The Hackett Group, Inc. (HCKT) CEO Ted Fernandez on Q1 2022 Results - Earnings Call Transcript

May 13, 2022 3:12 PM ETThe Hackett Group, Inc. (HCKT)
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The Hackett Group, Inc. (NASDAQ:HCKT) Q1 2022 Earnings Conference Call May 10, 2022 5:00 PM ET

Company Participants

Rob Ramirez - Chief Financial Officer

Ted Fernandez - Chairman & Chief Executive Officer

Conference Call Participants

George Sutton - Craig Hallum

Vince Colicchio - Barrington Research

Jeff Martin - ROTH Capital Partners

Operator

Welcome to the Hackett Group First Quarter Earnings Conference Call. Your lines have been placed on 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.

Rob Ramirez

Good afternoon everyone and thank you for joining us to discuss The Hackett Group's first quarter 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, Chief Financial Officer.

A press announcement was released over the wires at 4:05 P.M. Eastern Time. For a copy of the release, please visit our website at www.thehackettgroup.com. 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 question-and-answer session, we will be making statements about expected future results which may be forward-looking statements for the purposes of the federal securities laws. These statements 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, especially in light of COVID-19. 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 Ted.

Ted Fernandez

Thank you, Rob and welcome everyone to our first quarter earnings call. 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 detailed operating results, cash flow, as well as comment on outlook. We will then review our market and strategy-related comments, after which, we will open it up to Q&A.

Consistent with the momentum we experienced through last year, strong demand for our services continued into the first quarter of 2022. Results across nearly all groups exceeded our expectations. Organizations recognize the need to embrace digital transformation as a requirement to remain competitive and the rate of digital innovation and related change is unprecedented.

Correspondingly, this afternoon, we reported total revenues of $75.7 million and revenues before reimbursements of $75.1 million and adjusted earnings per share of $0.38, both above our quarterly guidance and up significantly on a year-over-year basis.

U.S. results were up 16.5%, driven by strong performance of our Strategy and Business Transformation Group and the performance of the Oracle and OneStream practices.

Strategy and Business Transformation Group continued its outperformance trend with increased revenues and gross margins. Additionally, our higher margin research advisory offerings grew at a higher rate than our Strategy and Business Transformation consulting offerings, favorably impacting margins.

Our EEA group or ERP EPM and Analytics group, this growth was driven by strong Oracle and OneStream growth as our SAP group is rebuilding its momentum after its strong performance in 2021. We also saw better-than-expected results from our European group, which benefited from large cross-Atlantic US engagements. Some of that overperformance will not continue into Q2 unfavorably impacting overall sequential guidance.

In summary, large strategy and business transformation and EEA engagements along with the increasing leverage of our higher-margin IP-based benchmarking research advisory and IP-as-a-Service offerings as well as the efficiencies from our virtual sales and delivery model are favorably impacting our performance. This increased momentum should allow us to perform at the higher end of our long-term growth and profitability targets.

Additionally, the investments we have made to fully digitize all of our IP and development of our digital platforms, which include Quantum Leap our state-of-the-art global benchmarking platform and our proprietary Hackett Digital Transformation Platform or DTP are allowing us to highly differentiate and expand our offerings and are important drivers of our long-term growth and profitability targets.

These platforms are allowing us to develop new relationships in rapidly growing cloud workflow automation and process mining technology providers across all areas of the enterprise.

We believe that these new and potential relationships are key to our digital transformation strategy and are important components of our growth strategy as well. It is worth noting that our reported results were achieved without any additional IPaaS relationships that we believe should benefit our future results.

On the balance sheet side, our ability to generate strong cash flow from operations has allowed us to increase our dividend and our buyback program. We also plan to expand our current facility to fund acquisitions we identify or buy back stock while continuing to invest in our business.

With that said let me ask Rob to provide details on our operating results, cash flow, and also comment on outlook. I will make additional comments on strategy and market conditions following Rob's comments. Rob?

