The Hackett Group Inc. Q1 2023 Earnings Call
Thank you for standing by today's conference will begin in approximately two minutes again todays conference will begin in two minutes. Thank you for standing by.
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Yes.
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Welcome to the Hackett Group first 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 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's first quarter 2023.
Speaking on the call today and here to answer your questions.
Ted Fernandez, Chairman and CEO of the Hackett group.
And myself, Robert Ramirez, Chief Financial Officer.
A press announcement was released over the wires at 424 P. M. Eastern time for a copy of the release. Please visit our website at Www Dot group Dot Com. We will also place any additional financial or statistical data discussed on this call.
Cause you're related comments after which we will open it up the Q&A.
Before I moved to our quarterly results. Let me start by mentioning are 20 twenty-two results and the cops that they will provide tool art twenty-three performance.
In 2022, we had a very strong first half of the year with operating results saving our guidance in Q1, two two by three in each quarter of that part year.
The middle of the year the impact of Ah that interest rate increases started to disrupt economic growth and resulted in extended clients decisionmaking.
All sorts of our first quarter.
Afternoon, we reported a total revenues of $69 $8 million and adjusted earnings per share of 37 cents.
Both at the midpoint of our quarterly guidance range.
Hardly speaking the economic volatility is evident but some of the demand for digital transformation solutions required to remain competitive and drive productivity improvements for our clients.
As a quarter progressed, we saw clients increasingly moving forward with significant engagements, which should allow us to be up sequentially from Q1, the queue to.
This was most pronounced in the Swift turnaround of our Oracle solutions segment.
Our quarterly results continue to be driven by the global Spt's second which was done down slightly on a reported basis.
And down 1% on a local currency basis, a recurring higher margin research advisory and Ipass offering revenue continue to grow and we continue to expect the annual contract value for these offerings to grow over 20% in 2023.
The quarter benefited from the growth of our Ipass revenues and we continue to add new pilot participants as we exited the quarter. We would also continue engage with large software and service companies to help them bolster their value selling and value realisation efforts during the quarter, we launched our second and third market intelligence programs and we plan to launch order.
<unk> programs throughout 20th 23 these.
These programs allow us to compare the capabilities of software and services providers, which is valuable to our large hackett benchmarking and consulting and user client base considering procuring these capabilities.
The programs also allow us to work with the solution providers to strategically support their sales and marketing efforts.
We have also continue to add new content to our existing functionally focused executive advisory programs improvements in our existing programs along with the new market intelligence programs the launch of our new <unk>.
Remember platform Hackett connect along with our aggressive sales hiring should allow us to continue to grow our higher margin recurring revenues and related annual contract value throughout the year.
The Oracle solutions segment was down 22% as expect that this quarter. However, we are pleased to say we have a number of significant contract wins in the latter part of the quarter, which will more than offset the large project launched.
Loss of we experience at the end of two four.
This will allow the segment to be constantly from Q1 and into.
Q2. This was an exceptional response by the team to a cheer and challenge and has accelerated the return to growth, which is now expected by two three of this year.
R. S. I P solutions sentiment delivered as expected with flat revenues before reimbursements and improved segment profits, we expect that segment to be up sequentially and up sequentially as well as on a year over year basis in the second quarter.
The investments we have made some fully digitize, our I P and the development of our digital platform switching some quantum leap our state of the art global benchmarking platform and our proprietary hacking digital transformation platform or PTP.
Are starting to pay off these platforms are allowing us to highly differentiate all of our offerings and also develop new licensing research relationship with the software and services providers across the enterprise.
We also expect to watch or had to connect platform and cute too, which will significantly improve our research and ipass member clients ability to avail themselves all Hackett IP as well as the virtual expertise which supports those programs.
On the balance sheet side, our first quarter in the in our first quarter refunded, our previous years annual performance bonuses pop back shares to finance that stinks and funded or prior quarter's dividend for the balance of the year you should expect to see us continue to pay down our credit facility.
As we have discussed on our last few calls we want to be more aggressive with our balance sheet by using our credit current credit facility, the fund acquisitions and Bipack stock, while continuing to invest in our business with.
