The Hackett Group, Inc.
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Welcome to the Hackett Group Third Quarter Earnings Call. [Operator Instructions] Please be advised that 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 A. Ramirez:]

Thank you, operator, and good afternoon, everyone, and thank you for joining us to discuss The Hackett Group's third 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:]

Thank you, Rob, and welcome, everyone, to The Hackett Group's third quarter earnings call. As we customarily do, I will start by providing some overview comments relative to our third quarter performance. I will then turn it back over to Rob and ask him comment on detailed operating results, cash flow and any updates relative to our credit facility and also ask him provide some detailed comments regarding our guidance. He will then turn it back over to me. I will try to provide some market and strategic overview comments and then we will open it up for Q&A. But let me first start with our quarterly highlight comments. We were pleased to report revenues of $58 million and pro forma earnings per share of $0.12 in our third quarter of the fiscal year 2013. For the quarter, strong U.S. performance was partially offset by weaker than expected international performance, which prevented us from being at the high-end of the guidance. More importantly, we now expect continuing deterioration in both Europe and Australia to more than offset continued year-on-year U.S. improvement in the fourth quarter. Our U.S. business experienced solid sequential and year-on-year improvements, particularly in our transformation and enterprise performance management groups. Internationally, both Europe and Australia were down more than expected, with the weakness in Europe coming primary from the U.K. On the balance sheet side, we continue to generate strong cash flow and -- but we did not pay down any additional debt as we prepared for the Dutch tender offer, which was planned during the quarter. We acquired nearly 1 million shares in our Dutch tender, which was short of our targeted 5.5 million shares, even after increasing our range. Given these results, the board approved an increase to our buyback authorization of an additional $5 million, taking the total available authorization to $10 million. I'm also pleased to announce that the board approved the declaration of annual dividend. Correspondingly, we will pay $0.10 per share for any shareholder of record as of December 10, on or before December 20 of this year. On the investment front, and consistent with prior quarters, we continue to develop and attract talent and expand our brand and intellectual property through the constant best practice research that we publish, that emanates from our proprietary benchmarking and performance study insight, as well as the development of our new Hackett Performance Exchange offering. I will comment about these opportunities in more detail in my strategic overview section of our call. I'll also comment further on market conditions and 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. Rob?

[Robert A. Ramirez:]

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

[Ted A. Fernandez:]

Thank you, Rob. As we look forward, we expect year-over-year growth from our U.S. business, led by our EPM transformation benchmarking and advisory groups. We also expect demand in international to remain adequate, but characterized by uneven decision-making as compared to the U.S. We believe that some of our international volatility may be a result of our scale and more limited solution offering, when compared to the U.S. A key part of our solid U.S. activity is due to our very strong Enterprise Performance Management and Business Intelligence Capability, which now represents over 40% of our total U.S. Hackett revenues. If you recall in our last quarter's call, I mentioned that we have recently been named Oracle's #1 influence partner in EPM and BI in North America. To leverage this strength, internationally, we have hired a new European leader that has experience in successfully building and managing EPM practices. Additionally, we also plan to move selected U.S. EPM technology professionals to Europe to help us aggressively grow this critical capability in that region. We believe, by more closely mirroring our U.S. capabilities in Europe and building our EPM and BI strength globally, we can improve our ability to grow in Europe and also further our global delivery capabilities, which are important for large multinational engagements. Beyond our immediate focus on Europe, our strategy is to continue to build our brand, by building dedicated skills around our unmatched intellectual capital in order to serve clients strategically. We believe that clients that leverage our IP are more likely to allow us to serve them more broadly. IP-based services enhance our opportunity to serve clients remotely, continuously and more profitably. Our goal is to use this unique intellectual capital to establish a strategic relationship with our clients and to further use that entry point to introduce our business transformation and technology consulting capabilities. This strategy would allow us to increase our client base, profitability, as well as increase revenue per client. The best example of this strategy continues to be the revenue leverage we have experienced from our executive advisory client base. I apologize if that background noise is making this a little bit more difficult to hear. Specific to our executive advisory client base, our long-term goal is to be able to ascribe an increase in percentage of our total annual revenues to clients who are continuously engaged with us to our executive advisory programs and eventually, to our Hackett Performance Exchange. At the end of Q2, our executive advisory members totaled 821, across 248 clients. Consistent with prior quarters, over 40% of our Hackett Q3 revenue sales were also advisory clients, continuing to show its strong relationship leverage. On The Hackett Performance Exchange front, we have nearly completed our planned enhancements for both Oracle and SAP offerings. We are finalizing some key algorithms and presentation alternatives to our dashboard and are now fully engaged in testing and feedback with clients. Our plan is to increase client participation through the balance of the year to ensure the offerings are working as intended, by the beginning of next year. We are currently recruiting to build our dedicated sales team in preparation for our 2014 sales efforts. As I repeatedly have mentioned, this is an ambitious new offering, but if successful, it could enhance our business model by creating a powerful and, possibly, continuous relationship with our clients. Although we continue to learn about how best to sell and leverage our new offerings, we believe, it could represent a new way to monitor and benchmark a client's performance, which could result in a new revenue stream and a significant increase in data capture and operating insight. Lastly, even though, we have the client base offerings and market coverage to grow our business, we continue to look for acquisitions and alliances that can add scope, scale and capability and accelerate our growth. I would also add that our efficient access to debt further encourages this focus. In summary, we reported solid quarterly results, but it is clear that we must be more successful in Europe, so that it does not offset our success in the U.S. Having said that, we continue to believe that our unique ability to combine proprietary intellectual capital, with terrific talent to help our clients optimize their performance in a complex demand environment allows us to remain top of mind with leading global companies, and continues to bode well for our prospects. As always, let me close by thanking our associates for their tireless efforts and, as always, urge them to stay highly focused on our clients, our people and opportunities available to our organization. Those are my comments. Let me then ask the operator to open it up for our next section, which is the Q&A.

