Q2 2019 Earnings Call
Okay.
Welcome to the Hackett group's second quarter earnings Conference call. Your lines have been placed on listen only mode until the question and answer session.
Please be advised this 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 second quarter 2019 results.
Speaking on the call today and here to answer your questions are Ted Fernandez, Chairman and CEO of the Hackett group and myself Robert Ramirez CFO .
A press announcement was released over the wires at four or five P.M. eastern time.
For a copy of the release please visit our website at Www Dot the Hackett group Dotcom.
We will also place any additional financial or statistical data discussed on this call that is not contained in the release on the Investor Relations page of our website.
Before we begin I would like to remind you that in the following comments and in the Q and 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 relate to our current expectations estimates and projections and are not a guarantee of future performance. They involve risks uncertainties and assumptions that are difficult to predict and which may not be accurate.
Actual results may vary.
These forward looking statements should be considered only in conjunction with the detailed information, particularly the risk factors contained in our SEC filings at this point I would like to turn it over to Chad. Thank you, Rob and welcome everyone to our second quarter earnings call.
As we normally do I'll open the call with some overview comments on the quarter I will then turn it back over to Rob to comment on detailed operating results cash flow as well as comment on guidance. We will then go over to our market strategy related comments, then we will open it up to Q anyway.
This afternoon, we reported net revenues of 68 million and pro forma earnings per share of 28 cents.
Which was at the high end of our guidance more importantly, bolt up strongly on a sequential basis.
As expected the momentum we developed during the back half of the first quarter continued into the second quarter and now consistent with our guidance will continue into the third quarter. Our increased demand was across both our strategy and business transformation group and our E or ERP EPM and analytics group consistent with prior quarters digital transformation and enterprise application cloud implementation initiatives continue to be the driving force for our water for organizations.
On the strategy and business transformation front, we had some client transitions during the quarter, which impacted our U.S. growth.
But we expect to use to be up 5% to 10% in Q3.
However, our international revenues were down over 20% in Q2.
And more than offset our us growth in the second quarter, and we will continue to impact our growth in the third quarter.
In our E. Eight group, we made great progress with stronger growth in our Oracle cloud applications practices.
Which was offset by the decline in our on premise related implementation, so essentially flat.
Our S&P group, which has now reported within the EEI group came in better than expected, which allowed our overall EA group to be up nicely in the quarter. It's been a while since we've been able to say that.
The combination of our strong cloud implementation growth and the decreasing exposure to our on premise revenue should allow the group to be up in Q3 and as you would have when you would expect.
Should only improve as we move beyond.
The subsequent quarter on the investment side, we believe the strategic investments we have made to fully digitize all our IP launching which we believe is a next generation benchmarking platform, we named quantum leap and the introduction of our proprietary Hackett digital transformation platform or as we refer to it DTP highly differentiate our offerings and we will continue to be important drivers of our growth.
Additional additionally, our investments in smart automation, along with strategic relationships with rapidly growing procurement and EHR EPM software providers will also be key to our strategy in digital transformation momentum some of those relationship have yet to impact our revenue growth, but will impact the balance of the year and are important future drivers of our growth strategy.
On the balance sheet side, we continue to generate strong profitability and cash flow from operations.
This allows us to increase our dividend buy back stock and fund acquisitions, while we continue to invest in our business.
I will all come will comment further on.
Our strategy and market conditions, but let me first ask Rob to provide details on our operating results cash flow and also comment on our outlook or guidance, Rob. Thank you Jay.
As I typically do I'll cover the following topics. During this portion of the call an overview of our 2019 second quarter results along with an overview of related key operating statistics.
Also cover an overview of our cash activities during the quarter and I'll, then conclude with a discussion on our financial outlook for the third quarter of 2019.
For purposes of this call I will comment separately regarding the financial results of our strategy and business transformation or SMB team.
And our ERP, EPM and analytics solutions group or E Bay, and the total company.
