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Edited Transcript of HCKT.OQ earnings conference call or presentation 2-Nov-20 10:00pm GMT

·37 min read

Q3 2020 Hackett Group Inc Earnings Call MIAMI Nov 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Hackett Group Inc earnings conference call or presentation Monday, November 2, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Robert A. Ramirez The Hackett Group, Inc. - CFO & Executive VP of Finance * Ted A. Fernandez The Hackett Group, Inc. - Co-Founder, Chairman & CEO ================================================================================ Conference Call Participants ================================================================================ * Adam David Kelsey Craig-Hallum Capital Group LLC, Research Division - Research Analyst * Jeffrey Michael Martin ROTH Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst * Trevor Romeo William Blair & Company L.L.C., Research Division - Associate * Vincent Alexander Colicchio Barrington Research Associates, Inc., Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the Hackett Group Third Quarter Earnings conference call. (Operator Instructions) 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 begin. -------------------------------------------------------------------------------- Robert A. Ramirez, The Hackett Group, Inc. - CFO & Executive VP of Finance [2] -------------------------------------------------------------------------------- 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, 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, especially in light of COVID-19. 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 A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [3] -------------------------------------------------------------------------------- Thank you, Rob, and welcome, everyone, to our third 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 to comment on outlook. We will then review our market and strategy-related comments, and then we will proceed to Q&A. I would like to start by continuing to acknowledge those dedicated individuals who have continued to work nonstop and under very dangerous circumstances to support us all during this pandemic. I also want to acknowledge our associates and clients that quickly and successfully adapted to the remote delivery requirements around the globe. It goes without saying, we eagerly wait for the conditions that will allow us to return to our next normal. As we communicated at the end of Q2, we were experiencing increased meeting counts and engagement and we expected both revenue and profitability to start to recover in Q3. This increased activity continued through the quarter, and I am pleased to announce today that our actual Q3 results exceeded our expectations. This afternoon, we reported net revenues of $57.8 million and pro forma earnings per share of $0.17. Net revenues were up 10% sequentially, with EPS up strongly from our lockdown-compromised Q2 results. U.S. sequential revenue growth was led by the strong bounce back of our Strategy and Business Transformation Group and the continued growth of our SAP and OneStream practices. On the international front, Europe was also up strong sequentially. The investments we have made to fully digitize all of our IP the development of our IP as a service platforms, Quantum Leap, our state-of-the-art global-leading benchmarking platform and our proprietary Hackett Digital Transformation Platform, or DTP, are highly differentiating our offering and will continue to be important drivers of our growth for many years to come. Additionally, our investments with rapidly growing eProcurement, cloud analytics, EPM and other workflow automation providers also continued to be key to our digital transformation strategy and are important future drivers of our growth strategy as well. On the balance sheet side, our ability to generate strong cash flow from operations has allowed us to continue our dividend, buy back stock and fund acquisitions we identify while continuing to invest in our business. It is important to reiterate how important it was to start the year with such a strong cash position and no outstanding debt, which has provided us with the ability to properly manage the demand disruption that we have experienced. 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? -------------------------------------------------------------------------------- Robert A. Ramirez, The Hackett Group, Inc. - CFO & Executive VP of Finance [4] -------------------------------------------------------------------------------- Thank you, Ted. As I typically do, I'll cover the following topics during this segment of our call: an overview of our 2020 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 2020. For purposes of this call, I will comment separately regarding the financial results of our Strategy and Business Transformation Group, or S&BT; our ERP, EPM and Analytics Solutions Group, or EEA; our International Group; and the total company. Our S&BT group includes the results of our North America IP as a service offerings, our executive advisory programs and benchmarking services and our business transformation practices. Our EEA Solutions Group includes the results of our North America Oracle SAP solutions and OneStream practices. Our international group includes the results of our S&BT and our EEA resources that are based primarily in Europe. In addition, please note that all references to net revenues represent revenues excluding reimbursable expenses. Reimbursable expenses are primarily project travel-related expenses passed through to our clients and