Welcome to The Hackett Group Fourth Quarter Earnings Conference Call. Your lines have been placed on 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..
Thank you, operator. Good afternoon, everyone, and thank you for joining us to discuss The Hackett Group's Fourth 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 Web site 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 Web site.
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 that 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 fourth quarter earnings call. As we normally do, I will open up the call with some quarterly comments, overview and highlights. I'll then turn it over to Rob and ask him to provide some detailed comments on our quarterly, our cash flow as well as guidance.
Rob will then turn it back over to me to provide market, strategic overview comments and then we’ll open it up for Q&A. So let me first start by saying this afternoon we reported net revenues of 63.7 million and pro forma earnings per share of $0.24, which were at the high and midpoint of our guidance respectively.
Solid US performance was unfavorably impacted by week international results. Consistent with our guidance, we took immediate steps to right size our international operations in an attempt to limited impact on our overall results going forward. As a result of that review, we also decided to exit our Hackett Institute's Analytics program.
We wanted to make sure we are focusing our efforts and resources on the offerings and markets that provide us the strongest opportunity to grow. Total Q4 US revenues were up 8% in spite of the diminishing impact from the Oracle on-premise revenue decline.
More importantly, it now appears that the headwinds from the Oracle on-premise decline will be in material by midyear of 2020. The strategy of business transformation activities continues to be solid as companies continue to pursue enterprise digital transformation initiatives.
In our EEA or ERP, EPM and Analytics group, we saw strong growth in the Oracle Cloud ERP multi-tier deals, which are larger and broader, as well as strong SAP S4/HANA activity, which continued to build throughout the quarter. We also saw an emerging contribution from our promising OneStream group.
As Rob mentioned these two groups or as Rob will mention, these two groups are expected to grow 10% to 15% in the first quarter. On the international front Europe continues to be challenging. As we mentioned last quarter, the Brexit dispute and uncertainty affected client decision making.
Accordingly we took the appropriate actions to adjust our cost to be in line with our current revenue and market demand and as I mentioned protect our overall results into 2020. With that said recent election results should provide the clarity needed to allow business demand to return to more normalized level as the year progresses.
However, we know we will have challenging European comps impacting our total growth rate through the second quarter of 2020.
On the investment side, we believe the strategic investments we have made to fully digitize all of our IP, the development of our next generation benchmarking platform Quantum Leap and the introduction of our proprietary Hackett Digital Transformation Platform or DTP, highly differentiate our offerings and continue to be important drivers of our growth.
Additionally, our investments to smart automation along with strategic relationships were rapidly growing. Procurement, EPM and RPA software providers also continue to be a key of our strategy and digital transformation momentum.
Some of these relationships are just starting to impact our revenue growth, but are important future drivers of our growth strategy. On the balance sheet side was we continue to generate very strong – we generated strong profitability, but very strong cash flow from operation.
This allows us to continue to increase our dividends, buy back stock and fund acquisitions while continuing to invest in our business. I'll also comment further on strategy and 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'll cover the following topics during this portion of the call.
I'll cover an overview of our 2019 fourth quarter results, along with an overview of related key operating statistics, an overview of our cash flow activities during the quarter and I'll then conclude with a discussion on our financial outlook for the first quarter of 2020.
For purpose of this call, I will comment separately regarding the financial results of our Strategy and Business Transformation group or S&B T, and Our ERP, EPM and Analytic solutions group or EEA and our International group and the total company.
Our S&BT group includes the results of our North America IP-as-a-service, which include our executive advisory programs and benchmarking services, and our business transformation practices. Our EEA solutions group includes the results of our North American Oracle and SAP solutions practices.
Our international group includes the results of our S&BT and our EEA groups that are based primarily in Europe. Please note that this differs from how we've commented in the past, when we grouped all international practices within our S&BT group.
We believe providing international results separately enhances our current year reporting given a volatility in Europe. In addition, please note that all references to gross revenues in my discussion represent revenues, including reimbursable expenses, and any references to net revenues represent revenues excluding reimbursable expenses.
