HCKT - NASDAQ

Welcome to The Hackett Group First Quarter Earnings Conference Call. [Operator Instructions] Please be advised the conference is being recorded. Hosting tonight's call are Mr. Ted Fernandez, Chairman and CEO; and Mr. Rob Ramirez, Chief Financial Officer. Mr. Ramirez, you may begin.

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, Rob Ramirez, Chief Financial Officer. A press announcement was released over the wires at 4:05 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 are contained in our SEC filings. At this point, I would like to turn it over to Ted.

Thank you, Rob, and welcome, everyone, to our first 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 detailed operating results, cash flow as well as comment on outlook. We will then review our market and strategy-related comments, after which, we will open it up to Q&A. This afternoon, we reported total revenues of $77.2 million and revenues before reimbursements of $75.7 million, which is above the high end of our guidance and adjusted earnings per share of $0.39, which was at the high end of our guidance. Our results were driven by the overperformance of both our Oracle and SAP segments, which were up strongly. Oracle's overperformance is consistent with the momentum that we have experienced since the second quarter of last year. A new important development is the notable increase in the demand that we're experiencing in our historically strong Enterprise Performance Management or EPM offerings. Oracle has reemphasized its sales commitment to this area and we are clear beneficiaries of this strategy. Our SAP Solutions segment also performed above our expectations as it closed several value-added reseller transactions, which strongly benefited the quarter. We have started to see some of the sales investments we made in this segment last year start to pay off. Our Global SBT segment was down 3% when compared to last year, as we see economic headwinds continued results in extended decision-making. This has been particularly noticeable in the eProcurement area. Although segment was impacted by market conditions and new Gen AI investment considerations, we are experiencing the significant opportunity that comes from the unlimited transformational use cases that Gen AI initiatives will offer. More importantly, our recently launched Gen AI assessment platform, AI Explorer and that is XPLR, continues to receive very favorable feedback. AI Explorer uses AI-assisted functionality, which leverages our world-class business process IP and the task automation opportunities of AI to ideate as well as assess the feasibility and financial benefit potential of client-specific use cases. This has led to over 170 client demo meetings with many more scheduled. These meetings have now resulted in a number of new enterprise or functional domain-specific AI engagements. Although the revenue impact in Q1 from AI Explorer was nominal, we expect these engagements to increase in number and scope throughout the second quarter. These engagements also leverage our rapidly growing use case library, which can be used to establish Gen AI road maps with related benefit case analysis using our highly recognized benchmark database. The use case library allows us to promote embedded and recently created capabilities of other software and services providers. Our market intelligence programs are playing a significant role in this endeavor. The rapidly emerging Gen AI interest is creating an entirely new way to engage clients broadly and strategically. AI Explorer is creating a unique opportunity to expand our performance improvement access to aggressively pivot to become strategic architects of our clients' Gen AI journey. We also continue to invest in growing our IP-based programs. Specifically, we are quickly acknowledging the power of Gen AI thought leadership will have on the value of the research and expert advice we deliver in our executive advisory and market intelligence programs. While our pipeline for these offerings continues to increase, our conversion rates are lower than planned. We believe our move to fully integrate Gen AI content we began in April, will be responsive to this market shift. We also believe that our ability to launch our Hackett AI platform later this year that will incorporate our AI Explorer, Hackett IP and research to support the move to increase Gen AI-led content as well as advice. On the balance sheet side, in the short term, you can expect us to use our strong cash flow from operations to continue to pay down our outstanding balance of our credit facility. Longer term, we plan to use our balance sheet to fund acquisitions and to buy back 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, I'll cover the following topics during this portion of the call. I'll cover an overview of our 2024 first quarter results, along with an overview of related key operating statistics, I'll cover an overview of our cash flow activities during the quarter. I'll then conclude with a discussion on our financial outlook for the second quarter of fiscal 2024. For the purpose of this call, I will comment separately regarding the revenues of our Global S&BT segment, our Oracle Solutions segment, our SAP Solutions segment and the total company. Our Global S&BT segment includes the results of our North America and international benchmarking and business transformation offerings, executive advisory and IPaaS programs and our OneStream and Coupa implementation offerings. Our Oracle Solutions and our SAP Solutions segments include the results of our Oracle and SAP offerings prospectively. Please note that we will be referencing both total revenues and revenue before reimbursements in this portion of the discussion. Reimbursable expenses are primarily project, travel-related expenses passed through to our clients that have no associated impact on our profitability. During our call today, we will also reference certain non-GAAP financial measures, which we believe provide useful information to investors. We have included reconciliations of GAAP to non-GAAP financial measures in our press release filed earlier today and will post any additional information based on the discussion from this call to the Investor Relations page of the company's website. For the first quarter of 2024, as Ted mentioned, our total revenue was $77.2 million, up 8% over the prior year. Our revenues before reimbursements were $75.7 million, which was above the high end of our quarterly guidance, also up by 8% over the prior year. The first quarter reimbursable expense ratio on revenues before reimbursements was 1.9% as compared to 1.7% in the prior quarter and 2% when compared to the same period in the prior year. Total revenues from our Global S&BT segment were $40.9 million for the first quarter of 2024. Revenues