The Hackett Group, Inc. (NASDAQ:HCKT) Q4 2023 Earnings Call Transcript

The Hackett Group, Inc. (NASDAQ:HCKT) Q4 2023 Earnings Call Transcript February 20, 2024

The Hackett Group, Inc. beats earnings expectations. Reported EPS is $0.39, expectations were $0.37. HCKT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Rob Ramirez: Thank you, operator. Good afternoon, everyone, and thank you for joining us to discuss The Hackett Group’s fourth quarter 2023 results. Speaking on the call today and here to answer your questions are Ted Fernandez, Chairman and CEO of The Hackett Group; and myself, Rob Ramirez, Chief Financial Officer. A press announcement was released over the wires at 4:05 P.M. Eastern Time. For a copy of the release, please visit our website at www.thehackettgroup.com. We will also place any additional financial or statistical data discussed on this call that is not contained in the release on the Investor Relations page of our website. Before we begin, I would like to remind you that in the following comments and in the 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.

Ted Fernandez: Thank you, Rob, and welcome, everyone, to our fourth quarter earnings call. As we normally do, I will open the call with some overview comments on the quarter. I will then turn it back over to Rob to comment on detailed operating results, cash flow as well as comment on outlook. We will then review our market and strategy-related comments, after which we will open it up to Q&A. This afternoon, we reported total revenues of $72.4 million and revenues before reimbursement of $71.2 million, which was above the high-end of our guidance and adjusted earnings per share of $0.39, which was also above the high-end of our guidance. Our results were driven by the performance of our Oracle Solutions segment, which was up strongly.

This is consistent with the momentum that we’ve have experienced in that segment since the second quarter. A new important development for the segment is the notable increase in demand that we are experiencing in our historically strong Enterprise Performance Management offering. Our Global S&BT segment was up when compared to last year. Although the segment was impacted by market conditions, we continue to see an increased interest in Gen AI initiatives. More importantly, our recently launched Gen AI assessment platform, AI Explorer, is receiving favorable feedback. It has led to a significant number of new client wins, enabling us to showcase our unique ability to assess readiness and identify organizational transformation opportunities. We are leveraging our rapidly growing use case repository to establish Gen AI road maps with related benefit case analysis using our highly recognized benchmark data base.

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Q&A Session

The rapidly emerging Gen AI interest is creating an entirely new way to engage clients broadly and strategically. AI Explorer is creating a unique opportunity to expand our trusted performance improvement access to become strategic architects of our clients’ Gen AI journey. Our SAP Solutions segment continued its solid performance, but was down on a year-over-year basis as the sales investments we made during the year did not start to generate revenues until the end of the year. However, this should benefit the first half of 2024. We also continue to aggressively invest in our growing — in growing our IP-based programs. We are enhancing the product architecture and pricing of our existing executive advisory programs resulting in a more powerful combination of highly focused IP and access to expert practitioners, emphasizing our advisor expertise and applied knowledge research.

All of our executive advisory programs are now delivered through our new member platform, Hackett Connect, which fully launched in October. This new state-of-the-art platform allows all of our existing and new members to avail themselves to our experts, research, benchmarking metrics as well as our best practices IP. While our pipeline for these offerings continues to increase, our conversion rates were lower than what we expected during the year. We believe the lower conversion rates were primarily due to the large number of new hires during the year and their lack of familiarity with our offering. In 2023, annual contract value grew 2%, but we expect all of the foundational work we did in 2023 to lead to increasing growth in 2024. On the balance sheet side, in the short-term, you could expect us to use our strong cash flow from operations to continue to pay down our outstanding balance of our credit facility.

Longer term, we plan to use our balance sheet by using our current credit facility to fund acquisitions and to buy back stock while continuing to invest in our business. With that said, let me ask Rob to provide details on our operating results, cash flow and also comment on outlook. I will make additional comments on strategy and market conditions following Rob’s comments. Rob?

Rob Ramirez: 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 2023 fourth quarter results, along with an overview of related key operating statistics. I’ll also cover an overview of our cash flow activities during the quarter, and I’ll conclude with a discussion on our financial outlook for the first quarter of 2024. For purposes of this call, I will comment separately regarding the revenues of our Global S&BT segment, our Oracle Solutions segment, our SAP Solutions segment and the total company. Our Global S&BT segment includes the results of our North America and international IPaaS and benchmark offerings, our executive advisory programs, our business transformation and our OneStream and group offerings.

Our Oracle Solutions and our SAP Solutions segments include the results of our Oracle and SAP offerings, respectively. Please note that we will be referencing both total revenues and revenues before reimbursements in our discussion. Reimbursable expenses are primarily project travel-related expenses passed through to our clients that have no associated impact to our profitability. During our call today, we will also reference certain non-GAAP financial measures, which we believe provide useful information to investors. We have included reconciliations of GAAP to non-GAAP financial measures in our press release filed earlier today and will post any additional information based on the discussion from this call to the Investor Relations page of the company’s website.

For the fourth quarter of 2023, as Ted mentioned, our total revenue was $72.4 million, up 3% over the prior year. Our revenues before reimbursements were $71.2 million, which was also above the high-end of our quarterly guidance, up 3% over the prior year. The fourth quarter reimbursable expense ratio on revenues before reimbursements was 1.7% as compared to 1.6% in the prior quarter and 1.9% when compared to the same period in the prior year. Total revenues from our Global S&BT segment were $42.2 million for the fourth quarter of 2023. Revenues before reimbursements for our Global S&BT segment were $41.6 million for the fourth quarter of ’23, an increase of 3% when compared to the same period in the prior year. Total revenues from our Oracle Solutions segment were $19 million for the fourth quarter of 2023.

Revenues before reimbursements for our Oracle Solutions segment were $18.4 million for the fourth quarter, an increase of 10.6% when compared to the same period in the prior year. This is consistent with the momentum we’ve experienced since the second quarter of ’23, with strong double-digit growth over the last two quarters when compared to prior year periods. Total revenues from our SAP Solutions segment were $11.2 million for the fourth quarter of ’23. Revenues before reimbursements for our SAP Solutions segment were $11.1 million for the fourth quarter, a decrease of 5% when compared to the same period in the prior year, consistent with the guidance we provided last quarter. The sales investments we made during ’23 are expected to contribute to growth in 2024.

Approximately 24% of our total company revenues before reimbursements consist of recurring multiyear and subscription-based revenues, which includes our executive advisory, IP as a service, multiyear benchmarks and application managed services contracts. Total company adjusted cost of sales, which exclude reimbursable expenses and noncash stock-based compensation expense, totaled $40.3 million or 56.7% of revenues before reimbursements in the fourth quarter of 2023 as compared to $37.8 million or 54.9% of revenues before reimbursements in the prior year. Total company consultant headcount was 1,168 at the end of the fourth quarter as compared to a total company consultant headcount of 1,177 in the previous quarter and 1,128 at the end of the fourth quarter of the prior year.