As previously discussed, we exited our European based REL working capital practice at the end of 2018, which continues to be accounted for as discontinued operations in our financial statements.
Additionally, references to pro forma results exclude non-cash compensation expense, intangible asset amortization expense and other non-recurring adjustments and assumes a normalized long-term cash tax rate of 25% as detailed on the accompanying tables of our press release.
Acquisition related compensation expense adjustments, our cash and non-cash items related to the portion of the purchase consideration for acquisitions, which are reflected as compensation expense under GAAP.
Moving on to our fourth quarter, for the fourth quarter of 2019 our net revenues from continuing operations increased by 3.5% to 63.7 million when compared to the prior year and was at the high end of our revenue guidance range. The Q4 2019 reimbursable expense ratio on net revenues was 8.4% as compared to 8% for the fourth quarter of the prior year.
Reimbursable expenses are primarily project travel related expenses passed through to our clients and have no associated impact to a margin or profitability. Including reimbursable expenses, company gross revenues from continuing operations were 69.1 million in the fourth quarter of 2019.
Net revenues for our S&BT group were 25.9 million in the fourth quarter, an increase a 5% on a year-over-year basis, driven by solid results across most of the practices. Net revenues for our EEA solutions group were 30.5 million in the fourth quarter, an increase of 11% on a year-over-year basis.
This was driven by strong growth from SAP, OneStream and Oracle ERP practices. Specific to our US Oracle practice with EEA, our cloud revenue growth was in excess of 30% on a year-over-year basis, resulting in the improved mix of clouds on-premise implementation revenue, which is now approximately 75%.
Equally important our remaining on-premise implementation revenues continue to stabilize reducing the unfavorable impact on growth. Net revenues for International group were 7.4 million in the fourth quarter of 2019, a decrease of 22.5% on a year-over-year as we expected and discussed in the previous quarter.
Total company international net revenues accounted for 12% of total company net revenues in the fourth quarter as compared to 16% in the fourth quarter of 2018.
Our recurring revenues, which include our executive and best practice advisory and AMS groups accounted for approximately 20% of our total company net revenues, and approximately 29% of our total company pre-tax practice profitability in the fourth quarter of 2019.
Total company pro forma cost of sales, excluding reimbursable expenses, totaled 38.6 million or 60.6% of net revenues in the fourth quarter of 2019, as compared to 36 million or 58.4% of net revenues for the same period in the prior year.
Total company consultant head count was 990 at the end of the fourth quarter, as compared to 1036 in the previous quarter and 984 at the end of the fourth quarter of 2018. Total company pro forma gross margin was 39.4% of net revenues in the fourth quarter, as compared to 41.6% in the fourth quarter of 2018.
S&BT gross margins on net revenues was 49.1% in the fourth quarter, as compared to 48.2% in the fourth quarter of the prior year. The margin increase was primarily driven by higher revenues during the quarter partially offset by increased headcount related costs.
EEA gross margins on net revenues was 33.4% in the fourth quarter, as compared to 37.6% in the fourth quarter of the prior year.
The margin decrease was primarily driven by revenue increases that were offset by increased headcount and higher utilization of subcontractors in the quarter, as well as decreased revenues from SAP software sales, which carry a higher gross margin.
International gross margins on net revenues was 30.6% in the fourth quarter of 2019, as compared to 36%, in the fourth quarter of the prior year, primarily driven by revenue decreases in the group as we discussed.
Pro forma SG&A was 14.8 million in the fourth quarter, as compared to 14.4 million in the previous year and represented 23% of net revenues in both years. Pro forma EBITDA in the fourth quarter of 2019 was 11.2 million, as compared to 11.9 million in the same period of the prior year and represented 18% and 19% of net revenues respectively.
Total company pro forma net income for the fourth quarter of 2019 totaled 7.7 million or $0.24 per diluted share which was at the midpoint of our fourth quarter's guidance. This compares to pro forma net income of 8.4 million or $0.26 per diluted share in the fourth quarter of the previous year.
