The Hackett Group, Inc.
Q2 2019 Earnings Call Transcript

Published: 11 Aug 2019

[Operator:]

Welcome to The Hackett Group's Second Quarter Earnings Conference Call. [Operator Instructions] 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.

[Robert Ramirez:]

Good afternoon, everyone, and thank you for joining us to discuss the Hackett Group's second quarter 2019 results. Speaking on the call today and here to answer your questions are Ted Fernandez, Chairman and CEO of 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, 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&A.This afternoon, we reported net revenues of $68 million and pro forma earnings per share of $0.28, which was at the high end of our guidance. More importantly, both 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 EEA 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 organization.On the strategy and business transformation front, we had some client transitions during the quarter, which impacted our U.S. growth, but we expect the U.S. to be up 5% to 10% in Q3. However, our international revenues were down over 20% in Q2 and more than offset our U.S. growth in the second quarter and will continue to impact our growth in the third quarter.In our EEA group, we made great progress with strong growth in our Oracle Cloud application practices, which was offset by the decline in our on-premise related implementation, so essentially flat.Our SAP group, which is now reported within the EEA group came in better than expected, which allowed our overall EEA 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 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 of our IP launching which, what we believe is, a next-generation benchmarking platform, we named Quantum Leap in the introduction of our proprietary Hackett Digital Transformation platform, or as we refer to it DTP, highly differentiate our offerings and will continue to be important drivers of our growth.Additionally, our investments in smart automation along with strategic relationships with rapidly growing procurement and EPM software providers will also be key to our strategy in digital transformation momentum. Some of those relationships 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 operation. This allows us to increase our dividend, buy back stock and fund acquisitions while we continue to invest in our business. I will comment further on 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?

[Robert Ramirez:]

Thank you, Ted. As I typically do, I'll cover the following topics during this portion of the call

[Ted Fernandez:]

Thank you, Rob. As we look forward, let me reiterate our thoughts on the demand environment and on the growth opportunity it offers our organization.As I have been repeatedly mentioning the rapid development in digital transformation along with the emerging enterprise cloud applications, RPA, artificial intelligence is dramatically influencing the way businesses compete to 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 very good environment for our organization.In the U.S., these transformative technologies are 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 engagements 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, the complete benefit 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 be 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 benchmarking and best practice intellectual capital. This should and is allowing us to serve our clients strategically and whenever possible, continuously.Specifically, we redefined global benchmark -- global benchmarking leadership with the launching of Quantum Leap, our new digital transformation software as a service solution. This new 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 -- but 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 service 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 proven 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, we're just starting to scrape the surface.We are leveraging our Digital Transformation Platform to 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 now have nearly 1,000 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 continue 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 have strategically leveraged 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 and RPA 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.A 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 Rob just mentioned, which again bodes well for our future.As always, let me close by thanking our associates for their tireless efforts and always urge them to stay highly focused on our clients, our people and the exciting opportunities available to our organization.Those conclude my comments. Let me turn it over to our operator, and let's move on to the Q&A section of our call.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Tim McHugh. Go ahead, your line is open.

[Timothy McHugh:]

Yes. Thanks. Just wondering if you could elaborate on Europe in terms of what you're seeing, is it client not engaging? Are they deferring all work? I guess this is a particular type of work. Just any more color, just -- particularly trying to understand, I guess, how long that might continue?

[Ted Fernandez:]

Well if you recall, in the second quarter, we actually added a pretty significant client -- global client that impacted both Europe and the U.S. business in Q2, and will, for several quarters to come. But what we saw is simply clients deferring decisions at an abnormal pace. So we're assuming that until there's a little clarity, we should expect 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 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 where it will actually allow us to be flat to up in Europe in Q4.Now whether that will continue, whether things in Europe improve or deteriorate, we don't know. But what we do know is that the comp alone allow Europe not to drag us into beyond Q4 and into 2020. Hopefully, whether it's some closed-door agreement with Europe or a hard Brexit, I think the clarity either way will help everyone tremendously.

