kind of 10% of company revenues before reimbursements as compared to 9% in the first quarter of the prior year.
Approximately 20% of our total company revenues before reimbursements consist of recurring subscription based revenues, which include our research advisory IP as a service multiyear benchmarks and Ams groups.
Total company adjusted cost of sales, which exclude reimbursable expenses and noncash stock compensation expense.
The $45 7 million or 68% of revenues before reimbursements in the firm.
First quarter as compared to $39 3 million or 62% of revenues before reimbursements in the previous year.
Company consultant headcount was 1141 at the end of the first quarter as compared to total company consultant headcount of 1106 in the previous quarter and 963 at the end of the first quarter of 2021.
The year over year increase was primarily result of higher activities and increased utilization of subcontractors, resulting from higher demand.
Total company adjusted gross margin on revenues before reimbursements was 39, 2% in the first quarter output compared to the prior year of 38%.
The margin increase was primarily due to increased revenues, partially offset by the incremental use of subcontractors increased head count and incentive compensation commensurate with improving results.
Adjusted SG&A was $13 3 million or 18% of total revenues in the first quarter as compared to $12 4 million or 20% of revenues in the prior year the year over year absolute dollar increase is primarily due to increased incentive compensation accruals associated with improving company performance.
Adjusted EBITDA was $17 million or 22% of total revenues in the first quarter of 2022 as compared to $12 6 million or 20% of total revenues in the prior year, primarily resulting from increasing revenues and margins.
GAAP diluted net income per common share were 33.
Up 74% for first quarter of 2022.
Compared to GAAP diluted net income per common share of 19 in the same period of the prior year, primarily due to the year over year revenue and margin growth.
Adjusted net income for the first quarter of 2022 totaled $12 1 million or adjusted diluted net income per common share of <unk> 80 838 cents.
Which represents a year over year increase of 41% and is above the high end of our earnings guidance range.
This compares to adjusted net income of $8 8 million or adjusted diluted net income per common share of <unk> 27 in the prior year.
The company's cash balances were $47 8 million at the end of the first quarter as compared to $45 8 million at the end of the previous quarter.
Net cash provided by operating activities in the quarter was $6 1 million, primarily driven by net income adjusted for noncash activity increases in contract liabilities.
Which were partially offset by decreases in accrued expenses due to the payment of 2021 performance bonuses.
Our DSO or days sales outstanding at the end of the quarter was 61 days as compared to 66 days at the end of the previous quarter.
The Companys $45 million credit facility remained unused during the first quarter of 2022.
During the quarter, we repurchased 157000 shares of the company stock for an average of $19 51 per share at a total cost of approximately $3 1 million.
Primarily driven by purchases from employees to satisfy income tax withholding triggered by the vesting of restricted shares.
Our remaining stock repurchase authorization at the end of the quarter was $10 6 million.
At its most recent meeting the company's board of directors declared the second quarterly dividend of <unk> 11 per share for shareholders of record as of June 24th 2022 to be paid on July eight 2022.
Before I move to guidance for the second quarter of 2022, I would like to remind everyone that in the second quarter of the prior year company results included a nonrecurring $5 $3 million software sales transaction.
During our 2021 second quarter call, we highlighted the impact of these results with and without this software sales transactions.
The company estimates total revenue before reimbursements for the second quarter of 2022 to be in the range of $71 million to $73 million.
Excluding the impact of the SLP software sale transaction in Q2 of the prior year, we expect year over year total revenues to be up 5% to 8% with year over year increases across all three practice groups.
On a sequential basis, we expect <unk> to be up and <unk> international will be down due to the transition of several large engagements. The international decrease represents a sequential decrease of approximately <unk> <unk> in the second quarter.
We estimate adjusted diluted net income per share in the second quarter of 2022 to be in the range of 33% to 35.
Excluding the impact of the SAP software sale transaction in Q2 of the prior year. This would represent an increase of 10% to 17%.
We expect adjusted gross margin on revenues before reimbursements to be approximately 40% to 41%.
We expect adjusted SG&A and interest expense for the second quarter to be approximately $14 3 million.
We expect second quarter, adjusted EBITDA and revenues before reimbursements to be in the range of 21% to 22%.
And we expect cash balances, excluding the impact of share buyback activity to be up on sequential basis.
At this point I would like to turn it back over to Ted to review, our market outlook and strategic priorities for the coming months.