have no associated impact to our margin or profitability. Given the limited amount of business travel due to the pandemic, we encourage investors to focus on net revenues to assess revenue and growth trends. During our call today, we will reference certain non-GAAP financial measures, which we believe provides useful information to investors. We included reconciliations of GAAP to non-GAAP financial measures in our press release filed earlier today. Additionally, my comments today are based on results from continuing operations. For the third quarter of 2020, our net revenues increased 10% sequentially and decreased 13% to $57.8 million when compared to the prior year, which is above the high end of our revenue guidance range. The Q3 reimbursable expense ratio on net revenues was 0.3% as compared to 8.9% for Q3 of the prior year. Net revenues and reimbursable expenses were both affected from economic disruption of the COVID-19 pandemic and as we transition to a remote service delivery model throughout the U.S. and Europe. Net revenues for our S&BT group were $22.2 million, a decrease of 21% when compared to the same period in the prior year. However, S&BT was up strongly on a sequential basis by 25%, as the group reversed much of the disruption it experienced during the second quarter. Net revenues for our EEA Solutions group were $29.7 million, a decrease of 1% on a year-over-year basis and 2% on a sequential basis. This was driven by growth from our SAP and OneStream practices, offset by declines in our Oracle practice as we rebuild backlog during the quarter after efficiently maintaining its momentum and outperforming during the second quarter of 2020. Our U.S. operations, which currently represents 90% of our total company net revenues for the third quarter, were down 11% on a year-over-year basis but up 8% on a sequential basis. Net revenues for our international group were $5.8 million, a decrease of 30% on a year-over-year basis and an increase of 32% sequentially as the group's performance improved from its recent declines. Total company international net revenues accounted for 10% of total company net revenues as compared to 13% in the third quarter of the prior year and 8% in the prior quarter. Our recurring revenues, which include our executive advisory, IP as a Service and AMS groups, accounted for approximately 24% of our total net revenues and approximately 36% and of our total company pretax practice profitability in the quarter. Total company pro forma cost of sales, excluding reimbursable expenses, totaled $37.8 million, or 65.4% of net revenues in the third quarter of 2020 as compared to $41 million or 61.5% of net revenues for the same period in the prior year. Total company consultant head count was up 2% sequentially to 923 as we hired consultants as demand improved during the quarter. This compares to the total company head count of 908 in the previous quarter and 1,036 at the end of the third quarter of 2019. The year-over-year decrease was a result of the actions taken in the second quarter of 2020 to reduce our global workforce by approximately 10% in response to the ongoing disruption from the pandemic. Total company pro forma gross margin on net revenues was 34.6%, up sequentially from 26.6% and down as compared to the prior year of 38.5%, primarily due to the COVID-19 pandemic disruption. S&BT gross margins on net revenues was 42.4%, up sequentially from 26.4% and down as compared to the prior year of 49%. The variances were primarily driven by the pandemic disruption. EEA gross margins on net revenues was 27.5%, down sequentially from 29.7% and down as compared to the prior year of 33.7%. The year-over-year margin decrease was primarily due to modest revenue declines and increased utilization of subcontractors in the quarter, partially offset by lower headcount. International gross margins on net revenues was 40.7% up sequentially from 5.1% and up as compared to prior year of 22.9%. The margin increase related to increased sequential revenues and the restructuring actions that took place in the prior quarter, which more than offset the year-over-year revenue declines. Pro forma SG&A was $12.7 million or 22% of net revenues in the third quarter as compared to $14.1 million or 21% of net revenues in the previous year, and $11.4 million or 22% of net revenues in the prior quarter. The year-over-year dollar decrease of $1.4 million was primarily due to decreased travel-related selling and marketing activities throughout the quarter. Pro forma EBITDA was $8.2 million or 14% of net revenues in the third quarter as compared to $12.5 million or 19% of net revenues in the prior year and $3.4 million or 7% of net revenues in the prior quarter. Total company pro forma net income for the third quarter of 2020 totaled $5.4 million or $0.17 per diluted share. This compares to pro forma net income of $8.7 million or $0.27 per diluted share in the third quarter of 2019. GAAP diluted earnings per share was $0.09 for the third quarter of 2020 as compared to earnings per share of $0.21 in the third quarter of the previous year. The company's cash balances were $43.2 million at the end of the third quarter as compared to $37.4 million at the end of the previous quarter. Net cash provided by operating activities in the quarter was $10.1 million, which was primarily driven by net income adjusted for noncash items and increases in activity expenses. Our DSO, or days sales outstanding, at the end of the quarter was 57 days as compared to 64 days at the end of the previous quarter. Given our strong cash balances, the company's $45 million credit facility remained unused