Rob Ramirez

Thank you, Ted. As I typically do I'll cover the following areas during this portion of the call; an overview of our 2022 first quarter results along with an overview of related key operating statistics; an overview of our cash flow activities during the quarter; and I'll then conclude with a discussion on our financial outlook for the second quarter of 2022.

For the purposes of this call, I will comment separately regarding the revenues of our Strategy and Business Transformation Group or S&BT; our ERP EPM and Analytics Solutions Group or EEA; our International Group and the total company.

Our S&BT Group includes the results of our North America IP-as-a-Service offerings, our research advisory programs and benchmarking services and our business transformation practices. Our EEA solutions group includes the results of our North America Oracle, SAP solutions and OneStream practices. Our International Group includes the results of our S&BT and our EEA resources that are based primarily in Europe.

Please note that we will be referencing revenues before reimbursements in our discussion. Reimbursable expenses are primarily project travel-related expenses passed through to our clients and have no associated impact to our profitability. During our call today, we'll also reference certain non-GAAP financial measures, which we believe provide useful information to investors. We included reconciliations of GAAP to non-GAAP financial measures in our press release filed earlier today, and will post additional reconciliations based on the discussion from this call to the Investor Relations page of the company's website.

For the first quarter of 2022, as Ted mentioned, total revenues were $75.7 million, up 19% when compared to the prior year. Our revenues before reimbursements increased to $75.1 million, up 18% when compared to the prior year, which is above the high end of our revenue guidance range as we continue to see strong demand for our services throughout the quarter. The first quarter 2022 reimbursable expense ratio on total revenues was 0.7% as compared to 0.1% in the prior year.

As stated previously, reimbursable expenses have been significantly reduced due to the transition to remote sales and service delivery model. Our US operations which represented 90% of our revenues before reimbursements in the first quarter of 2022 were 16.5% when compared to the first quarter of the prior year.

Revenues before reimbursements for our S&BT Group were $29.8 million, an increase of 16% when compared to the same period in the prior year, reflecting the continued sequential growth since the second quarter of 2020, which includes strong growth from our research advisory offerings.

Revenues before reimbursements for our EEA Solutions Group were $37.6 million, an increase of 17% when compared to the same period in the prior year. The year-over-year increase was driven by large ERP and EPM Oracle engagements and continued growth from our OneStream implementation practice, partially offset by the transition of large SAP year-end engagements.

Revenues before reimbursements for our International Group were $7.7 million, an increase of 39% on a year-over-year basis, primarily due to US-driven global engagements and strong Hackett Institute sales. Company international revenues before reimbursements account for 10% of company revenues before reimbursements, as compared to 9% in the first quarter of the prior year.

Approximately, 20% of our total company revenues before reimbursement consist of recurring and subscription-based revenues which include our Research advisory IP as a Service, multiyear benchmarks and AMS groups. Total company adjusted cost of sales which exclude reimbursable expenses and non-cash stock compensation expense, totaled $45.7 million or 60.8% of revenues before reimbursements in the first quarter as compared to $39.3 million or 62% of revenues before reimbursements in the previous year.

Company consultant headcount was 1,141 at the end of the first quarter, as compared to total company consultant head count of 1,106 in the previous quarter and 963 at the end of the first quarter of 2021. The year-over-year increase was primarily a result of higher activities and increased utilization of subcontractors resulting from higher demand.

Total company adjusted gross margin on revenues before reimbursements was 39.2% in the first quarter, up with compared to the prior year of 38%. The margin increase is primarily due to increased revenues, partially offset by the incremental use of subcontractors, increased headcount and the set of compensation commensurate with improving results.

Adjusted SG&A was $13.3 million or 18% of total revenues in the first quarter as compared to $12.4 million or 20% of revenues in the prior year. The year-over-year absolute dollar increase is primarily due to increased incentive compensation accruals, associated with improving company performance. Adjusted EBITDA was $17 million or 22% of total revenues in the first quarter of 2022, as compared to $12.6 million or 20% of total revenues in the prior year, primarily resulting from increasing revenues and margins.