With that said, let me ask <unk> to provide details on or off operating results cash flow and also comment on the outlook I will make additional comments on strategy and market conditions. Following rob's comments Roth. Thank.
Thank you judge.
Typically do during these portion of the call I'll call the following topics and.
Interview of 2023 foot square results, along with an overview of Lady operating statistics.
An overview of our casual activities during the quarter and all that conclude the discussion on our financial outlook for the second quarter of 2023.
The purpose of this column, our covenant separately regarding the revenue each of our global <unk> segment Oracle solutions segment, RSA peacefully segment and the total company or.
Global is going to be two segment and keeps the results over North America and international Ivy is a service offerings Ah Research advisory programs Ah benchmarking services business transformation and our Windstream all things.
<unk> solutions <unk> solution servants include the results Oracle NSP offerings, respectively.
Please note that will be referencing both total revenues and revenue before reimbursements in our discussions.
Reimbursed of all expenses are primary project.
Related expenses capacity to our clients have no associated impacts from a probability.
During our call today.
Also referenced certain non-GAAP financial measures, which we believe provide useful information to investors.
We've included reconciliation of GAAP to non-GAAP financial measures into our press release filed earlier today, and we will post any additional information based on the discussions from each call to the Investor Relations page from the company's website.
For the first quarter of 2023, our revenue was $71.2 million.
Revenues before reimbursements was $69.8 million, which was in line with our quarterly guidance.
As we discussed last quarter during the first half of fiscal 2022, we experienced stronger than expected post COVID-19 pent up demand that drove strong results in the prior year.
The Q1, 2% believe reimbursable expense ratio on revenues before reimbursements with 2% as compared to 1.9% in the prior quarter and 2.7% when compared to the same period in the prior year.
Post Covid, we have experienced increased client related travel however, given the market is transition to remote delivery model. We do not expect these projects related travel expenses can return to pre COVID-19 levels.
Total revenues from our global attributes you segment with $42.3 million for the first quarter of 2023.
<unk> before reimbursements for a global SVG segment, where 41.7 for the first quarter of 2023, a decrease of 1.7% when compared to the same period in for a year, but John 1% lower local currency basis, utilizing the same foreign currency rates and Q1 of a priority.
Total revenues from oral solution segment, where $17.2 million for the first quarter of 2023.
Revenues before reimbursements for oral solution segment, where $16.7 million for the first quarter, a decrease of 22% when compared to the same period is it per year as we expected and as we guided.
For our last quarter.
Local solutions was coming off of solid 2022 results and with rebuilding pipeline in light of unfavorable macroeconomic conditions as we entered the first quarter. However.
However, given a number of significant engagements, which closed towards the end of the first quarter. We now expect Oracle will be up strongly honest with the basis as we move into Q2.
Total revenues from RSVP solution segment, where $11.7 million for the first quarter of 2023.
Revenues before reimbursements for a security solution segment, where $11.5 million for the first quarter, an increase of 1.3% when compared to the same period in the prior year.
Approximately 23% of our total company revenues before reimbursements consists of recurring multiyear and subscription subscription based revenues.
Which include our research advisory opinions of service multiyear benchmarks and an application managed services contracts.
Total company adjusted cost of sales, which exclude with reversible expenses and non-cash stock based compensation expense totaled $41.6 million or.
Or 59, 6% of revenues before reimbursements in the first quarter of 2023 as compared to $45.7 million.
Or 60.8% of revenues for forward embarrassments in the prior year.
Total company consultant head Count was 1101 at the end of the first quarter as compared to the total accompany consult the head cut of 1128 and the previous quarter and 1141 at the end of the first quarter of 2022.
Total company adjusted gross margin on revenues before reimbursements.
Which excludes reimbursable expenses and non-cash stock based compensation expense.
Was 40.
4% in the first quarter of 2023 as compared to 39.2% in the prior year period.
120 basis points gross margin improvement was primarily driven by the relative mix of higher margin Global SMB Chi segment revenues.
Adjusted SG&A, which excludes non-cash stock based compensation expense and intangible asset amortization was $14.5 million or 20.8% of revenues before reimbursements in the first quarter of 2023.