Our SMB team group includes the results of our IP as a service offerings, which include our executive advisory programs and benchmarking services.
As well as our business transformation practices. Our ERP solutions group includes the results of our U.S. Oracle and SAP ERP solutions practices.
Please note that this differs from how Weve commented in the past, whereas we previously discussed SMB solutions separately from the other practices that were grouped under attack.
In addition, please note that all references to gross revenues in my discussion represent revenues, including Reimbursable expenses and any references to net revenues represent revenues excluding reimbursable expenses.
As previously discussed we exited our European based audio working capital practice at the end of 2018.
Which was accounted for as discontinued operations in our financial statements.
All historical information discussed on this call has been recast to exclude discontinued operations for comparability purposes.
All recast historical financial information that excludes our European based or your working capital practice is posted on the Investor Relations page of our website.
Additionally, references to pro forma results.
Specifically exclude noncash stock compensation expense intangible asset amortization expense and nonrecurring adjustments and assumes a normalized long term cash tax rate of 25% as detailed on the accompanying tables of our press release.
Acquisition related compensation expense.
Adjustments, our cash and noncash items relating to the portion of the purchase consideration for acquisitions that contain vesting requirements, which are reflected as compensation expense under GAAP.
For the second quarter of 2019, our net revenues from continuing operations decreased by 1.1% to 68 million when compared to the prior year and it was at the midpoint of our revenue guidance range.
The Q2 2019 Reimbursable expense ratio on net revenues was 8.2% as compared to 8.5% for the second quarter of the prior year.
Reimbursable expenses are primarily project travel related expenses passed through to our clients have no associated impact to our margin or profitability.
Including Reimbursable expenses company gross revenues from continuing operations were $73.5 million in the second quarter, which represents a year over year decrease of 1.3%.
Net revenues for our SVP group were up 7.4% on a sequential basis to $35.7 million in the second quarter, but down 5.6% on a year over year basis.
The decrease was due to weaker than expected international revenues, which were down 21% as the uncertainty surrounding Brexit appeared to have impacted client decision, making.
Net revenues for Egain solutions group were $32.3 million in the second quarter, an increase of 4.4% on a year over year basis.
And up 10.9% on a sequential basis.
This was driven by strong or cloud revenue growth offsetting our oracle on premise declines and better than expected growth from our S&P practice.
Specific to our U.S. or practice, we're going to eat.
Hey, our cloud revenue growth was in excess of 30% on a year over year basis, resulting in improved the mix of cloud to on premise implementation revenue, which are now approximately 69%.
Total company International net revenues accounted for 16% of total company revenues in the second quarter of 2019.
Compared to 19% in the second quarter of the previous year.
Our recurring revenues, which include our executive and best practice Advisory NMS groups accounted for approximately 19% of our total company net revenues and approximately 25% of our total company pre tax practice profitability in the second quarter of 2019.
Total company pro forma cost of sales, excluding reimbursable expenses totaled $40.8 million.
Or 60.1% of net revenues in the second quarter of 2019 as compared to 42.1 million.
Or 61.3% of net revenues for the same period in the prior year.
Total company consultant headcount was 999 at the end of the second quarter as compared to 979 in the previous quarter.
In 1020 at the end of the second quarter of 2018.
The year over your head count reduction is primarily due to the rationalization of resources, resulting from the migration from on premise software to cloud based resource requirements and lower utilization of subcontractors in the quarter.
Total company pro forma gross margins was 39.9% of net revenues in the second quarter of 2019.
As compared to 38.7% in the second quarter of the previous year.
SMB T. gross margins on net revenues were 44% in the second quarter as compared to 44.7% in the second quarter of the prior year.
This decrease is primarily due to the decrease in European revenues previously discussed.
He eight gross margins on net revenues was 35.4% in the second quarter of 2018 as compared to 31.3% in the second quarter of the prior year, primarily driven by improved revenue growth.
Pro forma as today was 15.2 million in the second quarter as compared to $14.8 million in the previous year as a percentage of net revenues both periods were 22%.
