The Hackett Group, Inc.
Q2 2008 Earnings Call Transcript

Published: 24 Sep 2008

[Operator:]

Welcome to The Hackett Group Second Quarter conference call. (Operator Instructions) Hosting tonight’s call is Ted Fernandez, Chairman and CEO, and Rob Ramirez, Chief Financial Officer.

[Robert A. Ramirez:]

Thank you for joining us to discuss The Hackett Group’s second 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. Our press announcement was released over the wires at 4

[Ted A. Fernandez:]

I’ll try to provide some overview and highlights in the quarter. I will then turn it back over to Rob, who will comment on our operating results, cash flow and also provide some commentary around outlook. It will then come back to me where I will make some market or strategic-related comments. And then we will open it up for Q&A. We’re delighted with the results we reported today, both revenue and EPS growth. But just to remind everyone, last December our shareholders approved the rebranding to The Hackett Group from Answerthink. And as I mentioned at that time, the rebranding is an indication of the level of transformation that our organization has undergone over the last several years. Nearly 70% of our revenues now emanate from our Hackett Group’s strategic advisor programs and services that compares for approximately 15% as we entered 2003. Our goal for 2008 have been to continue to grow Hackett, excluding Technology Solutions at north of 15% annually. We expect the growth to be led by our benchmarking and transformation business as well as the growth in Europe and other international markets, as we continue to take advantage of the vast market opportunity available to our global brand. I am happy to say that our goal remain unchanged even in a weakening macroeconomic backdrop. With a 15+% target growth rate for The Hackett Group and with our Technology Solutions revenues stabilizing, and in fact now expected to grow on a year over year basis in this upcoming quarter, we continue to see an opportunity to grow EPS and expand our EBITDA margin and cash flow in a meaningful way. By continuing to expand our market permission, leveraging our broader transformational benchmark at the entry point, along with the continuous relationship that comes from our Executive Advisory programs, we are continuing to create a truly unique business model. Our revenue growth has been driven by our improved ability to engage larger global clients more strategically. Additionally, we are just starting to tap into our Executive Advisory client base. In the quarter, we had approximately 10% of our Executive Advisory client base by another one of our offerings. We believe about a third of that group should be utilizing one or more of our offerings at any given time. So although advisor revenues only represent approximately 12% of our Hackett revenues, we believe this is a ready-made entry point to leverage the relationships more broadly. Before I comment about our profits for the remainder of 2008, let me comment further on our second quarter results. As you will recall at the beginning of last year, we introduced the transformational benchmark which has allowed us to sell our transformation, planning, design and implementation services along with our benchmark. As a result, we have experienced an increase in the average revenue per client as well as how we continue to better leverage our intellectual capital in pricing. This is evident in the 15% increase in revenue for Professional year on year. Along with the improved REL performance, these are the primary reasons for our increased growth and profitability since the beginning of 2007. During the quarter we also launched a new version of our benchmark that incorporates the working capital performance assessment. I mentioned that last quarter. I said these enhancements increased the overall value of our traditional Hackett benchmark as well as increases the leads we expect to provide to our REL working capital group. All of these efforts are still in its infancy stage. We believe this strategy holds great promise, relative to the REL long-term growth. Over the last two years, we increased our investment in both resources and infrastructure across France, Germany and the U.K. and we launched our alliance in the Nordic region. Those investments continue to pay off with year over year international growth of 40%. In my strategic overview, I will discuss our plans to further expand strategic alliance strategies to energy markets. One of the most encouraging signs of the quarter was the 14% sequential growth of our Technology Solutions group from Q1 to Q2, which was [inaudible] by improved operating results in our Hyperion and SAP practices. We are now expecting this group to be up on a year over year basis in Q3. This will be the first year over year improvement for this group since the first quarter of 2006. Activity in SAP has remained solid. Our Hyperion group activity has improved significantly and our Oracle group continues to perform lower-than-expected but is expected to show improvement in Q3. Without a doubt, some of the changes and investments we’ve made in this group, especially in leadership, have started to pay off. On the SG&A front, the cost reduction actions we took in early 2007 improved our SG&A leverage throughout 2007 but they are more evident when you look back on a year over year basis. We expect to continue to improve the leverage of SG&A throughout 2008 and this will be partially offset by increased investments in our associate development and training program and higher bonus compensation. Our second quarter results continue to demonstrate the potential of the organizational transformation we embarked on several years ago. We took a strong benchmarking capability and brand and we have developed it into a powerful, highly recognized global professional service brand with services that help clients improve organizational effectiveness globally. Let me know ask Rob to provide details on our operating results, cash flow and to also comment on outlook.