during the third quarter. During the quarter, we repurchased 83,000 shares of the company's stock for an average of $12.57 per share or at a total cost of approximately $1 million, including purchases from employees to satisfy income tax withholding triggered by the vesting of restricted shares. Our remaining stock repurchase authorization at the end of the quarter was $4.7 million. In July of 2020, the Board declared a quarterly dividend of $0.095 per share which was paid in October 2020. At its most recent meeting, the Board declared the next quarterly dividend of $0.095 per share, which will be paid in early January 2021. Before I move to guidance for the fourth quarter, I would like to remind everyone of the seasonality of our business, specifically, the increased holiday and vacation time that is historically taken in the fourth quarter will decrease our available billing days by approximately 8% when compared to the third quarter. As Ted mentioned in his comments, although economic uncertainty from the pandemic continues to be high, the company's current estimates suggest that net revenue for the fourth quarter of 2020 will be in the range of $55 million to $58 million. We expect sequential revenues for S&BT to be up; EEA revenues to be flat and Europe to be down, primarily due to an expected managed services contract exploration. We estimate pro forma diluted earnings per share in the fourth quarter of 2020 to be up sequentially and in the range of $0.20 to $0.22. We expect pro forma gross margin on net revenues to be approximately 36% to 38%. We expect pro forma SG&A and interest expense for the fourth quarter to be approximately $12 million. We expect fourth quarter pro forma EBITDA on net revenues to be in the range of approximately 17% to 18%. We expect cash to be up when excluding dividend payments, and share buybacks. At this point, I would like to turn back it over to Ted to review our market outlook and strategic priorities for the coming months. -------------------------------------------------------------------------------- Ted A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [5] -------------------------------------------------------------------------------- Thank you, Rob. As we look forward, let me share our thoughts on the short-term as well as the long-term demand environment, and on the growth opportunity it offers our organization. It goes without saying that we've entered an unprecedented period where the demand disruption necessitated to ensure our safety has required extreme measures. But it is now also clearly evident that the digital transformation era which was just beginning, has been rapidly accelerated by the pandemic. This means that digital innovation in emerging enterprise cloud applications, analytics and infrastructure, workflow automation, process mining and artificial intelligence is 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 in order to remain competitive. On the demand side, the short-term environment continues to improve as our clients now understand that they must continue to transform, and that the virus will continue to disrupt our lives until a vaccine and therapeutics are readily available to all. This means all organizations must adapt to this new environment while we sort through the changes which will result from the pandemic. Specifically, the increasing momentum we experienced in Q3 and is continuing into Q4 as our clients and our sales and service delivery model acclimate to the next normal market requirements. This should position us well for 2021 and should allow us to return to pre-pandemic levels of target growth as well as profitability. Additionally, we continue to see significant increase in the interest from potential partners that desire to license our Quantum Leap and Digital Transformation Platforms to bolster their business case development and value selling efforts by leveraging our credibility in IP. We now have more than 10 opportunities, with more than half of them with formal proposals outstanding. Strategically, our focus will remain the same, which 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 and platforms. This should allow us to serve our clients strategically, increasingly remotely and whenever possible, continuously. Specifically, we will continue to redefine our global benchmarking leadership through the enhancements we have made to our Quantum Leap digital transformation software as a service solution. As I've mentioned in the past, this platform allows us to deliver more information with significantly less client effort. It also allows our clients to leverage our IP and track transformation initiatives over the life of their respective effort. We believe that there is no comparable platform in the market. And as I previously mentioned, we have been experiencing increasing interest from potential strategic partners in leveraging our platforms and also leveraging our brand and IP and credibility. We will also continue to refine and improve our Digital Transformation Platform to further differentiate our unique IP and related capabilities. DTP, unlike Quantum Leap, allows us to fully digitize our best practice IP aligned with proven configuration, organizational solutions to help clients drive transformational change. DTP is a core asset to both our business transformation and cloud implementation offerings. We have added a 20-minute demo to our Investor Relations page of our website so that investors can become more familiar with the unique 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 add scope, scale and capability, which can accelerate our growth. In summary, we