GAAP diluted net income per common share were $0.33, up 74% for the first quarter of 2022, as compared to GAAP diluted net income per common share of $0.19 in the same period of the prior year, primarily due to the year-over-year revenue and margin growth. Adjusted net income for the first quarter of 2022 totaled $12.1 million or adjusted diluted net income per common share of 88 -- $0.38, which represents a year-over-year increase of 41% and is above the high end of our earnings guidance range. This compares to adjusted net income of $8.8 million or adjusted diluted net income per common share of $0.27 in the prior year.

The company's cash balances were $47.8 million at the end of the first quarter, as compared to $45.8 million at the end of the previous quarter. Net cash provided by operating activities in the quarter was $6.1 million, primarily driven by net income adjusted for non-cash activity, increases in contract liabilities which were partially offset by decreases in accrued expenses due to the payment of 2021 performance bonuses. Our DSO or days sales outstanding at the end of the quarter was 61 days as compared to 66 days at the end of the previous quarter.

The company's $45 million credit facility remained unused during the first quarter of 2022. During the quarter, we repurchased 157,000 shares of the company's stock for an average of $19.51 per share at a total cost of approximately $3.1 million, primarily driven by purchases from employees to satisfy income taxable holding triggered by the vesting of restricted shares.

Our remaining stock repurchase authorization at the end of the quarter was $10.6 million. At its most recent meeting the company's Board of Directors declared the second quarterly dividend of $0.11 per share for shareholders of record as of June 24, 2022 to be paid on July 8, 2022. Before I move to guidance for the second quarter of 2022, I would like to remind everyone that in the second quarter of the prior year company results included a nonrecurring $5.3 million software sales transaction.

During our 2021 second quarter call, we highlighted the impact of these results with and without this software sales transaction. The company estimates total revenue before reimbursements for the second quarter of 2022 to be in the range of $71 million to $73 million. Excluding the impact of the SAP software sale transaction in Q2 of the prior year, we expect year-over-year total revenues to be up 5% to 8% with year-over-year increases across all three practice groups.

On a sequential basis, we expect S&BT to be up and EEA and International will be down due to the transition of several large engagements. The international decrease represents a sequential decrease of approximately $0.03 in the second quarter. We estimate adjusted diluted net income per share in the second quarter of 2022 to be in the range of $0.33 to $0.35.

Excluding the impact of the SAP software sale transaction in Q2 of the prior year this would represent an increase of 10% to 17%. We expect adjusted gross margin on revenues before reimbursements to be approximately 40% to 41%. We expect adjusted SG&A and interest expense for the second quarter to be approximately $14.3 million. We expect second quarter adjusted EBITDA on revenues before reimbursements to be in the range of 21% to 22%. And we expect cash balances excluding the impact of share buyback activity to be up on a sequential basis.

At this point, I would like to turn it back over to Ted to review our market outlook and strategic priorities for the coming months.

Ted Fernandez

Thank you, Rob. As we look forward, let me share our thoughts on the near and long-term demand environment and on the growth opportunity it offers our organization. All of the pandemic created unprecedented demand disruption it also created heightened awareness that accelerated demand for digital transformation initiatives. This means that digital innovation and enterprise cloud applications, analytics, infrastructure, workflow automation, process mining 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 in order to remain competitive. We also believe that digital transformation will be critical for organizations to realize productivity improvement initiatives that may result from economic deceleration, that may be created by the fiscal, inflationary, supply chain or geopolitical challenges which our clients may face.

The increased digital transformation demand is also resulting in increased competition for experienced talent, unlike we have seen in a very long time. We believe that the emerging from the remote service delivery model should help us address our short-term recruiting and retention concerns as we help to be able to attract associates from a broader pool of global candidates. We have done that successful all throughout 2021. We believe that will continue into 2022.

Longer term, we're now finally on a path to our next normal which results in a highly engaged client base with a sales and delivery model which provides our clients and our associates with greater personal, flexibility to perform their defined responsibility. This will allow us to attract and retain talent that we have struggled to retain because of the demanding historical travel requirements of our industry, a very positive development for our industry.