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.
All of the pandemic created unprecedented demand disruption. It also created heightened awareness awareness that accelerated demand for digital transformation initiatives. This means that digital innovation and enterprise cloud applications <unk> analytics infrastructure workflow automation process mining are dramatically influencing the way businesses compete and did.
Liver their services there.
<unk> 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 also believe that digital transformation will be critical for organizations to realize productivity improvement initiatives that may result from economic deceleration.
It may be created by the fiscal inflationary supply chain or geopolitical challenges, which our clients may face.
The increased digital transformation demand is also resulting in increased competition for experienced talent. Unlike we have seen in very in a very long time, we believe that the emerging data emerging from the remote service delivery model should help us address our short term recruiting and retention concerns as we hope to be able to attract associates from a bra.
<unk> pool of global candidates, we have done that successful all throughout 2021, we believe that will continue into 2022.
Longer term, we are now finally on our path to our next normal which results in a highly engaged client base with a sales and delivery model, which provides our clients and our associates with greater personal flexibility to perform their defined responsibility.
This will allow us to attract and retain talent that we have struggled to retain because of the demanding historical travel requirements of our industry are very positive development for our industry in order to increase our revenues across all of our IP led offerings. We will continue to invest in our IP platforms and increase our sales and marketing.
<unk> dedicated to this area.
This will include our IP as a service offerings to partners that desire to license, our IP and brand permission to bolster their business case development and value selling and delivery efforts. We continue to have many opportunities with formal proposals.
Pilot programs launching and contract negotiations we believe these opportunities should further benefit our 'twenty two results as I said, they didn't impact our first quarter. They will start impacting our second quarter. We also expect to leverage our brand IP platform slots a series of new vendor market intelligence program.
That will help SaaS and highlight the unique capabilities of technology and service providers across selected categories. This is another key initiative that we believe has great potential to add high margin recurring revenue in the next few years.
Obviously, we are encouraged by the performance of our executive Advisory and research our existing research advisory offerings. We think we have a similar or greater opportunity in this market intelligence category.
<unk>, our focus will remain the same which is to continue to build our brand and our new offerings and capabilities focused on digital transformation around our fully digitized and unmatched IP and benchmarking and best practices intellectual capital platforms. This should allow us to serve our clients strategically remotely.
And continuously.
We also will continue to redefine our global benchmarking leadership through additional enhancements in quantum leap our digital benchmarking.
Software as a service solution along with our digital transformation platform. These platforms allow us to deliver more information with significantly less client effort. It also allows us to leverage our IP to create compelling benefit case assessments accelerate the process.
Flow and software configuration decisions as well as to track transformation initiatives over the life of their respective effort. We believe that there are no comparable platforms in the market.
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 platform.
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 and add scope scale and capability, which can accelerate our growth as always let me close by congratulating our associates on our performance and by thanking them for their tireless efforts and always urge them to stay.
Highly focused on our clients and our people no matter what short challenges we may encounter.
Those include 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 one and record your name if you.
You'd like to withdraw your question Press Star two.
First question in queue is from George Sutton with Craig Hallum. Your line is now open.
Thank you Ted you had a great first quarter and Youre looking for what I would define as a pretty good Q2.
Can you talk about the change that youre seeing from it I don't know if economic.
Anything that's sort of changing the demand characteristics as you you're expecting outside of just pure implementations that you finished in Q1 that don't recur in Q2.
None on the marketplace at all.
As you'll I'll comment as I commented the biggest change from Q1 to Q2 will be the contribution and the reduction of that contribution that emanates from Europe , which is in our international practice group.
But no the other activity. It was it was just an outstanding first quarter, it's as close as you come to firing across Cook as they say on all cylinders George.
And yes.
It comes with some large engagements that we will be migrating.
Specifically in our.
EEA group, but.
Outside that what I'll call. It customary I mean, you get great benefits. When you do large engagements allowed us to deploy people longer and obviously in many cases that also results in <unk>.
Greater throughput margin.
But when you deal with that transition, yes, it disrupts that fluidity, but who would have expected that we would exceed first quarter by <unk> I mean.
We've been doing this a long time and never saw that so yes. What's made this call a little awkward is the fact that we're trying to talk about the results of Q1, then moving into Q2, and we've tried to provide as much color as we can because we know it's.
