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spk00: Welcome to the Hackett Group second quarter earnings conference call. Your lines have been placed in a listen-only mode until the question and answer session. 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.
spk02: Thank you, operator. Good afternoon, everyone, and thank you for joining us to discuss the Hackett Group 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 Neres, Chief Financial Officer. A press announcement was released over the wires at 4.15 p.m. Eastern Time. For a copy of the release, please visit our website at www.thehackettgroup.com. We will also place any additional financial or statistical data discussed on this call that is not contained in the release on the Investor Relations page of our website. Before we begin, I would like to remind you that in the following comments and in the Q&A session, we will be making statements about expected future results, which may be forward-looking statements for the purposes of the federal securities laws. These statements relate to our current expectations, estimates and projections, and are not a guarantee of future performance. They involve risks, uncertainties, and assumptions that are difficult to predict and which may not be accurate. Actual results may vary. These forward-looking statements should be considered only in conjunction with the detailed information, particularly the risk factors, that is contained in our SEC files. At this point, I'd like to turn it over to Ted. Thank you, Rob, and welcome everyone to our second quarter earnings call. As we normally do, I will open the call with some overview comments on the quarter. I will then turn it back over to Rob to comment on the detailed operating results cash flow, as well as common outlook. We will then review our market and strategy-related comments, after which we will open it up to Q&A. Before I move to our quarterly results, let me start by mentioning our 2022 results and the props they will provide to our 2023 performance. In 2022, we had a very strong first half of the year with operating results exceeding our guidance in Q1 and Q2 by at least three cents in each quarter of the prior year. By the middle of the year, the impact of that interest rate increases started to disrupt economic growth, which has resulted in extended client decision making. Relative to the second quarter, this afternoon we reported revenue before reimbursement of $75.6 million which was above the high end of our guidance, and adjusted earnings per share of 39 cents, which was at the high end of our guidance. Although economic volatility is evident, so is the demand for our digital transformation solutions, which perhaps require to remain competitive and drive productivity improvement. Consistent with our comments on our previous earnings call, significant first quarter end sales resulted in an 8% sequential revenue growth in the second quarter, This has allowed us to exceed the results from Q2 of last year. This was most pronounced in the swift turnaround of our Oracle Solutions segment. Our total company quarterly results continue to be driven by our global strategy and business transformation segment, which was up sequentially but down slightly on a reported basis when compared to last year's strong comp. Our recurring high-margin research advisory and IPaaS offering sales grew sequentially and we expect strong sequential sales growth in Q3. If this momentum continues, we are able to close a couple of IPaaS pilots. We should be able to achieve an annual contract value growth of 20% in 2023. In Q2, we published our customer cash receivables market intelligence report. In the third quarter, we intend to publish two additional market intelligence reports, First up, we will analyze and compare the purchase-to-pay software companies such as Coupa, SAP, Ariba, and Oracle. The second market intelligence report, which evaluates service providers in finance and accounting outsourcing, will include companies such as Accenture, IBM, and TCS. What makes our market intelligence report essential is the unique approach to assess companies for both differentiated capabilities and measurable value delivered. on our HACCP value matrix. Our unique insight is our ability to measure value realized through automation and service improvements that enhance customers' business performance. Our next one, Enterprise Performance Management, is a three-part report that will include specialized analysis of planning and budgeting, enterprise consolidation, plus an aggregate view of total enterprise performance management. By early 2024, we intend to issue six additional evaluations of software and services providers. Our market intelligence reports represent critical value to our providers, to the providers. The companies learn how they compare to competitors, strengths and opportunities, as well as the measurable impact their solutions deliver. Our conclusions, which are depicted in our Hackett Value Matrix, help providers market and sell their solutions through licensing and the use of Hackett digital tools. We also advise how providers can adapt their solutions to perform better. Providers aren't the only ones to benefit. A large benchmarking and consulting in executive advisory and customer base can apply to the market intelligence report to inform software and services purchase decisions. All of these enhancements are critical to the launch of our new member