The Hackett Group, Inc.
Q1 2021 Earnings Call Transcript

Published: 11 May 2021

[Operator:]

Welcome to the Hackett Group First Quarter Earnings Conference Call. The conference is being recorded. Hosting tonight’s call are Mr. Ted Fernandez, Chairman and CEO; Mr. Rob Ramirez, Chief Financial Officer. Mr. Ramirez, you may begin. Thank you.

[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, CFO. A press announcement was released over the wires at 4

[Ted Fernandez:]

Thank you, Rob, and welcome, everyone. As we normally do, I will start with quarterly overview comments and then ask Rob to comment on operating results, cash flow and also provide his comments on outlook. The call will then return to me for some market strategic-related comments, and then we will open it up for Q&A. Let me again start by welcoming everyone to our first quarter earnings call. Although circumstances are improving, I would like to continue to acknowledge those dedicated individuals who continue to work nonstop and under very difficult circumstances to support all of us during the pandemic. Also, I want to acknowledge our associates and clients that quickly and successfully adapted to the remote delivery requirements around the globe. Consistent with our comments since the end of the second quarter, we continue to experience increased client engagement and demand for our services through this quarter. It is clearly evident that organizations are increasingly recognizing the need to embrace digital transformation as a requirement to remain competitive. Correspondingly, this afternoon, we reported net revenues of $63.4 million and pro forma earnings per share of $0.27, up 17% sequentially and equally important, up 12.5% from the prior year. Although net revenues were down 3% in the prior year, they were up 7% sequentially, which is consistent with the demand recovery we have been experiencing and expected now to continue into the second quarter. U.S. sequential revenue growth was up 8% and flat on a year-over-year basis, which was comparing itself to a mostly pre-pandemic quarter. This was led by the continued bounce back of our Strategy and Business Transformation Group. In our EEA Group, the sequential growth was primarily driven by our Oracle ERP and SAP practices as well as strong growth in our emerging OneStream practice.

[Rob Ramirez:]

Thank you, Ted. As I usually do, I’ll cover the following topics during this portion of the call. An overview of our 2021 first quarter results along with an overview of related key operating statistics, an overview of our cash activities for the quarter and I’ll then conclude with a discussion on our financial outlook for the second quarter of 2021. For purposes of this call, I will comment separately regarding the financial results of our Strategy and Business Transformation Group, or S&BT, our ERP, EPM and Analytics 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 executive 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.

[Ted Fernandez:]

Thank you, Rob. As we look forward, let me share our thoughts on the short and long-term demand environment and the growth opportunity it offers our organization. Although the pandemic created unprecedented demand disruption, it is now also clearly evident that it has also created heightened awareness and accelerated digital transformation demand and related initiatives. This means that digital innovation and enterprise cloud applications, analytics and infrastructure, workflow automation, process mining and artificial intelligence are dramatically influencing the way businesses compete, 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.

[Operator:]

Thank you. Our first question will come from George Sutton with Craig-Hallum. Your line is now open.

[George Sutton:]

Thank you and congratulations for – on the nice results. I wondered if you could give us a breakdown of the cloud versus premise on the Oracle side of the business.

[Ted Fernandez:]

We have two dimensions, George. So first, on the – approximately 90% of our revenues are implementation revenues, maybe a little bit of less than 10% is application-managed services revenues. The large portion of the AMS-related revenues is actually on-prem-related applications. That represents a little bit more than half of the remaining on-prem revenues that we have for the entire organization. The pipeline and the implementation side, god, at this point, it is over 90% cloud-related implementations. On the SAP side, it’s probably 90% plus as well. And on the OneStream side, it’s fully cloud.

[George Sutton:]

I wanted to address, I think, kind of a bifurcated message relative to – you mentioned demand for talent on your side is substantially better if people are not required to travel. On the other hand, as we start to open up and remove some of the COVID restrictions that would have a nice positive impact on your growth rate and pipeline. Can you just address that bifurcation?