Slightly different than you would hear from us.
Looking a little further out as you look at the challenges that are out there you have major supply chain challenges I think youre increasingly you're going to have working capital question marks for companies given the higher rates.
You've also got the obvious operational challenges as we enter what may be a recession all of those things typically bode pretty well for your opportunities can you talk about if youre seeing anything like that yet or when would you expect to see that as we go into a normalized recession.
We haven't seen any disruption, but we are seeing engagement, where people are responding to and some of the inflationary or supply chain issues that are affecting them.
As part of the reason for some of the engagements that we're taking on so now as I mentioned in the iPad I added the commentary in the early part of our call.
We've been responding to just the fact that moving are aggressively trying to just get digitize across every aspect of their business to remain competitive.
I wanted to remind everyone that if that focus changes to productivity improvement.
Thats also core to both of our business as well as.
Most of those challenges are addressed through improving workflow automation and reorganizing your business to be more efficient and that's what we concentrate on so.
Short of some I'll call it truly meaningful disruption.
We don't we don't expect to see anything here in the near term.
You mentioned are firing on all cylinders I guess a question for Rob will the Formula one sponsorship money be in Q2.
Okay.
Unfortunately not.
Yeah.
I was there or does it have a chance to go there to borrow but no doubt that we offer dose sponsorship opportunities, but we had a chance to spend some time with some really important clients.
Super Thanks, guys.
Okay.
And as a reminder, if you would like to ask a question over the phone. Please press star one and record your name.
Next question the cues from Vince Colicchio with Barrington Research. Your line is now open.
Ted could you give.
Give us a sense of the SAP pipeline is improving and would you expect when would you expect growth to return a sequentially to the S&P business.
It has been improving since we got through the year and so we're seeing at month on month.
So we would expect that in the third quarter.
You talked on prior calls about.
Increasing your offshore effort.
To help offset some of the.
Labor constraints in the U S market.
Did you increase to our share for the quarter and what are your thoughts on.
Doing this in the second half.
Of our hiring more than half of our hiring continues to be hires.
That our offshore we are hiring across.
Im going to say nearly all practices.
Then half of the total happening offshore as we continue to try to leverage.
That offshore capability across all of our groups the effort thus far.
Has been primarily in our technology practices. So.
Or we have.
Over 40% of those groups.
Our are with <unk>.
Offshore related resources.
We think theres an opportunity to take some of the work, we do in SMB and leverage that as well.
So we will keep looking at that opportunity through the balance of the year as well.
And.
I think you had commented that you know your your IP as a service.
I think you can see you added you you may have more more relationships that will benefit future results.
Are you close to some new deals there what does that look like.
The answer is yes. So let me start answering that was yes, but let me first give you a little bit more color.
If you recall, we had a significant.
As I call it ipass.
Research deal.
That we did last fall, which extended into Q1.
That large provider has actually.
More than increase their initial commitment that that opportunity starts in Q2.
In fact, that's been that provider that.
It has been so complimentary of our work that has led to our I'll call. It accelerated effort to launch what we will call market intelligence programs too.
Sure.
To support the technology and service providers that.
Wanna be I'll call. It a SaaS commented on where we can do research for <unk>.
Similar to what Gartner does for some of these software and software vendors you can expect the Hackett to last several of these segment programs in the second half of the year at that comes from the success. We had with that initial we think highly sophisticated client who uses all of these research advisory service and was just incredibly complementary.
Additionally, we have launched.
Our pilot in the process mining space I'll just leave it at that.
As also ipass related but it is an opportunity where that success and could lead to a broader opportunity and we've also.
We'll be launching I think it was just signed will launch a smaller pilot we're giving.
Clients, an opportunity or clients potential partners, an opportunity to sign up for a smaller amount or.
A smaller amount and say half a million dollars.
Two.
Try a basket of our tools and frameworks that we make available as part of our Ipass program and we have one of those launching as well this quarter.
But as you also know, we're working and tracking with <unk>.
Much larger opportunities that we continue to be optimistic about.
And could you remind us your long term financial goals and.
Do you I think you said that you think you should get to achieve that for this year.
Well, we were consistent with the first quarter statement I was expecting somebody.
To have made up that since we said that we thought we would operate at the higher end of both the long term growth revenue and profitability targets.
Clearly the first quarter sets us up beautifully for that you you look at any number of our year to date results.