[Operator:]

[Operator Instructions] The first question comes from Bill Sutherland.

[William Sutherland:]

So just, obviously, a little more color on Europe would be great, Ted, and as much as maybe the mix of business over there at this point, and what's faring better than some of the other offerings? And I guess, and if you can also give a little more color on how many resources you're putting over there?

[Ted A. Fernandez:]

I guess, I would mention 2 things. One is that, the most important thing I mentioned is that we know how important our EPM capability has been to the overall U.S. success. So I would start by saying that, we think making sure that we add and grow that capability in Europe is important. Secondly, relative to client decision-making, look, we had one significant client in Europe and one significant client in Australia, push Q4 opportunities into Q1, for entirely different reasons, that would be one way to add color. I would say, the other piece of it, as you know, probably Europe, relative to the U.S., the mix of working capital, or REL-related business, to the overall number is more significant. And I would say that there continues to be higher demand for the strategic cost reduction efforts of Hackett than there are right now for working capital-related additions. And I think, that's simply a direct function of just the access to capital and lower overall weighted average cost in capital that has taken place since the financial crisis. That would be the best way to add color. Overall, Bill, I think, further color is just that, with the smaller scale, those differences in client decisions are pushed can significantly alter our quarterly performance as we are experiencing right now. And I think, that's just a direct -- directly related to scale. I don't think, we can change scale. But I think, we can more closely mirror the capabilities in the U.S. And I think, that would help, so we're aggressively doing that. We're starting with the leaders. We're going to quickly build capabilities around that. We have actually made some staff adjustments in Europe to actually allow us to make those investments more freely. We think, there is demand for those services. But as you know, it'll take time to ramp that up. But we hope to, by the middle of the year. We've got a pretty nice capability in Europe as we head into the second half. So our hope is that the pushes start, that the decision-making does not change much, let's say, activity there. When I say adequate, look, it's no different than it was the last few quarters. And that we would see results from Europe actually contribute instead of hurt us to this level, like they are, relative to our fourth quarter guidance.

[William Sutherland:]

You said, the U.K. was the weakest, a little surprised by that, just based on the kinds of economic numbers they've been reporting, you feel it's unrelated to that?

[Ted A. Fernandez:]

Well, I think, when you look at the 2 major markets that we serve, Germany and the U.K., economic activity and -- the really strong consumer industrial manufacturing orientation of Germany has always been a pretty good market place for Hackett Group. So Germany is stronger than the U.K. Germany is more predictable than the U.K. and Germany's client base is -- probably has more affinity to our offerings than they do in the U.K.