before reimbursements for our Global S&BT segment were $40.3 million for the first quarter of 2024, a decrease of 3% when compared to the same period in the prior year. This segment has been impacted by extended client decision-making and increased market volatility in our business translation engagements, particularly impacting our eProcurement offerings. Total revenues from our Oracle Solutions segment were $21.7 million for the first quarter of '24. Revenues before reimbursements for our Oracle Solutions segment were $21.1 million for the first quarter of 2024, a higher-than-expected increase of 26% when compared to the same period in the prior year. These results continue the momentum we've experienced in the second quarter of 2023, with strong double-digit growth over the last 3 quarters when compared to prior year periods. Total revenues from our SAP Solutions segment were $14.6 million for the first quarter of '24. Revenues before reimbursements for our SAP Solutions segment were $14.4 million for the first quarter of '24 with a higher-than-expected increase of 26% when compared to the same period in the prior year. This was primarily due to very strong value-added resell activity in the quarter. Approximately 21% of our total company revenues before reimbursement consists of recurring multiyear and subscription-based revenues, which includes our Research Advisory, IP as a Service, multiyear benchmarks and application managed services contracts. Total company adjusted cost of sales, which exclude reimbursable expenses and non-cash stock-based compensation expense totaled $44.4 million or 58.6% of revenues before reimbursements in the first quarter of '24, as compared to $41.6 million or 59.6% of revenues before reimbursements in the prior year. This increase is primarily due to increased headcount and subcontractors in our Oracle segment to support revenue growth as well as severance costs related to selected headcount reductions in Global S&BT due to the market volatility discussed. Total company consultant headcount was 1,154 at the end of the first quarter as compared to total company consultant headcount of 1,168 in the previous quarter and 1,120 at the end of the first quarter of '23. Total company adjusted gross margin on the revenues before reimbursements, which excludes reimbursable expenses and non-cash stock-based compensation expense was 41.4% in the first quarter of '24, as compared to 40.4% in the prior year. The 100 basis point gross margin improvement was primarily driven by the higher margin value-added reseller sales during the quarter. Adjusted SG&A, which excludes non-cash stock-based compensation expense and one-time legal settlement-related costs was $17.1 million or 22.6% of revenues before reimbursements in the first quarter of '24. This is compared to $14.5 million or 20.8% of revenues before reimbursements in the prior year. The year-over-year absolute dollar increase primarily due to incremental investments we are making in dedicated sales resources in executive advisory and in other targeted practices, as well as higher commissions associated with the increased SAP value-add reseller sales and incentive compensation accruals commensurate with company performance. Adjusted EBITDA, which excludes non-cash stock-based comp expense and onetime legal settlement-related costs was $15.2 million or 20% of revenues before reimbursements in the first quarter of '24, as compared to $14.5 million or 20.8% of revenues before reimbursements in the prior year. GAAP net income for the first quarter of '24 totaled $8.7 million or diluted earnings per share of $0.32 as compared to GAAP net income of $8.2 million or diluted earnings per share of $0.30 in the first quarter of the prior year. Adjusted net income, which excludes non-cash stock-based comp expense and one-time legal-related settlement costs for the first quarter of '24 totaled $10.7 million or adjusted diluted net income per common share of $0.39, which is at the top end of our earnings guidance range for the quarter. This compares to adjusted net income of $10 million or adjusted diluted net income per common share of $0.37 in the first quarter of the prior year. The company's cash balances were $13 million in the first quarter as compared to $21 million at the end of the previous quarter. Net cash provided from operating activities in the quarter was $2.8 million, primarily driven by net income adjusted for non-cash activity but was partially offset by decreases in accrued expenses due to the payment of 2023 performance bonuses and increases in accounts receivable. Our DSO or day sales outstanding at the end of the quarter was 68 days as compared to 65 days at the end of the previous quarter. During the quarter, we repurchased 205,000 shares of the company's stock for an average of $23.57 per share at a total cost of approximately $4.8 million. This was driven by purchases from employees to satisfy income tax withholding triggered by divesting of restricted shares as well as shares repurchased from our Board. Our remaining stock repurchase authorization at the end of the quarter was $12.9 million. During the quarter, the company paid down $2 million on our credit facility. The balance of the company's total debt outstanding at the end of the first quarter was $31 million. At its most recent meeting subsequent to quarter end, the company's Board of Directors declared the second quarter dividend of $0.11 per share for shareholders of record on June 21, 2024, to be paid on July 5, 2024. I'm now going to move to the guidance for our second quarter of 2024. The company estimates total revenue before reimbursements for the second quarter to be in the range of $73.5 million to $75 million. We expect Global S&BT segment revenue before reimbursements to be down slightly when compared to the prior year but up on a sequential basis. We expect Oracle Solutions segment revenue before reimbursements to be up both sequentially and year-over-year. We expect SAP Solutions segment revenue before imbursements to be down on a year-over-year basis. We estimate adjusted diluted net income per common share in the second quarter of '24 to be in the range of $0.36 to $0.39, which assumes a GAAP effective tax rate on adjusted earnings of 27.2%. We expect the adjusted gross margin as a percentage of revenues before reimbursements to be approximately 42% to 43%. We expect adjusted SG&A and interest expense for the second quarter to be approximately $17.1 million. We expect second quarter adjusted EBITDA as a percentage of revenue before reimbursements to be in the range of approximately 21% to 22%. Lastly, we expect cash flow from operations to be up on a sequential basis. At this point, I'll turn it back over to Ted to review our market outlook and strategic priorities for the coming months.