platform, Hackett Connect. This new state-of-the-art platform will allow all of our existing and as well as new members to avail themselves to the proprietary benchmarking metrics, best practices and research which is based on applied knowledge and proven implementation expertise delivered by practitioners which highly differentiates our insight and expert advice. We are also building a community of users that can benefit from one another that we believe will result in a powerful expert network. This is one of our organization's most significant transformative efforts. The Oracle Solutions segment was up strongly on a sequential basis as expected this quarter. We started several engagements which we sold as we completed the first quarter and continue to experience strong market demand and receive strong support from the Oracle sales channel. Our SAP solution segment continued its momentum with higher than expected software sales activity. The investments we have made to fully digitize our IP and the development of our digital platforms, which include Quantum Leap, our state-of-the-art global benchmarking platform, and our proprietary Hackett Digital Transformation Platform, or DPP, are paying off. These platforms are allowing us to highly differentiate all of our offerings and also develop new licensing and research relationships with software and service providers across the enterprise. Our launch of our Hacker Connect platform provides members access to the IP and tools of these two platforms and also significantly improves their ability to engage with our experts and shortly, our community of users in an ever-improving way. On the balance sheet side, you can expect us to use our cash flow from operations to accelerate the pay down of our outstanding credit facility throughout the balance of the year. Longer term, we want to be more aggressive with our balance sheet by using our current credit facility fund acquisitions and buyback stock while continuing to invest in our business. With that said, let me ask Rob to provide details on our operating results, cash flow, and also comment on Outlook. I will make additional comments on strategy and market conditions following Rob's comments. Rob? Thank you, Ted. As I typically do during this personal call, I'll cover the following topics. An overview of our 2023 second quarter results, along with an overview of related key operating statistics, an overview of our cash flow activities during the quarter, and I will then conclude with a discussion on our financial outlook for the third quarter of 2023. For purposes of the call, I will comment separately regarding the revenues of our global SMBT segment, our Oracle solution segment, our SAP solution segment, and the total company. Our global SMBT segment includes the results of our North America international IP and service offerings, our research advisory programs, our benchmark services, our business transformation, and our one screen offerings. Our Oracle solutions and our SAP solution segments include the results of our Oracle and S&P offerings, respectively. Please note that we will be referencing both total revenues and revenue before reimbursements in our discussion. Reimburseable expenses are primarily project travel related expenses passed through to our clients that have no associated impact to our profitability. During our call today, we will also reference certain non-GAAP financial measures, which we believe provides useful information to investors. We have included reconciliations of GAAP to non-GAAP financial measures in our press release filed earlier today, and we'll post any additional information based on the discussions from this call to the investor relations page of the company's website. For the second quarter of 2023, our total revenue was $77.1 million. Our revenues before reimbursements were $75.6 million, which was above the high end of our quarterly guidance. The second quarter reimbursable expense ratio on revenue before reimbursements was 1.9% as compared to 2% in the prior quarter and 1.6% when compared to the same period in the prior year. Total revenues from our global SMBT segment were 43.6 million for the second quarter of 2023. Revenues before reimbursements for our global SMBT segment were 43 million for the second quarter of 2023 a decrease of 2.4% when compared to the same period in the prior year. This was consistent with guidance as extended client decision-making impacted business transformation engagements. Additionally, the comparisons were against accelerated post-COVID demand we experienced throughout the first half of the prior year. Total revenues from our Oracle Solutions segment were $20.8 million for the second quarter of 2023. Revenues before reimbursements for our Oracle Solutions segment were $20.3 million for the second quarter of 2023, an increase of 3.8% when compared to the same period in the prior year, as well as a sequential increase of 21.6%. The momentum we discussed when we provided guidance last quarter continued to accelerate and drove earlier than expected second quarter year-over-year revenue growth and strong sequential growth. Total revenues from our SAP solution segment were $12.7 million for the second quarter of 2023 and also exceeded expectations due to the sale of a number of cloud-licensed deals. Revenues before reimbursements for our SAP solution segment with $12.4 million for the second quarter of 2023, an increase of 10.7% when compared