Q2 2023 The Hackett Group Inc Earnings Call
Speaker 1: improvements that enhance customers' business performance. Our next one, Enterprise Performance Management, is a three-part report that will include specialized analysis of planning and budgeting, enterprise consolidation, plus an aggregate view of total enterprise performance management.
Speaker 1: By early 2024, we intend to issue six additional evaluations of software and services providers. Our market intelligence reports represent critical value to our providers, to the providers. The companies learn how they compare their competitors, strengths and opportunities, as well as the measurable impact their solutions deliver. Our conclusions, which are depicted in our Hackett Polymetrics Health providers market and sell their solutions through licensing and the use of Hackett digital tools. We also advise how providers can adapt their solutions to perform better. Providers aren't the only ones to benefit. A large benchmarking and consulting and executive advisory customer base can apply to the market intelligence report to inform software and services purchase decisions. All of these enhancements are critical to the launch of our new member platform, Hackett Connect. This new state-of-the-art platform will allow all of our existing and as well as new members to avail themselves to the proprietary benchmarking metrics, best practices and research which is based on applied knowledge and proven implementation expertise delivered by practitioners.
Speaker 1: which highly differentiates our insight and expert advice. We are also building a community of users that can benefit from one another that we believe will result in a powerful expert network. This is one of our organization's most significant transformative efforts. The Oracle Solutions segment was up strongly on a sequential basis as expected this quarter. We started several engagements which we sold as we completed the first quarter, and continued to experience strong market demand and received strong support from the Oracle sales channel.
Speaker 1: Our SAP Solutions segment continued its momentum with higher than expected software sales activity.
Speaker 1: The investments we have made to fully digitize our IP and the development of our digital platforms, which include QuantumLeap, our state-of-the-art global benchmarking platform, and our proprietary Hackett Digital Transformation Platform, or DPP, are paying off. These platforms are allowing us to highly differentiate all of our offerings.
Speaker 1: and also develop new licensing and research relationships with software and service providers across the enterprise.
Speaker 1: Our launch of our Hacka Connect platform provides members access to the IP and tools of these two platforms and also significantly improves their ability to engage with our experts and shortly our community of users in an ever improving way. On the balance sheet side, you can expect us to use our cash flow from operations to accelerate the pay down over our outstanding credit facility.
Speaker 1: throughout the balance of the year. Longer term, we want to be more aggressive with our balance sheet by using our current credit facility fund acquisitions and buyback stock while continuing to invest in our business.
Speaker 1: 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? –
Speaker 1: Thank you, Ted. As I typically do during this personal call, I'll cover the following topics in overview of our 2023 second quarter results along with an overview of related key operating statistics.
Speaker 1: an overview of our cash flow activities in the quarter, and I will then conclude with a discussion on our financial outlook for the third quarter of 2023.
Speaker 1: For purposes of the call, I will comment separately regarding the revenues of our global SMBT or Oracle Solutions Segment, RXAP Solutions Segment, and the telecompany.
Speaker 1: Our global SMBT segment includes the results of our North America International IP and Service offerings, our Research Advisory Programs, our benchmark services, our business transformation, and our one-screen offerings.
Speaker 1: Our Oracle solutions and our SAP solution segments include the results of what Oracle and SAP offer, respectively.
Speaker 1: Please note that we will be referencing both total revenues and revenue before we reverse the sequence in our discussion.
Speaker 1: Reimbursement expenses are primarily project travel and expenses passed through to our clients that have no associated impact to our profitability.
Speaker 1: Through our call today, we will also reference certain non-GAAP financial measures, which we believe provides useful information to investors.
Speaker 1: We have included reconciliation of GAAP to non-GAAP financial measures in the press release filed earlier today and will post any additional information based on the discussions from this call to the investor relations page of the company's website.
Speaker 1: For the second quarter of 2023, our total revenue was $77.1 million.
Speaker 1: Our revenues before reimbursements were $75.6 million, which was above the high end of our quarterly guidance.
