Earnings Transcript for HCKT - Q2 Fiscal Year 2023

Operator: Welcome to The Hackett Group Second 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.

Rob Ramirez: Thank you, operator. Good afternoon, everyone and thank you for joining us to discuss The Hackett Group’s second quarter results. Speaking on the call today and here to answer your questions are Ted Fernandez, Chairman and CEO of The Hackett Group; and myself, Rob Ramirez, Chief Financial Officer. A press announcement was released over the wires at 4

Ted Fernandez: Thank you, Rob and welcome everyone to our second quarter earnings call. As we normally do, I will open the call with some overview comments on the quarter; I will then turn it back over to Rob to comment on the detailed operating results, cash flow as well as comment on outlook. We will then review our market and strategy-related comments, after which, we will open it up to Q&A. Before I move to our quarterly results, let me start by mentioning our 2022 results and the comps they will provide to our 2023 performance. In 2022, we had a very strong first half of the year with operating results exceeding our guidance in Q1 and Q2 by at least $0.03 in each quarter of the prior year. By the middle of the year, the impact of interest rate increases started to disrupt economic growth, which has resulted in extended client decision-making. Relative to the second quarter, this afternoon we reported revenue before reimbursements of $75.6 million, which was above the high end of our guidance and adjusted earnings per share of $0.39 which was at the high end of our guidance. Although economic volatility is evident so is the demand for our digital transformation solutions which clients require to remain competitive and drive productivity improvement. Consistent with our comments on our previous earnings call significant first quarter and sales resulted in an 8% sequential revenue growth in the second quarter. This has allowed us to exceed the results from Q2 of last year. This was most pronounced in the swift turnaround of our Oracle Solutions segment. Our total company quarterly results continue to be driven by our Global Strategy and Business Transformation segment which was up sequentially but down slightly on a reported basis when compared to last year's strong comp. Our recurring higher margin Research Advisory and IPaaS offering sales grew sequentially and we expect strong sequential sales growth in Q3. If this momentum continues and we are able to close a couple of IPaaS pilots we should be able to achieve an annual contract value growth of 20% in 2023. In Q2, we published our Customer-to-Cash Receivables Market Intelligence Report. In the third quarter, we intend to publish two additional market intelligence reports

Rob Ramirez: Thank you, Ted. As I typically do during this portion of the call, I'll cover the following topics

Ted Fernandez: Thank you, Rob. As we look forward, let me share our thoughts on the near- and long-term demand environment and the growth opportunity it offers our organization. As I repeatedly say, the demand for digital transformation is being impacted by extended decision-making as organizations asset competing priorities created by the increasing interest rates and the demand disruption, which it is intended to affect. However, it continues to be a clear strategic priority for our clients. Digital innovation and enterprise cloud applications analytics and artificial intelligence cloud infrastructure and workflow automation are dramatically influencing the way businesses compete and deliver their services. Digital transformation is redefining all activities at an accelerated pace forcing organizations to fundamentally change and adopt these new capabilities to remain competitive and to realize targeted productivity gains. As we mentioned at the beginning of the year we believe clients use, the year-end planning process and the beginning of the 2023 year to assess their industry risk make headcount and spend reductions and rebalance their spend with productivity and strategic cost reduction efforts, which are also core to our offerings. We believe that clients will become more comfortable with the economic headwinds and we will see their behavior improved throughout the year. Similar to us, many of our clients did not experience the demand disruption until late in Q2 of last year, and will be more challenged by the strong year-over-year -- or have been more challenged by the strong year-over-year comparisons of the first half of the year. However, most will face more favorable comps in the second half of the year. If we are correct, this will further support the behavior improvement, which we expect when we look at the second half when compared to the first half of 2023. On the talent side, competition for experienced executives continues. Overall, we saw turnover continue to moderate during the quarter and expect the trend to continue. Longer term, we have transitioned to a hybrid sales and delivery model, which provides us with effective access to our clients and their respective teams. This hybrid model provides our associates with greater personal flexibility to perform their defined responsibilities remotely, which is very valuable to them. This should allow us and is allowing us to attract and retain talent that we have struggled to retain, because of the demanding historical travel requirements of our industry. Strategically, we are accelerating our focus on recurring high-margin IP-related services, by increasing the development of new programs those, which we detailed on the market intelligence comments I made previously, and aggressively adding to our sales and marketing resources dedicated to this area. The investment will decrease our Q3 results by $0.04. Additionally, on the CapEx side, we will continue our investment on our new Hackett Connect member platform and plan to introduce generative AI functionality in 2024. It is also important to note, that we continue to see strong downstream revenues from our benchmarking and research advisory clients through our business transformation and Oracle OneStream and Coupa Consulting Services. This halo effect has been in excess of 40% over the last several years. Simply put, organizations who rely on our IP research and benchmarking services are more likely to utilize our consulting services. We are also exploring strategic partnerships, which will allow us to syndicate our IPs through new channels and that will allow us to reach beyond the Global 1000 focus in an efficient manner. We launched our first syndication agreement of our IP and content on April 1. We continue to evaluate new channels for our IP in our platforms. We also continue to redefine our global benchmarking leadership, through enhancements in Quantum Leap, our digital benchmark software-as-a-service solution along with our digital transformation platforms. This platform -- these platforms allow us to deliver more information with significantly less client effort. It also allows our clients to leverage our IP to create compelling benefit case assessments, accelerate process flow and software configuration decisions and track the value realization of the transformation initiatives, over the life of their respective effort. We believe that there are no comparable IP-led platforms in the market. As I have mentioned on previous calls, we have a 20-minute demo on our Investor Relations page of our website so that investors can become more familiar, with the capabilities of our platform. Lastly, even though we believe that we have the client base and offerings to grow our business, we continue to look for acquisitions and alliances that strategically leverage our IP and adds scope scale and capability, which can accelerate our growth. As always, let me close by congratulating our associates on our performance and by thanking them for their tireless efforts and always urge them to stay highly focused on our clients and our people no matter what challenges we may encounter. That'll conclude my comments. Let me turn it over to our operator and let us move on to the Q&A section of our call. Operator?