This is compared to $13.3 million or $17 70 per cent of revenues before reimbursements in the prior year.
Over your absolute dollar increase is primarily due to incremental investments, we're making and program development and dedicated showed resources for our benchmarking executive advisory market intelligence and our IP service offerings.
Investments approximated three cents in the first quarter of 2023.
Adjusted EBITDA, which excludes non-cash stock based compensation expense and intangible asset amortization.
Was $14.5 million with 20.8% of revenues before reimbursements in the first quarter as compared to $70 million or 22.6% of revenues before reimbursements in the prior year.
GAAP net income for the first quarter of 2023 totaled $8 $2 million.
Or diluted earnings per share of 30 cents as compared to GAAP net income of $10.5 million or diluted earnings per share of 33 and.
In the first quarter of previous year.
Adjusted net income, which excludes non-cash stock based compensation expense and intangible amortization.
For the first quarter of 2023 total $10 million or adjusted diluted net income procurement share of 37 cents, which is in line with our earnings guidance range.
This compares to adjusted net income of $12.6 million or just to do it at net income per share of 39.
In the first quarter of the prior year.
In Q2 of 2022, we moved to an actual gap effective tax rate for adjusted net income reporting purposes.
For those who do reconciling prior year reported results in Q1, we reported adjusted diluted income requirements sure of 38, when utilizing a non-GAAP effective tax rate of 25%.
The company's cash balances were $16.9 million at the end of the first quarter of 2023 as compared to $33 million at the end of the previous quarter.
Net cash used an operating activities in the quarter was $3.1 million per.
Primarily driven by decreases in a crude expenses due to the payment of 2022 performance bonuses.
Increases in accounts receivable, partially offset by net income adjusted for non-cash activity.
<unk> So four days sales outstanding at the end of the quarter was 66 days.
As compared to 63 days at the end of the previous quarter.
During the quarter, we repurchased 199000 shares of the company stock for an average of $21.23 per share of the total cost of approximately $4.2 million.
Driven by purchases from employees to satisfy income tax withholding triggered by the vesting of restricted shares as well and the board of share repurchases.
Ah remaining stock repurchase authorization at the end of the quarter was $14.0 million.
During the quarter the company paid them $2 million on our credit facility.
The company's total debt outstanding at the end of the first quarter.
Approximately $58 million.
And his most recent meeting subsequent quarter and the company's board of directors declared the second quarterly dividend of 11 cents per share for shareholders of record on June 23rd 2023 to be paid on July 7th 2000 2003.
Now moving to a second quarter of 2023 and our guidance.
The company currently estimates total revenue before reimbursements for the second quarter of 2023.
To be in the range of of $72 five to 74 million.
We expect global Swt's second of revenue before reimbursements to be slightly town and when compared to the prior year as we expect slowing economic growth. The result of an extended client decision, making in business transformation engagements.
We expect a local solutions segment revenue before embarrassments to be up strongly on extracurricular basis.
And to be only slightly down when compared to the prior year we.
We expect <unk> solutions segment revenue before reimbursements to beat up on a year over year basis.
We estimate adjusted diluted net income requirements share in the second quarter of 2023, it should be in the range of 36% to 39.
Which assumes gap effective tax rate on adjusted earnings of 27%.
As Ken mentioned last quarter, the second quarter will reflect the continuing incremental investments, we're making and program development and a dedicated sales resources for our branch marketing executive advisory market intelligence, and our IP as a service offerings.
These incremental costs are expected impact are diluted net income per carbon share for our approximately four cents when compared to the prior year.
We expect adjusted gross margin on revenues before reimbursements to be approximately 42% to 43%.
We expect adjusted SG&A and interest expense for the second quarter to be approximately $16.7 million.
We expect second quarter adjusted EBITDA on revenues before reimbursements to be in the range of approximately 21% to 23%.
Lastly, we expect cash flow from operations to be up on us which are basis.
At this point I would like to turn it back over to Ted there'll be a market outlook and strategic priorities for the coming months. Thank.
Thank you Bob.
We look forward, let me share our thoughts on the near and long term demand environment and the growth opportunity. It offers our organization.