Pro forma EBITDA in the second quarter of 2019 was 12.8 million as compared to $12.4 million in the same period of the prior year and represented 18.9% at 18.1% of net revenues respectively.
Total company pro forma net income for the second quarter of 2019 totaled 8.9 million or 28 cents per diluted share, which was at the high end of our second quarter's guidance.
This compares to pro forma net income of 8.7 million or 27 cents per diluted share in the second quarter of 2018.
Our pro forma return on equity was 26% for the second quarter of 2019.
GAAP diluted earnings per share was 22 cents for the second quarter of 2019 as compared to 36 cents in the second quarter of 2018.
This decrease is due to the fact that previous year GAAP results included a 4.6 million or 14 cents benefit due to additional adjustments to the contingent earn out liability relating to the Jive acquisition.
The company's cash balances was 16.7 million at the end of the second quarter of 2019 as compared to $10.7 million at the end of the previous quarter.
This cash increase in the second quarter was primarily attributable to strong cash provided by operations, partially offset by debt repayments and repurchases of common stock.
Net cash utilized by operating effort net cash generated from operating activities in the second quarter of 2019 was 11.3 million, which was primarily driven by net income adjusted for non cash items decreases in accounts receivable offset by net accretion net decreases in accrued expenses.
Our DSO or days sales outstanding at the end of the second quarter of 2019. It was 68 days as compared to 76 days at the end of the previous quarter.
During the second quarter of 2019, we repurchased 93000 shares of the company stock at a total cost of approximately 1.5 million.
Our remaining stock repurchase authorization at the end of the quarter was 3.9 million.
During the quarter the company repaid 3 million on its credit facility.
The balance of the Companys total debt outstanding at the end of the second quarter was 4.5 million.
Consistent with seasonal I will now turn to guidance for the third quarter consistent with seasonal third quarter trends.
We expect the impact of the additional U.S. holiday and the typical increase in time off to the summer vacation in the U.S. and even more meaningfully in Europe .
Unfavorably impact available days by approximately 3% to 5%.
On a sequential basis.
The company estimates total net revenues for the third quarter of 2019 to be in the range of 66.5 to 68.5 million.
On a year over year basis, we expect SMB team to be flat as strong us revenue growth of 5% to 10% will be adversely affected by lower international revenues of approximately 20% primarily from Europe as we expect Brexit concerns to continue.
For the EPA group, we expect revenues to be flat to up 2% when compared to the prior year.
The company estimates gross revenue to be in the range of 72 to 74 million.
The gross revenue guidance includes an estimated 8% for Reimbursable expenses.
We expect our pro forma diluted earnings per share in the third quarter of 2019 to be in the range of 27 to 29 cents.
At the high end of the range. This would represent a year over year increase approximately 4%.
Sequentially, we expect pro forma margins in the third quarter to benefit.
From the seasonal reductions in us payroll related taxes, resulting from reaching FICA limits and the utilization of vacation accruals offset by decreasing available days due to summer vacations.
As a result, we expect pro forma gross margin on net revenues to be approximately 39% to 40%.
We expect our pro forma as DNA and interest expense for the third quarter to be approximately $15 million.
We expect third quarter pro forma EBITDA on net revenues to be in the range of 18.5% to 19.5%.
We expect cash generated from operations to be up on a sequential basis.
And at this point I would like to turn it back over to Ted to review, our market outlook and strategic priorities for the coming months.
Thank you Rob.
As we look forward, let me reiterate our thoughts on the demand environment and on the growth opportunity it offers organizations.
As I have been repeatedly mentioning the rapid development in digital transformation, along with the emerging enterprise cloud applications RP, a artificial intelligence is dramatically influencing the way businesses compete deliver their services.
Traditional sequential sequential and linear based business models are changing to fully digital and dynamic automated workflows and events with enhanced intelligence.
Digital transformation is redefining entire industries at an accelerated pace, forcing organizations to fundamentally change and adopt these new capabilities in order to remain competitive.