to the same period in the prior year. Approximately 22% of our total company revenues before reimbursements consist of recurring multi-year and subscription-based revenues, which includes our research advisory, IP as a service, multi-year benchmarks, and application managed services contracts. Total company adjusted cost of sales which exclude reimbursable expenses and non-taxed stock-based compensation expense totaled 43.8 million or 57.9% of revenues before reimbursements in the second quarter of 2023 as compared to 43.2 million or 57.8% of revenues before reimbursements in the prior year. Total company consultant headcount was 1,148 at the end of the second quarter as compared to total company consultant headcount of 1,128 in the previous quarter and 1,125 at the end of the second quarter of 2022. Total company adjusted gross margin on revenues before reimbursements, which excludes reimbursable expenses and non-cash stock-based compensation expense, was 42.1% in the second quarter of 2023, as compared to 42.2% in the prior year period. Adjusted SG&A, which excludes non-cash stock-based compensation expense and intangible asset amortization, was $16.3 million, or 21.5% of revenues before reimbursements in the second quarter of 2023. This is compared to $14.8 million, or 19.7% of revenues before reimbursements in the prior year. The year-over-year absolute dollar increase is primarily due to incremental investments we are making and dedicated sales resources for our benchmarking, executive advisory, market intelligence, and our IP as a service offerings. These investments approximated three cents in the second quarter of 2023. Adjusted EBITDA, which excludes non-cash stock-based compensation expense, was 16.4 million, or 21.6% of revenues before reimbursements in the second quarter of 2023, as compared to 17.6 million or 23.6% of revenues before reimbursements in the prior year. GAAP DEN income for the second quarter of 2023 totaled 8.7 million, or diluted earnings per share of 32 cents, and compares to GAAP DEN income of 10.2 million, or diluted earnings per share of 32 cents in the second quarter of the prior year. Adjusted DEN income, which excludes non-cash stock-based compensation defense and intangible amortization for the second quarter 2023 totaled 10.8 million or adjusted diluted net income per common share of 39 cents, which was at the high end of our earnings guidance range. The second quarter of 2023, results were negatively impacted by one penny due to unfavorable movements in foreign currency. This compares to adjusted net income of 12.1 million or adjusted diluted net income per common share of 38 cents in the second quarter of the prior year. The company's cash balances were $15.8 million at the end of the second quarter as compared to $16.9 million at the end of the previous quarter. Net cash provided by operating activities in the quarter was $7.7 million, primarily driven by net income adjusted for non-cash activity and increases in accrued expenses, partially offset by increases in accounts receivable. Our day sales outstanding at the end of the quarter was 68 days as compared to 66 days at the end of the previous quarter. This increase in DSO is primarily due to slightly unfavorable terms on large client engagements that we've begun during the first half of the year. During the quarter, we repurchased 6,000 shares of the company's stock from employees to satisfy income tax withholding triggered by the vesting of restricted shares for an average of $19 per share at a total cost of approximately $119,000. Our remaining stock repurchase authorization at the end of the quarter was $13.9 million. During the quarter, the company paid down $5 million on our credit facility. The balance of the company's total debt outstanding at the end of the second quarter was $53 million. Our plan is to further accelerate debt paydowns through the balance of the year. Net interest expense for the quarter was $921,000. At its most recent meeting, subsequent to quarter end, the company's board of directors declared the third quarterly dividend of 11 cents per share for shareholders of record on September 22nd, 2023, to be paid on October 6th, 2023. I'll now move to our guidance for the third quarter. The company estimates total revenues before reimbursements for the third quarter of 2023 to be in the range of 72.8 to $74.3 million. We expect global SVT segment revenue before reimbursements to be up when compared to the prior year. We expect Oracle Solutions segment revenue before reimbursements to be up strongly when compared to the prior year. We expect SVT Solutions segment revenue before reimbursements to be down on a yearly basis, primarily due to expected decreases in cloud license sales. We estimate adjusted deleted net income per common share in the third quarter of 2023 to be in the range of 38 to 41 cents, which assumes a GAAP-effective tax rate on adjusted earnings of 27.5%. As Ted mentioned last quarter, the third quarter will reflect the continued incremental dedicated investments we are making in program development and in dedicated sales resources for our benchmarking, executive advisory, market intelligence, and our IP service offerings. These incremental costs are expected to impact our diluted net income per current share by approximately four cents. We expect adjusted gross margin on revenues before reimbursements to be approximately 43 to 44%. We expect adjusted SG&A and interest