Our pro forma return on equity was 25% for the fourth quarter of 2019. GAAP diluted earnings per share was $0.07 for the fourth quarter of 2019, as compared to no GAAP earnings in the fourth quarter of the previous year.
GAAP results for the fourth quarter of 2019 include a 3.3 million or $0.09 restructuring expense, primarily related to severance costs related to the reduction of staff in Europe and Australia and include 1.2 million or $0.03, expense related to the write down of assets in our investment in the Hackett Institute's Enterprise Analytic program.
There were no GAAP earnings in the fourth quarter of 2018 as a result of losses recorded from discontinued operations and the write down of assets relating to HPE that we recorded last year. The company's cash balances were 26 million at the end of the fourth quarter of 2019, as compared to 16.4 million at the end of the previous quarter.
The increase in the fourth quarter was primarily attributable to strong cash flow from operations, which was partially offset by debt repayments, stock repurchases, earn-out settlements and capital expenditures.
Net cash generated by operating activities in the fourth quarter of 2019 was 15.8 million, which was primarily driven by net income adjusted for non-cash items and decreases in accounts receivable. Our DSO or days sales outstanding at the end of the fourth quarter of 2019 was 66 days, as compared to 72 days at the end of the previous quarter.
During the quarter, the company fully repaid the outstanding balance of 2.5 million on its credit facility. During the quarter of the company repurchased approximately 148,000 shares of the company stock at a total cost of 2.3 million or an average cost of $15.34 per share.
Subsequent to the end of the fourth quarter, at its most recent meeting, the Board of Directors authorized a $5 million increase to the share repurchase program.
Additionally, at its most recent meeting, the company's Board of Directors approved an increase of the company's annual dividend from $0.36 per share to $0.038 cents per year to be paid semi-annual. I will now turn to our guides for the first quarter of 2020.
Before I do that, I would like to remind everyone of the seasonality of our business relative to cost as we move sequentially from Q4 to Q1, specifically consistent with first quarter guidance provided in previous years our first quarter guidance of 2020 reflect a sequential increase in US payroll related taxes and the sequential buildup of our vacation cost.
The company estimates total net revenues for the first quarter of 2020 to be in the range of 65 million to 66.5 million. On a year-over-year basis, we expect North America S&BT and EEA to be up 10% to 15% as it benefits 3% from SAP software sales.
We expect international to be down approximately 25% to 30% as we expect the impact from Brexit to continue until the second quarter due to unfavorable 2019 comps. The company estimates gross revenue to be in the range of 70.5 million to 72 million. The gross revenue guidance includes an estimated 8.5% for reimbursable expenses.
We expect our pro forma diluted earnings per share in the first quarter of 2020 to be in the range of $0.23 to $0.25. At the high end of this range this would represent a year-over-year increase in pro forma earnings per share or approximately 14%. We expect pro forma gross margin on net revenues for the first quarter to be approximately 38% to 39%.
Gross margins for the first quarter are somewhat tempered due to the ramp up of headcount and utilization of subcontractors associated with revenue increases in North America. We expect pro forma SG&A and interest expense for the first quarter to be approximately 15 million.
We expect first quarter pro forma EBITDA on net revenues to be in the range of approximately 16% to 18%.
We expect cash balances, excluding the impact of share buyback activity to be down on a sequential basis due to the payment of 2019 performance related bonuses, the payment of the fourth quarter dividend declaration that was paid early in the first quarter of 2020 and the payment of employee income tax withholding triggered by net vesting of restricted shares.
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 we look forward, the investments we have made in Quantum Leap, our digital benchmark as a service platform, has allowed us to further differentiate Hackett as the global enterprise benchmarking leader. As I've mentioned previously, this new platform allows us to deliver more information with significantly less client effort.
It also allows clients to leverage our IP to frame and track transformation initiatives over the life of their respective efforts. We believe that there is no comparable platform in the market. We also released our Digital Transformation Platform or DTP to further differentiate our unique IP and related capabilities.
