The Hackett Group, Inc.
Q1 2009 Earnings Call Transcript

Published: 11 May 2009

[Operator:]

Welcome to The Hackett Group first quarter earnings. (Operator Instructions) 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 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. Welcome everyone to the Hackett Group’s first quarter earnings call. For the quarter we reported revenues of $39.5 million and pro forma EPS of $0.03, both in line with our guidance. As expected, the results reflect the impact from the volatile economic environment which our clients are experiencing across the U.S. and European markets that we serve. As we noted in February when we provided our Q1 guidance, although pipeline activity is healthy clients are taking longer to make decisions and they are also doing what they can to reduce the size of their commitments to external providers. Overall, client indecision is reducing the pace at which we normally convert pipeline to active contract and report revenues. As we entered the year our plan assumed that Q1 would be a bottom relative to revenues but given the volatility in client decision making and the lack of broad market improvement reflected in GDP from Q4 to Q1 we are now hoping to see client activity bottom in Q2 and for revenues to stabilize in Q3. With the revised plan in mind we have taken cost reduction actions that will allow us to continue to invest in our people and our offerings while maintaining an appropriate level of profitability during the year. If revenue stabilizes in the second half of the year, these actions will provide the opportunity to show noticeable improvement in our operating results in the second half of the year. We also believe that these actions will provide sustainable operating leverage when our growth re-emerges. As expected in Q1 our Hackett Technology Solutions was impacted more significantly by the market environment. We continue to see good pipeline activity but experienced the same client indecision as we experienced in our other offerings. In this environment it is more difficult for clients to make decisions on initiatives with longer benefit realization time frames. Having said that, current client activity is such that an equal opportunity exists for our Technology Solutions Services to stabilize in Q3 as there is for our non-technology offerings. As I mentioned last quarter we will continue to ensure that our clients understand that our unique, best-practice intellectual capital and implementation expertise to allow them to accelerate the change they must make to improve their performance especially in this environment. Although we are planning for a challenging 2009 environment we are also making sure that we build on the great momentum we have created over the last several years. We will continue to expand our brand permission and improve in all aspects of our go-to-market execution so that we can be responsive to our clients’ needs regardless of the economic environment that they face. As we tell our clients, standing still is not an option. It is important to take the necessary actions to ensure that your competitive position is strengthened during this period. I will comment further on the market conditions and our specific go-to-market initiatives but let me first ask Rob to provide details on our operating results, cash flow and also comment on outlook.

[Robert Ramirez:]

Thank you Ted. Good evening everyone. I plan to cover the following four main topics this evening

[Ted Fernandez:]