expense to be approximately 16.7 million. We expect third quarter adjusted EBITDA on revenues before reimbursements to be in the range of approximately 23 to 24%. Lastly, we expect cash flow and operations to be up on a substantial basis. At this point, I would like to turn it back over to Ted to review our market outlook and strategic priorities for the coming months. Thank you, Bob. As we look forward, let me share our thoughts on the near and long-term demand environment and the growth opportunity it offers our organization. As I repeatedly say, the demand for digital transformation is being impacted by extended decision making as organizations assess competing priorities created by increasing interest rates and the demand disruption which it is intended to affect. However, it continues to be clear, a clear strategic priority for our clients. Digital innovation in enterprise cloud applications Analytics and artificial intelligence, cloud infrastructure, and workflow automation are dramatically influencing the way businesses compete and deliver their services. Digital transformation is redefining all activities at an accelerated pace, forcing organizations to fundamentally change and adopt these new capabilities to remain competitive and to realize targeted productivity gains. As we mentioned at the beginning of the year, we believe clients use the year-end planning process and the beginning of the 2023 year to assess their industry risk, make headcount and spend reductions, and rebalance their spend with productivity and strategic cost reduction efforts, which are also core to our offerings. We believe that clients will become more comfortable with the economic headwinds, and we will see their behavior improve throughout the year. Similar to us, Many of our clients did not experience a demand disruption until late in Q2 of last year and will be more challenged by the strong year-over-year or have been more challenged by the strong year-over-year comparisons of the first half of the year. However, most will face more favorable comments in the second half of the year. If we are correct, this will further support the behavior improvement which we expect when we look at the second half and compare it to the first half of 2023. On the talent side, competition for experienced executives continues. Overall, we saw turnover continue to moderate during the quarter and expect the trend to continue. Longer term, we have transitioned to a hybrid sales and delivery model which provides us with effective access to our clients and their respective teams. This hybrid model provides our associates with greater personal flexibility to perform their defined responsibilities remotely which is very valuable to them. This should allow us and is allowing us to attract and retain talent that we have struggled to retain because of the demanding historical travel requirements of our industry. Strategically, we are accelerating our focus on recurring high-margin IP-related services by increasing the development of new programs, those which we detailed on the market intelligence comments on the previous week, and aggressively adding to our sales and marketing resources dedicated to this area. The investment will decrease our Q3 results by four sets. Additionally, on the CapEx side, we will continue our investment on our new Hackett Connect member platform and plan to introduce generative AI functionality in 2024. It is also important to note that we continue to see strong downstream revenues from our benchmarking and research advisory clients to our business transformation in Oracle, OneStream, and Coupa consulting services. This halo effect has been in excess of 40% over the last several years. Simply put, organizations who rely on our IP research and benchmarking services are more likely to utilize our consulting services. We are also exploring strategic partnerships which will allow us to syndicate our IP through new channels and that will allow us to reach beyond the global 1,000 focus in an efficient manner. We launched our first syndication agreement of our IP and content on April 1st. We continue to evaluate new channels for our IP and our platforms. We also continue to redefine our global benchmarking leadership through enhancements in QuantumLeap, our digital benchmark software as a service solution, along with our digital transformation platforms, this platform, These platforms allow us to deliver more information with significantly less client effort. It also allows our clients to leverage our IP to create compelling benefit case assessments, accelerate process flow and software configuration decisions, and track the value realization of the transformation initiatives over the life of their respective effort. We believe that there are no comparable IP-led platforms in the market. As I have mentioned on previous calls, we have a 20-minute demo. on our investor relations page of our website so that investors can become more familiar with the capabilities of our platform. 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 strategically leverage our IP and add scope, scale, and capability, which can accelerate our growth. As always, let me close by congratulating our associates on our performance and by thanking them for their tireless efforts and always encourage them to stay highly focused on our clients and our people, no matter what challenges we may encounter. 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?