DTP allowed us to fully digitize our best practice IP and align proven software configuration and organization solutions to help clients drive transformational change. DTP has been instrumental in many of our recent business transformation, as well as cloud implementation wins.
These investments along with our Oracle ERP and RPA investments to name a few have allowed us to position ourselves for the digital transformation era. With that said, with that as a backdrop, we're excited about our prospects for 2020. So let me share some of the reasons why.
The on-prem headwinds should be substantially gone by the end of the second quarter. And we have now addressed the volatility in Europe. We believe both the S&BT and EEA businesses in the US should continue to grow throughout the year.
Additionally, as the Europe impact fully subsides by midyear so should our total company revenues grow at our 5% to 10% long-term revenue growth rate.
Within strategy and business transformation, the benchmarking and executive advisory practice strengthened by Quantum Leap and DTP are considered our wedge offerings, and they are good indicators of the momentum of the business.
In 2019, both of these practices in the US had revenue for ACV or on Annual Contract Value growth in excess of 10%, which we believe bodes well for the rest of the businesses in 2020.
Within our EEA group, our Oracle ERP acquisition on the West Coast has been fully integrated and grew strongly in 2019 and led the momentum of larger and broader Oracle deals. Given this success, we're aggressively looking for ways to expand our Oracle ERP capabilities on the East Coast.
Our SAP Business also finished the year strong and has great momentum into Q1 of this year. Also last year we launched a one stream EPM practice and within the first 12 months we've already achieved platinum status consistent with our growing market success.
Relative to Europe, we believe that the election in the UK and the Phase 1 trade deal with China should provide the stability for increased business demand, which should begin to be accretive in the back half of the year.
On a long-term basis and as you've heard me repeatedly mention, the rapid development in digital transformation along with emerging enterprise cloud applications, workflow automation, process mining and artificial intelligence is dramatically influencing the way businesses compete and deliver their services.
Traditional sequential and linear based business models are changing to fully digital and dynamic automated workflows and events with enhanced intelligence. Digital transformation is redefining entire industry at an accelerated pace, forcing organizations to fundamentally change and adopt these new capabilities in order to remain competitive.
Strategically, our focus is to continue to build our brand with our new offerings and capabilities focused on digital transformation around our fully digitized and unmatched benchmarking and best practices intellectual capital. This should allow us to serve clients strategically and whenever continuously.
Given the success of our existing partner initiatives and the improved functionality, we continue to add to our Quantum Leap and Digital Transformation Platforms. We believe we will attract other strategic partners to similar programs.
We continue to launch paid pilot initiatives with new partners and that will further demonstrate our unique capabilities and unmatched credibility that our brand brings to our Digital Transformation business case assessments.
We now have nearly 1000 clients with access to our IP platforms across our executive advisory and other IP-as-a-service offerings.
Lastly, even though we believe 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 with our accelerated growth.
As I mentioned, expanding our Oracle ERP capability and some of the other technology areas which we've been aggressive with are prime targets for us. In summary, even though the weakness in Europe unfavorably impacted our quarterly results, we took the necessary steps to address its impact on our continuing results.
We continue to build our momentum in the US, which has allowed us to resume our growth not only in this quarter, but more aggressively into Q1.
This progress demonstrates the investments we've been making around digital transformation and expanded cloud and smart automation in our IP-as-a-service offering continue to provide us with highly differentiated offerings and strategic access to most of the leading global companies.
As always, 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. This does conclude my comments, let me turn it over to the operator and let us move on to the Q&A section of our call.
Operator?.
Yes, the phone lines are now open for questions. [Operator Instructions] Thank you. The first question in the queue is from Andrew Nicholas with William Blair. Your line is now open..
Hi, good afternoon.
And with the European cost cutting initiatives in the rearview mirror and what sounds like a very strong demand backdrop for the US businesses, I was hoping you could talk a little bit about how you're thinking about headcount growth, both in the first quarter and through the rest of 2020?.
