Ted Fernandez - Chairman and CEO Rob Ramirez - Chief Financial Officer.
Morris Ajzenman - Griffin Securities, Inc. George Sutton - Craig-Hallum Capital Group LLC Bill Sutherland - Emerging Growth Equities Ltd. Jeff Martin - Roth Capital Partners.
Welcome to the Hackett Group Third Quarter Earnings Call. Your lines have been placed on a listen-only mode until the question-and-answer session. 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 now begin..
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, Rob Ramirez, CFO. A press announcement was released over the wires at 4:20 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 question-and-answer 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 contained in our SEC filings. At this point, I would like to turn it over to Ted..
Thank you, Rob. As we customarily do, I will open up the call with our quarter overview highlights. I will then turn it back over to Rob and ask Rob to comment on our Q3 operating results, cash flow, and also provide some comments on our guidance.
Rob will then it back over to me and I will try to provide some market and strategic overview comments and then we will open it up for Q&A. So let me now start with the highlight or overview comments and start by welcoming everyone to our third quarter earnings call. This was another very strong quarter.
This afternoon, we’ve reported revenues of $67.2 million, up 11%, 13% on a constant currency basis and pro forma earnings per share of $0.20, which is up 25%, and both were above the high end of our guidance. Stronger than expected U.S. momentum drove our results as our momentum continued across virtually all of our U.S. practices.
Our record results were in spite of weak European results and the unfavorable impact from FX, which reduced pro forma earnings per share by $0.01. Revenue in North America was up 20%, with all Hackett practices up nicely with specifically strong performance from our EPM group.
Excluding our ERP group which was essentially flat, our North American business grew over 24%. As I mentioned European performance was weak with revenue down 13% on a local or constant currency basis and down 33% on a reported basis.
Our ability to differentiate our capabilities and engage clients strategically with our benchmarking in best practice advisory offerings continues to expand.
More importantly our ability to use our proprietary best practice intellectual capital that emanates from these offerings is resulting in increase downstream opportunities to our transformation and EPM consulting groups. This noticeable in our ability to compete for business as well as in our improving gross margins throughout our business.
We also continue to see how our best practice IP helps us position our SAP and Oracle, EPM solutions. We’re also seeing early in the case of on how our best practice IP is also helping our alliance partners differentiate their offerings.
As I mentioned last quarter, it is impressive when we see how large software organizations and others use our proprietary benchmarking and best practice implementation in site to influence the sale and value proposition of their offerings. On the balance sheet side, in July, we paid our semi-annual dividend.
We also generated very strong cash flow and paid down $9 million of our $80 million of outstanding debt. As a result we exited the quarter with over $16 million in cash, cash which represents a net cash position of $7 million. On the investment front, we continue to believe that by more closely mirroring our U.S.
capabilities in Europe, we can improve our ability to grow in that region, and also further strengthen our global delivery capabilities which are important to our large multi-national engagements. We also continue to develop and attract talent and expand our brand by continuing to build our proprietary best practices intellectual property.
We also continue to look for ways to leverage this IP to help differentiate, support the sale and delivery of our offering. And as I mentioned above, we are seeing the improvement of this leverage throughout our business.
What is clearly different and we pointed out over the last couple of quarters is that we now see the potential leverage to use this intellectual capital through new external channels as we have highlighted with our new alliances. I will comment on these opportunities in more detail in my strategic overview section of our call.
I will also comment further on the market conditions. But let me first ask Rob to provide details on our operating results, cash flow and also comment on outlook.
Rob?.
Thank you, Ted. As I typically do, I will cover the following topics during this portion of the call.
An overview of our 2015 third 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 fourth quarter of 2015.
For purposes of this call, any references to Hackett Group will specifically exclude ERP Solutions. Correspondingly, I will comment separately regarding the financial results of The Hackett Group, ERP Solutions, and the total company. Please note that all references to gross revenues in my discussion represent revenues including reimbursable expenses.
Additionally, references to pro forma results specifically exclude non-cash stock compensation expense, intangible asset amortization expense, acquisition-related charges and gains, restructuring charges, and assumes a normalized 30% cash tax rate.
As Ted mentioned, for the third quarter of 2015, total company gross revenues were $67.2 million, and above our third quarter’s guidance. This represents year-over-year growth of 11% or 13% when adjusting for constant currency.
Gross revenues for The Hackett Group, which excludes ERP Solutions were $58.2 million in the third quarter of 2015, an increase of 13% on a year-over-year basis or 16% on a constant currency basis. Hackett U.S.
growth was 25%, which was stronger than expected and international which is primarily Europe decreased 23% and 13% on reported or constant currency basis.
Hackett Group annualized gross revenue per professional was $396,000 in the third quarter of 2015, as compared to $368,000 in the third quarter of the prior year and $397,000 in our previous quarter. This is especially strong when you consider lower available billing days on a quarterly sequential basis.
