Q3 2023 The Hackett Group Inc Earnings Call
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[music].
Welcome to the Hackett Group third 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 third quarter 2023 results.
Speaking on the call today and here to answer your questions, Chuck Fernandez, Chairman and Chief Executive Officer back that group and myself, Robert Ramirez, Chief Financial Officer.
A person ask couples released over the wires at four <unk> P M Eastern time.
For a copy of the release please visit our website at Www Dot the Hackett group Dot Com, we will also place any additional financial or statistical data as 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 the following comments and in the Q&A session. We will be making statements about expected future results, which may be forward looking statements for the purposes of the federal Securities laws.
These statements are what their current expectations estimates and projections.
And there are not a guarantee of future.
Performance they involve risks uncertainties and assumptions that are difficult to predict and which may not be accurate actual results may vary. These forward looking statements should be considered only conjunction with the detailed information.
Typically the risk factors.
And in our SEC filings at this point I would like to turn it over to Chad.
Thank you Robert and welcome everyone to our third quarter earnings.
As we normally do I will open the call with some overview comments on the quarter I will then turn it back over to Rob to comment on the detailed operating results cash flow as well as comment on outlook.
I'll, then review our market and strategy related comments after which we will open it up to Q&A.
This afternoon, we reported revenues before reimbursements of $74 6 million, which was above the high end of our guidance and adjusted earnings per share of <unk> 41.
It was at the high end of our guidance consistent with our comments on our previous earnings call. The momentum we experienced in the second quarter continued it allowed us to exceed the results from Q3 of last year. This was most pronounced with the strong performance of our Oracle solutions segment, which was up strongly at several engagements, which we launched in the second.
Quarter continued to rank equally.
Equally important we continue.
<unk> experienced strong market demand and receive strong support from the Oracle sales channel during the quarter.
Our global SPT segment was up over 5% when compared to last year. We saw most of the new client meetings now include thoughtful discussions Jenny I considerations, we have been working on a new series of AI offerings. We recently launched our new AI would explore tool, which allows us to deliver a comprehensive jedi opportunity assessment for clients and provides.
Recommendation function at the activity levels, we expect this activity to increase significantly in 2024.
We are also seeing increasing activity in our enterprise performance management function, which is favorably impacting our oracle and one screen practices.
SAP solutions segment continue to perform strongly but was down on a year over year basis is it comped against very strong software sales realized in the third quarter of last year.
We also continue to aggressively invest and grow in growing our IP based programs in Q3, we continued to enhance the product architecture and pricing of our existing executive advisory programs into a more powerful combination of highly focused IP and access to expert practitioners emphasizing our unmatched best.
Practices and value realization tools benchmark metrics as well as applied knowledge and research.
Our pipeline for these offerings continues to increase meaningfully extended client decision, making has impacted our sales more than expected given the development. We now expect to achieve annualized contract value growth closer to 5% to 10%.
<unk> 23.
All of our executive advisory programs are delivered through our new member platform packet connect with fully launched in October This new state of the art platform allows all of our existing and new members to avail themselves to our benchmarking and best practices IP applied knowledge research and dedicated experts. We are also building a community of users.
Is that we have.
Believe wearable salt and a powerful extended expert network. These investments represent one of our organizations most significant transformative efforts on the balance sheet side, you can expect us to use cash flow from operations to continue to pay down the outstanding credit facility through the balance of the year long term, we plan to use our balance sheet by us.
Our current credit facility to fund acquisitions at the buyback 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 conditions following rob's comments Rob.
You have our castle activities during the quarter I'll conclude with a discussion on our financial outlook for the fourth quarter of 2023.
Okay.
For purposes of this call I will comment separately regarding the revenues of our global SWT segment are oil.
Local solutions segment, our SMT solutions segment and the total company.
Our global SMB to segment includes the results for North America, and International IP as a service offerings, our executive advisory programs, our benchmark services, our business transformation, and our windstream offerings or Oracle solutions and our <unk> solutions segments include the results of our Oracle and SAP offerings, respectively.
Sure.
Please note that we will be referencing both total revenues and revenue before reimbursements and our discussions.
Reimbursable expenses are primarily project travel related expenses passed through to our clients that have no associated impact to our profitability.