In order to increase our revenues across all of our IP-led offerings we will continue to invest in our IP platforms and increase our sales and marketing resources dedicated to this area. This will include our IP-as-a-Service offerings to partners that desire to license our IP and brand permission to bolster their business case development and value selling and delivery efforts.

We continue to have many opportunities with formal proposals, pilot programs launching and contract negotiations. We believe these opportunities should further benefit our '22 results. As I said they did impact our first quarter. They will start impacting our second quarter. We also expect to leverage our brand, IP and platform to launch a series of new vendor, market intelligence programs that will help assess and highlight the unique capabilities of technology and service providers across selected categories.

This is another key initiative that we believe has great potential to have high-margin recurring revenue in the next few years. Obviously, we've been encouraged by the performance of our executive advisory and our existing research advisory offerings we think we have a similar or greater opportunity in this market intelligence category.

Strategically, our focus will remain the same, which is to continue to build our brand and our new offerings and capabilities focused on digital transformation around our fully digitized and unmatched IP and benchmarking and best practices intellectual capital platforms. This should allow us to serve our clients strategically, remotely and continuously.

We also will continue to redefine our global benchmarking leadership through additional enhancements in Quantum Leap, our digital benchmarking Software-as-a-Service solution along with our Digital Transformation platform. These platforms allow us to deliver more information with significantly less client effort. It also allows us to leverage our IP to create compelling benefit case assessments, accelerate the process flow and software configuration decisions as well as to track transformation initiatives over the life of their respective effort.

We believe that there are no comparable platforms in the market. As I mentioned on our last call we have added a 20-minute demo to our Investor Relations page of our website so that investors can become more familiar with the capabilities of our platform.

Lastly, even though we believe that we have the client base and the offerings to grow our business, we continue to look for acquisitions and alliances that strategically leverage our IP, and add scope scale and capability, which can accelerate our growth.

As always, let me close by congratulating our associates on our performance and by thanking them for their tireless efforts and always urge them to stay highly focused on our clients and our people no matter what sort of challenges we may encounter.

Those conclude my comments. Let me turn it over to our operator and let us move on to the Q&A section of our call. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question in the queue is from George Sutton with Craig Hallum. Your line is now open.

George Sutton

Thank you. Ted, you had a great first quarter and you're looking for what I would define as a pretty good Q2. Can you talk about the change that you're seeing from I don't know the economic? Anything that sort of changes the demand characteristics as you're expecting outside of just pure implementations that you finished in Q1 that don't recur in Q2?

Ted Fernandez

None, on the marketplace at all. As you'll -- I'll comment -- as I commented the biggest change from Q1 to Q2 will be the contribution and the reduction of that contribution that emanates from Europe, which is in our international practice group. But no, the other activity it was just an outstanding first quarter. It's as close as you come to firing across as I said on all cylinders, George.

And yes, it comes with some large engagements that we will be migrating, specifically, in our EEA group. But outside that what I'll call it customary, I mean, you get great benefits when you do large engagements to allow you to deploy people longer. And, obviously, in many cases that also results in greater throughput margin. But when you deal with that transition, yes, it disrupts that fluidity.

But who would have expected that we would exceed first quarter by $0.05, I mean, we've been doing this a long time never saw that. So, yes, what's made this call a little awkward is the fact that we're trying to talk about the results of Q1 then moving into Q2 and we've tried to provide as much color as we can because we know it's slightly different than you would hear from us.

George Sutton

Well, looking a little further out as you look at the challenges that are out there you have major supply chain challenges. I think, you're increasingly going to have working capital question marks for companies given the higher rates. And you've also got the obvious operational challenges as we enter what may be a recession. All of those things typically bode pretty well for your opportunities. Can you talk about if you're seeing anything like that yet, or when would you expect to see that if we go into a normalized recession?

Ted Fernandez

We haven't seen any disruption, but we are seeing engagement where people are responding to some of the inflationary or supply chain issues that are affecting them as part of the reason for some of the engagements that we're taking on. So no, as I mentioned in the -- in fact I added the commentary in the early part of our call that we've been responding to just the fact that moving are aggressively trying to just get digitized across every aspect of their business to remain competitive.