Gross revenue from our ERP Solutions Group, which consists of our SAP Reseller, ERP Implementation and Application Managed Services Groups or AMS, totaled $9 million for both the current quarter and in the prior year.
ERP Solutions hourly gross realized billing rate per hour was $132 in the third quarter of 2015, as compared to $128 in the third quarter of 2014. This includes the impact of our offshore resources, which approximate 40% of our SAP, ERP implementation and AMS resources.
SAP implementation and AMS utilization was 75% for the third quarter of 2015 as compared to 72% in the third quarter of 2014. Total company international gross revenues accounted for 14% or 16% in constant currency of total company revenues in the third quarter of 2015, as compared to 21% in the third quarter of 2014.
Our recurring revenues which include our AMS groups, as well as our executive advisory practices now make up approximately 16% of our revenues and 21% of our pretax practice profitability.
Total company pro forma cost of sales, excluding reimbursable expenses and stock compensation expense totaled $36.2 million or 60.4% of net revenues as compared to $33.4 million or 61.3% of net revenues in the previous year.
Total company consultant headcount was 827 at the end of the third quarter of 2015, as compared to 810 in the previous quarter and 775 at the end of the third quarter of 2014. Total company pro forma gross margin was 39.6% of net revenues in the third quarter of 2015, as compared to 38.7% in the third quarter of the prior year.
Hackett Group pro forma gross margins on net revenues was 40.6% in the third quarter of 2015, as compared to 38.8% in the third quarter of 2014, a 180 basis point improvement, primarily due to increased revenue per professional achieved as a result of increased utilization and rates when compared to the prior year.
ERP solutions pro forma gross margins on net revenues was 33.3% in the third quarter of 2015, as compared to 37.9% in the previous year. This decrease is primarily due to lower software license sales in the period when compared to the prior year.
Pro forma SG&A was $14.6 million or 24.3% of net revenues in the third quarter of 2015 as compared to $14.1 million or 25.8% of net revenues in the previous year. This increase in SG&A is primarily due to incremental cost relative to incentive compensation accruals resulting from improved company performance.
Pro forma EBITDA in the third quarter of 2015 was $9.8 million or 16.4% of net revenues as compared to $7.6 million or 13.9% of net revenues in the third quarter of 2014, an increase of 30%. Total company pro forma net income for the third quarter of 2015 totaled $6.4 million or $0.20 per diluted share which exceeded our third quarter’s guidance.
Earnings per share in the quarter were negatively impacted by approximately $0.01 due to the impact of foreign currency fluctuations. This compares to pro forma net income of $4.8 million or $0.16 per diluted share in the third quarter of 2014, an increase of 25% on a year-over-year basis.
Total company pro forma net income for the third quarter of 2015 excludes non acquisition stock compensation expense of $3.4 million, acquisition related stock compensation expense of $251,000 and intangible asset amortization expense of $548,000. Pro forma results also assumes a normalized cash tax rate of 30% or $2.7 million.
GAAP diluted earnings per share was $0.10 for both the third quarter of 2015 and 2014.
GAAP results for the third quarter were unfavorably impacted by a $1.3 million accrual for performance based stock appreciation rights issued in fiscal 2012, which are now expected to be earned, as well as a higher effective tax rate when compared to the prior year.
At the end of the third quarter of 2015, the Company had approximately 3 million of income tax loss carry forwards remaining in the U.S. primarily relating to state taxes and approximately $9 million in foreign tax jurisdictions respectively. We expect to fully utilize our U.S. federal net operating losses during the fourth quarter of 2015.
We will continue to have the ability to offset most of our international tax liabilities throughout 2016. For those of you who track this, diluted weighted average shares outstanding used in our earnings per share calculation grew by 1.7 million shares on a year-over-year basis.
96% of this increase is due to the increase of our average stock price when compared to the prior year, not the issuance of these shares. The Company’s cash balances were $16.3 million at the end of the third quarter of 2015, as compared to $16.2 million at the end of our previous quarter.
Cash in the second quarter was generated from net income adjusted for non-cash items, offset by debt payments, cash payment of acquisition related compensation expense, and payment of semiannual dividends.
Net cash provided by operating activities in the third quarter of 2015 was $12.5 million, which was primarily driven by net income, adjusted for non-cash items, increases in accrual expenses and decreases in accounts receivable and offset by a $3.4 million cash payment related to the 2,014 EPM - AMS contractual earn out achievement, which has been reflected as compensation expense for GAAP purposes.
Excluding this acquisition related cash payment, cash flow provided by operating activities were $16 million for the third quarter of 2015. Our DSO or Day Sales Outstanding at the end of the third quarter of 2015 was 60 days, as compared to 61 days at the end of the previous quarter.