During our call today, we will also reference certain non-GAAP financial measures, which we believe provide useful information to investors. We have included reconciliations of GAAP to non-GAAP financial measures in our press release filed earlier today I will pose any additional information based upon the discussions from this call to the Investor Relations page of the company's website.
Eight.
As Ted mentioned for the third quarter of 2023, our total revenue was $75 9 million up 5% over the prior year, our revenues before reimbursements were $74 6 million, which was above the high end of our quarterly guidance also up 5% over the prior year.
The third quarter Reimbursable expense ratio on revenues before reimbursements was one 6% as compared to one 9% in the prior period at one 5% when compared to the same period in the prior year.
Total revenues from our global extremities segment were $43 8 million for the third quarter of 2023 revenues before reimbursements for global SNB segment were $43 3 million for the third quarter of 2023, an increase of five 3% when compared to the same period in the prior year.
Revenues before reimbursements for Oracle solution segment were $24 million for the third quarter, an increase of 16, 9% when compared to the same period in the prior year. This reflects the momentum we started to build in the second quarter of 2023 as Ted had mentioned.
Total revenues from our <unk> solutions segment were $11 2 million for the third quarter of 2023.
Revenues before reimbursements for Sap's solutions segment were $11 million for the third quarter of 2023, a decrease of 12% when compared to the same period in the prior year, primarily due to the expected decreases in software sales in the quarter.
Approximately 23% of our total company revenues before reimbursements consist of recurring multi year in subscription based revenues, which includes our executive advisory IP as a service multiyear benchmarks and application managed services contracts.
Total company adjusted cost of sales, which exclude reimbursable expenses and noncash stock based compensation expense.
Totaled $42 9 million or 57, 5% of revenues before reimbursements in the third quarter of 2023 as compared to $41 2 million or 58, 1% of revenues before reimbursements in the prior year.
Total company consultant headcount was 1177 at the end of the third quarter as compared to total company consultant head count 1148 in the previous quarter and 1133 at the end of the third quarter of the prior year.
Total company adjusted gross margin on revenues before reimbursements, which excludes reimbursable expenses and noncash stock based compensation expense.
It was 42, 5% in the third quarter of 2023 as compared to 41, 9% in the prior year period.
Adjusted SG&A, which excludes noncash stock based compensation expense was $15 3 million or 25% of revenues before reimbursements in the third quarter of 2023.
This is compared to $13 8 million or 19, 4% of revenues before reimbursements in the prior year the year over year absolute dollar increase is primarily due to the incremental investments, we're making in dedicated sales resources for our IP left service offerings.
These investments approximated three cents in the third quarter of 2023.
Adjusted EBITDA, which excludes noncash stock based comp expense was $17 3 million or 23, 2% of revenues before reimbursements in the third quarter as compared to $16 9 million or 23, 7% of revenues before reimbursements in the prior year.
GAAP net income for the third quarter of 2023 totaled $9 4 million or diluted earnings per share of <unk> 34 cents as compared to GAAP net income of $10 4 million or diluted earnings per share of <unk> 32 cents in the third quarter of the prior year.
Adjusted net income, which excludes noncash stock based comp expense for the third quarter of 2023.
Total $11 4 million or adjusted diluted net income per common share of <unk> 41.
Which was a behind and our earnings guidance range.
This compares to adjusted net income of $11 8 million, whereas adjusted diluted net income per common share of <unk> 37.
In the third quarter of the prior year.
The company's cash balances were $9 9 million at the end of the third quarter of 2023 as compared to $15 8 million at the end of the previous quarter.
Net cash provided by operating activities in the quarter was $7 2 million.
Primarily driven by net income adjusted for noncash activity and increases in accrued expenses, partially offset by increases in accounts receivable and decreases in contract liabilities.
Our DSO or days sales outstanding at the end of the quarter was 75 days as compared to 68 days at the end of the previous quarter.
The increase in DSO is primarily due to extended terms and milestone deliverables, a large multiyear client engagements that we've begun during the first half of the year, we expect a reduction in accounts receivables in the fourth quarter, which should benefit DSO by an estimated three to five days.
During the quarter the company paid down $9 million on our credit facility.
The balance of the company's total debt outstanding at the end of the third quarter was $44 million.
Our plan is to continue to make debt pay downs through the balance of the year net interest expense for the quarter was 814000.
During the quarter, we purchased repurchased approximately 3000 shares of the company's stock from employees to satisfy income tax of a holding triggered by the vesting of restricted shares for an average of 23.