We think this creates a a very good.
Environment for our organization.
In the U.S. These transformative track technologies, all resulting in increased demand as companies determine how to respond to the quickly changing competitive environment.
We are seeing the growth in cloud and digital transformation engagement improve our growth prospects.
As our digital transformation and cloud engagements continue to grow and our on premise revenue or legacy revenue becomes a smaller part of our total company revenue that complete benefits of our transition will become increasingly clear.
We believe that we're getting very close to the point, where that crossover is significant enough to demonstrate to be up.
Fully reflected in the organic growth that we have been targeting for several years.
Our long term strategy is to continue to build our brand with our new offerings and capabilities focused on digital transformation around our fully digitized and unmatched unmatched benchmarking and best practice intellectual capital.
This should and is allowing us to serve our clients strategically and whenever possible continuously.
Specifically.
We redefined a global benchmark or global benchmarking leadership with the launching of quantum leap.
Our new digital transformation software as a service solution.
This new style dispute platform has allowed us to deliver more information with significantly less client effort. It also allows our clients to leverage our IP and track transformation initiatives over the life of their respective effort. We believe that we're just starting to see the benefits of the state of the art platform, but we all up we feel strongly that as that platform continues to pick up clients and momentum and grow the way. It has been that it reflects very good on the transformation opportunities available both technology and organizational transformation opportunities available to both of our surface groups.
We also launched our digital transformation platform or as we call. It internally DTP to further differentiate our unique IP and related capabilities DTP allowed us to fully digitize, our IP and align proving software configuration and organization solutions to help clients drive transformational change in many ways. We believe our new platform is redefining how consulting services will be delivered in the digital era. We also believe that the benefits of this platform, where we're just starting to scraped. The surface. We are leveraging our digital transformation platform to us expand and attract new alliance partners that can utilize our unique benchmarking and best practice IP to help them differentiate and sell their software or service solutions, which should allow us to further expand our IP as a service offerings.
As I mentioned last quarter, we we now have nearly 1000 clients with access to our IP platforms across our executive advisory and other IP as a service offerings, which include our benchmarking platform quantum leap.
Given the success of our current client initiatives and the improved functionality, we continued to add to quantum leap and our digital transformation platform. We believe we will attract other strategic partners to similar programs 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 are strategically leverage our IP and have scope scale or capability, which can accelerate our growth.
In summary, Q2 allowed us to reestablish our momentum, which should allow us to resume our growth in the second half of the year. It also demonstrates that the investments we're making in our very strategic platforms are expanding our cloud at our PVA applications capability and software partners as well as our IP as a service offerings, providing us with highly differentiated offerings and strategic access to most of the leading global companies are very strong proof of that not only is the strength of the quantum leap growth rate, which was has been significant in the first half of this year, but also the fact that we continue to grow our oracle cloud offerings in excess of 30% the way Bob just mentioned.
Which again bodes well for our future.
As always let me close by thanking our associates for their tireless efforts and always our attempt to stay highly focused on our clients our people and the exciting opportunities available to our organization does conclude my comments, let me turn it over to our operator, let's move onto the queue in a section of our call.
Thank you.
Again, the question and answer session.
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A few moments where the questions. Please standby.
Our first question is from Tim Mchugh go ahead. Your line is open.
Yeah, yeah. Thanks.
Just wondering if you could elaborate on on Europe in terms of what you're seeing is that.
Client not engaging are they deferring all work I guess is a particular type of work.
Just any more color just.
Particular trying to understand I guess.
How long that might continue well if you recall in the second quarter, we actually added a pretty significant client global client that impacted both Europe and in the U.S. business in Q2, and it will for several quarters to come but what we saw is simply clients deferring decisions.
At at at a abnormal pace, so we're assuming that the.
Until there is a little clarity, we should expect a the revenue growth there to be more limited.
I think for US I would say not the positive part, but Q3, it hurts us as as it did in Q2 pretty strongly.