During the quarter of 2015, the Company made debt repayments of $9 million on its credit facility. At the end of the third quarter, the Company had $9.3 million of long-term borrowings outstanding. During the third quarter, the Company paid 3.1 million due to the new declaration of its semiannual dividend.
As Ted mentioned, we are now declaring the next semiannual dividend of $0.10 per share, which will be paid in January of 2016.
Additionally, we have now reflected cash utilized to repurchase shares of the Company’s common stock from employees to satisfy income tax withholding triggered by the vesting of restricted shares in financing activities on a cash flow statement.
We utilized $65,000 to repurchase 5,000 shares in the third quarter and have utilized $2.2 million to repurchase 281,000 shares on a year-to-date basis. Before I move to guidance for the fourth quarter of 2015, I would like remind everyone of the seasonality of our business.
Specifically, the increased holiday and vacation time that is taken in the fourth quarter will decrease our available billing days by approximately 10% when compared to the third quarter.
We expect total Company gross revenues for the fourth quarter of 2015 to be in the range of $63 million to $65 million with a reimbursable expense estimate of 11.5% on net revenues. On the total company basis, we expect revenues to be up by 5% to 7% or 6% to 8% on the constant currency basis.
Unfavorable foreign currency movements are also expected to impact pro forma EPS by approximately $0.01. We expect strong U.S revenue growth of approximately 20%, with European revenues to be down approximately 19%. This European revenue decline includes the negative impact of foreign currency fluctuations of approximately 6%.
Relative to pro forma diluted earnings per share, we expect the unfavorable impact of decreased available billing days to be partially offset by the corresponding utilization of vacation accruals and lower U.S. payroll taxes resulting from reaching FICO limits.
As such we expect our pro forma diluted earnings per share in the fourth quarter of 2015 to be in the range of $0.19 to $0.21. Our pro forma guidance excludes amortization expense, total non-cash stock compensation expense and includes a normalized tax rate of 30%.
Sequentially, we expect pro forma gross margins in the fourth quarter to benefit from the seasonal reductions in U.S. payroll related taxes, resulting from reaching FICO limits and the utilizations of vacation accruals, offset by decreasing revenues due to decrease in available days.
As a result of our revenue guidance, we expect pro forma gross margin on net revenues to be approximately 40% to 42% in the fourth quarter. We expect pro forma SG&A and interest expense for the fourth quarter to be approximately $14.5 million which is comparable on a sequential basis.
We expect fourth quarter pro forma EBITDA on net revenues to be in a range of approximately 16% to 18%. We expect our cash balances, excluding the impact of any additional debt repayments or share buyback activity to be up on a sequential 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, Rob. As Rob mentioned, as we look forward, consistent with the last several quarters we expect continued growth from our U.S. business across nearly all of our groups.
In Europe, we expect the revenues to be sequentially flat, but down on a year-over-year basis, as we see overall activity to be stable but still volatile and with a decreasing foreign exchange impact. We continue to expect one of the key drivers for our U.S.
growth to come from the growing leverage of our so called wedge or benchmarking and executive or best practice advisory services. We continue to invest strongly on both of these areas.
Next year we will roll out a new benchmarking offering project named Quantum Leap, that will fully incorporate our HPE technology as well as many other enhancements that improve the value we deliver as well as the ease of use to our clients.
In Advisory our alliance relationships are helping us invest in new technology that is improving the user experience and access to our content, as well as the capability and insight that we deliver through these best practice programs.
Both of these offerings are highly differentiated in the marketplace and provide significant cross-selling leverage for all of our transformation and technology services. Another key driver of our growth strategy has been to continue to expand our market leading enterprise performance management for EPM business.
EPM now represents nearly 50% of our North American Hackett revenues. We believe that the combination of assembling a terrific team and our unique ability to leverage our best practice configuration and organizational excellent IP is responsible for the success.
Our empirically based insight helps our software partners be successful in positioning the business value of their software when their product is optimally configured, targeting the appropriate information, and also by taking advantage of our best practice insight to organize their business most effectively.
This allows us to deliver a more credible and complete solution when we deliver our EPM transformation, technology as well as our AMS services. Rob mentioned the strong recurring revenue and margin performance that our AMS groups are contributing to our overall results.
This ability to serve clients after they go live, that use Oracle EPM or SAP allows us to maintain a recurring strategic relationship with our clients. This capability also allows us to leverage highly trained offshore resources effectively that have clearly strengthened our implementation teams, as well as our operating performance.
Our long-term strategy is to continue to build our brand by building new offerings and capabilities around unmatched best practice intellectual capital, in order to serve clients strategically and whenever possible, continuously. We believe that clients that leverage our IP are more likely to allow us to serve them more broadly.
IP based services enhanced our opportunity to serve clients remotely, continuously and more profitably. Our goal is to use our unique intellectual capital to establish strategic relationships with our clients directly or through strategic alliances and external channels in order to further use this entry point to introduce our other capabilities.