<unk> 55 per share at a total cost of approximately 66000 or.
Our remaining stock repurchase authorization at the end of the quarter was $13 9 million.
At its most recent meeting subsequent to quarter end the company's board of directors declared a fourth quarterly dividend of <unk> 11 per share for its shareholders of record on December 22023 to be paid on January 5th 2024.
Before I move to guidance for the fourth quarter of 2023, I would like to remind everyone of the seasonality of our business.
Specifically the increased holiday and vacation time that has historically taken in the fourth quarter will decrease our available billing days by approximately 10% when compared to the third quarter.
As such the company estimates total revenues before reimbursements for the fourth quarter of 2023 to be in the range of 69 million to $74 million.
We expect global <unk>, and Oracle segment's revenue before reimbursements to be up when compared to the prior year. We expect <unk> solutions segment revenue before reimbursements to be down on a year over year basis.
We estimate adjusted diluted net income per share in the fourth quarter of 2000, Twenty's reads of bringing the range of 36 to 38 cents.
Which assumes a GAAP effective tax rate on adjusted earnings of 28, 6%.
As Todd mentioned last quarter, the fourth quarter will reflect the continued incremental dedicated investments, we're making in program development and in dedicated sales resources for our benchmarking executive advisory market intelligence and related IP as a service offerings.
These incremental costs are expected to impact our diluted net income per common share by approximately <unk> <unk>.
We expect adjusted gross margin on revenues before reimbursements to be approximately 43, 8% to 44, 4%.
We expect adjusted SG&A and interest expense to be approximately $16 2 million in the quarter.
We expect fourth quarter adjusted EBITA in revenues before reimbursements to be in the range of 23 to 23, 8%.
Lastly, we expect cash flow from operations to be up strongly on a sequential basis.
At this point I'd like to turn it over back to Ted to review, our market outlook and strategic priorities for the coming months. Thank you Rob as we look forward, let me, let me share our thoughts on the near and longer term demand environment and the growth opportunity. It offers our organization.
Although demand for digital transformation remains it is being impacted by the extended decision, making as organizations assess competing priorities created by the increasing interest rates and the demand disrupted disruption, which is intended effect digital innovation and enterprise cloud applications analytics and artificial intelligence as well as work.
So automation are dramatically influencing the way businesses compete and deliver their services digital transformation is redefining all activities at an accelerated pace, forcing organizations to fundamentally change and adopt these new capabilities to remain competitive and to realize targeted productivity gains.
When the year started we believe declines would become more comfortable with the economic headwinds as the year progressed.
And we would see behavior improve in the second half of the year, although we have seen many clients adjust to the higher rate inflationary environment. The prolonged rate increased uncertainty continues to result in headwinds for new initiatives, which we expect to persist through the balance of the year.
On the talent side competition for experienced executives continues overall, we saw that turnover continue to moderate and improved 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 an effective access to our clients and their respective teams.
This hybrid model provides our associates with greater personal flexibility to perform their defined responsibilities remotely which is very valuable to them. This should allow us to attract and retain talent that we have struggled to retain because of the demanding historical travel requirements of our industry.
Strategically we have accelerated our focus on our recurring high margin IP related services by increasing the development of new programs and sales and marketing resources dedicated to this area. Additionally, we will continue to invest on our new Hackett cannot remember platform with plans to introduce further gen AI case.
Abilities beyond the AI explore throughout 'twenty 'twenty four.
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 and cloud application consulting services. This halo effect has been approximately 40% over the last several years.
Simply put organizations, who rely on our IP research and benchmarking services are also more likely to utilize our consulting services.
We also published our inaugural and second market Intelligence reports with the most recent report focus on purchase to pay software providers, such as Cooper SAP Oracle and others. We will soon published our third market intelligence program, which evaluate service providers in the finance and accounting outsourcing space, including companies such.
Accenture IBM and cap Gemini our unique insight it is our ability to measure value realization and provides implementation insight that accelerates a customers business performance.
Our next one enterprise performance management is a three part report that includes specialized analysis of planning and budgeting enterprise consolidation as well as close in addition to an aggregated view of total P. M.
By early 2024, we intend to issue six Additionally, valuations of software and services providers.
Our market intelligence reports represent critical value to the providers.