[Ted Fernandez:]

Well, we actually separate the two. We’ve demonstrated now that our ability to both deliver and sell remotely can happen and happen very efficiently relative to the desire to people to work from home. There is no doubt that we think that a significant amount of the remote delivery that we currently have in place will remain in place for many years to come. The mix will not go back to where we had it pre-COVID. That creates significant efficiencies for us, both in terms of the lifestyle for our people that would normally – a large percentage of them would be traveling 4 out of 5 days a week. Well, when that amount is reduced from, let’s say, 70% of our people to 20% to 25% of our people, that will have a very favorable impact on our ability to attract and retain people who do not – who love the work that they do, but can’t deal with some of the travel demands that they would have experienced under COVID. So right now, we’re expecting – we’re expecting clients obviously to embrace us and have us back here sometime in the near future. We think it will be slow during the remaining part of 2021. So on the sales side, we would bifurcate that and say we would expect those contacts to go back and return to more on-site or in-person-related activity. On the delivery side, George, we really believe that a large, large majority of our work is going to continue to be done remotely. It creates great efficiencies, not only relative to lifestyle, but the ability of some of our senior people to effectively deal with multiple clients on a single day versus – as you can imagine some of our people would be traveling to two or three different places sometimes in a given week, and they were spending quite a bit of time. They would end up having a lot of ineffective time which now is being fully translated to client-related pursuits and client-related delivery. So we think it’s great for us. We think it’s great for the client. We will see where the mix plays out.

[George Sutton:]

Got it. And then lastly, I think that both you and Rob had typos in your script, you referred to improvement in Europe?

[Ted Fernandez:]

We...

[George Sutton:]

I don’t think we’ve heard the word improvement in Europe in the same sentence in many years.

[Ted Fernandez:]

We will go back and look at it – let Rob look at his exact words.

[Rob Ramirez:]

No. No, no. So what we said is the net revenues for international group was $5.5 million, a decrease 4%, but we did say it was worth noting that International is expected to be up slightly on a sequential basis.

[George Sutton:]

Up sequential, correct. That was the term, and that’s fabulous.

[Ted Fernandez:]

The results on a year-over-year basis, George, clearly, are still hurting us significantly. They were down 26%. But we wanted to note that, we think Europe has a chance to turn around and actually start improving into the second quarter. We thought that was worth noting.

[George Sutton:]

Yes. No, that was nice to hear. Thanks guys.

[Operator:]

Our next question will come from Jeff Martin with ROTH Capital Partners. Your line is now open.

[Jeff Martin:]

Thank you. Hi, Ted and Rob. How are you doing?

[Ted Fernandez:]

Hi, Jeff.

[Rob Ramirez:]

Hi, Jeff.

[Jeff Martin:]

So Ted, wanted to get a sense, EPM improving is also a good thing to hear. Can you point anything specifically driving improved demand there? And what are the implications for the balance of the year? You mentioned in Q2, it’s going to be a tailwind, but you see that carrying forward for the balance of the year?

[Ted Fernandez:]

Several things. One, sheer demand for cloud enterprise applications is clearly strong, and it is extending into EPM. Secondly, we believe Oracle has started to increase its attention on EPM-related initiatives, whether they are part of an ERP deal, which we call multi-tier opportunity or single opportunities. So both the Oracle focus has also been very, very helpful. But it is sheer demand on an application set that is pretty strong and increased focus by the vendor, resulting in improved demand. So as you would know, we – the reason that we wanted to come at it and say it is because we’re experiencing this without gapping the ERP capability that – which we would like to cap in the East Coast and we continue to work on. So we wanted to make sure that it was of note that even without that improvement we want to make in the East Coast resources relative to Oracle ERP. The Oracle EPM group is clearly seeing improvement, and that’s throughout the entire country. So it was worth noting.

[Jeff Martin:]

Yes. That’s a good segue into my second question. Do you foresee yourself having an East Coast Oracle ERP group before the end of the year?

[Ted Fernandez:]

We’re certainly working hard at it. So the answer is we will continue to improve and increase those capabilities organically, but we continue to look for that capability on the acquisitions front. It remains a priority.

[Jeff Martin:]

Okay. And then are there other pieces to the business that you’re looking for actively through acquisitions?

[Ted Fernandez:]

The answer is that we’re looking at other technologies. Look, we’d also love to add to the OneStream group. We will keep an eye, given the strength and the success we’ve had in S/4HANA as well. And the hardest ones for us to identify, and attract our IP-related opportunities. Those seem to be much harder to attract. But you’ll see us continue to be aggressive on the cloud enterprise side through the balance of the year.