[Timothy McHugh:]

Okay, thanks. And just a follow-up. The cloud growth that you continue to see with the Oracle platform. You talked just about the size and the engagements, I guess, that you're seeing, is that increasing? Is it just the number of engagements?

[Ted Fernandez:]

No, the size has clearly increased. I've got to say, if you remember, Tim, when we first did the ERP acquisition to really expand our Oracle footprint, one of the things we needed to do, we were a little bit of a mismatch with the access and size of clients that Hackett had versus the team that came on board to help us grow our ERP business.But no, with a little time in grade and our calls, we clearly improved in all aspects. So now it's important to note that, in fact, that our ERP business is growing, in fact, at a higher pace than our EPM business, which you know is a market-leading group, which I think is very positive for us.

[Timothy McHugh:]

Great, thank you.

[Operator:]

[Operator Instructions] Our next question is from George Sutton. Go ahead, your line is open.

[Adam Kelsey:]

Good evening. This is Adam on for George. Can you discuss the progress that you're making with any non-Oracle EPM providers such as OneStream?

[Ted Fernandez:]

Well, we said we were launching that capability and announced our partnership, and we will see a nice revenue growth in that business into Q3. So I think it's progressing as we thought. As you know, Adam, we are a very strong EPM, both transformation and technology, partner for many of these large clients, so this provides another meaningful channel opportunity for us, which we think we'll exploit properly.

[Adam Kelsey:]

Great. Thank you. And then just in terms of the longer view, 3 to 5 years, what would you expect the growth rate to be once you see some more progress on on-prem?

[Ted Fernandez:]

I'm sorry, on-prem or on.....

[Adam Kelsey:]

Once you see more progress on on-prem, and it's not as big of a factor.....

[Ted Fernandez:]

We believe that it doesn't take many quarters for us to be, right, to have that EEA 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 getting close.

[Adam Kelsey:]

Great. And then just one final question. Obviously, Brexit has been a big deal, but is there any other geopolitical events that you're worried about looking forward?

[Ted Fernandez:]

I hate to speculate because I don't want to jinx us. I really believe that Brexit -- Brexit has really not been much of an event as all of the planning and the ramp-up into the last year took place. But I don't think anyone expected this kind of deadlock. But obviously, one way or another, we think October 31 is the deadline either way. So I think in my -- in our point of view, clearly whichever way that exit or Brexit takes place, will be good news for all industries.

[Adam Kelsey:]

Great. Thank you.

[Operator:]

Our next question is from Jeff Martin. Go ahead, your line is open.

[Sarra Schuster:]

Hi, this is Sarra Schuster on behalf of Jeff Martin. You mentioned last quarter that the recently launched Digital Transformation Platform is helping Hackett differentiate 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?

[Ted Fernandez:]

Thank you. Actually, the significant of 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 practice insights that the clients try to gain when they engage The Hackett Group.So I would say that across our strategic and business transformation business, across the Oracle Fusion Cloud growth engagements where we have an Oracle Digital Transformation platform, specifically with an Oracle capability view as well as the way we believe that it's currently being leveraged or can be leveraged by additional strategic partners and alliances, we believe it's a significant component of our growth strategy over the next 3 to 5 years.

[Sarra Schuster:]

Thank you. Can you please provide an update on some of your newer procurements -- speech impediment, procurement relationships such as Coupa, as I believe you expect them to be meaningful drivers in 2H '19 revenue growth?

[Ted Fernandez:]

The Coupa relationship has been very significant to us. We continue to believe that we're one of the top handful of partners that they have. So both the relationship with the channel, our understanding of the capability and the success they're having has been significant. With that said, we're having also success with the SAP Ariba product as well.So procurement overall for us has been a real strength that we -- in an area we expect will continue to grow across both transformation, advisory and the technology parts of our business.