The company has learned how they compare to competitors as well as the measurable impact their solutions deliver our large benchmarking and consulting and executive advisory customer base can also acquire the market intelligence reports to inform software and service purchasing decisions.
We're also exploring strategic partners partnerships that will allow us to sell our IP through new channels and that will allow us to reach beyond our current global 1000 and focus in an efficient manner. We executed our first agreement of our IP and content on April <unk>, we continue to evaluate new channels for our IP and platforms we have.
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 platforms. 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 access.
<unk> process flows and software configurations decisions and track the value realization of transformation initiatives over the life of their respective effort. We believe there are no comparable IP platforms in the marketplace.
Lastly, even though we believe that we have a client base and the offerings to grow our business. We continue to look for acquisitions and alliances that strategically strategically leverage our IP and add scope scale or capability, which can accelerate our growth as always let me close by congratulating our associates on our performance by thanking them for their time.
Gross efforts and always urge them 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 the operator, and let us move on to the Q&A section of our call operator.
Thank you if you would like to ask a question. Please.
Press Star one and when prompted to record your first and last name. So I may introduce you.
Your question. Please press star two.
First color is Jeff Martin with Roth.
Thanks, Curt good evening turnaround how are you.
Hi, Jeff Jeff.
Ted I was I was hoping to get an update from you regarding you've made some significant investment in sales resources really since the beginning of 'twenty two but it has accelerated this year just kind of looking for an update there on progress.
And relative to your expectation and what you see as potential benefit as we head into 2024.
While we continue firstly, we've made significant investments and enhancements to all of our offerings and specifically the investments in the sales team have been very significant.
We've assembled a great group of.
Individuals'.
We've been aggressively training and building our pipelines and I would say that although our conversions this quarter were little lower than we expected. We continue to believe that the investments we're making on this team and the impact that they will have on our hi, Mark the sale of our high margin.
IP based offerings.
<unk> will be significant.
Okay, and then with respect to the market intelligence Rollouts would you say you're on track.
All of that to your thoughts going into the year or maybe even ending.
After the second quarter, and then secondly did I hear you correctly that you are seeing you know late uncertainty is kind of a headwind to some of these new initiatives taking off initially.
We've really seen it across the board so it's impacted.
These services as well.
I would say that.
When we look at the overall activity, it's incredibly high when we look at conversion, we know that we'd like to convert at a at a faster pace. We expect it to convert that pipeline at a faster pace in Q3, but we saw that extended client decision making extend into.
All offerings and it impacted the sales of the IP based offerings as well I think it's probably easier for a client to extend the decisions of a new offering from a new individual but we think that when we look at the kind of traction and relationships and knowledge of the products that they are building.
The capabilities of the team we think it's only a matter of time is it extending beyond where we hoped yes, but then we also believe that the second half of this year would be without headwinds or with significantly I'll call them less headwinds, but the fact of the matter is is that as the prolonged interest rate environment.
As the historic rate environment took longer to hopefully hit its peak and I say, hopefully and now the decision on whether or not to extend that it's there's no doubt that the intended impact.
That it is intended to have to kind of slow down economic growth.
<unk> is being felt so I want to make sure that it is not isolated to those offerings I think when we look at the results for the year under those environment and under those conditions as well as the investments, we're making and the progress we're making yes.
Yes, what I like to have higher numbers across the board that I want to in this quarter expected it too even though this quarter was strong and also in the next quarter look were feeling it but this does that determined or dampened the expectations of the returns that we expect to get from those investments absolutely not.
And as a reminder, if you would like to ask a question. Please mute your phone and press star one.
You May go ahead.
Hey, Good afternoon. This is Adam on for George.
I would love to hear if you have any early feedback on AI explorer and Additionally, you mentioned in your remarks that you are can be investing beyond that as well with luck. We will have some further details on what exactly youre thinking about.
Well, we actually started all of our Gen AI related offering development.
At the tail end of last year.
We did a very extensive study to look and develop a significant inventory of used cases.
At by function at the activity level, So what AI explorer does.
It allows the client to do a very efficient and comprehensive.
<unk> of their opportunities and determine priorities and understand the related business changes they.
They would have to make.
Just.
<unk> rolled it out in October and I know that the first thing I had is that we had up 10 clients already.
<unk> requested.
We're going to be offering it.