Speaker 1: The second quarter reversible defense ratio on revenue before reimbursement was 1.9% as compared to 2% in the prior quarter and 1.6% when compared to the same period in the prior year.
Speaker 1: Total revenues from our global SWT segment were $43.6 million for the second quarter of 2023.
Speaker 1: Revenues before reimbursements for our global SMBT segment were 43 million for the second quarter of 2023, a decrease of 2.4% when compared to the same period in the prior year.
Speaker 1: This was consistent with guidance as extended client decision-making impacted business transformation engagements.
Speaker 1: Additionally, the comparisons were against accelerated post-COVID demand we experienced throughout the first half of the prior year.
Speaker 1: Total revenues from our Oracle Solutions segment were $20.8 million for the second quarter of 2023.
Speaker 1: Revenues before reimbursements for our Oracle Solutions Site were $20.3 million for the second quarter of 2023, an increase of 3.8% when compared to the same period in the prior year as well as a sequential increase of 21.6%.
Speaker 1: The momentum we discussed when we provided guidance last quarter continued to accelerate and drove earlier than expected second quarter year over year revenue growth and strong sequential growth.
Speaker 1: Total revenues from our S&P Solutions segment were $12.7 million for the second quarter of 2023 and also exceeded expectations due to the sale of a number of cloud license deals.
Speaker 1: Revenues before reimbursements for our SIP Solutions segment with $12.4 million for the second quarter of 2023, an increase of 10.7% when compared to the same period in the prior year.
Speaker 1: Approximately 22% of our total company revenues before reimbursements consist of recurring multi-year subscription based revenues.
Speaker 1: which includes our research advisory, IP as a service, multi-year benchmarks, and application-based services contracts.
Speaker 1: Total company adjusted cost of sales, which exclude reimbursable expenses and non-cash stock-based compensation trends.
Speaker 1: totaled $43.8 million, or 57.9% of revenues before reimbursements in the second quarter of 2023 as compared to $43.2 million, or 57.8% of revenues before reimbursements in the prior year.
Speaker 1: Total company consultant headcount was 1,148 at the end of the second quarter as compared to total company consultant headcount of 1,128 in the previous quarter and 1,125 at the end of the second quarter of 2022.
Speaker 1: Pro-company adjusted gross margin on revenues before reimbursements, which excludes reimbursable expenses and non-cash stock-based compensation trends.
Speaker 1: was 42.1% in the second quarter of 2023, as compared to 42.2% in the prior year period.
Speaker 1: adjusted SG&A which excludes non-cash stock-based compensation expense and intangible asset amortization.
Speaker 1: with $16.3 million, or 21.5% of revenue before reimbursements in the second quarter of 2023.
Speaker 1: which is compared to 14.89 or 19.7% of revenues before reimbursements in the prior year.
Speaker 1: The yearly or absolute dollar increase is primarily due to incremental investments in making and dedicated sales resources.
Speaker 1: for our benchmarking, executive advisory, market intelligence, and their IP as a service offerings.
Speaker 1: These investments are approximated 3 cents in the second quarter of 2023.
Speaker 1: adjusted either by which excludes non-cash stock based compensation expense.
Speaker 1: with $16.4 million, or 21.6% of revenues before inversions in the second quarter of 2023.
Speaker 1: has converted to $17.6 million or 23.6% revenue before investments in the prior year.
Speaker 1: The gap in income for the second quarter of 2023 totaled $8.7 million, or diluted earnings per share of 32 cents.
Speaker 1: And compares the gap in income of $10.2 million for the new earnings per share of $0.32 in the second quarter of the prior year.
Speaker 1: Adjusted net income, which excludes non-cash stock price compensation, prevents intangible amortization for the second quarter of 2023, totaled $10.8 million, or adjusted diluted net income per common share of $0.39.
Speaker 1: which was at the high end of our earnings guidance range. The second quarter of 2023, results were negatively impacted by one penny due to unfavorable movements in foreign currency.