Obviously.
We're gonna be delighted when.
When we finished the second quarter and then expect to continue that momentum for the balance of the year, but have we changed the commentary that I provided in Q1 that we would expect to operate at the high end of both our revenue and profitability long term targets, but we believe that.
That comment that we had that we should operate at that level are clearly what we've reported in Q1 kind of into Q2.
Sure.
Adequately provides to that opportunity.
Yeah. Please remind me what the targets are despite hearing many times, 5% to 10% on the revenue line drives 15% to 20% plus on the on the bottom line right. Thank you Ted good quarter.
Next question I'm, sorry, Rob is correcting me here.
On the bottom line it would be 10% to 20% plus on the bottom line.
The next question is from Jeff Martin with Roth Capital Partners. Your line is now open.
Thanks, Good evening, Chad and a.
Good to talk to you here.
You touched on it a little bit.
Already Ted but I was just curious if you could give us.
A little bit more detail with respect to your market intelligence programs.
Maybe give us an example of a client use case.
How significant is that with respect to driving growth.
This year.
Okay. It's an excellent question.
Sure Jack Youre familiar with the kind of programs that Gartner.
Initiate surround its magic quadrant for straight forest or initiate surround its forrester wave.
This ability to SaaS software and services vendors across very specific verticals and segments.
We're an organization like ours, especially with our applied knowledge those other organizations are.
Are able to assess and fundamentally.
Help those organizations not only.
I would describe their offering a SaaS compare but it also gives them some feedback on where there are opportunities for improvement exist not only on their product side, but also on the market side. So.
Based on the success, we've had with the research program, we did for our our large cloud infrastructure client, who encouraged us to expand our wings is something we've been looking at we believe that.
Market Intelligence program, where those software and services companies.
Is.
A significantly greater opportunity than the executive advisory opportunity that we currently have with corporate clients. So imagine us using that large corporate credibility and applied knowledge that we have and provide some of that intelligence to help.
The software and services provider across the spending how many segments that we pick as I'm sure you know there are.
There is 100 of them.
We will we will launch in the areas, where we're the strongest where we have the greatest opinion and capability to be able to.
Drive the greatest service to these clients.
We started building a sales team around that as you also know we've.
We've never built a large sales and marketing team.
It dedicated to those offerings.
We're going to try to increase that.
That the size of that sales and marketing team. We've already started that initiative. So the combination if you recall.
Or even in this current quarter, we said that the annualized contract value for our corporate Executive Advisory program was in excess of 20% last year.
Our results. This year you saw we grew at 18, 90% of the revenue line.
That group grew in excess of that in the quarter.
We believe that.
The opportunity in growth in those areas with the right segments with the right sales and marketing investments should allow us to grow that business.
Okay great.
And then I.
IP as a service it sounds like its.
It's starting to really come to fruition.
Would you call it 2022, and you breakout year for that.
It sounds like you got some things that are really starting up in Q2 and Q3.
Also stopping commenting Rob says I'll be commenting about this for 10 years, but I told him. He hasnt been employed that loan which is not true by the way.
The answer is.
Look we've made a significant investment to commercialize our platforms and make and make them available to these large.
If you want to call them strategic partners.
<unk>.
On a commercial basis and yes, we believe that the investments that we've made.
Where those platforms, where our platform stand.
The discussions conversations pilots all of these.
As I've commented.
Throughout the last few quarters.
Should benefit our future results than we expected and we expect.
Some of that to clearly happened in 'twenty two.
Okay, Great and then last question for me you mentioned.
Fourth quarter earnings call the pricing environment was quite strong I was curious if that.
<unk> at a robust pace.
The current environments, putting a little bit of pressure there.
We need a little bit more information, we did put through.
This increases a year ago, we did that again just recently.
So give us a little bit of time, but we believe that the market demand for the right services. Many of these which we believe we're having great success with.
It should allow us to retain pricing.
Howard.
That we've experienced here recently.
Yeah.
That's it for me thanks for your time.
Thank you Jeff.
Okay.
At this time I show no further questions I will now turn the call back over to Mr. Fernandez.
Well I'd like to thank everyone for participating in our first quarter earnings call. We look forward to updating you again, when we report the second quarter.
Thank you again.
This concludes today's call. Thank you for your participation you may disconnect at this time.