Q4 2023 Hackett Group Inc Earnings Call
Participants
Robert A. Ramirez; CFO & Executive VP of Finance; The Hackett Group, Inc.
Ted A. Fernandez; Co-Founder, Chairman & CEO; The Hackett Group, Inc.
George Frederick Sutton; Partner, Co-Director of Research & Senior Research Analyst; Craig-Hallum Capital Group LLC, Research Division
Jeffrey Michael Martin; Co-Director of Research & Senior Research Analyst; ROTH MKM Partners, LLC, Research Division
Vincent Alexander Colicchio; MD; Barrington Research Associates, Inc., Research Division
Presentation
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.
Robert A. 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 A. 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 have experienced in that segment since the second quarter. A new important development for the segment is the notable increase in demand that we're 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. 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?
Robert A. 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 2 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.
Total company adjusted gross margin on revenues before reimbursements, which excludes reimbursable expenses and noncash stock-based compensation expense, was 43.3% in the fourth quarter of 2023 as compared to 45.1% in the prior year period. This decrease is primarily due to increased head count and lower utilization in the fourth quarter.
Adjusted SG&A, which excludes noncash stock-based compensation expense and our Gartner legal settlement and related costs, was $15.4 million or 21.6% of revenues before reimbursements in the fourth quarter of '23. This is compared to $14.9 million or 21.7% of revenues before reimbursements in the prior year. The year-over-year absolute dollar increase is primarily due to incremental investments we're making and dedicated sales resources for executive advisory service offerings. These investments approximated $0.01 in the fourth quarter of 2023.
Adjusted EBITDA, which excludes noncash stock-based compensation expense and the onetime legal settlement previously mentioned and related costs, was $16.3 million or 23% of revenues before reimbursements in the fourth quarter of '23 as compared to $16.9 million or 24.5% of revenues before reimbursements in the prior year.
GAAP net income for the fourth quarter of '23 totaled $7.9 million with diluted earnings per share of $0.28 in compares to GAAP net income of $9.7 million or diluted earnings per share of $0.31 in the fourth quarter of the previous year. GAAP net income includes a onetime legal settlement and related costs of $1.2 million or $0.03 per diluted earnings per share.
Adjusted net income, which excludes noncash stock-based compensation expense and the legal settlement for the fourth quarter of 2023, totaled $10.8 million or adjusted diluted net income per common share of $0.39, which was above the high end of our earnings guidance range. This compares to adjusted net income of $11.5 million or adjusted diluted net income per common share of $0.36 in the fourth quarter of the prior year.
The company's cash balances were $21 million at the end of the fourth quarter of '23 as compared to $9.9 million at the end of the previous quarter. Net cash provided by operating activities in the quarter was $25.6 million, primarily driven by net income adjusted for noncash activity and decreases in accounts receivable and related days sales outstanding. Our DSO at the end of the quarter was 65 days as compared to 75 days at the end of the previous quarter and as compared to 63 days at the end of the fourth quarter of 2022.
During the quarter, the company paid down $11 million on our credit facility. The balance of the company's total debt outstanding at the end of the fourth quarter was approximately $33 million. Net interest expense for the quarter was $641,000.
During the quarter, we repurchased approximately 3,000 shares of the company's stock from employees to satisfy income tax withholding triggered by the vesting of restricted stock -- of restricted shares for an average of $23.08 per share at a total cost of approximately $71,000. Our remaining stock repurchase authorization at the end of the quarter was $13.9 million. At its most recent meeting, subsequent to the end of the quarter, the company's Board of Directors declared the first quarterly dividend of $0.11 per share for its shareholders of record on March 22, 2024, to be paid on April 5, 2024.
I'm now going to move to discussing the guidance for our first quarter of 2024. Before I do that, I'd like to remind everyone of the seasonality of our business relative to costs as we move sequentially from Q4 to Q1. Specifically, consistent with first quarter guidance provided in previous years, our first quarter guidance for 2024 will reflect the sequential increase in U.S. payroll-related taxes and the sequential buildup of our vacation accruals.
The company estimates total revenue before reimbursements for the first quarter of 2024 to be in the range of $72.5 million to $74 million. We expect all 3 segment revenues before reimbursements to be up when compared to the prior year with Oracle Solutions up strongly. We estimate adjusted diluted net income per common share in the first quarter of 2024 to be in the range of $0.36 to $0.39, which assumes a GAAP effective tax rate on adjusted earnings of 22%.