Speaker 1: This compares with just a net income of $12.1 million or just a diluted net income for common share of $0.38 in the second quarter of the prior year.
Speaker 1: The company's cash balances were $15.8 million at the end of the second quarter as compared to $16.9 million at the end of the previous quarter.
Speaker 1: net cash provided by operating activities in the quarter was $7.7 million, primarily driven by net income adjusted for non-cash activity and increases in accrual expenses, partially offset by increases in accounts receivable.
Speaker 1: Our day sales outstanding at the end of the quarter was 68 days.
Speaker 1: as compared to 66 days at the end of the previous quarter.
Speaker 1: This increase in the facility is primarily due to slightly unfavorable terms and large client engagements that we've begun during the first half of the year.
Speaker 1: During the quarter, we repurposed 6,000 shares of the company's stock from employees to satisfy income checks withholding triggered by the vestibular safety shares for an average of $19 per share at a full cost of approximately $119,000.
Speaker 1: Our remaining stock repurchase authorization at the end of the quarter was $13.9 million.
Speaker 1: During the quarter, the company paid down $5 million on our credit facility.
Speaker 1: The balance of the company's total debt outstanding at the end of the second quarter was $53 million.
Speaker 1: I'm planning to further accelerate debt paydowns through the bounds of the year.
Speaker 1: net interest expense for the quarter was $921,000.
Speaker 1: At its most recent meeting, subsequent to quarter-end, the company's board of directors declared the third quarterly dividend of 11 cents per share for shareholders of record on September 22, 2023 to be paid on October 6, 2023.
Speaker 2: I'll now move to our guidance for the third quarter.
Speaker 1: The company estimates total revenues before reimbursements for the third quarter of 2023 to meet in the range of seventy two point eight
Speaker 2: to $74.3 billion.
Speaker 1: We expect global SMT segment revenue before reimbursement to be up when compared to the prior year.
Speaker 1: We expect Oracle Solutions segment revenue before reimbursement to be up strongly when compared to the prior year.
Speaker 1: We expect SAP solutions second-order before we break this to be down on a yearly basis, primarily due to expected decreases in cloud license sales.
Speaker 1: We estimate adjusted diluted net income for common share in the third quarter of 2023 to be in the range of 38 to 41 cents.
Speaker 1: which assumes a gap effective tax rate on adjusted earnings.
Speaker 2: of 27.5%.
Speaker 1: As Ted mentioned last quarter, the third quarter will reflect the continued incremental dedicated investments we're making.
Speaker 1: in program development and in dedicated sales resources for benchmarking, executive advisory, marketing intelligence, and IP service offerings.
Speaker 1: These including the cost expected to impact a diluted net income per carbon share by approximately 4 cents.
Speaker 1: We expect adjusted gross margin on revenues before reimbursements to be approximately 43 to 44 percent.
Speaker 1: We expect adjusted SGA and interest expense to be approximately $16.7 million.
Speaker 1: We expect third quarter adjusted EBITDA on revenues before reimbursements to be in the range of approximately 23 to 24 percent.
Speaker 1: Lastly, we expect casual collaboration to be up on a spiritual basis.
Speaker 1: At this point, I will return back over to Ted to review our market outlook and strategic priorities for the coming months.
Speaker 1: Thank you Rob. As we look forward, let me share our thoughts on the near and long-term demand environment and the growth opportunity it offers our organization.
Speaker 1: As I repeatedly say, the demand for digital transformation is being impacted by extended decision making as organizations assess competing priorities created by increasing interest rates in the demand disruption which it is intended to affect.
Speaker 1: However, it continues to be a clear strategic priority for our clients.
Speaker 1: digital innovation in enterprise cloud applications, analytics and artificial intelligence, cloud infrastructure and workflow automation are dramatically influencing the way businesses compete and deliver their services.
Speaker 1: Digital transformation is redefining all activities at an accelerated pace, forcing organizations to fundamentally change and adopt these new capabilities to remain competitive and to realize targeted productivity gains.