Thank you Rob. As we look forward first let me comment on 2008. In 2008 we were net winners in an increasingly difficult environment. As I mentioned throughout last year that meant we had more clients turn to us quickly than those who either delayed or made a decision to go it alone. It is clear that the first half of 2009 will be more challenging than what we experienced in the second half of 2008. We continue to believe that demand for our services remains favorable. Companies clearly recognize the need to reduce costs and optimize cash during this period of economic uncertainty. However, they are being more thoughtful and involving more people in these decisions. It is also evident that there is a point where the market demand is so volatile that the client decision making for our specific offering is affected. At a macro level we believe that when GDP goes negative by a significant margin, say more than 2-3% negative as we experienced in Q4 and Q1, client decision making becomes less thoughtful and reduced discretionary spend impacts the demand for virtually all services, including ours. In that environment, as we have recently experienced, clients will take actions on their own regardless of whether the action is the most appropriate or will result in sustainable improvement. Between the negative 2-3% and a plus 2-3% GDP environment, clients stay very focused on sustainable productivity improvement and in that environment we fare very well as we proved throughout all of 2008. There is also a point on the plus GDP side where the growth opportunity is so strong, say beyond 3%, where the clients lose focus on productivity and focus on growth at any cost scenario kicks in. Our plan is now that we will see gradual improvement in both European and North American markets in the second half of the year and that the clients decision making will improve accordingly. Although we hope for gradual improvement for the balance of the year, our planning and operating actions will not anticipate any such improvement. We also believe that although we do not know the length or extent of the current economic cycle we know that it will pass and more importantly that the long-term prospects for our organization remain unchanged. With that demand overview as the backdrop let me now comment on some of our strategic priorities. Clearly the focus is on revenue or revenue growth. We understand our largest opportunity to grow will come by extending our special market permission from being the premier benchmarking organization to our other offerings. This means improved go-to-market execution across all dimensions of our business. It is all about making sure your clients know why you are special. The market today recognizes our proprietary intellectual property but we are working hard for them to ascribe that same permission to our global implementation expertise where a large amount of our total revenue resides. To that point, during the quarter we worked on expanding our client message around key service delivery expertise with our key service delivery expertise which is in architecting and implementing global G&A service delivery strategies for our clients. In our upcoming U.S. best practice conference we will have a large group of clients hear directly from other clients on how they are managing in a volatile economic environment. This conference, which begins Wednesday, represents our biggest marketing event of the year. Executive advisory leverage, as I have repeatedly mentioned, our long-term goal is to be able to ascribe an increasing percentage of our total annual revenues to clients who are continuously engaged with us through our executive advisory programs. At the end of the quarter our membership count approximated 730 members across 218 clients which are down slightly from last quarter. In Q1 30% of our total sales came from 9% of our advisory client base. At the beginning of the year we invested in a dedicated sales team in both the U.S. and Europe which we expect to impact the performance in our executive advisory base in the second half of the year. This was in addition to the incentive plan changes we made for our advisory program leaders in 2008 and further enhanced at the beginning of this year. Important to note, all of our client touch points; inquiries, research and web casts remained very high during the quarter. In all of our upcoming research and marketing programs we will further highlight our unique best-practice intellectual property along with our global implementation expertise that resides in our transformation and technology groups. In Q1 we completed our version two of the integration of working capital related questions into our traditional benchmark offering. We have also started to expand the training of our combined Hackett and REL teams which we believe will drive more sale opportunities to our working capital management team. Just last week we launched our new global delivery methodology which fully integrates the intellectual capital that resides within our best practice implementation tools and content. This is where a large part of our training focus will be for the balance of the year. We also continue to see a great opportunity to expand internationally. We continue to look for alliance relationships as the most efficient way to make this happen during 2009. This is an area where we see how valuable our intellectual property is to our potential partners across the globe. A great example is the recently announced strategic alliance with shared services and outsourcing network alliance which provides for joint marketing of our research and offerings to their 10,000 practitioner membership base. It also provides a great resource for our intellectual property capture and an expanded research base for our entire organization. We will continue to be active in the alliance area throughout the year. Lastly, we will continue to look for acquisitions that would enhance and strongly leverage our existing intellectual capital to drive and accelerate our overall growth. Then, as I have commented on now for several quarters, talent management. We fully recognize the potential of our business model can only be limited by our ability to attract, retain, develop and motivate our associates. In the latter part of 2008 we rolled out a new performance management program and introduced the first part of our new training curriculum. In Q1 we continued the expansion of these initiatives and associate development programs and received excellent feedback on these new programs. In summary, the strategy we put in place several years ago has been favorable to our brand permission and it was clearly favorable to our growth and profitability in 2008 and 2007 even though obviously it has been disrupted here in the first half of 2009. Regardless of the short-term impact we may experience from the global economic environment we are certain that the opportunity for our organization remains boundless. We have a powerful brand, proprietary and unmatched intellectual capital, a terrific group of talented associates, strong balance sheet and ample cash balances with no debt. In 2008 we proved these attributes were extremely valuable during increasingly challenging economic times and we continue to believe they will allow us to optimize our market opportunity regardless of the environments that our clients face. Let me close by thanking our associates for their numerous contributions and tireless efforts and urge them to stay highly focused on our clients and our people as I normally do. Let me now open it up for Q&A.

[Operator:]

(Operator Instructions) The first question comes from the line of George Sutton – Craig-Hallum Capital.

[George Sutton:]

You suggested Q2 should or could mark the bottom with stabilization into Q3. Could you give us some specific guide posts you are looking at that might confirm that suggestion?

[Ted Fernandez:]

It is really our ability to convert the current pipeline that we have right now. We have opportunities in front of us that if they convert the way we believe they will that would allow that to happen. I think you said right. Should or could is right. In this environment obviously everything lacks certainty but we believe that opportunity is clearly there for us.