[Jeff Martin:]

Okay. And then finally, on the OneStream practice, are you able to give us a sense of how large that practice is at this point, and how fast that is growing or are you still too early to talk numbers specific to OneStream?

[Ted Fernandez:]

The answer is becoming more meaningful each quarter. The answer is no. We’d rather hold back on that and let that group continue to grow and get a little larger. It’s growing at a very rapid pace. I think you’ve seen, we’ve been named a Diamond Partner, which is the highest level of partnership. We think we are clearly now one of their very top partners, if not number one, then number two. We’re very close thereafter. So it’s an area of focus for us. We’re having tremendous success with it. So you’ll see us to continue to invest and grow that rapidly.

[Jeff Martin:]

Okay, wonderful. And I also want to commend you on a really nice quarter and exceeding what you set out as expectations for the back half of 2020 and then as we get into 2021. So, nice to see the year-over-year adjusted EPS growth.

[Ted Fernandez:]

Yes. We will tell you, no one’s enjoying it more than us. Obviously, the disruptive was meaningful second quarter of last year to see us out now with profitability in – even though our revenues were slightly below last year’s, but to see profitability above last year’s in Q1 for us was very promising. And then when we look at the sequential opportunity that we provided in guidance into Q2, obviously, that’s promising as well.

[Jeff Martin:]

Thank you, Ted.

[Operator:]

Our next cost will come from Vincent Colicchio from Barrington Research. Your line is now open.

[Vincent Colicchio:]

Yes. Ted, I’m curious, is the pandemic disrupting your offshore delivery business in any way or – and if not yet, is that something of concern?

[Ted Fernandezb:]

Yes. It has. We’ve got an incredible team, but it has been impacted. We’ve got a great leader. So we’re trying to backfill some of the disruption that they have experienced here recently. But again, we’ve had – that’s been a growing group for us with a very strong leader, a very strong team. So we expect them to pull-through here strongly. But we – it’s been a very challenging time, obviously, for the entire country.

[Vincent Colicchio:]

And Rob, in your prepared remarks, I didn’t hear what you said on the EEA business in terms of sequential change for Q2?

[Rob Ramirez:]

For Q2, we didn’t. We just said that’s going to be up strongly.

[Vincent Colicchio:]

Okay. And the International changed for the better, is there anything to call out there? Or is it just ebb and flow of business?

[Ted Fernandez:]

So we think it’s just a slower path to what we will call it, recovery in client engagement in the UK than we have experienced in the U.S. but no, other than activity clearly increasing. But the disruption and the lockdown there were longer and more extended. And so – but we – our hope is that they can continue to improve. So it’s nice for us not to think that they can be up even if that’s going to be slightly, we will take it, but it means it’s stabilizing and things that are starting to turn around. That would be great for us as well.

[Vincent Colicchio:]

And speaking about your IP-as-a-service business, did I understand you that you expect incrementally for that – for some of those potential partnerships to start contributing at some point this year?

[Ted Fernandez:]

We will be very disappointed if they don’t have – if they don’t contribute to the second half of 2021. But I also wanted people to know that the guidance is not being impacted by what we believe should be the impact that many of those contracts could have for us in the second half of the year.

[Vincent Colicchio:]

So you already have some relationships that are contracted so is what you’re saying that you’ll see some incremental revenue from new relationships? Is that your expectation?

[Ted Fernandez:]

We have – the comments I’ve said is that we have several in what we are – we’ve been negotiating and finalizing pilot launches. And we have several also that are in contracting stage so the combination of pilots and the combination of what we hope will be finalizing contract negotiation with several of different parties, we think, should help our second half of 2021.

[Vincent Colicchio:]

And then has there been any change in the competitive environment in any of your businesses in terms of pricing?

[Ted Fernandez:]

No. But I can tell you, the attention has gone through resourcing and getting great resourcing. So what it means is that pricing will only improve when you start experiencing this kind of demand.

[Vincent Colicchio:]

Okay. Nice quarter, Ted.

[Ted Fernandez:]

Thank you, Vince. Just making sure we are all set?

[Operator:]

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

[Ted Fernandez:]

Thank you, operator. Let me thank everyone again for participating in our first quarter earnings call. We look forward to updating you again once we report the second quarter. Thank you.

[Operator:]

This will conclude today’s conference. Thank you for your participation on today’s call. Please have a great day. Thank you.