Speaker 1: As we mentioned at the beginning of the year, we believe clients should...
Speaker 1: the year-end planning process and the beginning of the 2020-23 year to assess their industry risk, make headcount and spend reductions.
Speaker 1: and rebalance their spend with productivity and strategic cost reduction efforts, which are also core to our offerings. We believe that clients will become more comfortable with the economic headwinds and we will see their behavior improve throughout the year. Similar to us.
Speaker 1: Many of our clients did not experience a demand disruption until late in Q2 of last year and will be more challenged by the strong year over year or have been more challenged by the strong year over year comparisons of the first half of the year. Most will face more favorable comes in the second half of the year.
Speaker 1: If we are correct, this will further support the behavior improvement which we expect.
Speaker 1: when we look at the second half and compare it to the first half of 2023. On the talent side competition for experienced executives continues.
Speaker 1: Overall, we saw turnover continue to moderate during the quarter and expect the 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 model provides our associates with greater personal flexibility to perform...
Speaker 1: their defined responsibilities remotely, which is very valuable to them. This should allow us and is allowing us to attract and retain talent that we have struggled to retain because of the demanding historical travel requirements of our industry.
Speaker 1: Strategically, we are accelerating our focus on recurring high-margin IP-related services, increasing the development of new programs, those which we detailed on the market intelligence comments on the previous week, and aggressively adding to our sales and marketing resources dedicated to this area.
Speaker 1: The investment will decrease our Q3 results by four cents. Additionally, on the CAPEX side, we will continue our investment on our new Hacket Connect member platform and plan to introduce generative AI functionality in 2024.
Speaker 1: It is also important to note that we continue to see strong downstream revenues from our Benchmarking and Research Advisory clients to our business transformation in Oracle OneStream and Coupa Consulting Services.
Speaker 1: This halo effect has been in excess of 40% over the last several years. Simply put, organizations who rely on our IP research and benchmarking services are more likely to utilize our consulting services.
Speaker 1: We are also exploring strategic partnerships which will allow us to syndicate our IPs to new channels and that will allow us to reach beyond the global 1000 focus in an efficient manner. We launched our first syndication agreement of our IP and content on April 1st. We continue to evaluate new channels for our IP and our platforms.
Speaker 1: We also continue to redefine our global benchmarking leadership through enhancements in Quantum Lake, our digital benchmark software as a service solution, along with our digital transformation platforms. These platforms allow us to deliver more information with significantly less client effort.
Speaker 1: It also allows our clients to leverage our IP to create compelling benefit case assessments, accelerate process flow and software configuration decisions, and track the value realization of the transformation initiatives over the life of their respective effort.
Speaker 1: we believe that there are no comparable IP-led platforms in the market. As I have mentioned on previous calls, we have a 20-minute demo on our investor relations page of our website so that investors can become more familiar with the capabilities of our platform.
Speaker 1: 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 powerless efforts.
Speaker 1: always present to stay highly focused on our clients and our people no matter what challenges we may encounter.
Speaker 1: Those conclude my comments. Let me turn it over to our operator and let's move on to the Q&A section of our call.
Speaker 1: to our operator and let's move on to the Q&A section of our call. Operator.
Speaker 3: Thank you. We will now begin the question and answer session. If you would like to ask a question over the phone lines, please press star 1 from your phone, unmute your line and speak your name clearly when prompted. Your name is required to introduce the question. To withdraw your question, press star 2. Again, to ask a question over the phone lines, please press star then 1. If you would like to ask a question over the phone lines, please press star 1. Again, to withdraw your line and speak your name clearly when prompted.
Speaker 3: Our first question comes from Jeff Martin with Roth MKM. Your line is open. In this heading your line stolen before the coronavirus in Florida. In his plot fridge
Speaker 4: Thanks. Good evening, Robin. Chad, how are you?
Speaker 4: Robin, Ted, how are you? That part, yeah.