But if we were to remain sequentially flat, which is pretty close to what we're doing from Q2 to Q3 in Europe .
We run up to a comp will actually allow us to be flat to up in Europe . In Q4, now whether that will continue with the things in Europe improve or deteriorate. We don't know about what we do know is that the comp alone allow Europe not the drag is that Oh beyond Q4 and into 2020.
Hopefully, whether it's some cultural agreement with Europe , or a hard Brexit I think the clarity either way will help everyone tremendously.
Okay, Thanks, and just a follow up.
The cloud growth that you can just continue to see what the or the Oracle platform.
You talk just about the size and the engagement say I guess that you're seeing is that is that increasing is that just the number of engagements.
Ill decided they only increase I've got to say I'm as if you if you remember Tim.
When we first did the ERP acquisition to really expand Oracle footprint one of the things we needed to do you know we were a little bit of a best match of with the the access and size of client that Hackett had versus the team that came on board to help us grow our ERP business.
But no ER with a little time and grade and our calls Weve clearly improved in all aspects. So no. It's important to us it's important to note that impacted our ERP business is growing in fact that off at a higher pace than our EPM business, which you know is a market leading group, which I think you know is very positive for us.
Great. Thank you.
Again as a reminder, please press star one on your phone and record your name if you have a question.
Our next question is from George Sutton Go ahead. Your line is open.
Good evening this is Adam on for George.
Can you discuss the progress that you're making with any non work <unk> P.M. providers such as one stream.
Oh, well, we said we were launching that capability and announced our partnership and we will see a a nice revenue growth in that business into Q3. So I think it's progressing as we as we thought.
As as you know Adam we are.
A very strong EPM, both transformation and technology partner for many of these large clients.
Ah. So this provides a another meaningful channel opportunity for us, which we think bullets Floyd properly.
Great. Thank you and then just in terms of the longer view three to five years, what would you expect the growth rate to be once you. Once you see some more progress on on Prem.
Im sorry on on Prem or on <unk>, one once once you've seen more progress on on Prem and it's not as big of a so we believe we believe that it doesnt take many quarters for us to be right to have that he group right in that 5% to 10% long term growth rate, which you know gives us a 12% to 25% bottom line impact. So no. We're we're getting close.
Great and then just one final question on obviously Brexit is it's been a big deal, but is there any other geopolitical events that you're worried about looking forward.
I'd hate to speculate because I don't want to Jinx us I've really believed that Brexit Brexit had really not been a must have been a bad as as all of the planning and or the ramp up until the last year took place, but I don't think anyone expected this kinda deadlocked, but obviously.
A one way or another we think October 31st this is the deadline either way. So I think in my in our point of view clarity whichever way that exit or breakfast takes place a will be good news for us all industries.
Great. Thank you.
Our next question is from Jeff Martin Go ahead. Your line is open.
Hi, This is so she's trying on behalf of Jeff Martin.
You mentioned last quarter that the recently launched digital transformation platform is helping hackett differentiated in the marketplace.
Can you provide an update on the impact this is having on the business and how you see that affecting the model over the next few years.
Oh, Thank you I actually are the significant a both the quantum leap platform and the digital transformation platforms are becoming significant and critical to our success I can't emphasize enough how much it differentiates our ability to engage our clients with all of the capability intellectual capital that comes from our benchmark and executive advisory business. The best that best practice insight that the clients I tried to type tried to gain when they.
Engage the Hackett group, so I would say that across.
Our strategic and business transformation business across the fall Oracle fusion cloud growth engagements, where we havent Oracle digital transformation and platform specifically within Oracle capability view.
As well as the way, we believe that it's currently being leverage or can be leveraged by additional strategic partners and alliances. We believe it's a significant component of our growth strategy over the next three to five years.
Thank you can you. Please provide an update on some of your newer per crewman.
Sorry, [laughter] cure.
Speech impediment.