It's an excellent question. If you look at some of the comments that Rob mentioned when he provided guidance, we grew headcount pretty aggressively, as the year ended. You may not see that because some of those increases in the US were offset by the decreases in Europe. They continue into Q1.
So we're placing a significant bet that the increased, if you want to call it headcount costs that we're incurring in Q1 will continue to pay off through the balance of the year. So no, it's a very important part of what we're doing.
And even though we have to take those reductions in Europe, we've been equally aggressive to add headcounts in the US across both groups..
Great and then just with respect to the European business and kind of a post Brexit market environment, can you speak a little bit more about the client conversations you're having, client behavior, general demand trends.
I know it sounds like you expect some of those headwinds to kind of dissipate over the first half of the year so that you can grow into the back half.
So I'm just curious, what gives you confidence in that acceleration over time?.
Well, part of the confidence that we have is the fact that historically, we've had so much success in that market.
And we believe that some of the disruption that we felt specifically, we do so much transformation and organizational work, we really believe that some of – that area was probably hurt most by some of the indecisions of what Brexit would mean relative to organizing whether it was across an entire group of companies versus having unilateral agreement, which we'll see how it plays out here very quickly.
What we're, I guess, pleased, I don't want to say happy, but we're pleased to see is that there appears to be a clear direction as to the outcome and therefore it allows these companies to start planning.
On a, if you want to call on a current market basis, we believe that the client conversations are improving and the directivity is improving, consistent with the clarity in direction. So we, as I mentioned, we would expect European results to benefit us in the second half, which – they're clearly hurting us in the first half of the year..
Great, thank you..
[Operator Instructions] The next question in the queue is from George Sutton with Craig-Hallum. Your line is now open..
Thank you. Ted, I wondered if you could give us a current breakdown of where we are with respect to Oracle on the cloud versus premise.
What kind of growth rates are we seeing in the cloud? What kind of declines are we seeing in the premise? You mentioned that we should see that headwind abate by the end of Q2, just if you can give us a little more detail there that'd be helpful?.
No, it's a very important question, George, especially given exactly the impact of the transition we're experiencing, not only slightly in Q4, but we're experiencing in Q1. The Oracle Cloud growth continues to be in excess of 30% in the quarter, which we were happy to see.
And the on-prem decline in the quarter, in the fourth quarter was still pretty significant on a year-over-year basis. But when you look at the changes in the on-prem revenues from Q1 all the way through Q4, the changes were really very nominal.
So what happens as we move from Q4 to Q1, we've seen that, for example, in Q4, the on-prem decline on total results, but still in the 3% to 4% range. And in Q1, we believe that percent will be about half of 1%, which means that we're at a critical juncture where not only cloud revenue growth is benefiting, but the stability of the on-prem.
What remains in the on-prem, which is significantly lower than it was last year and the year before and the year before that will no longer continue to be a headwind. So the headwind is probably not even worth mentioning on our Q1 guidance, so we didn't.
We actually say that we actually extend that into – all the way through Q2 just because we know we have some Oracle on-prem AMS activity, which runs out in June. So we made the midyear comment about beyond Q2 the amount being totally in material.
It's only because we know that there are some things that are still playing out in Q1 and Q2, but the relative impact on our total consolidated results, boy that – from going from three to four negative to half of a percent in Q1, we believe that will be virtually little to none in Q2 and then it's just totally gone or fully immaterial beyond Q2 is great to know.
And as you can imagine, it allows them the growth not only an Oracle to play out which is important, but it's also being – it's being further supported by the growth in our S4/HANA SAP business and our emergent OneStream business.
So look, a very good trend for us and obviously, delighted to see that on-prem amble as I've referred to it jokingly for a while, really become virtually have no way..
Thank you. You called out two things in your other highlights on your press release. And I just wanted to see if we get a little more clarity. First, you mentioned that you were doing a lot of research in the smart automation technologies area, including RPA and others.
Can you just give us a sense of how significant that is to your total offering or how is that being integrated into your deals? And then you also called out OneStream and I just wondered if you can give us a sense of the scale or scope of that opportunity?.