But I wanted to remind everyone that if that focus changes to productivity improvement that's also core to both our business as well as most of those challenges are addressed through improving workflow automation and reorganizing your business to be more efficient and that's what we concentrate on. So short of some -- I'll call it truly meaningful disruption. We don't expect to see anything here in the near term.

George Sutton

You mentioned firing on all cylinders, I guess, a question for Rob. Will the Formula One sponsorship money be in Q2?

Rob Ramirez

Unfortunately, not. I was there, George. I did have a chance to go there tomorrow. But no, no do we offer those sponsorship opportunities, but we had a chance to spend some time with some really important clients.

George Sutton

Super. Thanks, guys.

Operator

[Operator Instructions] Next question in the queue is from Vince Colicchio with Barrington Research. Your line is open.

Vince Colicchio

Ted, could you give us a sense of the SAP pipeline? Is it improving? And would you expect -- when would you expect growth to return sequentially to the SAP business?

Ted Fernandez

It has been improving since we got to the year-end. So we're seeing it month-on-month. So we would expect that in the third quarter.

Vince Colicchio

You talked on prior calls about increasing your offshore effort to help offset some of the labor constraints in the U.S. market. Did you increase to share for in the quarter? And what are your thoughts on doing this in the second half?

Ted Fernandez

Half of our hiring -- more than half of our hiring continue to be hires that are offshore. We are hiring across, I'm going to say, nearly all practices. With than half of the total happening offshore, as we continue to try to leverage that offshore capability across all of our groups. The effort thus far has been primarily in our technology practices. So -- or we have over 40% of those groups are with offshore related resources. We think there's an opportunity to take some of the work we do in S&BT and leverage that as well. So we'll keep looking at that opportunity through the balance of the year as well.

Vince Colicchio

And I think you had commented that your IP-as-a-Service, I think, you insinuated you may have more relationships that will benefit future results. Are you close to some new deals there? What does that look like?

Ted Fernandez

The answer is, yes. So let me start answering that with yes, but let me first give you a little bit more color. If you recall, we had a significant, as I call it, IPaaS research deal that we did last fall which extended into Q1. That large provider has actually more than increase their initial commitment that opportunity starts in Q2.

In fact, it's been that provider that has been so complementary of our work that has led to our I'll call it accelerated effort to launch what we'll call market intelligence programs to support the technology and service providers that want to be, I'll call it, assess commented on where we could do research for similar to what Gartner does for some of these software and software vendors, you can expect Hackett to launch several of these segment programs in the second half of the year. But that comes from the success we had with that initial we think highly sophisticated client, who uses all of these research advisory services and was just incredibly complementary.

Additionally, we've launched a pilot in the process mining space. I'll just leave it at that, which is also IPaaS related, but it's an opportunity where that success then could lead to a broader opportunity, and we've also we'll be launching. I think it was just one we'll launch a smaller pilot. We're giving clients an opportunity or clients potential partners an opportunity to sign up for a smaller amount say, $0.5 million to try a basket of our tools and frameworks that we make available as part of our IPaaS program and we have one of those launching as well this quarter. But as you also know, we're working and tracking with much larger opportunities that we continue to be optimistic about.

Vince Colicchio

And could you remind us your long-term financial goals? And do you -- I think you said that you think you should be able to achieve that for this year?

Ted Fernandez

Well, we were consistent with the first quarter statement. I was expecting somebody to have me up that, but since we said that we thought we would operate at the higher end of both the long-term growth revenue and profitability targets. Clearly, the first quarter sets us up beautifully for that. You look at any number of our year-to-date results. Obviously, we're going to be delighted when we finish the second quarter and then expect to continue that momentum for the balance of the year.

So -- but have we changed the commentary there prepared in Q1 that we'd expect to operate at the high end of both the revenue and profitability long-term targets? No, but we believe with that comment that we said that we should operate at that level. Clearly, what we reported in Q1 and kind in Q2 adequately provides to that opportunity.