Demand for digital transformation is being impacted by extended decision, making as organizations obsess competing priorities created by increasing interest rates and that demand disruption, which it is intended to perfect. However, it.
It continues to be a complete our strategic priority for our clients.
Digital innovation and enterprise cloud applications analytics, and artificial intelligence cloud infrastructure and work flow automation are dramatically influencing relate businesses compete and deliver their services.
Digital transformation is redefining all activities at an accelerated pace pushing organizations to fundamentally change and adopt these new capabilities to remain competitive and to realize targeted productivity gains.
We believe clients use the year and planning process in the beginning of the year to assess the industry risk make head count and spend reductions.
And rebalance their stand with productivity and strategic cost reduction efforts, which are also covered our offerings. We believe the clients will become more comfortable with the economic headwinds and we will see their behavior improved throughout the year similar to us many of our clients did not experience demand disruption until late into two of last year and will be.
More challenged by this coming year over year comps of the first half of the year. However, multiple faiths more favorable cost in the second half of the year. If we are correct. We will we will this will further support that behavior improvement, we expect from the first half to the second half of the year on.
The talent side competition for experienced executives continues but we saw turnover continue to moderate during the quarter and expect that trend to continue longer term, we have transitioned to a hybrid sales and delivery model, which provides us with effective access to our clients and their respective teams. This hybrid bottle provides our searches.
With greater personal flexibility to perform their define responsibilities remotely which is very valuable to them.
This should allow us to attract and retain talent that we have struggled to retaining because of the demanding historical traveled requirements of our industry.
Strategically we are accelerating our focus on a recurring high margin IP related services by increasing the development of new programs and sales and marketing resources dedicated to this area. This.
This investment will decrease R Q2 results by approximately four cents. Additionally on the Capex side, we will continue our investment on our new Hackett connect member platform and introduce AI functionality in 2024.
It is also important to note that we continue to see strong downstream revenues from our benchmarking in research advisory clients to our business transformation and technology consulting services.
This halo effect has been in excess of 40% over the last several years simply put organizations, where we rely on our IP research and benchmarking services are more likely to use utilize our consulting services.
We we.
We have been exploring or continued explore strategic partnerships that will allow us to syndicate, our IP through new channels and.
And that will allow us to reach beyond our global one focus in an efficient manner, we launched our first syndication agreement.
IP and content on April 1st like.
Like our other licensing efforts, we expect new recurring high margin revenue to slowly build from this relationship.
New markets and segments are offered.
<unk>.
We also continue to redefine our global benchmarking leadership through 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 clients to leverage our IP to create compelling benefit case assessments accelerate process flow and software configuration decisions and track the value realisation of transformation initiatives over the life of their respective effort.
We believe that there are no comparable IP, let platforms in the market.
As I have an mentioning on previous calls 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. We will also be updating our demo with our newly launch Hackett connect platform.
In the next few months.
Lastly, even though we believe that we have a client based on offerings to grow our business. We continue to look for acquisitions and alliances.
Strategically leverage our IP in that scope scalar or 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 are always urgent to stay highly focused on our clients and our people no matter what challenges we may encounter.
Those conclude my comments, let me turn it over to our operator, and let's move over to the Q&A section of our call operator.
Thank you if you would like.
To ask a question.
Helen.
One.
First and last name slowly and clammy when pumpkin.
So enjoying your request.
Q.
Can I ask a question Taiwan.
My first caller is George.
Hello. Thank.
Go ahead.
Thank you Ted I wondered if you could walk through the Oracle wins that you saw late in the corner that you mentioned just give us any sort of quantification, particularly relative to what I believe was a high.
Your loss late last year.
Thank you for their question George.
One there were numerous so it wasn't a couple.
We had one we.
At least one we had one of at least equal size to the one that we lost late in queue for but.
But we had gosh.
Four or five multi million dollar.
Wins.
Which clearly position as strongly for the next quarter and really the remainder of the year.
Where most happy about is that it demonstrates.
That our relationship with Oracle and the Oracle channel and our ability to present a value differentiated message on our ability to configure Oracle in a unique way.
Resonates in the marketplace, so in a competitive environment for headwinds.
We were able to do that I cannot commend our team.