spk00: Thank you. We will now begin the question and answer session. If you would like to ask a question over the phone line, please press star 1 from your phone, unmute your line, and speak your name clearly when prompted. Your name is required to introduce the question. To withdraw your question, press star 2. Again, to ask a question over the phone lines, please press star then 1. Our first question comes from Jeff Martin with Roth MKM. Your line is open.
spk03: Thanks. Good evening, Robin. Ted, how are you?
spk02: Jeff, how are you?
spk03: Good, thanks. Ted, you mentioned generative AI, you know, a product launch in 2024. Could you give an early peek under the hood what that might look like?
spk02: Well, we're looking at two things on GenAI. First, our ability to advise clients on exactly what use cases they can benefit from sooner rather than later. So we're doing an exhaustive assessment of all of our business process areas, which are a total of 130 as we define the enterprise, and looking beyond that into activities to see exactly where the specific GenAI capabilities lie. can actually advantage them soon. That's one way of making sure that they can start prioritizing their initiatives. On our end, we're looking at different ways to try to create our own large language model, with or without a partner, we're considering both, but we'd like the idea of being able to engage clients significantly more efficient than we are today. An example that, for example, we reviewed this morning is the concept around the idea of app hacking. We know individuals consistently want to be able to engage in content more efficiently without ever really even going to a click of either some mobile device or some type of laptop. So we're looking at what kind of training, what kind of data, obviously we know the data that we have, but what kind of training we would provide our data so that, again, the idea is can we provide our clients and our members with the powerful IP of Hackett by simply posing a question as an example and getting some detailed information to whatever is on their mind at any given point of the day and as they're considering some of their strategic or productivity initiatives. But those would be two examples both on the client side and one on how we're thinking about deploying our capability and driving that to our client base more aggressively in 2024. Great.
spk03: And then I wanted to ask what kind of reaction you're getting from the initial market intelligence launch and what you think the sales cycle on that might be and what kind of timing of engagements you might start to expect. And then finally... What would be considered an average contract size related to market intelligence?
spk02: Well, first, as I said on the call, the actual published report was our CBC side. We're publishing a prepare-to-pay software assessment here in the next week or so. And we'll follow that up with finance and accounting outsourcing and hope to get that out before the end of the third quarter. So we're still trying to first put out a number of these as quickly as we possibly can. The engagement, both on the participation side and post, has been favorable. The important thing for us is to really complete the programs that we do want to go out in if you want to call it first thoughts, to make sure that everyone, both participants as well as clients, know exactly how we're weighing in and both the influence that we have and the insight that we can provide that is valuable to them. So that's really where we see the benefit coming. To be more specific, when I think of meaningful monetization of all those programs, both in terms of numbers and the engagement, we would like to see that start materializing in the beginning of 2024, just like we would like to see the impact of the significant sales resource investments that we've been making to increase the number of our sales executive within our IP service ranks to have what we hope is a meaningful impact in the middle of 2024. If, as I said on my call, if we see the sequential growth from the sales that we're currently expecting improve as strongly as we expect from Q2 to Q3, we saw a good improvement from Q1 to Q2, we expect stronger sequential improvement for Q2 to Q3. If that kind of pace continues, then you will see the impact on both market intelligence programs, both in the rollout and the sales of them, as well as the impact of just the sales resources across all of our executive advisory programs, which are already in place.
spk03: Great. And then you mentioned a 4 cent impact in Q3 from the investments in program development and sales personnel or sales resources. What might we expect in Q4? I know it was a $0.03 impact in Q2. That's up to $0.04 in Q3. What do you think it might look like in Q4?