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jeff Martin with Roth MKM. Your line is open.

Jeff Martin: Thanks. Good evening, Rob, and Ted how are you?

Ted Fernandez: Great. How are you?

Jeff Martin: Good. Thanks. Ted, you mentioned generative AI, a product launch in 2024. Could you give an early peek under the hood what that might look like?

Ted Fernandez: Well, we're looking at both -- two things on GenAI; first, our ability to advise clients on exactly what use cases they can benefit from sooner rather than later. So we're doing an exhaustive assessment of all of our business process areas, which total 130 as we define the enterprise. And looking beyond that into activities to see exactly where the specific GenAI capabilities can actually advantage them soon. That's one way of making sure that they can start prioritizing their initiatives. On our end, we're looking at different ways to try to create our own large language model with or without a partner. We're considering both. But we like the idea of being able to engage clients significantly more efficient than we are today. An example that -- for example, we reviewed this morning is a concept around the idea of Hackett. We know individuals consistently want to be able to engage in content more efficiently without ever really even going to strict -- to a click on either some mobile device or some type of laptop. So we're looking at what kind of training -- what kind of data, obviously, we know the data that we have. But what training we will provide our data, so that again the idea is can we provide our clients and our members with the powerful IP of Hackett by simply posing a question as an example and getting some detailed information to whatever is on their mind at any given point of the day and as they're considering some of their strategic or productivity initiatives. But those would be two examples both on the client side and one on how we're thinking about deploying our capability and driving that to our client base more aggressively in 2024.

Jeff Martin: Great. And then wanted to ask what kind of reaction you're getting from the initial market intelligence launch? And what do you think the sales cycle in that might be? And what timing of engagements you might start to expect? And then finally what would be considered an average contract size related to market intelligence?

Ted Fernandez: Well, first as I've said on the call, the actual published report was our C2C side, we're publishing procure-to-pay software assessment here in the next week or so. And we'll follow that up with finance and accounting outsourcing and hope to get that out before the end of the third quarter. So we're still trying to first put out a number of these as quickly as we possibly can. The engagement both on the participation side and post has been favorable. The important thing for us is to really complete the programs that we do want to go out in this if you want to call it first tranche to make sure that everyone both participants as well as clients know exactly how we're weighing in and both the influence that we have and the insight that we can provide that is valuable to them, so that's really where we see the benefit coming. To be more specific, when I think of meaningful monetization of all those programs both in terms of numbers and engagement, we would like to see that start materializing in the beginning of 2024, just like we would like to see the impact of the significant sales resource investments that we've been making to increase the number of our sales executive within our IP service ranks to have what we hope is a meaningful impact in the middle of 2024. If -- as I said on my call, if we see the sequential growth from the sales that we're currently expecting improve as strongly as we expect from Q2 to Q3, we saw a good improvement from Q1 to Q2. We expect stronger sequential improvement from Q2 to Q3. If that kind of cadence continues, then you will see the impact on market intelligence programs both on the rollout and the sales of them as well as the impact of just the sales resources across all of our executive advisory programs which are already in place.