continue to believe we are well positioned to resume our growth as the demand disruption subsides. Clearly, Q3 was a welcome relief after the significant lockdown disruption of Q2. We are also encouraged to see that the power of our brand and the focus of our offerings, along with a sound financial position, has allowed us to positively address the most challenging economic events. This validates our focus and investments that we're making on our platforms, our expanded cloud capabilities and our IP as a Service offerings, which provide us, as I said, highly differentiated offerings in strategic access to most of the leading global companies. As always, let me close by thanking our associates by asking them to remain safe, for their tireless efforts and urge them to stay highly focused on our clients and our people regardless of the short-term challenges we continue to encounter. Those 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? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Jeff Martin with ROTH Capital Partners. -------------------------------------------------------------------------------- Jeffrey Michael Martin, ROTH Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [2] -------------------------------------------------------------------------------- I didn't hear -- I didn't catch specifics on cloud growth in the quarter relative to on-premise. I know on-premise has largely taken its course. But how did cloud fare in the quarter. -------------------------------------------------------------------------------- Ted A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [3] -------------------------------------------------------------------------------- Our cloud revenue continues to grow. I don't know if Rob has some specific statistics. If not, we can forward them on to you, Jeff. But the most important part to understand about the growth in the quarter. And obviously, you're -- we're talking sequentially, was that we had the growth from the SAP and OneStream groups that continued their growth sequentially, offset some of the transition that we guided and mentioned relative to our Oracle group which so strongly outperformed in Q2 as it efficiently worked through its backlog and had to use the second quarter to basically rebuild it, as we call it, prime the pump. But clearly, when you look at the mix of what we're doing, virtually everything that we're doing is cloud oriented, the mix of cloud in both the Oracle side is now well in excess of 80% on the Oracle side. And it is virtually 95-plus percent on SAP. And obviously, all of the OneStream work is considered next-gen cloud when we make that reference. -------------------------------------------------------------------------------- Jeffrey Michael Martin, ROTH Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [4] -------------------------------------------------------------------------------- Right, right. Okay. And then I thought that you mentioned process mining as -- and AI as part of the opportunity set for Hackett. How is Hackett positioned to approach the process mining market? And are there any tools that you've got in the war chest to approach that market? -------------------------------------------------------------------------------- Ted A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [5] -------------------------------------------------------------------------------- It's an excellent question. I mean, this takes us all the way back to 2010 when we actually launched HPE, as you know, which was really the most aggressive way to build and drive a totally automated process mining solution. As you can now imagine, a large portion of the work that we do within Quantum Leap is, in fact, process mining. Where we continue to gather in both import and extract data that we use for some of those initiatives. So the question for us really relative to process mining will be just how aggressively we want to invest in that category in years to come. As the category is now defined with a new entrance being funded at meaningful valuation, we continue to believe that process mining as a category and opportunity for the firm longer term, not 2021, remains a very significant opportunity. The second part of your question, Jeff, was not process mine, but what was it? I'm sorry? -------------------------------------------------------------------------------- Jeffrey Michael Martin, ROTH Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [6] -------------------------------------------------------------------------------- You mentioned AI as part of the... -------------------------------------------------------------------------------- Ted A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [7] -------------------------------------------------------------------------------- AI. Testing on the AI side, we have a couple of initiatives that are coming from the IP as a Service channel or those requests where cloud analytics and cloud infrastructure companies are asking -- have come to us for some assistance in how they can leverage our IP and our database to look at their value selling and go-to-market efforts. That impetus and that engagement with that client is giving us a pretty significant opportunity. Let's start with the initial piece, but the idea -- or the concept of making sure that all of the information -- that performance assessment information we provide clients relative to business outcome also has a data or content performance element to it. So I will again say that early stage for us, but you will see us increase our capabilities in driving, if you want to call it, business performance all the way