[George Sutton:]

Just to be clear, the problem is not with your pipeline. Your pipeline in your view is as large as it has been. It is simply the conversion of the pipeline to business?

[Ted Fernandez:]

Absolutely. Now the real question for us is how much of it will ultimately convert or not. To give you some color, we went into March with 16 large transactions that at this point as we sit here today we have converted 12 of those 16. A portion of them closed in March but not nearly as many of them as we had hoped. A nice number closed in April which likely resulted in a pretty decent April sales activity. Obviously we continue to pursue the balance. There are only a couple that we believe have actually gone away. If you take just that example of those 16 clients and when the client’s decision extends or when it comes in smaller amounts when their commitments are in smaller amounts it simply provides for more down time. It is harder for us to plan. It provides for more pockets of non-chargeable time and then results in the lower reported revenue. So that is really what we hope that as the economy recovers, as we see gradual improvement in overall economic behavior simply clients will go back to making decisions the way we are traditionally accustomed to them making. We clearly didn’t see that in March and we will have to see how it plays out in Q2 but we know the activity is there for it to stabilize.

[George Sutton:]

You mentioned your conference coming up soon. Is there a way you can give us a year-over-year comparison in terms of attendees last year versus how many you would anticipate this year?

[Ted Fernandez:]

The attendance will be down on a year-over-year basis but the fee level participation of clients is actually up. So when we look at the, I will call it primary decision makers we are actually very enthusiastic about the conference. It is going to be very well attended. There is no doubt that clients are being more cautious in the number of people that may attend from an individual company. So we have clearly seen some reduction in that area.

[George Sutton:]

Lastly for me, with respect to the REL business, we track a number of companies that sell cash management software and companies that are focused on the working capital from a software perspective and they are doing extremely well in this environment. I am surprised that REL specifically is not benefiting from that same trend. Can you just give us a little picture as to why that might be the case?

[Ted Fernandez:]

They did benefit. Their Q1 results were absolutely solid. So the only question for them is whether or not it gets disrupted. We will have to wait and see. As you know, they had a strong 2008 and their performance continued into Q1.

[Operator:]

The next question comes from Mickey Schleien – Ladenburg Thalmann & Co.

[Mickey Schleien:]

My question is related back to the clients. During the last call there was a sense that there was clearly a disruption at the end of last year in terms of decision making and then things started to improve as the first quarter started to progress at least to the point of time we had the call. What I want to understand is what happened since then specifically in terms of client behavior that has caused you to become a little bit more cautious about the second quarter?

[Ted Fernandez:]

It is really back to the same comments that I made to George. At the heart of the business or the core of the business with the 16 new deals the best example is to go back to the 16 deals. In a traditional environment, especially coming off of pretty good behavior in February, we would have expected probably 12 of those 16 to actually convert in the month of March and for many of them to actually have impacted March performance and given the absolutely strong running rate into April. The decision making, just to use that 16 as a way to respond to your question, it simply extended out. Even though at this point we have converted, I believe probably 12 of those 16 it took us much longer to do that and that resulted in revenue disruption in March and in April that we clearly didn’t plan for. When we look at that even a little further, the opportunity we were originally tracking when we looked at that group of 16 in many of them we closed a contract but the contract was closed for an amount lower than what we had originally envisioned. That doesn’t mean that the client relationship will not extend but any time you have transition points from one phase or another or you need approval especially in this environment internally from a client to go from one phase to another we just know that you need to plan on that to simply take longer. We are assuming that in Q2 until we see it change as we go into Q3.

[Operator:]

The next question comes from William Sutherland - Boenning & Scattergood, Inc.

[William Sutherland:]

Just a couple of number questions that I noticed. The technology gross billing rate seemed to drop pretty significantly. Is that a blip or a trend?

[Robert Ramirez:]

No, that was really when you look at the groups that reside in that group are the overall balance of our Hyperion group relative to the other groups was down on a relative basis. That was probably the single largest impact just say from one quarter to the other.

[William Sutherland:]

Just a revenue mix this year.