Our whole team for the.
Cause it really is a very strong last 60 days that they've had.
Great could you give us a update on the three programs that you've now launched under the market Intelligence program, just give us a sense of the demand relative to what you might've been anticipating and any further thoughts on on the scale of that program.
As I.
Mentioned.
We published our first saw program our customer to cash a program such focus specifically on receivables management.
At the beginning of the quarter, we launched two more laws and procure to pay in the software area and in finance and accounting outsourcing services.
Participation from vendors and both of those.
Has been strong and.
But we will not limit those that we.
Compare and ranked.
Those who.
Participate directly.
So we're going to make sure that we are expanding our perspective on as many providers in each of these segments as we possibly can.
We actually reviewed the programs that are.
Scheduled for the remainder of the year.
So you'll see us move in from here too.
Software extend into.
H C anime Char outsourcing.
On the next two programs that will be extending beyond that into procurement areas into GBS areas.
In the balance of the year and probably closed out the year with a.
A broader ERP software assessment.
And we will be trying to then identify the.
The next night, the Golden novel was to get eight or nine launched by the end of the year, even though it's taking a little longer to get the first few done.
But we think that's because our goal is to be distinct from anything that's in the marketplace and be able to speak and provide guidance on the value realized from these investments, which is not something anyone has taken on.
As clearly as aggressively as we've had so even though I would say we're running.
Call it at least one quarter behind the.
The quality of the product of participation in the number of programs we planned launch.
We think will be meaningful.
These nine programs will then just to put that in context of total Ah research advisory related programs will then equal the nine existing programs, which we have today, which are functionally focused programs.
Which are which we call the executive advisory programs. So our goal is to try to.
Double at least launched.
Doubling the number we had at the beginning of the year and look each of these programs has multimillion dollar opportunities to us over time, depending on how well not only.
Able to serve the.
Software and services providers, who participate or who who want.
R.
Marketing or strategic supporting some of these areas.
But more importantly.
We think that the are very large.
And user client base.
Let's not forget that.
We've done benchmarks for over 25000 clients.
So we just have this immense coverage.
We see ourselves as having a being able to become a radio influencer in the space.
So this idea of value realisation being able to capture the voice of the client.
Hope over time that resonates.
In software and services.
Some other leading.
A column services like J D power in the automotive area had so we've got some very high expectations.
For these programs.
Cooper.
And again, if you would like to ask a question. Please I need your phone press Star one record your first and last name, calling and clearly.
Jeff Martin.
Can.
I had wanted to get a sense with respect to the delay the extended decision making.
Are you getting feedback from clients that.
There's other reasons other than the difficult comparisons in the first half of the year that second half May open up just just curious if you have anything you know to.
[noise] tangible from clients that you're hearing.
Oh, yes, it's not only that it's the increasing rates is is this going to slowly.
Economic demand that's impacting the demand for.
For our client services.
So no I mean, they're having to re prioritize because they everyone.
Everyone is having to work harder to achieve.
The kind of revenue growth that they clear.
Clearly achieved in 2022 and hope to achieve in 2023.
But.
We see again, we see even though those headwinds are there.
It's across industry, we can't really exclude one industry from from another.
We'll also see the fact that clients then equally understand that if they ignore digital transformation initiative that can help them engaged their clients and sell their services more effectively as well as than being able to get the productivity gains that come from leveraging.
Emerging technology is as critical so they're sitting there just trying to rebalance that and.
We expect that to continue through the balance of the year.
Just think that people are becoming more comfortable with what that means.
They are getting a better sense.
What these interest rates convened through the balance of the year all of those things with more favorable comps, we think will be favorable to the demand environment, we hope for rain.
Right and then with respect to the investments that are being made obviously four cents a quarter is is a significant investment for ya.
Are those primarily investments in sales personnel.
I'm curious how much of that is within the market intelligence strategy and what are you seeing or what are you expecting in terms of the sales cycle.
The market intelligence platforms.
Grams.
Well first the.
Oh.
Least 75% of the investment and building that sales group.
We were we were lucky it successful to attract a new global leader for that group, who joined US April 1st what we think is.
A terrific addition to our <unk>.