Speaker 4: Good, thanks.
Speaker 4: Ted, you mentioned generative AI, a product launch in 2024. Could you give an early peek under the hood what that might look like? Well, we're looking at two things on Gen AI. First, our ability to advise clients on exactly what use cases they can benefit from.
Speaker 1: sooner rather than later. So we're doing an exhaustive assessment of all of our business process areas, which are total 130 as we define the enterprise and looking beyond them into activities to see exactly where the specific Gen AI capabilities can actually...
Speaker 1: advantage them soon. That's one way of making sure that they can start prioritizing their initiatives. On our end, we're looking at different ways to try to create our own large language model with or without a partner. We're considering both. But we'd like the idea of being able to engage clients significantly.
Speaker 1: the idea of AskHacket. We know individuals consistently want to be able to engage in content more efficiently without ever really even going to a click of either some mobile device or some type of laptop. So we are looking at what kind of training, what kind of data. Obviously we know the data that we...
Speaker 1: our members with the powerful IP of Hackett by simply opposing a question as an example and getting some detailed information to whatever is on their mind at any given point of the day and as they're considering some of their strategic or productivity initiatives.
Speaker 1: But those would be two examples both on the client side and one on how we're thinking about deploying our capability and driving that to our client base more aggressively in 2024.
Speaker 4: Great. And then I wanted to ask what kind of reaction you're getting from the initial Market Intelligence launch and
Speaker 4: what you think the sales cycle on that might be and what kind of timing of engagements you might start to expect and then finally.
Speaker 4: What would be considered a you know an average contract size related to market intelligence?
Speaker 1: Well, first, as I said on the call, the actual published report was our C2C side. We're publishing our peer-to-pay software assessment here in the next week or so, and we'll follow that up with finance and accounting outsourcing.
Speaker 1: and hope to get that out before the end of the third quarter. So we're still trying to first put out a number of these as quickly as we possibly can. The engagement, both on the participation side and post, has been favorable. The important thing for us is to really...
Speaker 1: complete the programs that we do want to go out and, if you want to call it, first thoughts, to make sure that everyone, both participants as well as types, know exactly how we're weighing in, and both the influence that we have and the insight that we can provide that is valuable to them. So that's really where we see the benefit coming.
Speaker 1: To be more specific, when I think of meaningful monetization of all those programs, both in terms of numbers and the engagement, we would like to see that start materializing in the beginning of 2024, just like we would like to see the impact of the significant sales resource investments that we've been making.
Speaker 1: to increase the number of our sales executive within our IP service ranks to have what we hope is a meaningful impact in the middle of 2024. If, as I said on my call, if we see the sequential growth from the sales that we're currently expecting…
Speaker 1: improve as strongly as we expect from Q2 to Q3. We saw good improvement from Q1 to Q2. We expect stronger sequential improvement from Q2 to Q3. If that kind of pace continues, then you will see the impact on both.
Speaker 1: market intelligence programs both in the roll out and the sales of them as well as the impact of just the sales resources across all of our executive advisory programs which are already in place. Today, I mean 101, if you get 3 million comments every year on communications we say approach
Speaker 4: Great. And then you mentioned a 4 cent impact in Q3 from the investments in program development and sales personnel or sales resources. What might we expect in Q4? I know it was a 3 cent impact in Q2. That's up to 4 cents in Q3. What...
Speaker 4: What do you think it might look like in Q4? We would expect it to be similar. We have no reason to expect it to be any different. We thought it was going to be four steps into...
Speaker 1: Two, but it actually ended up being three cents, and that's just when the resources came in and impacted the quarter We're seeing that roll into the next quarter We know what that expand is expected to be so we would expect it to be four I have no reason to believe that it won't be four in Q4
Speaker 4: Great. And then in terms of the headcount addition on the consultant side, what areas are you adding more aggressively than others?
Speaker 1: Well, it's hard to ignore this incredible performance and...
Speaker 1: performance that we're getting from Oracle Solutions Group.