We expect adjusted gross margin on revenues before reimbursements to be approximately 40.6% to 41.4%. We expect adjusted SG&A and interest expense to be approximately $16.8 million. We expect first quarter adjusted EBITDA on revenues before reimbursements to in the range of approximately 20% to 21%. Lastly, we expect cash balances, excluding the impact of share buyback activity, to be tempered due to the payment of 2023 performance-related bonuses and the payment of the employee income taxable 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 our strategic priorities for the coming months. Ted?
Ted A. Fernandez
Thank you, Rob.
As we look forward, let me share our thoughts on the near and long-term demand environment and the growth opportunities it offers our organization. Although demand for digital transformation remains strong, it continues to be impacted by extended decision-making as organizations assess competing priorities created by high interest rates and the demand disruption, which it is intended to affect. Digital innovation and enterprise cloud applications, analytics and artificial intelligence as well as workflow automation are dramatically influencing the way businesses compete to deliver their services.
So what's new? It's the rapidly emerging attention and demand for Gen AI. Its possibly unlimited potential will drive an entirely new level of digital world-class performance standards, driving all software and services providers to extend the value of their existing offerings. We believe this will result in an unprecedented innovation, which all organizations will have to consider. On the talent side, competition for experienced executives continues. Overall, we saw the turnover continue to moderate and remained low during the quarter, and we expect that trend to continue.
Longer term, we have transitioned to a hybrid sales and delivery model, which provides 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 to attract and retain talent.
Strategically, we have accelerated our focus on our recurring high-margin IP-related services by increasing the development of new programs and sales and marketing resources dedicated to this area. We also continue to invest on our new Hackett Connect member platform.
But what is new is the accelerated focus and investments we are making in our Gen AI capabilities. We are utilizing the AI Explorer platform as the vehicle to integrate the Gen AI impact across all of our offerings. We have also hired critical data and technology architecture resources to further support our efforts. This will allow us to become critical architects, advisors and consultants of our clients' Gen AI journey. Our ability to measure and assess the impact of Gen AI utilizing our growing use case repository, along with market intelligence about the respective Gen AI solution providers is a powerful way to help guide our clients through the unlimited opportunities they will have to consider. We see this as an opportunity for our organization to provide an objective business perspective to what thus far has been primarily a technology innovation story.
We continue to see strong downstream revenues from our benchmarking and executive advisory clients to our business transformation and cloud application consulting services. This halo effect has been approximately over 40% for the last several years. We believe this will only be expanded by our AI Explorer offering. Organizations who rely on our assessment, solutioning and market intelligence platforms are also more likely to utilize our advisory and consulting services.
We also continue to publish our market intelligence reports with the most recent reports focused on finance and accounting outsourcing, several dimensions of Enterprise Performance Management and customer to receivables creation. Our unique insight is our ability to measure value realization and provide implementation insight that accelerates a customer's business performance. We will soon publish our research reports on Gen AI and key solution providers, which is important content for AI Explorer and our executive advisory program.
Our market intelligence report represent critical value to providers. The companies learn how they compare to competitors as well as the measurable impact their solutions deliver. Our large benchmarking and consulting and executive advisory customer base can also acquire the market intelligence reports to inform software and services purchases decision. We are also exploring strategic partnerships that will allow us to sell our IP through new channels. This will allow us to reach beyond our current Global 1000 focus in an efficient manner.
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. These platforms allow us to deliver more information with significantly less client effort. It also allows clients to leverage our IP to create compelling benefit case assessment, accelerating process flow and software configuration decisions and track the value realization of transformation initiatives.
We believe the integration of these platforms with AI Explorer significantly enhances the value of our IP and fully aligns our perspective on the new digital world-class performance standards that will be achieved due to emerging Gen AI technology and related use cases. As I mentioned on previous calls, we have a 20-minute demo in the Investor Relations page of our website that investors can utilize to become more familiar with the capabilities of our Quantum Leap and DTP platforms. We are also adding videos that preview our Hackett Connect and AI Explorer platforms.
Lastly, even though we believe that 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 or 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 they may 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.
Question and Answer Session
Operator
(Operator Instructions) George Sutton with Craig-Hallum.
George Frederick Sutton
Ted, I wondered if you could walk through how you take AI Explorer into a company, do some work for them and then how it extends into your broader offering? I'm particularly compelled by the thought that it's an entirely new way to engage clients as you said. Can you just walk through exactly how that works?