Specific to our executive advisory client base, we’ve set our long-term goals to be able to ascribe an increasing percentage of our total annual revenues from clients that are continuously engaged with us through our executive and best practice advisory programs and through our Hackett performance exchange.
At the end of the quarter, our executive advisory members totaled 940 across 306 clients. And consistent with prior quarters, over 40% of our Hackett sales were also advisory clients, which continues to support the leverage of this entry or IP wedge offering.
As we announced last quarter, we are now seeing opportunities through our new alliances and channels to use our IP to help others sell and deliver their offerings. Last quarter we announced a new alliance with ADP that adds a dedicated Hackett best practice advisory program to ADP’s vantage HCM solution.
This was an 18-month agreement which includes a contractual dollar guarantee that will allow ADP to both use our best practice IP in the sale, implementation as well as post implementation support of their cloud based offering. Our program will run concurrent with their multiyear contracts that they have with their clients.
By augmenting ADP Vantage HCM with industry best practices that the Hackett group provides, clients will enhance their ability to achieve a business outcome by better aligning the HR services with their business strategies.
We launched our dedicated program and portal in September and all early indications from the ADP sales force as well as their clients are very favorable. In fact, we already have several clients that are utilizing the new Hackett best practice advisory program in their ADP vantage implementations, as well as a growing pipeline.
Last quarter, we also announced our new alliance with CIMA, the Chartered Institute of Management Accountants. We believe this relationship will allow us to build an entirely new professional development business that provides globally recognized certifications for shared services and global business service professionals.
We launched our training of CIMA and Hackett resources during the third quarter and have started to share entry level programs with clients and early indications there are also very favorable. Our plan is to augment our existing entry level program with an executive level program next April, and a managerial level program by next July.
At that time, we will have our complete curriculum fully rolled out. Last week we announced our new joint marketing plan with Oracle that will allow -- that will include the sale of HPE or the Hackett Performance Exchange dashboard, along with the sale of Oracle’s new business intelligence cloud service or BIC.
During the quarter we exposed a large number of Oracle BI sales for a force personnel to this joint offering and we just recently kicked off our joint sales effort and hope to see sales from this joint effort as we exit the calendar year.
Our best practice IP leverage strategy allows us to increase our client base, profitability and increased revenue per client. It would also represent an increase in recurring revenue at much higher margins too to the way these services are provided and contracted.
Lastly, even though we believe that we have the client base and offerings to grow our business, we continue to look for acquisitions and alliances that can strategically leverage or IP add scope, scale or capability which can accelerate our growth. In summary, we reported another strong quarter.
More importantly we are seeing the improvement and investments we’re making in our IP, in our sales channel and in our expanded EPM and AMS focus, and should continue to lead to improve these results. The unique value of our IP and the potential it offers when coupled with our terrific talent and improving execution are strong proof points.
As always, and I’m sure you get tired of hearing me say this, let me close by thanking our associates for their tireless efforts and always urge them to stay highly focused on our clients, our people and the exciting opportunities available to our organization. Those conclude my comments.
Let me then ask the operator to go ahead and move us to the Q&A section of our call..
Thank you. We will now begin the Question and Answer session. [Operator Instructions] Our first question comes from the line of Morris Ajzenman, your line’s now open..
Two questions. first question top ten customers, 27% of revenues. So the concentration on the top ten, even the top five or top class really hasn’t changed over the last year last quarter.
How would you summarize -- you’ve talked about it but the growth particularly domestically, what’s driving it? Is it just more confidence, better feeling by your customers to move forward with projects and into initiatives that you’re offering them.
Is it any handful of industries that’s driving the improvement? Wondering if you can kind of help us understand how these trends will improve, despite the U.S.
economy being relatively sluggish from the GDP perspective?.
Well, let me first start by addressing the 27%. You’re right, it hasn’t changed much but what that means is that our revenue growth -- our revenue is growing, and the scale of those top 10 clients is growing with it.
But there is no doubt we’re serving more clients but we’re also doing projects, larger projects with clients as well, which leads to the revenue growth. With that said what’s driving demand? Morris, look, for the S&P 500 or more broadly the Global 2000 that we generally serve, growth is hard to come by. People continue -- the U.S.
economy, even though that appears to be improving -- we forget but had some volatility in the first quarter as it did a year ago. Clients are starting the year with aggressive revenue growth plans.
By the time they get to the middle of the year, they realize that the revenue plans are not going to be achieved, just the overall GDP growth is simply not there.
And they’re driving the improved EPS results through productivity improvement, which we play a very strong part in or through some of the things they do in either acquisition or other financial architecture.
But specifically to productivity improvements, I think when you’re seeing the kind of growth we’re experiencing, there is no doubt that clients are turning to us for that identification.