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. Although demand for digital transformation remains strong, it continues to be impacted by extended decision-making as organizations assess competing priorities created by high interest rates and the demand disruption, it is intended to affect. Digital innovation and enterprise cloud applications, analytics and AI workflow automation are dramatically influencing the way businesses compete and deliver their services. But as I mentioned on our first quarter call, the major change has been the rapidly emerging demand for Gen AI solutions. Its unlimited potential will define an entirely new level of digital world-class performance standards, driving all software and services providers to extend the value of their existing offerings. We believe this will result in unprecedented innovations, which all organizations will have to consider. Strategically, we continue our focus on recurring high-margin IP-related services by increasing the development of new programs and the sales and marketing resources dedicated to this area. We also continue our investment on our new Hackett Connect member platform. But what is new is the accelerated focus and investment we're making in our Gen AI capabilities. The most significant investments have been the development of our AI Explorer platform and then the training and development of our associates. We are utilizing the AI Explorer platform as the vehicle to integrate the Gen AI impact across all of our offerings. We have also hired critical data and technology architecture resources to further support our efforts. These efforts will allow us to become critical architects advisers and consultants of our clients' Gen AI journey. Our ability to measure and assess the impact of Gen AI utilizing AI Explorer is powerful. Additionally, our growing use case repository, which integrates our market intelligence perspective on the specific strengths of Gen AI solution providers is another powerful way to help guide our clients through the unlimited opportunities that we'll have to consider. We see this as an opportunity for our organization to provide an objective and unique perspective thus far has been primarily a use case innovation story. We continue to see strong downstream revenues from our benchmarking and executive advisory clients to our business transformation and cloud application consulting services. This halo effect, as we describe it, has been approximately 40% over the last several years and continues as such. We believe this will only be expanded by the AI Explorer offering because of its broad and strategic access that it provides. Organizations who rely on our AI assessment, solutioning and market intelligence platforms are more likely to utilize our advisory and consulting services. We also continue to publish our market intelligence reports. We have started to publish our research reports on Gen AI and key solution providers, which are important content for AI Explorer as well as our executive advisory programs. Our market intelligence reports represent critical value to the providers. The companies learn how they compare to competitors as well as measure their measurable impact their solutions deliver. Large benchmarking and consulting and executive advisory customer base can also acquire the market intelligence reports to inform software and service purchasing decisions. On the talent side, competition for experienced executives continues. But overall, we saw turnover continue to moderate and remain low during the quarter. We expect the trend to continue. Longer term, we have transitioned to a hybrid sales and delivery model, which provides us with an 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 to attract as well as retain talent. We are also exploring strategic partnerships that will allow us to extend our AI capabilities and sell our IP through new channels that will allow us to reach beyond our current Global 1000 focus in an efficient manner. We also continue to redefine our global benchmarking leadership through enhancements in Quantum Leap as well and our digital transformation platforms. This allows us to deliver more information with significantly less client effort. It also allows clients to leverage our IP to create compelling benefit case assessments, accelerate process flow and software considerations decision and track value realization of their transformation initiatives. We believe the integration of these platforms with AI Explorer significantly enhances the value of IP and fully aligns our perspective on the new AI-driven digital world-class performance standards that we believe will be achieved as Gen AI technologies continues to take hold. As I mentioned on our previous call, we are adding videos of our platforms on our Investor Relations page of our website that investors can utilize to become more familiar with our new capabilities. 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 thanking them for their tireless efforts and always urge them to stay highly focused on our clients and our people no matter what challenges they 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?