Ted A. Fernandez
Okay. Let me do that. And first, let me also comment on the fact that you are correct that this emerging demand requires all software and services providers to, I will say, be prominent and active in this channel if they want to have an opportunity to engage clients strategically, which is only going to increase. So this AI Explorer effort for us has been very, very significant and it's received -- we've had in terms of number of meetings scheduled, held and even the level of proposals we've issued to date all are more significant than any other, I'll call it, new release that we have ever launched.
But with that said, it's -- we take our business process taxonomy, we evaluated cradle to grave as you know, for all of our benchmarking and digital transformation IP, we look at the enterprise across over 100 processes. We align those processes and compare the individual functions and activities against the Gen AI technologies which are emerging. So you look at the fact that if you're building a large language model, leveraging machine learning, leveraging neural networks, leveraging a chatbot or a digital assistant in some combination or strategic way, how does that impact both functions and activities?
We've been doing this review for more than 6 months. We've identified hundreds of use cases. So it's allowed us to: one, evaluate functions and activities for the level of Gen AI if we wanted to call impact. We then compare that opportunity for a client against the client's actual cost, time, service levels that they're achieving. It allows us again to use that measurement capability that exists in Quantum Leap to not only tell the client which activities we believe will drive the highest value, we can compare that value to the numbers that they're currently incurring, so that it results in a benefit case. We can do that.
We can then also use our growing use case repository to prioritize these opportunities for clients, again, at a functional -- bifunctional group throughout the enterprise and then -- help the client then establish priorities. A client can decide that it wants to simply walk what we would be calling workforce productivity or an incremental impact. It could -- client to be more aggressive and look at something more transformative or the client can be highly ambitious and do something that would be very breakthrough.
But as everyone is finding out, the investments required to actually achieve some of the breakthrough performance requires data harmonization that will support these large language models in order for them to have the intended impact. So we see the clients deciding how they want to start. But at the same time, clients that are very serious about this are really looking at their data standards and harmonization of data efforts that will allow them to position the most breakthrough innovation that Gen AI will offer.
So what I like the most about it since we've been in front of clients and now over the last week in front of -- in proposal scenarios with other providers is that we see the story really being framed from a technology perspective. And we believe that most of the clients are looking for somebody to bring a business perspective, how to prioritize, what's the impact, what's the organizational impact, all of the things that we do very strongly.
So for us, it's been a rapid, if you wanted, move to take all of our IP, benchmarking assets, Quantum Leap and DTP as well as the research that people can now avail themselves through Hackett Connect and make sure that they're being enveloped by this new JI innovation and activity that the clients must consider. We think it is a significant effort. It will be a significant effort for us throughout the year. But boy, I think we're pretty happy that we launched Explorer before the end of the year and the activity that we've seen since the beginning of the year has been very promising.
George Frederick Sutton
That's very helpful detail. So I wondered on the market intelligence side, how much has that -- and there wasn't a lot of discussion on market intelligence on this call or at least the prepared comments. I'm curious how much impact this Gartner issue has caused from that perspective, if any. Could you just walk through that for us?
Ted A. Fernandez
None. The Gartner issue, as you referred to it, was a, I would call it, more recruiting related where individuals that we hired, a very important one, the head of sales individual had a noncompete agreement, which was enforced in Connecticut. So we took them out of any direct sales-related activity that would compete with Gartner, and he will be precluded from returning to his head of global executive advisory sales until November 6, which is when that -- his 1-year period ends.
We were very fortunate. We were hiring a second leader to support some of our other renewals and customer service issues, very talented individual, which replaced this individual 2 weeks after we got that notice from the court that they believe that the -- their position was enforceable. We made that transition. We think we've addressed that about as smoothly as we can.
And as I said in my prepared comments, it may have disrupted or impacted, right, to ask a leader not be here at the end of the year, lead the team. But I referred to the interim head as a little bit of a Brock Purdy. No flash, just great execution, and we're delighted to have him on board. Therefore, we're looking forward to the investments we make in '23 to impact '24, but it had no impact on our development of market intelligence reports and how we intend to use them to support our executive advisory programs and now becomes a critical part of AI Explorer because a lot of the AI Explorer questions are not only what's my opportunity, how do I prioritize? But they also want a perspective of which vendors do what well and therefore, who they should consider. And I believe that they will rely on us, on that market intelligence element of our business to support Gen AI initiatives.