If you want to relate that to benchmarking or architecture which relates to our transformation capability or business analytics, which report to our EPM capability, across all of those three sectors, I think the Hackett brand and our ability to play this highly respected well branded independent perspective that can be played and then allow the clients then to execute those projects either their own or with a large SI has just continued to grow.
I think we relate that permission and the success we’re having to the fact that people really believe that we have information that results from our benchmarking business that is unique to Hackett, which allows us to quickly either compare their performance to others, or when they don’t want that direct comparison through a benchmark to quickly help them understand what the very best or leading global companies are doing to improve their performance.
And that permission I believe has improved. I think our execution has improved and I think the channel partners’ ability to rely on us to I think differentiate their offerings or understand their offerings by talking about what their products do, what their software products do instead of how many people we have in go-live is enviable.
And I think our job is to continue to build on that momentum. There is no doubt that with that kind of U.S. growth, at least in the U.S.
with these top clients, we must be taking market share or expanding our permission with these very large clients to play that identification out of the possible -- or architecture how best to drive sustainable change because of the IP we have..
Thank you. One more question and I’ll hop back in the queue. The three joint ventures you’ve discussed in dual in very early stages here.
Any sort of report card you want to have us kind of lookout as 2016 unfolds? Any quarter where you think you may have might be able to see traction, where we should be looking for something or should we just let 2016 play out without having any expectations?.
Well, I mean we have expectations. I just don’t want it to be guided, because we’re still early on these projects.
But our expectation is that we should see our current efforts result in increasing revenue throughout 2016 and that that revenue should come primarily in the shape of multiyear contracts, and that that revenue would then grow on a year-over-year basis in some significant way.
So what we don’t know is the extent of the success of each the three ventures.
But I tell people that if -- we can say if they all do average, that yields a certain expectation for us or if one does incredibly well and one does average and one really doesn’t do something at all; overall, we would attract Morris, for that revenue to increase throughout 2016, and because it would come in at such a high gross margin and operating margin, to at least be noticeable in the second half of next year and then allow us to layout some kind of growth and margin and operating margin from those activities as we exit 2016.
But we hope to be able to share activity that becomes meaningful as we close out the first quarter and we hope that that builds out throughout the year and then through years to come..
Thank you. [Operator Instructions] Next question comes from the line of George Sutton. Your line is now open..
Given the strong results, I wondered if we could peel back the onion a little bit here and talk about number of customers and strength there in the U.S. versus the size of the relationships that you’re seeing. You’re obviously seeing improvements in both. I wondered if we could discuss each of those a little bit more.
And I’m also thinking of this relative to some of the market share gains that you might be seeing..
George, we don’t provide that client count or average revenue account, but we can say both -- that we’re seeing, both increased activity in accounts, and we’re seeing the average size of our engagements increase across most of our practices. We don’t have specific counts with you.
But they’re both up and then that’s driving increased utilization, as Rob mentioned, that’s also coming with higher rate, not significantly higher.
But remember, we used to be in period where those rates were flat to down; now we’re seeing them flat to up, which I think again is attributed to the fact that people are willing to recognize this unique way that the unique information we have to help them make these decisions. So, it’s really improved execution across the board.
And unfortunately, no, I don’t have the exact increase in accounts and average client counts, but they’re both up..
Let me turn the focus to Europe which hasn’t performed to your expectations. Can you give us a sense of what you’re trying to do either from people perspective, strategic perspective? Obviously that economy is not -- has not gotten much better but frankly the U.S. hasn’t gotten much better.
So, it’s hard to understand the dichotomies?.
Well, there’s two significant differences, one, the relative scale of our business, even if you go back a couple years ago, when Europe was larger, is significantly larger in the U.S. as compared to Europe.
And the EPM business which we have is probably the most significant one that we have an EPM business which now represents 50% of our Hackett revenues in the U.S. which we’re still just trying to build in Europe. So, when we look at the two -- there’s also one other item which is very, very important. Even though GDP growth in the U.S.
is better than it is in Europe, you may point out that in certain economies, it may not be noticeably stronger. But when it comes to client decision-making, a North American or U.S.-based company is clearly more decisive and committed to productivity improvement than their European counterparts.
I think the European counterparts, both culturally and also as a result of some of the if you want to call them regulatory, individual countries, social economic rules will clearly differ and not act as quickly and decisively and stay with productivity’s initiatives as we see our U.S. counterparts behave with.
So, one, a significant component of the business out there; two, the scale of our business in U.S. is larger than Europe; and three, culturally. U.S. dealt with the financial crisis more aggressively and more assertively, U.S. GDP growth has been stronger, more consistent, and U.S. led companies act more decisively.
The combination of these things lead to difference in performance..
Okay, you mentioned your Quantum Leap strategy or Quantum Leap coming up next year. and it sounds like you’re packaging HPE together with your benchmarking.
Can you explain how that’s different than how you’re trying to go to market before with HPE, which sounded like it was a little bit more of a specific focus?.