through to cloud analytics and cloud infrastructure performance throughout all of 2021. It will be -- it's an initiative we started which will continue in '21. -------------------------------------------------------------------------------- Jeffrey Michael Martin, ROTH Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [8] -------------------------------------------------------------------------------- Okay. And then final question for me is you mentioned 10 opportunities for IP as a Service in the pipeline with half or more than half in formal proposal mode. Are those ones you solicited? Or are those inbound increase from opportunities? And how would you characterize how that takes your business and perhaps give you some new benchmarking data that you didn't previously have. -------------------------------------------------------------------------------- Ted A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [9] -------------------------------------------------------------------------------- That has a lot of great benefits for us, as you know, Jeff, but let me first start with the first part of your question which is where the opportunities are coming from. I'm going to say that 75% of the opportunities were inbound requests. Individuals who have been exposed to our -- 1 of our 2 platforms has either come and asked for how to access data or how to access Quantum Leap as a way of enhancing their go to market. That has led to conversations on how they can use that to go to market. What -- to me, what's most encouraging, #1 is that these companies -- and they're really different from different categories and different scale, understand the value and the credibility that our data and performance assessment information has in front of leading global companies. So it's adapting our IP to their specific solution in order for them to see how they can leverage it to either prospect, sell or even serve some of the clients that they're serving. The significant ancillary value is that not only are we able to help them with those efforts, if we're successful with any of these proposals, we know that it's been helpful to ADP, who helped us obviously launch this initiative a couple of years ago. But we know that the data capture aspect of this is significant also how it broadens the permission of the brand into new categories when you consider some of these emerging cloud areas where we're getting some of these new requests from. So for us, not only is it a very efficient model. It allows us to use our IP and these platforms in addition to using it to go to market to do -- and provide our own services. But it has a very different business model when you're able to do that through other's go-to-market opportunities, data captures and the learnings and insights that comes with it. So it exponentially expands the depth and breadth of the insight that we currently gather through the data, which we have, that we capture and have. And as you know, that data that we capture, we believe we have the most extensive enterprise benchmarking database of any of the companies, at least we have a chance to compete with, and see the capabilities of others. -------------------------------------------------------------------------------- Jeffrey Michael Martin, ROTH Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [10] -------------------------------------------------------------------------------- Very helpful. And good to see the sequential improvements. And nice to see you're back in the $0.20 range for EPS this quarter. -------------------------------------------------------------------------------- Ted A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [11] -------------------------------------------------------------------------------- We are delighted. We're glad to see that we can get there next quarter. So it is very well. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- (Operator Instructions) Our next question is from Andrew Nicholas with William Blair. -------------------------------------------------------------------------------- Trevor Romeo, William Blair & Company L.L.C., Research Division - Associate [13] -------------------------------------------------------------------------------- This is actually Trevor Romeo in for Andrew. Nice to see the sequential uptick for S&BT in the quarter and the positive outlook for next quarter. Was just wondering if I could ask for your confidence level in a sustainable rebound for business transformation going forward. And could you speak a bit more about how your conversations with potential clients are going on that side of the business. -------------------------------------------------------------------------------- Ted A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [14] -------------------------------------------------------------------------------- It was very important for us since that business side has an element that has a higher client engagement than the technology projects in the EEA side, and as you know, was most disrupted in Q2. It was great to see the demand for that business really increase throughout the quarter. So what has that -- what does that tell us? And what does that tell us about what we're going forward? That clients clearly understand the need to continue to address their performance improvement issues. And to do that -- they either are going to do that themselves, assuming they have the resourcing capability or they have to turn to organizations like ours. And then what it then proves beyond that is that they have become comfortable engaging remotely in -- I'm going to say, 90%-plus of those activities, which