[Robert A. Ramirez:]

I plan to cover the following topics

[Ted A. Fernandez:]

Let me start by commenting on market demand. We continue to believe that the market demand for our services remains healthy across all markets that we serve. Geographically, we entered the year expecting that the U.S. economy was slow and therefore we would see lower discretionary spending impact our U.S. business. In Europe, we expected the demand to remain strong across the markets that we serve with perhaps some tampering in the very strong demand we experience in 2007. Nothing has changed for us. Clients are being more thoughtful about their discretionary spending but it appears that the cost reduction and cash flow improvement initiatives are receiving an increased focus and attention from our client base resulting in a net increase in overall demand. It is also worth noting that an increased number of our client base continues to be large global companies who are benefiting from the stronger overall global demand. Overall, we continue to see healthy demand in both U.S. and European markets. Given this activity, our prospects for strong EPS and EBITDA improvements in fiscal 2008 remain unchanged. With that demand overview as a backdrop, let me now comment on our strategic priorities for 2008. And let me start with revenue growth. We continue to believe that the opportunity to grow by increasing our revenue per client with our current offerings is significant. Specific to that opportunity, we continue to see a great opportunity to grow internationally and this means beyond Europe. We continue to see our brand strongly resonate with both prospective clients and associates outside the markets that we currently serve. We want to expand our alliance partner relationships and markets that we are not currently serving as a great way to expand our brand and offerings and drive incremental revenue growth. I previously noticed this strong performance from our European Nordic region alliance and would like to use the same strategy in other regions where possible. We recently signed an alliance agreement with an organization in South Korea that’ll give us our first exposure to that marketplace. We are also exploring expansion into other markets, primarily in the Asian region. Lastly, we continue to look for acquisitions that would enhance our intellectual capital and would strongly leverage our existing intellectual capital to grow. As we previously mentioned, our long-term goal is to be able to describe and predict an increasing percentage of our total revenues to clients who are continuously engaged with us to our Executive Advisory programs. At the end of the quarter, gross members counts approximately 790 while client counts approximated 240 on flat year on year annualized contract value. These membership in client counts reflect a new method to count members who have the opportunity to participate in more than one offering. As we previously mentioned, approximately 10% of our current advisory base also bought one of our other Hackett offerings during the quarter. In consistent of last quarter, several of those represented significant relationships for us. Given the success we’re having in leveraging our advisory entry point into broader relationships, we plan to increase the number of same associates, solely focused on’ advisor growth through the balance of the year and into 2009. As always, so we costume to stand and leverage our best practices and electoral capital. We’ve repeated said, “Our organization is this day because of the proprietary data that we captured through our benchmark and the applied knowledge that we have captured in our best practices, depository and tools that help clients implement a solution. A key element of our 2008 plan were changes to our product architecture which determines how we avail our intellectual capital to our clients. Our goal is to ensure that we’re not only expanding our content but to also ensure that we are being responsive to the client need. In other words, make sure that it’s available to them the way they would like to buy it or avail themselves to it. Our primary IT investment for the organization continues to be centered around improving the user interface, plug-and-play and reporting an analysis aspect of our benchmarking and other measurement tools. We believe we’re continuing to improve how we avail our clients to our intellectual capital. Most importantly, we’re doing so by expanding our relationships with those clients. And lastly, let me comment on talent management. As we continue to grow and fully recognize the potential of our business model. It has become increasingly evident that the only limit to our progress and opportunity will be our ability to attract, retain, develop and energize our associates. Our associates are passionate about our organization and we must ensure that we nurture this sediment. To this end we are in the process of developing a global talent management program that will ensure that we have an opportunity to excel across all of these dimensions. Our plans are to roll out the first phase of this talent management initiative this summer during our expanded U.S. and European Knowledge Share meeting, which are being attended by all of our marketing associates. We have and will continue to increase our investments in this very important area. In summary, the strategy we put in place a couple of years ago along with the changes that we affected in 2007 have been favorable to our growth and profitability. As I repeatedly say to our associates, the opportunity for our organization is truly boundless when you consider the power of our brand, our unique intellectual capital, along with our talented associates. We know we have an opportunity to build one of the most admired and valuable professional services organizations in the world. Let me close by thanking our associates for their contributions and their tireless efforts and congratulate them for the great progress that we continue to make. Let me now open it up for Q&A.