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Jeff Martin with ROTH Capital Partners.

Ted, I was curious if you could quantify the level of investment you're making related to Gen AI and specifically Explorer?

Believe it or not, the majority of the investment we're making is really reallocating and refocusing all of our senior executives to the initiative. We have hired a dedicated team that has built that AI Explorer, but we've done that, I believe, incredibly efficiently. That was primarily because we had the ability to leverage other capabilities we had built during the RPA development era that we've been able to leverage and build AI Explorer from what's incredible, even though it's interesting, even though the impact -- revenue impact on the quarter was nominal, I can tell you that the amount of time and effort we're expanding in building out Explorer, communicating the value to clients, booking and responding to the demo meetings is like nothing we've ever done before. We've never launched a product like that, that has received the kind of market response and has resulted in the number of meetings and the number of pursuits that we continue -- discussions and pursuits, we continue to have with those individuals who have seen our product. The feedback has been outstanding. So for us, even though Gen AI to some extent, is somewhat of a moving target and a little bit of a distraction to our clients as they now try to understand how to reallocate their spend relative to the impact and the priorities they want to establish with or without Gen AI, the opportunity, we believe, is significant, and we believe that the launch of AI Explorer and the timing of it is going to pay off handsomely for us.

I was just curious if you could give us an example or 2 about the types of client interactions you have, what parts of the organization these are targeting? I'd imagine they start with one part of the organization and expand that over time. I just wanted to give you the opportunity to expand on that.

We make the offer to the organization as we've reached out to our client base. It has been primarily through C-level officers. I will say that probably 1/3 or maybe 40% of the time, it includes the CIO or somebody from the IT organization, but it really is across the board. And even though our primary offering has been on functionally domain-focused initiatives because we believe that if one C-level officer is exposed to our capabilities, it will quickly spread throughout the organization. We are getting and seeing the opportunity to, in fact, engage and present the capabilities to executive management teams and it's been an offer, we're going to continue to pursue because we know the impact from that conversation becomes more impactful. In fact, one of the engagements that we closed was presented and sold at the C-level officer and it's a very meaningful project.

And then one more, if I could. On the Global S&BT, delayed decision-making, if we back up 2 or 3 quarters, you thought that, that had largely run its course, appears not to be the case. Just curious if you have anything to add with respect to when we might see decision-making kind of clear up? Is this something they can put off for an indefinite period of time? Or do you see there being a pinch point where they have to move forward?