[Sarra Schuster:]

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?

[Ted Fernandez:]

The answer is, we've never provided that special -- that multiple information, but I would say that when those entry points emerge through Quantum Leap or a significant benchmarking exercise, our ability to transition that into a significant transformation of technology engagement is probably somewhere in the 25% to 50% range. So it's very significant.

[Sarra Schuster:]

Okay. Thank you. And finally, can you provide us with a sense of the monthly revenue cadence during the quarter?

[Ted Fernandez:]

Other than to say that our momentum from the back half of Q2 led to significant sequential growth in Q2 -- into Q2. And that now we've guided basically, 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.

[Sarra Schuster:]

Okay, thank you very much.

[Ted Fernandez:]

Thank you.

[Operator:]

Our next question is from Vince Colicchio from Barrington Research. Go ahead, your line is open.

[Vincent Colicchio:]

Yes, thanks for taking my questions. Ted, with the SAP better-than-expected performance, was that one big client? Can you give us more color on what that looks like?

[Ted Fernandez:]

No just improved activity across both the consulting, value-added reseller and AMS part of the business. So no, the improvement in SAP for the first half of the year has surprised us a little bit. We thought that, as you remember, as you can recall, Vince, we thought that it would still be a year-over-year decline in '19. And now, obviously, SAP will -- that business will grow nicely throughout 2019. So no, that's been very good news for us.

[Vincent Colicchio:]

And then within EEA, what was the year-over-year change in Oracle and SAP, respectively?

[Ted Fernandez:]

Within EEA, I'm going to say approximately 70% oracle, 30% SAP to give you kind of a broad sense. And I'm having Rob look at that as I make that statement, and he's pulling out the documents. But they both grew sequentially in the quarter. So the mix didn't change very much.

[Vincent Colicchio:]

Okay. And what is your expectation for year-over-year growth for the EEA group in the Q3?

[Ted Fernandez:]

Flat -- it will be flat to up slightly, which means that the on-prem number is still hitting us pretty strongly as we go into Q4. Again, I'll speak more broadly. So beyond EEA, so I'll say, S&BT and the Strategy and Business Transformation group, if that momentum continues, as you look into Q4, our growth prospects start to improve Q4 and beyond.I don't 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 do we also know that we're growing our Oracle Fusion Cloud strongly on bigger numbers. So in excess of 30% across ERP and EPM and that SAP is surprising us. So all of those things are favorable to us as we go into the latter part of the year and into 2020.

[Vincent Colicchio:]

And Rob, what was capital spending in the quarter?

[Robert Ramirez:]

$1.3 million.

[Vincent Colicchio:]

I'm sorry?

[Robert Ramirez:]

$1.3 million.

[Vincent Colicchio:]

Okay. And I missed what you said on pro forma total adjusted gross margin. Could you repeat that please?

[Robert Ramirez:]

I said that pro forma for Q3 would be 39% to 40%.

[Vincent Colicchio:]

No. What was the number in the quarter?

[Ted Fernandez:]

In Q2?

[Robert Ramirez:]

Oh, in Q2, for S&BT or for the business?

[Ted Fernandez:]

For one of the groups or for total?

[Vincent Colicchio:]

I missed S&BT and total.

[Robert Ramirez:]

So S&BT, the margin was 44% and total was 39.9%.

[Vincent Colicchio:]

And the year ago?

[Robert Ramirez:]

The year ago for S&BT was 44.7% and the year ago for total was 38.7%.

[Vincent Colicchio:]

Thank you very much. I’ll go back in the queue.

[Ted Fernandez:]

By the way, Vince, Rob also said that the estimate I provided you of 70% is actually 69.5%. So I stand corrected.

[Vincent Colicchio:]

Thank you.

[Operator:]

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

[Ted Fernandez:]

Well, let me thank everyone for participating in our second quarter's earnings call. We look forward to updating everyone as we report the third quarter. Thank you.