spk02: We would expect it to be similar. We have no reason to expect it to be any different. We thought it was going to be $0.04 in Q3. two, but it actually ended up being three cents, and that's just when the resources came in and impacted the quarter. We're seeing that roll into the next quarter. We know what that spend is expected to be, so we would expect it to be four. I have no reason to believe that it won't be four in Q4.
spk03: Great, and then in terms of the headcount addition on the consultant side, what areas are you adding more aggressively than others?
spk02: Well, it's hard to ignore this incredible performance and performance that we're getting from Oracle Solutions Group. So even though we went through that volatility at year end, I mean, since that latter part of Q1, we've been aggressively hiring both onshore and offshore resources to handle the kind of demand that we've been experiencing. So that's That would be the primary area. And then I'm going to say the second largest area is the hiring of all these additional sales resources. Those would be the two primary hiring areas in both Q2 and continuing to Q3. Great. Thank you for your time.
spk00: As a reminder, if you would like to ask a question, please press star 1 from your phone, unmute your line, and speak your name clearly when prompted. Our next question comes from Vincent Colicchio with Barrington Research. Your line is open.
spk01: Yeah, Rob. On GSBT and Oracle Solutions, I didn't hear in your prepared remarks the growth outlook for Q3. Could you repeat that, please? Sure.
spk02: What we said was that SMBT would be up or would be up strongly and that SAP would be down.
spk01: And that's year over year? That's year over year. Okay, thank you for that. Ted, the two cents cost less than expected. Was that because hiring salespeople was taking longer than expected?
spk02: Yes, we had... Some changes, but, yes, some of the resources came in later in the quarter.
spk01: Are you finding the right people you need, these folks from companies that are already doing research type of work?
spk02: Yes, yes. We're finding them, and we find their interest in what we're trying to do to be extremely high. We don't expect that to change. Okay.
spk01: Okay. And I know you've said, you know, you expect that you're looking for meaningful revenue from the market intelligence programs, you know, early next year. Is it too early to ask? The first programs were launched in December of last year. Has revenue come in with plan or is it just too early for that to even be meaningful?
spk02: Too early since the C2C program published just, I think, about, five weeks ago, so too early. But no reason, remember the biggest productivity measurement we are making is the productivity of the sales people that are coming on board. and how that's progressing. And as I said, we saw improvement from Q1 to Q2 and we expect strong improvement from Q2 to Q3 just based on the activity that they're experiencing. So that speaks to, the most important is that we have existing programs and then we're trying to increase the number of programs that we saw on a member subscription basis to our market intelligence programs. In essence, more than doubling the number of programs that we have. But the primary productivity is that of the sales force with the existing programs which we have in place, which are significant for the number of sales people that we have. But yes, what are we trying to do? As you've heard me say to investors, when we started 2022, our goal has been to quadruple the sales force and double the programs that we have in place or as close thereof by the end of 2023. And we're still trying to achieve that.
spk01: And how many sales people do you have now and how many do you plan to have by year end?
spk02: In this group that we brought on board, it's around 30 and counting. Okay.
spk01: And one last one for me. The strength in Oracle solutions, are there any particularly large deals there, or is it sort of balanced in terms of the business you're ramping now and also in the pipeline? Both.
spk02: We've seen both the number of deals we've closed peppered with some very significant deals, some from some previous clients, significant clients of ours that have come back to us for Oracle support and help, as they've implemented, as they've needed that kind of assistance. And we're seeing brand-new clients walk in the door as a result of, I think, what I would call excellent collaboration we've been getting with the Oracle Sales Channel. Okay. Thanks, Ted.
spk00: At this time, I show no further questions. I will now turn the call back over to Mr. Fernandez.
spk02: I want to thank everyone for participating in our second quarter earnings call, and we look forward to updating everyone when we report the third quarter. Thank you.
spk00: Thank you for your participation in today's conference. You may disconnect at this time.
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