George Frederick Sutton
Got you. So he can't come back until November 6. Just make sure he gets out and votes the next day on November 7. Thanks, guys.
Ted A. Fernandez
He's ready to go. Don't worry, we'll keep him busy in things that do not conflict with this agreement.
Operator
(Operator Instructions)
Our next caller is Jeff Martin with ROTH MKM.
Jeffrey Michael Martin
Ted, I wondered if you could elaborate on what you see as a growth acceleration in 2024. Maybe first touch on the sources of that. Is it giving more seasoned salespeople, not having them become more seasoned and therefore conversion rates go up? Is it new offering, is this a combination? In detail that would be helpful.
Ted A. Fernandez
Yes. I mean all of the above, obviously, time and great help. During the year, we were also changing and improving some of the programs. So they were not only becoming familiar with our relative strength in how to take those to market, but we were obviously even rolling out some enhancements, which included the November -- October rollout of Hackett Connect. So again, tremendous amount of work and investment that we made. So even with some disruption, listen, it should not prevent us from are growing that -- those services the way we originally intended.
Jeffrey Michael Martin
Great. And then back to market intelligence a little bit, if we could. Are you seeing much revenue impact from the programs? I mean, you published the first couple of them towards the middle or even in the fall of last year. It sounds like you published another $0.01 or $0.02 and kind of the cadence of $0.01 or $0.02 a quarter plan for the foreseeable future.
Ted A. Fernandez
No. We project that, as you know, very low revenue since we need these programs would be rolling out in the latter part of the year. So the answer is no. But again, we expect them to contribute to our growth in 2024.
Jeffrey Michael Martin
Okay. And then could you care to quantify growth acceleration in 2024. How should we think about the model? I know typically, you target a 5% revenue growth and 10% pro forma EPS growth. Is that how we should think about this year? Or should we think about an acceleration where the back half is perhaps stronger than that?
Ted A. Fernandez
Well, as you know, we'll provide the quarterly guidance, we'll set the same. We know that at 5% growth, we obviously generate profits in excess of 10%. If we grow anywhere near 10%, we're 20% bottom line contribution. We'll provide our quarterly guidance and allow that to play out, and we'll update that for you every quarter as we go through as we normally do. So no, if you're asking me to provide annual guidance, Jeff, no -- I'm not prepared to change my discipline at the moment.
Operator
Our next caller is Vincent Colicchio with Barrington Research.
Vincent Alexander Colicchio
So Ted, I'm curious, the sales force. My understanding is bundling of services is one of their focuses. Are you seeing some success there? And if not, do you expect to see some success in that area throughout the year?
Ted A. Fernandez
Well, it depends which sales force you're talking about. If it's our regional sales group that supports our S&BT segment, and that includes all services, the answer is yes. They carry a bag to support the sale of all services. If you're talking about the executive advisory and market intelligence dedicated sales group, they're fully focused on those offerings, but they obviously receive incentives to the extent that they identify other opportunities that are outside of their purview. And then our software-related teams work directly with those channel partners and those -- that the software companies support and they primarily focus on the sale of those software products across the U.S. regions for both Oracle and SAP.
Vincent Alexander Colicchio
And Rob, I don't -- I wasn't sure if I missed it. You had said Oracle should grow sequentially. Did you mention the S&BT and SAP sequentially in Q1?
Robert A. Ramirez
Yes, my comment was that all 3 of our segments are going to grow in Q1 with the strongest being Oracle.
Vincent Alexander Colicchio
Okay. And Ted, do you expect Q1 to see better conversion rates with the new sales force? Or will it take more time than that?
Ted A. Fernandez
Yes, we do expect it to improve. In fact, it improved throughout the year, as you can see, the time and greater the individuals become familiar with the product. So yes, we would expect it to improve throughout the year, including Q1.
Vincent Alexander Colicchio
And I know you don't want to talk about growth for the year. Maybe there's another way to ask a related question. Do you expect a return on the sales investments you made last year and the market intelligence investments to bear fruit in '24?
Ted A. Fernandez
Absolutely.
Operator
And at this time, I show no further questions. I would now turn the call back over to Mr. Fernandez.
Ted A. Fernandez
Let me thank everyone for participating in our fourth quarter earnings call. We look forward to catching up with you again when we report the first quarter. Thank you.
Operator
And thank you. This concludes today's conference call. You may go ahead and disconnect at this time.