[Operator:]

(Operator Instructions) Our first question comes from Bill Sutherland –Boenning & Scattergood, Inc.

[William Sutherland:]

A couple of things, you addressed the geographies which are apparently good across the board. Can you also kind of look at the demand picture from the perspective of verticals?

[Ted A. Fernandez:]

Well, as you know, we don’t go to market by industry vertical but we continue to see the greatest activity in the industries where business profits execution is most complex and that is normally in consumer and industrial product oriented companies. So, that continues to be the primary driver of our demand but we’re seeing it virtually across all of the other areas as well.

[William Sutherland:]

And the acquisition reference you made, Ted, I believe it was regarding new capability or new content.

[Ted A. Fernandez:]

Well, I spent a significant amount of my time scouring Europe for companies that go to market with unique intellectual capital. I will tell you they’re not easy to find. I still spend quite a bit of time doing that as I did this quarter. So, we’ll continue to look for those who bring two things for us

[William Sutherland:]

So, still nothing imminent, it sounds like there.

[Ted A. Fernandez:]

We will report those when and if we ever find it.

[William Sutherland:]

Rob, a couple of pro forma adjustment questions. The SG&A, I guess the non-cash comp intangibles for the quarter?

[Robert A. Ramirez:]

Non-cash stock comp was $1.1 million and amortization was $191,000.

[William Sutherland:]

Now that was in total, not just G&A, right?

[Ted A. Fernandez:]

Oh, I’m sorry. It’s actually on the face of our statement, Bill.

[Robert A. Ramirez:]

In SG&A we had approximately $839,000 in the quarter of non-cash stock compensation and the $491,000 was SG&A.

[Ted A. Fernandez:]

Of the amortization of intangibles.

[Robert A. Ramirez:]

Yes, the entire amount of the amortization intangibles included in SG&A.

[William Sutherland:]

So, the only adjustment to the gross margin pro forma would be the difference in non-cash?

[Robert A. Ramirez:]

Correct. It was only $261,000 of non-cash stock compensation.

[William Sutherland:]

Okay. One of the number question, if I might, you referenced billable days. I didn’t catch it. As far as this quarter, I think you were talking about your guidance for Q3?

[Ted A. Fernandez:]

We didn’t give a specific reference to the number of days, Bill. What we said is when you look at our European markets, the European tend to take a lot of time off in the summer so we know that we have less available days in Europe and also from a timing perspective we’re comparing Q3 ‘08 to Q3 ‘07, we scheduled our all-hands training session that occurred last year in Q4 in Q3 of this year. We didn’t make specific reference to the total number of days available. We also see more vacation usage in the U.S. in the summer months as well. It’s usually prior to kids going back to school as well. So, we have historically had lower available days when we go from Q2 to Q3. And we look at it sequentially. It should be comparable on a year on year basis with the exception of the European all-hands training meeting.