[William Sutherland:]

The headcount reductions in the quarter, were they related mostly to Europe? Or more to the ERP Solution reduction?

[Ted A. Fernandez:]

No. I would say that it was probably more to the quarter itself. It's really more of -- since it was -- those numbers are really not that large, if you look at it sequentially. It's probably just traditional turnover with us, just kind of holding the line. I think you'll see some of the headcount related things that I'm talking about, they really happened throughout the fourth quarter so they'll probably be more visible in Q1.

[William Sutherland:]

I mean, based on your forecast for the fourth quarter, I mean, even on a billable day basis, it seems like you'll be trimming headcount further, available headcount?

[Ted A. Fernandez:]

No, no. We -- we're -- with the changes that we've made, related to Europe have been made, those are happening, or have already happened, and -- but you won't see those reflected in -- until you see our Q1 headcount numbers. But we're not making -- these are small adjustments relative to our total European headcount. Europe is important. Europe -- in our view, long-term should be equal the size of the U.S. and our goal is to get it there. But there is no doubt that economic strength, client decision-making in Europe does not match the intensity of velocity of the U.S. It's different.

[William Sutherland:]

Okay. And on Hackett Performance Exchange, as you build up a sales force, I guess, this quarter, should we expect to see, I mean, Rob laid the outlook for expense lines. I'm just curious as you -- I guess, you are switching, I suppose, from development to sales expense, and is that how we should think about it?

[Ted A. Fernandez:]

Somewhat. But we're going to continue the development of the product, but we believe the product will be ready to commercially sell and go-to-market, and so we'd like to build that dedicated sales force as quickly as we can. And we've kicked that off already, so it'll happen throughout this quarter and into next quarter. And yet, those numbers are already in the SG&A guidance we've provided.

[William Sutherland:]

Okay.

[Ted A. Fernandez:]

Yes, the reason you're not seeing it, Bill, is that -- we manage SG&A pretty well. We've had cost containment efforts that were actually put in place and would benefit it from throughout the year. So you're seeing netting of number, that's why you're not seeing any significant movement. You are seeing SG&A, as a percentage of revenue, still continue to pretty -- to come down. But it's really -- we're just offsetting decisions we have previously made by making investments and they're showing up there now.

[William Sutherland:]

Is there still a penny of building and development in the expense structure this quarter?

[Ted A. Fernandez:]

That is correct. And that will continue throughout 2014, as we fully support the product. And try to drive adoption and see if we can build a revenue based on the offering.

[Operator:]

[Operator Instructions] Our next question comes from George Sutton.

[Unknown Analyst:]

This is Ryan, in for George. Where do you stand in your goal of expanding your brand permission? As we do checks, most companies still think of Hackett as a benchmarking firm, but your results the past couple of years suggest you're having in some success.

[Ted A. Fernandez:]

Well, we try to do it everyday. For example, I just looked at our marketing report for the current quarter. We had a 100 -- over 100 industry placements, quoting and citing Hackett across global periodicals and mediums throughout the globe. Our goal is to be able to use the fact that people want that research insight and to make sure that anyone ever refers to Hackett, we try to drive an implementation message to basically quickly follow the fact that our research and our data is what gets us into the press. We are trying to do it in the grassroots way. We do not believe that a broad-based advertising campaign that would be used by someone of much greater scale is something that we should do or could do at our scale. We think the process we're using to make sure clients understand that we're every bit as good at designing and implementing a solution as we are at helping them identify -- they tell us the size of the prize. Is there -- and we do it every opportunity we can. But you will not see us change our advertising or marketing budget in some substantial way in order to do that in a quicker fashion than we believe we can.

[Unknown Analyst:]

Okay. And regarding M&A, are there any other Archstone or Relic opportunities out there, in your view?

[Ted A. Fernandez:]

We spent quite a bit of time kind of scouring the universe looking for great opportunities. So yes, the answer is those efforts continue. But it's a combination of getting the right -- you've got to hit the right blend of strategic fit, culture fit in valuation. So that's really what predicates timing. But we've got the capital and our effort in that area continues very strongly.

[Operator:]

Next, we have Morris Ajzenman.