Speaker 1: we're getting from Oracle Solutions Group. So.
Speaker 1: Even though we went through that volatility at year end, I mean, since that latter part of Q1, we've been aggressively hiring both onshore and offshore resources.
Speaker 1: to handle the kind of demand that we've been experiencing. So that would be the primary area. And then I'm going to say that the second largest area is the hiring of all these additional sales resources. Those would be the two primary hiring areas.
Speaker 1: in both Q2 and continue into Q3.
Speaker 1: Q2 and continue into Q3. Great. Thank you for your time.
Speaker 2: Thank you.
Speaker 3: As a reminder, if you would like to ask a question, please press star 1 from your phone, unmute your line, and speak your name clearly when prompted. Our next question comes from Vincent Colicchio with Barrington Research. Your line is open. Your line is open.
Speaker 1: Yeah, Rob, on GSBT and Oracle solutions, I didn't hear in your prepared remarks the growth outlook for Q3. Could you repeat that, please?
Speaker 1: More.
Speaker 1: What we said was that SABT would be up or would be up strongly and that SAP would be down.
Speaker 5: And that's year over year.
Speaker 5: It's your beer. Okay, thank you for that. Ted, the two cents cost...
Speaker 5: you know, less than expected. Was that because hiring salespeople was taking longer than expected?
Speaker 1: Yes, we have some...
Speaker 1: Some changes, but yes, some of the resources came in later in the quarter.
Speaker 5: Are you finding the right people you need? These folks from companies that are already doing research type of work.
Speaker 1: Yes, yes, we're finding them and we find their interest in what we're trying to do to be extremely high. We don't expect that to change.
Speaker 5: Okay.
Speaker 5: and
Speaker 5: I know you've said you expect that you're looking for meaningful revenue from the market intelligence programs.
Speaker 5: early next year. Is it too early to ask, the first programs were launched in December of last year, has revenue come in with plan or is it just too early for that to even be meaningful?
Speaker 1: too early since the C2C program published just I think about
Speaker 1: five weeks ago, so too early. But.
Speaker 1: But no reason, remember the biggest productivity measurement we are making is the productivity of the sales people that are coming on board and how that's progressing. And as I said, we saw improvement from Q1 to Q2 and we expect –
Speaker 1: strong improvement from Q2 to Q3 just based on the activity that they're experiencing. So that speaks to the most important is that we have existing programs and then we're trying to increase the number of programs that we saw on a member subscription basis to our market intelligence programs.
Speaker 1: So, in essence, more than doubling the number of programs that we have. But the primary productivity is that of the Salesforce with the existing programs which we have in place which are, you know,
Speaker 1: which are significant for the number of salespeople that we have. Yes, what are we trying to do? As you've heard me say to investors, when we started 2022, our goal has been to quadruple the salesforce and double the programs that we have in place or as close to up by the end of 2023. And we're still…
Speaker 5: trying to achieve that. And how many salespeople do you have now, or how many do you plan to have by year-end?
Speaker 1: In this group that we brought on board, it's around 30 and counting.
Speaker 5: Okay, one last one for me. The strength in Oracle solutions, is that, are there any particularly large deals there or is it sort of balanced in terms of the business you're ramping now and also in the pipeline?
Speaker 1: We've seen both the number of deals we've closed peppered with some very significant deals, some from some previous clients, significant clients of ours that have come back to us for Oracle support and help as they've implemented, as they've needed that kind of assistance.
Speaker 1: And we're seeing brand new clients walk in the door as a result of, I think, what I would call excellent collaboration we've been getting with the Oracle Sales Channel.
Speaker 5: Okay, thanks Ted.
Speaker 3: At this time I show no further questions. I will now turn the call back over to Mr. Fernandez.
Speaker 1: I want to thank everyone for participating in our second quarter's earnings call, and we look forward to updating everyone when we report the third quarter. Thank you.
Speaker 3: Thank you for your participation in today's conference. Please do not disconnect at this time.