[William Sutherland:]

Okay, and then last, Ted, can you give us a little color on this talent management system that you’re developing or putting in place?

[Ted A. Fernandez:]

Well, I’m about to actually roll it out this week in Fort Lauderdale to our U.S. associates but we have spent quite a bit of time on a number of things. One has been to try to develop a training curriculum for each level of individual associate in our organization so that we could really increase the level of attention we’re putting in that area and making sure that our associates are just having the greatest impact they possibly can when they engage clients and engage the marketplace. And then secondly we’re also looking at instead of compensation, especially if some of the senior levels, just to make sure that we’re being competitive at all levels of the organization as we not only try to retain our best but are also going into the marketplace to hire as well. So, we realize we’re having a lot of success. We don’t want to take any of this for granted. We want to make sure we’re doing everything we can for all the individuals that have gotten us where it is today but we want to make sure that we’re being very, very competitive. There’s no doubt that when you look at our revenue for Professional, we have a great market opportunity and we’re going to make sure that, that opportunity is being passed on to our associates in the appropriate way.

[William Sutherland:]

Well, I’m assuming that given where you’ve gotten revenue for Professional, that’s a utilization. I mean I know you don’t break out utilization for Hackett, the non-technology, but are we at a level that is sustainable but probably not a lot of upside, as far as utilization?

[Ted A. Fernandez:]

You’ll probably find it’s hard to believe but we’re not at what we would call target utilization for our Hackett Group-related resources. I know we still have capacity. That doesn’t mean that we’re not going to continue to invest in higher. We still have capacity in that group.

[William Sutherland:]

And you all don’t reference attrition or turnover, do you?

[Ted A. Fernandez:]

We do not but I would say that attrition overall has been maybe slightly higher in the first half of the year. It wasn’t in the second half of last year. Our ability to attract how has probably improved pretty significantly since the year goes.

[William Sutherland:]

And I assume the attrition’s more a junior level?

[Ted A. Fernandez:]

Yes, I would say generally more junior level. I would think that’s true.

[William Sutherland:]

Okay. Thanks, guys.

[Operator:]

Our next question comes from George Sutton – Craig-Hallum Capital Group LLC.

[George Sutton:]

I have learned overtime how important your go-to-market sales strategy is and I’m curious how it has changed in this tougher, broader economic environment when your focus on selling to a somewhat different larger customer. How has that changed in the last several months?

[Ted A. Fernandez:]

Well, first of all, we’re really not interacting with a different client base than we were a year ago. The difference is that we’re introducing our services to that same client base much better than we were a year ago and more broadly. So, let’s just say that entry points that a year ago may have just been a benchmark and out or an advisor program and out. I think where we have clearly improved is to make sure that we don’t opt to a narrow entry point without exploring whether or not the client needs to engage someone like us more broadly. And in doing that, we’re seeing these large global companies develop much bigger relationships with us and that is clearly having an impact on our success. In fact, back to the question that was previously asked, one of the key things in the associate development program is actually breaking down that art at a dramatically lower level of details and making sure that we get that message and those subtleties and that nuance and that capability to every person in the organization, and to make sure that we develop those skills as quickly as possible in our total associate base.

[George Sutton:]

Now, if a year ago we were talking and I told you, Ted, in Q2 of ‘08, you’re going to see a sequential increase in your Hackett Technology Solutions but a sequential decrease in your Executive Advisory Program annualized contract value, you would have called me crazy. I think you’d agree. Help me understand what is changed in terms of your sales strategy within those specific areas to cause that kind of a shift.