[Morris Ajzenman:]

Going back to international, Europe and Australia, if I would quote correctly in the second quarter, still declining but the trend's looking ahead, showing some improvement, in a way the decline looks like it was just getting better. Now the third quarter, we hit -- clearly, we have a dip here and looks like into the fourth quarter continuing, maybe even accelerating. You talked about one client in Europe and one in Australia, particularly. But is this overall trend where even, x individual clients. that Europe and, to some extent Australia, are just retrenching, or moving back into a more defensive mode as far as spending. I mean, what's kind of changed, not that it was accurate before, but what's kind of reverted back to where things are more difficult now?

[Ted A. Fernandez:]

I think the macroeconomic conditions are the same. I don't really think it's changed. Yes, some people would say that European -- Europe is improving. You asked me this pretty frequently. We haven't seen that. We think that economic growth is still hard to come by. Client decision-making, as we can tell, can be, clearly, more uneven and have different velocity than it does in the U.S. Some people would make the argument that Australia may be at a high, high level. Somebody would say it is changing. No, Australia for us is -- it's a small entry point. So a client decision to start or stop can impact an Australia reference. In the U.K. it is really more broader. And as I said, a couple of client decisions, can -- I'll call it, exacerbate the issue in this quarter. And yes, back to your reference throughout up to Q3, if you remember, we thought that there was choppiness going into Q3, I mean, Q2. We thought we were going to have pretty significant decline, which we did have, instead of 20%, it was a 17% decline in Europe. We thought our decline in Europe in the third quarter would be 3% to 5%, it ended up being in the higher end. Australia ended being beyond the higher end of the range that we were thinking for Australia. Remember, our penny is $0.5 million. There is your penny, that was the difference between midpoint and high-end, which is, as you know, we target. Relative to the fourth quarter, a couple of those pushes, and in my view, as you get to the end of the year, would perhaps, maybe some clients being a little bit more cautious, if they don't think the fourth quarter is fully baked, protecting year-end performance, bonuses and the like, that could happen. I can't give you a specific reference. What we know is that for fourth quarter to happen, these are activities that already need to be in place. You need to plan for that holiday to disturb -- what would you call the traditional contract that have start -- that you would have, so you know that will happen as you enter early into December. Combination of all those things, lead us to think, like Rob said, that the year-over-year number for international could be down in excess of 30%. But no, I can't make a macro comment relative to any change, any pricing. Our client engagement is pretty good. But client decision-making is clearly uneven. There are some starts and stops, or even some who change scope. And we look at it and say, "Okay. So how does that compare to U.S?" We look at the overall success of the U.S. It is a broader business, much bigger scale, but we also see that we've got strength in EPM and that's just a hand we're not playing, and engaging clients where then we say, "At the minimum, we ought to be investing in the area where we seem to have the greater strength." In the U.S., and we're out to do that as quickly as we can.

[Morris Ajzenman:]

Switching gears, one further question on Hackett Performance Exchange. I'm not sure how this plays out, but you say you're certain of the investments through 2014. The paid subscription model, will that commence in the first quarter of '14 or is that going to be pushed out later into the year?

[Ted A. Fernandez:]

No, we will start marketing the product to be used either for an event, or as we would like, for an event that then leads to it being for a continuous use. So our goal is to be able to offer the dashboard to be used either way, as an event or as a continuous monitoring product. But even on the event top, even in the event efforts, our hope and belief is that if a client sees the value of the dashboard, how easy it is and how compelling the information is, they will want to use it on a continuous basis. That's what we hope to prove in 2014, but as I've always said, until I prove it, I'll talk about its promise, but promise nothing.

[Morris Ajzenman:]

But Ted, as far as the timetable looks, from your eyes, over the last few quarters, everything is on schedule, things have pushed out, there have not been any bugs or things for you that pushes this out a quarter throughout?

[Ted A. Fernandez:]

That is correct. That is correct. The product, the testing, the feedback, the way we think, how we go to market with it, all those things that are required for commercial launch, we believe are in track for January 1.

[Operator:]

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

[Ted A. Fernandez:]

I would like to thank everyone for participating in our third quarter earnings call and look forward to updating you again, when we report the results for the fiscal year and our fourth quarter. Thank you again for participating.

[Operator:]

Thank you for your participation on today's call.