Vince Colicchio

Yes. And please remind me what the targets are despite hearing it many times.

Ted Fernandez

5% to 10% on the revenue line drives 15% to 20% plus on the bottom line.

Vince Colicchio

Right. Thank you Ted. Good quarter.

Operator

Next question…

Ted Fernandez

I'm sorry, Rob is correcting me here on the bottom line it would be 10% to 20%-plus on the bottom line.

Operator

The next question is from Jeff Martin with ROTH Capital Partners. Your line is now open.

Jeff Martin

Thanks. Good evening, Ted and Rob. Good talk to you. You touched on it a little bit already, Ted, but was just curious if you could give us a little bit more detail with respect to your market intelligence programs? Maybe give us an example of a client use case and, how significant is that with respect to driving growth for this year?

Ted Fernandez

Okay. It's, an excellent question. First, I'm sure Jeff, you're familiar with the programs that Gartner, initiates around its Magic Quadrant force rate -- initiates around its force to wave. This ability to assess software and services vendors across very specific verticals and segments, where an organization like ours especially, with our applied knowledge. Those other organizations are able to assess and fundamentally help those organizations, not only describe their offering assess, compare, but it also gives them some feedback on where there are opportunities for improvement exist not only on their product side, but also on the market side.

So, based on the success we've had with the research program we did for our large cloud infrastructure client, who encourage us to expand our wings it's something we've been looking at. We believe that that market intelligence program, were those software and services companies is a significantly greater opportunity than the executive advisory opportunity that we currently have with corporate clients. So imagine us using that large corporate credibility and applied knowledge that we have, and provide some of that intelligence to help those software and services providers across that depending, on how many segments that we pick, as I'm sure you know there are -- there's 100 of them.

We will launch in the areas where we're the strongest, where we have the greatest opinion and capability to be able to drive the greater service to these clients. We started building a sales team around that. As you also know, we've never built a large sales and marketing team dedicated to those offerings. We're going to try to increase that -- the size of that sales and marketing team.

We've already started that initiative. So the combination, if you recall or even in this current quarter, we said that the annualized contract value for our corporate executive advisory program was in excess of 20% last year. Our results this year, you saw we grew 18% 19% of the revenue line. That group grew in excess of that in the quarter. We believe that the opportunity and growth in those areas, with the right segments, with the right sales and marketing investments should allow us to grow that business.

Jeff Martin

Okay. Great. And then IP-as-a-Service, sounds like it's starting to really come to fruition. Would you call 2022, your breakout year for that? Seems like you got some things that are really starting up in Q2 and Q3.

Ted Fernandez

Well, since I've been commenting Rob said, I've been commenting about this for 10 years. I told him he hasn't been employed that long, which is not true by the way. But the answer, is look we've made a significant investment to commercialize our platforms and make them available to these large, if you want to call them strategic partners on a commercial basis. And yes, we believe that the investment that we've made where those platforms where our platform stand, the discussions, conversations, pilots all of these as I commented throughout the last few quarters, should benefit our future results and we expected and we expect some of that to clearly happen in 2022.

Jeff Martin

Okay. Great. And then last question for me. You mentioned, last on the fourth quarter earnings call that pricing environment was quite strong. I was curious, if that continues at a robust pace or current environment is putting a little bit of pressure there?

Ted Fernandez

We need a little bit more information. We did put through price increases a year ago. We did that again, just recently. So give us a little bit of time, but we believe that the market demand for the right services many of these, which we believe we're having great success with, should allow us to retain pricing power that we've experienced here recently.

Jeff Martin

That’s all for me. Thanks for your time.

Ted Fernandez

Thank you, Jeff.

Operator

At this time, I show no further questions. I will now turn the call back over to Mr. Fernandez.

Ted Fernandez

Well, I'd like to thank everyone for participating in our first quarter earnings call. We look forward to updating you again when we report the second quarter. Thank you, again.

Operator

This concludes today's call. Thank you for your participation. You may disconnect at this time.

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