Yeah, Matt relationships, such as co pack as I believe you expect them to be meaningful drivers in two each 19 revenue growth.
Oh, the coomer relationship has been very significant to US we continue to believe that we're one of the top up.
A handful of partners that they have a so both have a relationship with the channel our understanding of the of the capability and the success. They are having a has been significant with that said.
We're having also success a with the S&P arriva product as well so procurement overall for US has been a real strength that we are in an area. We expect will continue to grow across both transformation advisory and the technology part of our business.
Another question with the addition of the more multiyear contracts you've mentioned in the past that those often come with follow on opportunities.
Can you give us a sense of how meaningful those are and.
Is there any common percentage to the follow on opportunities.
That represents a percentage of the original contract.
The answer is we we've never provided that that's special that multiple information, but Oh, I would say that when those entry points emerge through a quantum leap or a significant benchmarking exercise our ability to transition that into a significant transformation and technology engagement is probably somewhere in the 25% to 50% range. So it's it's very significant.
Okay and thank you finally can you provide us with a sense of the monthly revenue cadence during the quarter.
Other than to say that that our momentum from the back half of Q2 led to significant sequential growth in Q2 and into Q2 and that now we've guided basically a really you know call. It flattish sequential growth against a quarter, where we lose 3% to 5% available days that should give you an idea of the momentum from quarter to quarter.
Okay. Thank you very much thank you.
Our next question is from Vincent Colicchio from Barrington Research go ahead. Your line is open.
Yeah, Thanks for answering my questions.
Ted will discuss the P. better expected performance was that there's that one big client <unk> give us can you give us more color on what that looks like.
No just improved activity across both the consulting a value added reseller and A.M.S. part of the business. So no and they the improvement it actually people the first half of the year and surprises a little bit we thought that a as you remember as you can recall, Vince we thought that that it would still be a year over year decline in 19, and now obviously, a I'd say people are that business will grow nicely throughout 2019. So no. That's that's been very good news for us.
And then within the E Bay or what was the year over year change it work on Sep respectively.
Or with any a I'm going to say approximately.
70% Oracle a 30% the S&P to give you a kind of a broad question on having Rob look at that as I make that statement, though and he pulling out the documents but.
They both they both grew sequentially in the quarter or sold and the mix didn't change very much.
Okay, and what is your expectation for year over year growth for the EEI group into Q3.
Yeah, Oh flat it'll be flat to up slightly which means that the young prime number is still hitting us pretty strongly as we go into Q4, a again I'll speak more broadly so beyond E. I guess, I'll say, SMB tea and and the.
I'll just try to get business transformation group if that momentum continues as you look at the Q4, our growth prospects as we start to improve Q4 and beyond.
Okay, and then I want to get ahead of ourselves we had a false positive in Q3 of last year, but what do we know that the on premise revenue is significantly lower than it was a year ago. What are we also know that we are growing our oracle fusion cloud strongly on bigger numbers, so in excess of 30% across ERP any P. M.
In that S&P, a surprising so all of those things are favorable to us as we are as we go into the latter part of the year and into 2020.
And Rob what was the capital spending in the quarter.
1.3 million since Im sorry, 1.3 million.
Okay and.
I missed what you said on a pro forma total adjusted gross margin could you repeat that please.
He said the pro forma for Q3 would be 30, 940%.
No what was the number in the quarter.
You too.
In Q2 for SMB T or for the other businesses as well as for that for one of the groups. So for total I missed SPD in total.
Hey, John .
So SBG the margin was 44%.
In total was 39.9%.
And the year ago.
The year ago brought somebody was 44.7.
And a year ago for total was 38.7.
Thank you very much I'll go back to the queue by the way Vince Rob also said that the that estimate I provided you have 70%, it's actually 69.5% so I stand corrected.
Thank you all right.
At this time I show no further questions I would now turn the call back over to Mr. Fernando and that does.
Well, let me thank everyone for participating in our second quarter earnings call, we look forward to updating everyone.
Report the third quarter.
Thank you.