I believe that they will move forward, but I also believe that the amount of budget that's being reallocated or identified as AI-specific will consume a significant amount of that attention. So for us, let's call the Gen AI diversion, we believe to be temporary simply because the number of conversations we're having on broad initiatives, which have broad business transformation impact should increase throughout the balance of the year. I think it's also probably important to note that when you look at the overall decrease that we have experienced over the last couple of quarters, the fiery impact has come from our eProcurement area. So areas in spend analysis, which you remember like Coupa that were significant, maybe 24 months ago have seemed to struggle more than others. But the other, if you want to call it, variances or decreases have really have been nominal if you exclude that. So, we've been watching that activity level off. We think of that activity in eProcurement levels off you will see the SBT segment level off as well. And then if we get the expected impact from the new engagements, we're presenting -- utilizing the AI Explorer demo then you'll see that growth resume and resume with much longer-term opportunities because, I mean, the Gen AI opportunities is, we're talking about very initial engagements that if you have the right entry point and at the right level, it could be significant in multiyear.

[Operator Instructions] Our next question comes from George Sutton with Craig-Hallum. And George, we're not able to hear you in conference. Please check the mute feature on your phone.

This is Adam on for George. Ted, you mentioned that Oracle has reemphasized its sales commitment. I was hoping you can provide just a little more detail on that and what you expect to come from that effort?

Well, the momentum that we built through the balance really over the last 4 quarters has had quite a bit to do with the fact that they've really started to rebuild their dedicated EPM sales force and it seems to have -- we have such a strong reputation in that space, not only in the space broadly but in the install base itself that we've been significant beneficiaries of that activity. Those entry points and that -- I was going to call it that success is also bleeding over into, I'm going to call it, meaningful ERP opportunities for us as well. So, the growth prospects, both the quarterly performance and the guidance we provided for Oracle were very strong.

And obviously, clean data is key for Gen AI. I have to imagine at some point, we may see an impact on EPM or ERP sales. I would love to get your thoughts on it, though.

Well, interesting, it's really just reemphasizes the opportunity so that if you look at EPM or FP&A in general, the analytics opportunities within FP&A in Gen AI are really very significant. So, the software providers, I think, have been aggressively marketing their capabilities, their embedded capabilities -- but the innovation and the use cases that we're starting to see that extend beyond embedded are very significant. So, I believe that there will be significant beneficiaries of the Gen AI solutions, if you want to call it, breakthrough.

Thank you. Next, we will hear from Vincent Colicchio with Barrington Research.

Yes, Ted, with the strong AI consulting demand you're seeing and you had mentioned you are training professionals internally. Do you need to do more hiring outside the organization to meet demand currently?

The answer is yes. We are going to continue to train and certify our associates where we have increased our hiring for dedicated expertise that looks -- that extends beyond and we're also looking at partnerships and alliances and even beyond that to extend our capabilities. So, you can expect it to be aggressive across all dimensions.

And I think that Rob had mentioned that your SG&A was partly up on sales. Did you expand your sales force in the quarter?

The answer is the increase reflects the combination of sales increases we made in some of the -- in the software segments, but it also reflects the increased year-over-year increases that we had -- that we've made in the executive advisory dedicated team.

So, the investments in the executive advisory team and the market intelligence investments you've made, do you expect them to help offset some softness in GSBT this year? Or is in a meaningful way? Or what is your thinking there?

We see the same impact in advisory. If you look at the -- I'll call it lower growth result, Gartner just reported, I would say that we see the advisory space being impacted exactly as the business transformation space is. With that said, that also means that the shift in demand for Gen AI-related content advice specific capabilities that our clients are now requesting the ability for us to do that, which we didn't start integrating until April because we were building the content. So, we just started adding it to our program is an important part of the growth of advisory. So, we expect that change to impact the growth in executive advisory and market intelligence programs. But overall, the ability to position the organization and pivot, I believe as strongly as we have and demonstrate unique capabilities with AI Explorer to the Gen AI space will bode very well for us and will be the leading and most significant factor of revenue growth over the next 3 to 5 years. So, we're going to play that hand very aggressively.

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

Thank you, operator. Let me thank everyone for participating in our first quarter earnings call. We look forward to updating you again when we report the second quarter. Thank you.