Senior team.
We're not.
It's.
We're not <unk>.
Narrowing the scope of these new sales resources just to market intelligence.
Market intelligence is intended to double the number of programs that these teams will take the market. So.
As those programs rollout they'll have a chance then to drive revenue through those new programs, but in the interim.
They can be focused on the existing functionally focused executive advisory programs. Some resources are highly focused on on the ipass related activities.
So.
I would characterize the team as being responsible for the growth of high margin recurring revenues regardless of program.
So just to make sure you know.
Market intelligence will just add inventory to what they sell so we'd like to get twice as much product by the time, we enter 2024.
And yes, I wish we were a little bit more head on that inventory, we had given him earlier in the year.
But they've got plenty of product to sell.
Our clients.
We lack a lot of market coverage from these programs in many regions. So we will continue to have the resources as we planned it as a significant investment, but we think that there are significant payback.
And then one more if I could you mentioned an artificial intelligence offering launch in 2024 curious how that plays into your existing strategy.
Well as you can imagine we're sitting here in our building out our new Hackett connect member portal, which is basically.
The entry point to all of our members Ipass and research advisory and market intelligence users into the Hackett IP or access to our experts.
So.
Mediately.
Got a couple of early in Q1.
We started evaluating what those priorities and those changes could be a lot of the research right now is making sure we understand what.
How to prioritize.
Some of the functionality, we're evaluating our number one objective was to make sure that in doing so we do not jeopardize any of the IP that we make available to clients.
So a tremendous amount of groundwork in the middle and the inner.
R 2023 plan was laid out as being up Prioritising, just with very detailed functionality for that.
Hackett connect.
You want to call it portal.
But.
Alrighty, we've already got a dedicated team evaluating what those opportunities can be so that we can start prioritizing them through the balance of the year and start delivering and leveraging some of the capabilities of 2024.
Thank you.
And our next Congress Vincent.
Barrington Research you May go ahead.
Yes, Ted it's good to hear you're making some progress on the Oracle solution side.
Just curious.
How the essay P pipeline is progressing in when you may expect that to return to sequential growth.
Well.
<unk> I don't know if you just cut the comments on the call but.
He will be up both sequentially and year over year in queue too so.
Solid progress.
On both the Oracle and the Fap's side.
Which again.
It's something that we wanted.
To address as early as early in the year. It's possible I think we're ahead of schedule in both.
Are you are delays or cancellations still a factor in the Oracle an essay pre businesses.
On the answers.
<unk>, yes, I can't sit here and give you a specific example in this quarter [laughter], we're really focused on comparing pipelines that took delivered longer at the end of last year that really.
Came through very strongly for us.
And the latter part of the quarter.
But yes, local I'm assuming that in this environment.
You need to expect clients to be more judicious with their decisions and and in certain cases, depending on what they encounter they could you know.
A second guess themselves, but I don't expect it to be.
Anything that would be any any different than any year.
And could you provide an update on your Ipass pipeline maybe.
Negotiations that are close to coming.
On the right way.
While we are we are launching a couple more pilots here in the second quarter.
So we're hoping that some of these pilots as we get to through the balance of the year become more meaningful opportunities and we continue to add to those.
To our to those companies that are evaluating a more meaningful.
Two year relationship.
Question for US is bandage do we need an intro securities to move to before Clinton can move into.
Much more significant multiyear relationship we're trying to gauge that on a partner partner basis about activities.
<unk> and conversations in this space continue to be.
To be good.
And last for me could you remind us your current M&A priorities and evaluations are improving.
Ah.
No evaluations are improving but our priority.
Has been a lately has been focused on trying to identify unique.
Research related.
<unk> those are very hard to combine identify.
But you know people have a way of reaching out to us.
So we continue to stay actively involved in conversations with those that God.
Could be.
A good fit for us.
Thank you too.
Thank goodness.
And at this time I shall no further questions I will now turn the call.
Mister Fernandez.
Let me thank everyone for participating on our first quarter earnings call and we look forward to updating you again, when we report the second quarter. Thank you.
And this concludes today's conference. Thank you for participating you may disconnect at this time.
Great rest of your day.
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