is really very significant. So our belief is that every month that goes by, clients become more comfortable with the, if you want to call it, the disruption aspects of COVID to their individual businesses, and it then allows them to then free up time for what they know is continuing to address either digital transformation or performance improvement or productivity efforts that are critical to address this volatility, all of them are important. And that, that engagement has been favorably received in that communication, that client discussion and interaction and collaboration. We have found a way to do that in a manner where the client feels that they are receiving the value that they are used to from the interactions with us across all of our groups. So very positive. But I think the most important thing is it speaks to how we all adapt and how we continue to adapt to the circumstances to continue to fulfill the obligations we have for our respective companies. That's happening at our client organizations. That's happened within our organization and has allowed us to do, as I said at the beginning. I thank you and congratulate both clients and our teams for being able to do so, so successfully and for our client engagement to not only continue throughout the quarter, but that engagement to increase into the fourth quarter. -------------------------------------------------------------------------------- Trevor Romeo, William Blair & Company L.L.C., Research Division - Associate [15] -------------------------------------------------------------------------------- Okay. Great. That's good to hear. And I just wanted to ask a follow-up on the cost side. Could you just speak to how you see your expense base kind of evolving over the next year or 2? Particularly regarding some of the expenses like travel-reimbursable expenses, office expenses and things like that, that have kind of changed as a result of the pandemic. And then also, just your thoughts on whether staffing levels are adequate given current demand? Or if are you looking to add headcount in certain areas going forward? -------------------------------------------------------------------------------- Ted A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [16] -------------------------------------------------------------------------------- Well, let me start where you finished. As you heard from Rob's comments, we added head count during the quarter to deal with the increased demand so that we are clearly adding head count. There's still some movement as to where that's being accelerated by practice. So there are some differences depending on some of the groups and where we're seeing the greatest increase in demand. But it's pretty broad because the client engagement has been pretty broad. Relative to cost, you really have 3 pretty significant areas. And it's interesting that you focus immediately on travel because it becomes so visible to our reimbursable expense number, which is normally added to our net revenues to get to gross revenues and how they are dramatically down. So as Rob mentioned, we had 30 basis points, 0.003% of expenses. And last year, we were 8.9% in which is an incredible difference. That means that virtually most of our engagements are being delivered remotely. So yes, there is a clear then -- benefit that accrues to the client and some to us. Clearly accrues to us 100% on the selling-related efforts, which are also being done remotely, but the client engagement has been incredibly effective. What you start realizing is that, although, clearly, you don't have the personal aspect that we so dearly miss, and we know it's an important part of our business. What we're also learning is the frequency of the engagement and the time in which we're accomplishing tasks including sales-related efforts, has really become more efficient, meaning it allows us -- it provides more capacity to engage more with existing clients or to use that capacity to prospect. So think of first, the fact that you gain the efficiencies for non-reimbursable travel and expense, which in our business is meaningful. Secondly, that you're gaining some delivery efficiencies and related -- from that same virtual remote model. But start focusing also on the fact that as work can be delivered virtually or remotely, that it also allows you to deploy a different kind of resource. We all know that a certain skill set, a client has a certain -- I mean, our individuals have a certain functional, and technical and then industry-related skills that we bring to a client. When that skill does not -- does not require for that resource to be client-facing in client site at all times, it allows you to consider different resource models. So the nearshore-offshore part of our business, we see a real opportunity to move some of those costs to a lower-cost setting. And it's maybe even aligned to some significant capability where the skill set is maybe a little -- not as broad as you'd like in some -- in certain regions. So it's giving us -- it's given us flexibility on nonchargeable travel and expense. It's giving us flexibility in the way we resource jobs and how that can be deployed, and you can then share some of those gains with clients, but should also allow you to improve or protect margins. Those are significant. And then the last mention that you said was on resource on facilities. There is absolutely no doubt that as we continue to evaluate and assess our real estate facilities cost going forward, we will find a way. I believe we will find a way to support the -- our business and the revenues with a more efficient real estate footprint. And as you can imagine, that benefit will accrue as -- with the passage of time and leaves us -- and other related agreements. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Our next question comes from George Sutton. -------------------------------------------------------------------------------- Adam David Kelsey, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [18] -------------------------------------------------------------------------------- This is Adam on for George. Ted, I enjoyed the branding in the press release related to the next normal. I was hoping you can help us understand what that means in terms of -- what you mean by that specifically. And what strategic adjustments you've made to help people in that environment. -------------------------------------------------------------------------------- Ted A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [19] -------------------------------------------------------------------------------- Well, let's first start thinking of the -- probably the most significant is the accelerated digital transformation or digitization of as many activities as you possibly can to allow you to deliver, engage, support your clients in a remote, and in many cases, a dramatically more efficient manner. So digital transformation and digitizing all activities becomes really significant and will impact all of our business. So simply for us. Then you take that same kind of, if you want to call it, we see that in clients, and we help clients identify what that -- those opportunities are for them. Not only in customer engagement but all the way through its service delivery model, so it's very, very important. Take that then to us. For us, we -- whether it was foresight or a little bit of luck, as you know, we started a very formal process to digitize all of our IP client engagement. It led to the significant investments that resulted in the creation and launching of our 2 major platforms. So we now interface with clients differently than we have before. And not only -- that not only allows us to deliver that IP more efficiently to our people and clients that we serve in our technology and business consulting model, but it's allowing us to build an entirely new business when we can see the platforms in its own right being licensed to clients and creating a new source of revenue model where IP can be leveraged by others without diminishing or marginalizing our existing business. So it is extensive. It is extensive. And then think of the examples I just talked about impact on resources, impact on global use of resources for us, the ability to deliver a phenomenal resource that may be abroad. And before somebody would think it's inexcusable to not have those resources locally and to now be able to bring a great resource without that person ever leaving their home on a key engagement, is a huge benefit. But that will apply to all knowledge work in our activities across all industries, across all of our client base. I mean, this digital transformation acceleration is a massive transformation of industry clients, the way we carry out our normal everyday lives. It's as significant as all the commercials say, which everyone's got to be tired of hearing. The moniker is used over and over again in dramatically different circumstances. -------------------------------------------------------------------------------- Adam David Kelsey, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [20] -------------------------------------------------------------------------------- And on that point, with respect to the investments you have made for digitization, how big of an advantage has that proven to be so far when you compare yourself against competitors. -------------------------------------------------------------------------------- Ted A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [21] -------------------------------------------------------------------------------- Well, it's just starting. But imagine an organization like ours, where our single biggest weakness is our scale. And to some extent, not -- we've got incredible talent, but there is no doubt that the IP and insight we gather from all of our benchmark and research exercises is a key strategic reason that clients engages. That ability to drive that knowledge more efficiently without necessarily all engagements requiring a lot of resource, I think allows us to at least feel or execute as we look forward. We think it will allow us to feel and execute as if we had much greater scale because our ability to leverage expertise and leverage that insight to our platforms dramatically more efficiently. -------------------------------------------------------------------------------- Adam David Kelsey, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [22] -------------------------------------------------------------------------------- And then one last question for me. With looking ahead to the next normal, how has that affected what you've seen in terms of opportunity for M&A. And then your preferences in M&A. -------------------------------------------------------------------------------- Ted A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [23] -------------------------------------------------------------------------------- Well, we're rekindling our work -- our pursuits and our interest. The answer is that we would like to get larger. And we have specific areas that we want to continue to focus on. They're expanding now through this period. So if you've asked me, have they changed? Have the areas of interest changed from a pre and post COVID? The answer is yes, they have. So increasing