[Robert Ramirez:]

A change in mix as you look at it from the second half of 2008 coming into 2009. But it is a mix that we would expect. We have very high hopes and think we have a phenomenal Hyperion business that if that business re-establishes its momentum as we hope that it does then you would see the higher rates they normally realize blended in with the other two groups increase that overall number.

[William Sutherland:]

I have heard that [VI] is increasingly being thought of as a little bit of a nice to have in this environment. Is that pretty much the issue?

[Ted Fernandez:]

Clearly clients understand that having better information is important especially as they are trying to make decisions. Now the other thing that is good about that business is that the implementation cycles and the sales software come in smaller amounts which provide for smaller investment and quicker ROI so we continue to be very hopeful that given the quality of that EPM group, that Hyperion EPM group it will recapture its momentum hopefully in the second half of the year.

[William Sutherland:]

I just noticed the top customer inched up to 8%. Is that the same customer that has been in the top slot for awhile?

[Ted Fernandez:]

We may have had the top customer there for the second half of the year but no this is actually a different top customer that we had in Q4 of 2008 which by the way was part of the reason why our Q1 was a little softer in that large client relationship ended at 12/31 and originally that was expected to continue into as late as the latter part of 01 [sic] but some of the reasons for that initiative change and that relationship ended at 12/31. So this is a new client.

[William Sutherland:]

Is it a Hackett customer?

[Ted Fernandez:]

Actually it is an REL customer. It is a large working capital global engagement being done by both our North American and European groups.

[William Sutherland:]

So this one would have some duration to it?

[Ted Fernandez:]

The job continues. That is correct.

[William Sutherland:]

Can we get a little color in terms of sequential revenue trend in Q2 more or less if it is balanced between Hackett and Technology?

[Ted Fernandez:]

I think Rob mentioned that technology was down 12%. Hackett was down I think sequentially 9%.

[Robert Ramirez:]

No, we didn’t give the sequential numbers.

[Ted Fernandez:]

Year-over-year, both groups were down and tech was down more than Hackett.

[William Sutherland:]

That continues?

[Ted Fernandez:]

I’m sorry. Q1 to Q2 or Q4 to Q1?

[William Sutherland:]

Either but that is a pretty significant step down even though one group was more impacted than the other.

[Ted Fernandez:]

No, actually we are expecting both groups to be down around that 10% number Q1 to Q2. I mentioned also that because tech was being more heavily affected in Q1 that we have got an opportunity with the deals we have in place to have our technology group have the same stabilization opportunity that we would hope the non-tech group would have in Q3.

[William Sutherland:]

Remind me, does the FX comp stay difficult pretty much through the calendar year?

[Robert Ramirez:]

It will go through Q3 and it will start to level off in Q4. Primarily with the Pound was at its kind of record high in Q1 of last year. That weakened in Q2. The Euro started off weaker but then actually strengthened in Q2. So you will see a lot of the fluctuations actually level off towards the end of the year.

[William Sutherland:]

Are you feeling like as far as the acquisition pipeline there is anything that is a little more real at this point or are you still sort of sitting back?

[Ted Fernandez:]

There are opportunities for us. It is about making sure that you are doing it at the right value given the opportunity before you. We are continuing to be actively considering opportunities but we will only pull the trigger if we strongly believe that it will be accretive, highly aligned with our model and both on a short and long-term basis. If not, we are pretty happy with the, I will call it, the full organic performance and profitability we showed in 2008 and would be comfortable continuing to play that organic hand but we would love scale. As you know we would love scale. If we can do that where it makes sense for shareholders we would do it.

[William Sutherland:]

The example of the 16 deals coming into March, was that of a larger number of deals than you would have had last year? Or similar?

[Ted Fernandez:]

Without getting into details, given the size of the deals it was a very, very good volume of deals. Yes. The pipeline activity going into March was good. Getting it through and converting that into reported revenue was just a heck of a lot tougher than we have experienced in a very, very long time.

[Operator:]

There are no further questions at this time. I will turn the call back to Mr. Fernandez.

[Ted Fernandez:]

Thank you everyone. We look forward to updating you again when we report Q2. Thank you again for participating. Have a nice evening or afternoon.

[Operator:]

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