Well, HPE still has its specific focus and we sell it as an independent dashboard or where our primary efforts right now are to sell it jointly with the Oracle Business Intelligence Cloud Service platform to leverage Oracle’s large sales force in that business intelligence area.
Having said that, what we learned from the Hackett Performance Exchange, and you’ve been exposed to the dashboard is that we believe that our current benchmarking offerings could one, be streamlined so that clients could provide us the information more effectively.
We also wanted the clients to take advantage of the automated extraction capability of HPE in our -- or if you want to call it our base or traditional benchmarking offering. So, we wanted to integrate that capability in our base offering.
And we also wanted to add some capabilities to our base benchmarking offering that allows clients to perform a benchmark either on a continuous basis even if it’s just annually, or even if it decides to repeat it in some more frequent -- with more frequencies than they are today.
But at the end of the day, it’s about delivering, it’s capturing more data, clients submitting data more efficiently, us allowing clients to populate data with more ease, allowing them to update information if they want to re-benchmark more quickly, use full portal and dashboard capabilities to report all of our traditional benchmark information, using the dashboard capability.
So, it’s like, I liken this a lot to TurboTax, when I tell people that if you’re a TurboTax user and you started using TurboTax over 10 years ago, you were providing all the data and it completed your tax return.
And if you continue to use that capability that quicken product five years ago, you saw more direct extraction and download capabilities that came into that product and really significantly increased the ease of use of that product. We’ve been trying to emulate some of that capability for our traditional benchmark user.
So, consider benchmarking a product that somebody can use and run monthly and use it as a dashboard and both measure the event or measure how well they’re trending. But we want to take that technology even for our very large users who may use us maybe every three to four years and we’d like for them to use us with more frequency.
We think that that frequency will improve, if we give them technology that enhances their experience significantly, we think Quantum Leap will do that. Our benchmarking services excluding that capability today, as you know over the last couple of years, have been growing very strongly.
That’s a result of increased sales capability, but we also believe it’s because by demonstrating the HPE capability, a client can quickly see if they have any doubt that we are the leading global benchmarking organization in the world. We want to stretch that further with the introduction of Quantum Leap next year..
Thank you. Next question comes from the line of Bill Sutherland. Your line is now open..
Hey. I wanted to -- you’re going to hate this question, but I wanted to just see if you guys could think out a little bit about the way that CIMA, Oracle and ADP begin to influence the numbers. Two of them, as I understand it are simply going to be almost like a licensee kind of model, Oracle and ADP.
And then on CIMA that’s more of a traditional joint venture where you’re reporting your share of the financials. And so, because this just impacts kind of how the model starts to lay out as these things begin to take on any sort of size.
And so, I guess -- I mean you’ve got the sales engines turning over now, I guess in all three, and some sort of sense of order of magnitude or anything as far as how this is going to start influence the earnings statement?.
Well, let me see if I can give you some information on all three and see if that helps you with the response you’re looking for.
So number one, the ADP relationship, as you know, that includes a contractual guarantee, every time the ADP Vantage HCM product is sold with anything other than the -- with any other module other than the payroll module, our Hackett best practice advisory program is sold along with their software offering.
And as soon as the contract is signed and the client starts paying ADP, we get our share of that every month. So, we would expect for us to -- as the pipeline builds, we would expect to bring the clients on to build as these clients -- as we build this pipeline which we started to build with them here in the middle of September.
So, we would hope to be able to see some revenue, some revenue even in Q4 but hopefully something, more meaningful as we get Q1 and before. But as you could imagine, Bill, these are 3 or 5 year contracts.
So, this -- a new client would build on another, so this should grow throughout 2016 and beyond, if our relationship is -- if successful, the way we hope and believe it can be. So that -- I’ll call the cadence of that the numbers of clients that they signed and the size of those client will dictate how quickly that ramp takes place.
On CIMA, CIMA is a little trickier in that -- our vision is to sell companies, a full curriculum for their shared service for GBS professionals. But right now, we only have one of the three product offerings that we’re showing them that we will have. We have the -- as we said the executive level program out next April and the managerial next July.
So, right now, the ramp will start with just the entry level program.
And I believe you will see clients bring a number of their -- I’ll call it, may pick a center or may pick a certain group within their shared service or GBS organizations to participate, so that they can validate the strength of our offering, but they will do that only with one course.
That cadence will pick up after April when we have a second course that they can then pay us and sign up for. And then the full cadence will be next July.
And our hope is that once we have the full curriculum in place that we will go to these large organizations that have the largest population of the 5 million addressable market we believe exits that we’d like to come in and really get -- our goal is to say we’d like to get a portion of your training budget for the entire centers and to be responsive to any and all needs that emanates from that relationship.
But, I would expect that again it starts small as we have the one program increased through April and then be full blown by the time we get to July. And the number of organizations and more importantly, number of suits from those organizations come on-board will drive that revenue increase..