interest into cloud analytics and infrastructure areas that we weren't really discussing or considering pre-COVID. Obviously, we continue to look for areas to bring in scale in IP in -- across functional areas that we have expertise in as well as the cloud enterprise application areas we focus in on. To some extent, the pandemic has put some of that activity on hold. I believe, for us, it helps us identify a broader set of categories that we want to consider investing in. And I think it also will allow us to continue conversations in areas where we were already focused on. It is important, though, as you look at both our needs and the target needs that you have a full understanding of what the pandemic impact is, this pre and post assessment. And so the art of the deal, for lack of a better term, will come in understanding what that impact is and what a fair transaction and what a meaningful opportunity is as we look at 2021. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Our next question comes from Vincent Colicchio with Barrington Research. -------------------------------------------------------------------------------- Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [25] -------------------------------------------------------------------------------- Ted. So a couple for me. The Oracle pipeline in terms of the rebuild, could you give us some color on how that's progressing. -------------------------------------------------------------------------------- Ted A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [26] -------------------------------------------------------------------------------- Improved throughout the quarter. So prospects continue to be as good as we believe as we -- as they were as we entered the year. As we've said, the ERP component has become more and more important to multi-tier deals. So that's the area that we've been growing as aggressively as we possibly can. -------------------------------------------------------------------------------- Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [27] -------------------------------------------------------------------------------- And then could you give us more color on the drivers to the improvement in Europe in the quarter. And also, if we exclude, I think Rob said there's a managed services contract that's going to drive a decline. If we exclude that, what does it look like -- what does your book look like in the sequential period. -------------------------------------------------------------------------------- Ted A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [28] -------------------------------------------------------------------------------- We were glad to see the strong sequential improvement. That improvement ex the AMS transaction Rob mentioned, I would characterize as stable. So that, for us, is very positive. And obviously, we will keep a close eye on the current stay-at-home orders that have been instituted to see if they have any impact even though there was limited on-client and in-office engagement that was going on. It was restarting but it wasn't the driver of the activity and the engagement that we sold and serve and continue to serve in Q4. So optimistic. As you know, it's a market that's, for us, it's been hit pretty hard here over the last 18 months. So it was nice to see. So very good news for us. And we'll see how it continues. -------------------------------------------------------------------------------- Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [29] -------------------------------------------------------------------------------- And any early thoughts on -- given your pipeline on the growth trajectory for early next year. -------------------------------------------------------------------------------- Ted A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [30] -------------------------------------------------------------------------------- None other than to say that what I said in my opening comments that if the momentum, client engagement pipeline, all that activity continues the way it has from Q3 to Q4, that without disruption, we could see us going back to pre-COVID levels at least at the beginning at a profitability level in the first half of next year. On the revenue side, it will be different. So on a net revenue basis, we'll see. But if you want to call it, doesn't mean that we can't get back to those numbers in the first half. So it will be -- let's see how quickly we can get back to those numbers. We just know that whatever net revenue number we get back to, given the efficiencies that we've discussed in this call already, then our EPS yield will increase. You will see margin and operating margin improvements throughout our business when we look at the 2021 model. So we're optimistic. And that's the way I've tried to characterize it in my opening comments, and that's what we believe. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- At this time, I'm showing no further questions in the queue. I would now like to turn the call back over to... -------------------------------------------------------------------------------- Ted A. Fernandez, The Hackett Group, Inc. - Co-Founder, Chairman & CEO [32] -------------------------------------------------------------------------------- Thanks for everyone for participating in our third quarter earnings call. We look forward to updating everyone again when we report our fourth quarter results and our fiscal year results. Thanks again. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- That concludes today's conference. Thank you for your participation. You may disconnect at this time.