[Ted A. Fernandez:]

Well, let’s break it into the two pieces. There’s no doubt that the technology group needed some new leadership and needed some additional focus in sales and marketing investment and we started to make all of those changes, actually last Fall. And obviously, we’re delighted to see the improvement in the results of that team, especially when you consider that we’re showing improvement in, again, a weaker economic background. Now, the Advisory item is an entirely different item. One of the things we were doing very wrong in 2006, if you recall, George, is that we tried to dictate to the clients how they should buy our offerings and the sequence in buying those offerings. And that led to a dramatically sub-optimized client relationship. So, Executive Advisory, interesting enough, is being more impacted by the discretionary spend decisions that the clients are making and there’s no doubt that we believe discretionary spending in large corporate clients is, as I said, being done more thoughtful. And I, in fact, believe it’s lower. But the beautiful thing about our business model is that they seem to be then saying, “We’re willing to write you a much bigger check if you can help us drive results and improvement to our organizational effectiveness within 3-6 months. So, we’d love to be hitting in all cylinders, George, and I think what we’re finding out is that different markets and different circumstances, especially since we only have one sales force, unless we went through more dedicated sales force with individual product focus, which we are not in today. We’re letting the clients tell us how they want to avail themselves to us and fortunately for us, that means strong revenue growth and strong gross margin. But it is coming at the expense of the lower priced Executive Advisory Program, which some clients seem to think it is more maintenance monitoring support of initiatives versus the other offerings that we provide with a client is expected to see a delivered return within 3-6 months.

[George Sutton:]

Okay, well I think that’s a good answer to that question. Now, as a follow on, I think you had mentioned in your prepared remarks that you would begin to hire an Advisory specific sales team. Did I hear that correctly?

[Ted A. Fernandez:]

What we’re now doing is we obviously want both, advisory growth and benchmarking and transformation and HPS growth. We want it all. So, what we’re going to do is we’re going to go back and start by taking some of our existing sales team and having them solely focus on advisory revenue growth. We believe that we can deal with some of the potential channel conflict but more importantly, we think we can also increase the investment in that area if we can see the right level of return. But the good thing about our business model is that we don’t have to overplay any hand right now because we’re seeing very good reaction overall to our revenues and it’s being reflected in our growth. So, yes, we’re going to now adjust slightly and increase the focus there because we’d love to have both a growing advisory base as well as a growing total revenue base. And we think we can afford to do that and hopefully we’ll learn something from it. As we do each and every year, we’ll probably then provide further tweaks into the way we invest and focus our sales team as we go into ‘09.

[George Sutton:]

Okay, now as a follow on to that talent management question earlier, just to be clear, that is an internally focus program?

[Ted A. Fernandez:]

Yes, this is a comprehensive program that we have been doing to define and develop specific characteristics at every level. The training level that we want to provide and how the frequency, and we’re launching a significant part of that program and that curriculum this week in Fort Lauderdale for our U.S. associates.

[George Sutton:]

The cash from operations was negative in the quarter and I don’t have all the pieces obviously from your press release. Why would it be negative this quarter out of curiosity, given the numbers I see?

[Robert A. Ramirez:]

The biggest reason, George, you’ve got the timing of our U.S. payroll but we have an incremental payroll this particular quarter as well as the increase of the accounts receivables that I discussed in my prepared remarks. Those are the two big reasons that drove the negative cash flow from operations in Q2 on a standalone basis.

[Ted A. Fernandez:]

But basically, receivables was up over $5 million, which is just, I mean we build it as soon as we can but when you have the level of sequential growth we have, some of it is reflected on our balance sheet as receivables instead of cash. And the payroll timing is probably another $2-3 million impact.

[Robert A. Ramirez:]

It was interesting, George, we had a couple of large clients that actually delivered their funds literally just a week after out cutoff. That was almost $2.8 million that would’ve actually equalized a lot of it but those are the two main reasons.

[Operator:]

At the time, I show no further questions.

[Ted A. Fernandez:]

Well, let me thank everyone again for participating in our second quarter earnings call. I look forward to providing you another update when we report third quarter. Thanks again for joining us. Copyright policy