Jeff Martin: Great. And then you mentioned $0.04 impact in Q3 from the investments and program development and sales personnel or sales resources. What might we expect in Q4? I know it was a $0.03 impact in Q2. That's up to $0.04 in Q3. What do you think it might look like in Q4?

Ted Fernandez: We would expect it to be similar. We have no reason to expect it to be any different. We thought it was going to be $0.04 in Q2 but it actually ended up being $0.03 and that's just when the resources came in and impacted the quarter. We're seeing that roll into the next quarter. We know what that spend is expected to be so we would expect it to be $0.04. I have no reason to believe that it won't be $0.04 in Q4.

Jeff Martin: Great. And then in terms of the headcount addition on the consultant side what areas are you adding more aggressively than others?

Ted Fernandez: Well, it's hard to ignore this incredible performance and performance that we're getting from our Oracle Solutions group. So, even though we went through that volatility at year-end since that latter part of Q1 we've been aggressively hiring both onshore and offshore resources to handle the kind of demand that we've been experiencing. So, that would be the primary area. And then I'm going to say the second largest area is the hiring of all these additional sales resources. Those will be the two primary hiring areas in both Q2 and continue into Q3.

Jeff Martin: Great. Thank you for your time.

Operator: [Operator Instructions] Our next question comes from Vincent Colicchio with Barrington Research. Your line is open.

Vincent Colicchio: Yes. Rob on GS&BT and Oracle Solutions I didn't hear in your prepared remarks the growth outlook for Q3. Could you repeat that please?

Rob Ramirez: Sure. What we said was that S&BT would be up Oracle would be up strongly. And that SAP would be down.

Vincent Colicchio: And that's year-over-year?

Rob Ramirez: That's year-over-year.

Vincent Colicchio: Okay. Thank you for that. Ted, the $0.02 cost less than expected was that because hiring salespeople was taking longer than expected?

Ted Fernandez: Yes. We had some changes, but yes, some of the resources came in later in the quarter.

Vincent Colicchio: Are you finding the right people you need, at least folks from companies that are already doing research type of work?

Ted Fernandez: Yes. Yes. We're finding them. And we find their interest in what we're trying to do to be extremely high. We don't expect that to change.

Vincent Colicchio: Okay. And I know you've said you expect that you're looking for meaningful revenue from the market intelligence programs early next year. Is it too early to ask? And the first programs were launched in December of last year. Has revenue come in with plan or is it just too early for that to even be meaningful?

Ted Fernandez: Too early since the C2C program published just I think about five weeks ago, so too early. But no reason -- remember the biggest productivity measurement we are making is the productivity of the salespeople that are coming onboard and how that's progressing. And as I've said, we saw improvement from Q1 to Q2, and we expect strong improvement from Q2 to Q3, just based on the activity that they are experiencing. So that speaks to -- the most important is that, we have existing programs. And then, we're trying to increase the number of programs that we saw on a member or subscription basis to our market intelligence programs. So in essence, more than doubling the number of programs that we have, but the primary productivity is that of the sales force with the existing programs which we have in place which are significant for the number of salespeople that we have. But yes what are we trying to do? As you've heard me say to investors when we started 2022 our goal had been to quadruple the sales force and double the programs that we had in place or as close thereof by the end of 2023. And we're still trying to achieve that.

Vincent Colicchio: And how many salespeople do you have now? And how many do you plan to have by year-end?

Ted Fernandez: In this group that we brought onboard, it's around 30 and counting.

Vincent Colicchio: Okay. And one last one for me. The strength in Oracle Solutions, are there any particularly large deals there or is it balanced in terms of the business you're ramping now and also in the pipeline?

Ted Fernandez: Both. We've seen both the number of deals we closed peppered with some very significant deals some from, some previous clients significant clients of ours that have come back to us for Oracle support and help as they've implemented -- as they needed that kind of assistance. And we're seeing brand new clients walk in the door as a result of I think what I would call excellent collaboration we've been getting with the Oracle sales channel.

Vincent Colicchio: Okay. Thanks Ted.

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

Ted Fernandez: Well, thank everyone for participating in our second quarter's earnings call. And we look forward to updating everyone, when we report the third quarter. Thank you.

Operator: Thank you for your participation in today's conference. You may disconnect at this time.