And Ted, sorry to interrupt you, but that’s going to have an impact -- that’s going to be more of a traditional, like you’re utilizing your sales group in part?.
In part for CIMA, yes..
So that will have sort of a traditional ripple effect on your P&L as it builds as opposed to the other two that just dropped down for the most part..
Well, it’s interesting that you say that but yes, we’ll have higher sales expenses for CIMA. But I hate to get into the details of how the gross margin difference would be for CIMA versus the other. I don’t want to get to that level of detail..
Sure I understand..
Suffice to say though, suffice to say that the gross margin and operating margins from any ramp up from these three offerings since the HPE depreciation is already in our P&L since the beginning of 2004, will be substantially higher than any gross margin or operating margin we would have from any of our existing offering..
That goes without saying..
That’s right. So, let’s just say, even small amounts of revenue, since that operating -- this gross and operating margin would be high, after some period of time, should become noticeable to our P&L, once and/or if they ramp up, let me back get ahead of myself.
So, it’ll be hopefully by the time we report the first quarter, we’ll have some cadence or ramp up, so that we could then provide some -- a better idea of what the 2016 number would be. I would hate to try to do that prior to the first quarter of 2016 quarter plays out..
So, I’m just curious, if you were to just sort of estimate the size of your recurring revenue today and it’s -- you can be pretty precise actually because I’m thinking it would include executive advisory and then your AMS or EPM, SAP and Oracle, what it is they come to know?.
As Rob mentioned in his comments, 16% of our revenues come from our AMS and executive advisory practices today and it represents 21% of the profit contribution from those practices, as it relates to the total company’s performance.
So first of all, I think one, it’s important to note that this was a negligible number 24 months ago and now this number is up to 21%.
Our hope, right, in a perfect world, if we could have these new ventures kick in and they come in with higher gross margins and operating margins, it’d be nice to see that percentage of total profitability relating -- that relates to recurring revenue, not only increase as it relates total but also see that come in at higher gross margins and operating margins, so that even with smaller revenue growth and on absolute basis, we would see higher percentage of total profitability come from recurring revenue and from these IP based services, as we go through ‘16 and hopefully increase into ‘17 and beyond..
Thank you, sir. And we have another question coming from Jeff Martin. Sir you have an open line..
Could you give us an update on your progress with building EPM in Europe? I know that’s been a multi-quarter initiative and you spent key personnel over there to spearhead it.
Just curious the progress you’ve made and what your expectations are for the next couple of quarters in terms of progress, and if it’s more complicated than that, maybe kind of high level help us outline what exactly it takes to get that and start to gain more traction?.
I would say that progress to-date is disappointing. Having said that we believe that we’ve put the right people in place for us to build that EPM capability in Europe. We’re bidding and we’re competing, and doing more EPM work than we were at the beginning of the year.
What we need are for those opportunities to move from assessment to some nice implementation work that allow us to scale that business. Without that sequence, we’re not going to achieve the kind of results we want.
So, I would say, disappointing to-date, but staying all over it, believe it should be an important part of our European business and we expect to build it out. Having said that, I worry about commenting on Europe because I don’t want to talk about Europe as being -- there’s no doubt that Europe is a more difficult marketplace than the U.S.
marketplace. If I look across virtually, all industries with very few exceptions, all of our large clients see the same, I’ll call it -- have the same experience that we’re experiencing. So, we’re just mirroring what our clients are experiencing. Having said that, Europe was significantly larger, as a percentage of total for us four years ago.
We see no reason why it should not return to that. Our commitment to the region and especially since we serve a global client is undeterred by this. We operate profitably from Europe but we know that, boy, would we love to see our current result and our guidance if Europe had been flat to up the second half of the year.
I mean our results are incredibly strong. And as I said, this is in spite of weak European results. So, we’re not where we want to be but we expect to improve it as we get to ‘16. Will we plan on improvement, as we speak to the Street or try to think of what our prospects are? No.
But do we expect for Europe to perform at levels more commensurate with the ones we were experiencing four or five years ago? Absolutely. And it’s just a matter of time before either A, some combination of stronger GDP growth, I mean let’s see how their stimulus really impacts the consistency of that marketplace performance.
I know that we’re prepared and we are making the investments to see that return. We’re not going to give up. It could be material for our current operating performance. So, we know the opportunity is there and we know it’s just a matter of time before we capture it again..
And then was curious if you could touch on your alliance partners and how those essentially act as sales channel for you, do you expect that from [indiscernible] or is that particularly more related to Oracle?.
Well, first of all, in the ADP side, the channel is entirely theirs and we’re just available for support the calls that they would like for us to support. And part of our program is to work with them when we can to make sure a client understands the value of this Hackett capability that’s now being offered with them.