Well, on the first, as you know, the RPA capability on a pure standalone basis, we don't – we still don't consider it material to our total results. But the integration of that capability in our virtually every strategy and business transformation initiative is a requirement.
So it's a critical must have the understanding and the influence, so strategically critical revenue scale wise, on a separate basis, still not material. The OneStream business is a different story.
I mean, this is a group that we started less than a year ago as you know and we've had, as I mentioned and I'll stick to my transcript, we've had enough market success for us to reach the platinum status.
And I can tell you that in the Q1 growth that we're reporting, which is meaningful, that OneStream growth – that growth – OneStream revenue is meaningful to that total revenue growth rate. And I'll leave it at that..
Thanks, guys..
Next question in the queue is from Jeff Martin from Roth Capital Partners. Your line is now open..
Thanks. Good afternoon guys..
Hi, Jeff..
But I was wondering if you could elaborate on the 10% contract value growth you're seeing, is that an uptick acceleration and what do you think is driving them?.
Well, what's driving it is, is not only improved focus and performance of our team, but I really believe and as you know, I've been signaling for quite a while that by digitizing and being able to deliver our IP more efficiently either A, through the utilization of Quantum Leap, which means we have more data capture and more insights to share.
Also facilitating the way we share IP through our Digital Transformation Platform. Those investments, as we go to market with clients, even in the research advisory group, are becoming really the way we fully deliver those executive advisory offerings.
So we're going to continue to rely more strongly on our clients being able to access Hackett's insights through those platforms. I believe that that's having an impact and obviously, if I didn't give a credit to our team's execution and focus and performance, that just would simply be wrong..
Okay, and then on the prepared remark surrounding Oracle ERP, you mentioned larger and broader deal.
Is that in cloud, is it across the board? And does that – if it's cloud, does that imply we could see some acceleration of growth there in 2020?.
But it's clearly – the overwhelming majority of the pipeline is cloud. So I will say substantially cloud and yes, I mean, look, Oracle made a decision that it to lead with the ERP offerings and then allow all of the other capabilities like EPM and HCM and CX to then be sold along with or through an ERP relationship.
So we've seen that as we followed their strategy. And that investment in the West Coast acquisition that we made a couple of years ago has become increasingly important to our wins, especially the larger wins.
And then more importantly, that boy, if we could replicate that capability in the East, I think it would really strengthen and accelerate our ability to grow our revenues broadly and that's clearly a primary focus of ours here over the next couple of quarters to see how we do that because we're disproportionately successful in the West Coast and is clearly attributed to the combination of our ERP and EPM bundle.
And we'd like to replicate that as closely as we can in the East Coast..
Now is my final question, expanding capabilities on East Coast, is that done through acquisition or are you able to leverage some leadership and start it and accelerate more on a greenfield based?.
The answer is it'll probably be both. We're pushing on both hard..
Okay, very good. Thank you very much..
Next question is from Vincent Colicchio with Barrington Research. Your line is not open..
Yeah, Ted, in your prepared remarks you said regarding the EEA that these two should grow 10% to 15% in Q1; I wasn't sure what you're referring to..
That is correct. Our US group, which includes both our strategy and business transformation as well as our EEA groups will grow somewhere in the 10% to 15% range in Q1..
Okay.
And then did the IP business meet expectations in the Q4 and could you characterize the type of growth we can see into 2020?.
That will be dependent on the same comments I shared on the call. We have an increased number of pilots, paid pilots going on across multiple industries and users.
Some would surprise you in terms of where this capability has gone, so any of those pilots driving into a broader long-term relationship would significantly increase the IP-as-a-service growth in 2020, so we're sure working hard to make that happen..
And Rob, just a housekeeping so to speak, capital spending, what was that in the quarter?.
849,000, Vince..
Thanks. That's it for me. 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. Well, those conclude our comments and questions. We look forward to updating everyone again when we report our first quarter results. Thanks again..