As aggressively as we can throughout our client base. So as I mentioned on the call. We expect this activity to increase not only through the balance of the year, but to be significant in 2024, and there is no doubt that everyone.
That is considering any kind of digital transformation effort.
To do that without considering the significance of journey II and the women without Jenny I is no longer appropriate. So we think that kind of activity.
We will follow and will build throughout the year as it relates to other offerings. We expect to have an executive advisory program of horizontal program that will be that will extend to all of our functional programs.
We've actually started doing client briefings on those and we will formalize that program either latter part of this year or no later than the beginning of the year.
We've also incorporated than all.
Jet AI related.
Salting services that will accompany our follow the AI explore.
I'll call it opportunity identification.
Assessment that it intends to make.
Okay.
And.
Okay.
In terms of the M&A market I'd love to know if youre seeing anything improve.
<unk> come to the table or.
Pricing is pricing improving any any type of feedback would be great.
I can't really make many comments other than to simply say that on.
On the on the financing side, obviously, it's a lot harder to finance a deal it's definitely a more costly. So I think that that continues to be constrained and yes, it's going to take a little bit for people to really.
Reconsider what normalized pricing in.
It's just part of the process.
So no have we seen any difference in pricing no have we seen cigna.
Significantly less activity on the financial buyer side in financials, and those who play in that space yes.
And our final question for me with respect to the sales force build out for market intelligence I believe in the past you mentioned you wanted to to grow that to about 30.
How far along are you on that just from a head count perspective.
Well, we were in high <unk>.
Throughout this quarter. So the 30 number is is still the target.
So unchanged I think at this point.
It's around the conversion of the existing opportunities.
Because we we accelerated and built our team.
And that first half of the year.
Great. Thanks, guys.
Okay.
And our next caller is Vincent Colicchio with Barrington Research you May go ahead.
Yeah, Ted on the market intelligence program side.
How has the performance been lower than expected because you rolled out less programs that are expected as well as seeing less demand than expected.
Well first I think I said this on the last earnings call. So, let's make sure that we understand the the increase in the sales resources were built to sell our existing executive advisory Research's would focus on our functional buyers as you know we've got.
All depending on how you count them eight to 12 programs that is where the overwhelming amount of our time has been.
The time on market intelligence, yes, it's taken us longer to make sure the programs have the kind of content and impact that wed like.
They were never intended to be the sales are revenue producing.
In 2023, they are and we're expected to have the impact on 2024, we still believe we're going to have several new programs out through the balance of the year and then early 2024. So we think that the complementary market intelligence programs will come out, but just to make sure we're clear.
The 2023 projections were based on the sale of our executive advisory programs not the market intelligence programs, we expect them to start contributing in an incremental basis, which they have.
And yes, we wanted to rollout more that is.
As you May recall, we made a change from the market intelligence leader that we've made in the middle of the year I think it was the June timeframe, so that led to some.
The slowdown on approach and the effort we are making however, it is back on full force with our effort to get out the targeted number as early in 2024 as we can.
Thanks for the clarification there.
On the SP T G S P T and Oracle businesses.
Sequential growth here in Q4 I'm curious.
The sales pipelines look like there and to what degree do you feel that there's enough pipeline to continue to grow sequentially into next early next year.
Well the answer is.
You take the 10% or.
Less available data that we have in the quarter. When you consider the sequence from Q3 to Q4 and you look at our guidance and you will see that.
With the exception of I'd say P, which our guidance includes all call. It a more conservative number on the software sales out of the activity.
The others are all expected to grow sequentially.
Including the 10% available fewer available days that we've had.
Yes got that but I'm just curious.
The sales pipeline of potential new clients, what does that look like for the GSP T and Oracle businesses.
Again other than extended decision, making the activity with those clients remains unchanged.
Interactive declines remained strong Jenny I.
Conversations on virtually ever every conversation.
No that's unchanged, but is it taking longer for people to make decisions or way some of those new initiatives against or as part of a broader gen. AI opportunity. Yes, we're seeing those kinds of if you want to call it extended decision making.
Okay.
That's it for me thanks.
Okay.
Okay.
And at this time I show no further questions I would now like to turn the call back over to Mr. Fernandez.
I'd like to thank everyone for participating in our third quarter earnings call and look forward to updating you again, when we report our fourth quarter and full year results.
And this concludes today's conference. Thank you for participating you may disconnect at this time and have a great rest of your day.