So, a very large sales force, a very committed organization. As I said, the feedback from clients and sales force is very favorable. On CIMA, currently we’re from this, I call it early activity, I want to remind you that we didn’t actually finish training until I think the third week of September, so let’s say we’ve got six weeks into this.
But right now, about a third of the pipeline opportunities are coming from CIMA, two thirds from us. And I would expect that our opportunities, as we look at it, we expect our opportunities as we engage large clients and we complete the offerings, to be significantly greater from a dollar basis, as we fully roll out the curriculum.
But highly collaborative, doing all the things that you’d want to do and with a start up capability like this that CIMA’s a phenomenal organization, we think we picked the a terrific partner. And then on the Oracle side, again the product is being taken by Oracle through their BI channel. We now support those sales calls to the extent we want.
I would say that when I look at the activity today, perhaps a quarter of the activity is coming from us and three quarters of the activity that we’re pursuing is coming from them.
And that one is just too early to call, but as I mentioned we hope to be able to provide some sales activity as we exit the year and speak to the fourth quarter when we present our annual and quarterly results..
Okay, great.
And then could you touch on the wedge offering from a high level? How does that affect the sales process; how does it translate into opportunities and conversions from that pipeline and how do you see that evolving over time?.
I think one of the things that we learned is -- you’ve followed us for a while, even though you started covering us a couple of years after you met us and started kind of getting to know our business model.
But as I told you, one of the things that I think we did wrong coming out of the financial crisis, is that we discounted and cannibalized our benchmarking sales activity at the expense of trying to drive higher revenue growth.
One of the things that we think is critical to our current success is that about, I don’t know, I’m going to say as we were rolling out the initial HPE product but maybe a couple of years ago, we clearly decided and understood that benchmarking growth and data growth meant higher growth to the entire business and specifically our transformation business.
So, we think that the rollout of HPE helped us peak and reintroduce our benchmarking offerings and speak that just how differentiated we were. We think that had an impact increasing to sales force in that in benchmarking, has also been paying off for us and benchmarking has been growing as far as any group here over the last couple of years.
And we’re seeing the benefits of that. And it’s with these marquee clients that really want to make whether it’s post merger decisions or drive productivity decisions, more precisely they just know to turn to us.
And we hope that both by showing them that we give them alternatives on how to do it with HPE, if they want to monitor that on a quarterly basis or what they’ll see next year when we launch our project Quantum Leap, which will allow them to use our current offerings, again more easy and with better user interface and capabilities.
We think that the success we’re having now should only improve as our capabilities expand and improve into next year. But clearly, a strategic decision that we made several years ago to invest in product and sales which are paying off for us. So, both of those. On the advisory side, look, sometimes a client engages us, doesn’t want to benchmark.
They simply say Hackett, can I have some of your data to just either assess an opportunity to improve, to education our people a little differently or to monitor what we’re doing? But that executive advisory relationship has allowed us, and this is the right term, not only to give someone an alternative other than benchmarking to gain access to Hackett and the data, best practice and say and the benchmarking data, but it also allowing us to incubate clients.
So, clients can come in, gain the test of Hackett, call us with these strategic questions that come with the inquiry support. We answer them strategically. Eventually they say guys, you seem to help us navigate this so efficiently, can’t you help us architect that? And boy, there comes the introduction. And you’ve seen.
Actually we’ve said our sales this quarter and have been consistently of our total sales, 40% is coming from a client that currently uses our advisory services that actually was high 40s this quarter.
I mean clients who get exposed to our IP and see how it’s developed and how well it’s formatted and the insight that comes, have been giving us more transformation and EPM and working capital work.
I mean that incubation and that maintaining that relationship when we’re not doing project is something that is helping us do something without scale that large companies do by having a gazillion sales people or gazillion partners. We don’t have that luxury. But boy, we’re doing it pretty efficiently with the business that gives us a very good margin.
So, look, we’re really happy with the investments we’ve made. Obviously, you’re catching us in a quarter but the momentum is jus significant, record results. Things are working very well for us right now, Jeff..
Great and then last question on the alliance side, not to be greedy but do you foresee additional alliances over the course of the next year?.
Do I see additional ones? I am working my tail off to have additional ones. I think if anything what I’ve seen from these first three offerings is that we can help a large software company or a large e-learning company and who knows what the idea will be next to differentiate and our extend value.
So, I am working feverishly to identify what those opportunities are and introduce that capabilities to those companies. So, I will say that yes, I will personally be disappointed if we don’t introduce additional alliance partners in 2016..
Thank you. At this time, I show no further questions. I would now like to turn the call back over to Mr. Fernandez..
Thank you, operator. Let me thank everyone again for participating in our third quarter earnings call. We look forward to updating you again when we release our fourth quarter and annual results, sometime around mid-February. Again, thank you for participating..
Thank you. That concludes today’s conference. Thank you for participating. You may all now disconnect..