HCKT - NASDAQ

Thank you for standing by. Welcome to the Hackett Group First Quarter Earnings Conference Call. Your lines have been placed on a listen-only mode until the question-and-answer session. Please be advised the conference is being recorded. Hosting tonight's call are Mr. Ted Fernandez, Chairman and CEO; and Mr. Rob Ramirez, Chief Financial Officer. Thank you, Mr. Ramirez. You may begin.

Good afternoon, everyone, and thank you for joining us to discuss the Hackett Group's first quarter results. Speaking on the call today, and here to answer your questions are Ted Fernandez, Chairman and Chief Executive Officer 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 that are contained in our SEC filings. At this point, I would like to turn it over to Ted.

Thank you, Rob, and welcome everyone to our first quarter earnings call. As we normally do, I'll open up 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, and also provide guidance. We will then review our market and strategy related comments, after which we will open it up to Q&A. This afternoon, we've reported revenues before reimbursements of $76.2 million and adjusted earnings per share of $0.41 near and at the high end of our quarterly guidance respectively. Our results were driven by the performance of our DSBT segment, which was driven by the strong performance of strong revenue growth from our gen AI engagements. Gen AI engagements also favorably impacted our gross margin. They demand a higher margin than our traditional consulting and implementation revenues and are driven by the highly differentiated capabilities of our AI Explorer and

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 first quarter results for 2025, along with an overview of related key operating statistics. I’ll cover an overview of our cash flow activities during the quarter, and I’ll then conclude with a discussion on our financial outlook for the second quarter of 2025. 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 Gen AI consulting and implementation and licensing revenues, benchmarking and business transformation offerings, executive advisory, market intelligence, and iPass programs, and our OneStream and e-procurement implementation offerings. All 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 on 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 we’ll post any additional information based on the discussions from this call from the Investor Relations page of the company’s website. For the first quarter of 2025, our total revenue was $77.9 million up 1% over the prior year. Our revenues before reimbursements were $76.2 million which was near the high end of our quarterly guidance, also up 1% over the prior year. The first quarter reimbursable expense ratio on revenues before reimbursements was 2.1% as compared to 2.3% in the prior year and 1.9% when compared to the same period in the prior year. Total revenues from our global S&BT segment were $43.4 million for the first quarter of 2025. Revenues before reimbursements for our global S&BT segment were $42.6 million for the first quarter of 2025, an increase of 6% when compared to the same period in the prior year. The revenue growth from our Gen AI consulting and implementation offerings in this segment were partially offset by weaknesses in our OneStream and eProcurement implementation offerings during the first quarter. Excluding that decrease, our global S&BT segment would have been up 13%. Total revenues from our Oracle Solutions segment were $21.1 million for the first quarter of 2025. Revenues before reimbursements for our Oracle Solutions segment were $20.4 million for the first quarter of 2025, a decrease of 3% when compared to the same period in the prior year. This decrease is primarily due to the post go live wound down of a large cadre, as we discussed last quarter. Total revenues from our SAP Solutions segment were $13.4 million for the first quarter of 2025. Revenues before reimbursements for our SAP Solutions segment were $13.2 million for the first quarter of 2025, a decrease of 8% when compared to the same period in the prior year as expected. This was primarily driven by strong software related sales in the quarter resulting from increased investments we made back in late 2023. The overall performance in the fourth quarter and in the first quarter results, however, tempered our first quarter results. However, we expect demand for our SAP service to strong throughout the balance of the year due to the implementation services that correspond to the volume of software sales from these last two quarters. Approximately 23% of our total company revenues before reimbursements consist of recurring, multi-year and subscription-based revenues, which includes our executive advisory, IT as a service and application managed services contracts. Total company adjusted cost of sales, which exclude reimbursable expenses, non cash stock-based compensation expense, and all acquisition related cash and non-cash compensation, totaled $43.1 million or 56.6% of revenues before reimbursements in the first quarter of 2025, as compared to $44.4 million or [$058.6] percent of revenues before reimbursements in the prior year. This decrease is primarily due to decreased severance costs related to selected headcount reductions in Global S&BT in the prior year, as well as decreased use of subcontractors in the quarter. Total company consultant headcount was $13.32 at the end of the first quarter of 2025. As compared to total company consultant headcount of $1,284 in the previous quarter and $11.54 at the end of the first quarter of 2024. First quarter ending headcount was primarily driven by increases from our Gen AI acquisition and increased hiring for our Gen AI practices. Total company adjusted gross margin on revenues before reimbursements, which excludes reimbursable expenses and non-cash stock-based compensation expense and all acquisition related cash and non-cash compensation was 43.4% in the first quarter of 2025 as compared to 41.4% in the prior year. The improvement in gross margin was primarily driven by the higher margin Gen AI consulting and implementation revenue in the global S&BT segment. Adjusted SG&A, which excludes non cash stock-based compensation expense and all acquisition related cash and non-cash expenses, amortization of intangible assets and one-time legal settlements was $18.4 million or 24.1% of revenues before reimbursements in the first quarter. This is compared to $17.1 million or 22.6% of revenues before reimbursements in the prior year. The year-over-year absolute dollar increase is primarily due to incremental costs associated with the LeewayHertz and

Thank you, Rob. As we look forward, let me share our thoughts on the near and long-term demand environment and the growth opportunity it offers our organization. Although demand for digital transformation remains strong in traditional areas, it continues to be impacted by thoughtful decision making as organizations assess competing priorities due to the economic concerns and the consideration of emerging Gen AI technologies. What is new is the increased uncertainty that tariff negotiations will have on client short term decision making. We continue to expect IT budgets to increase with increasing attention and allocations to the rapidly emerging Gen AI solutions and the related opportunities and threats it brings to all industries. While in 2024 Gen AI budgets were primarily focused on developing awareness in AI, in 2025, we expect to see an increased amount of [AIT] budgets specifically allocated to Gen AI initiatives in high feasibility, high impact areas. We also expect to see an increasing investment in data quality and value initiatives, which are also critical to any Gen AI strategy. The unlimited potential of AI will define an entirely new level of Gen AI enabled world class performance standards, driving all software and services providers to extend the value of their existing offerings with the introduction of AI agent extensions. We believe this will result in unprecedented innovations which all organizations will have to consider. This shift is consistent with our aggressive pivot to Gen AI enabled transformations, which we believe positions our company with unique value creation opportunities. Given the strategic access and proprietary and expanding platform capabilities of AI Explorer, it was natural for us to extend our AI implementation capabilities to be able to fully develop and implement Gen AI solutions that we were identifying. This resulted in our acquisition of LeewayHertz, a highly recognized provider of advanced Gen AI solutions. The acquisition also included a sophisticated Gen AI orchestration platform,

[Operator Instructions] Our first caller is Jeff Martin with ROTH Capital Partners.

Ted, I wanted to jump in by just, asking you to elaborate on some of the client interactions you’ve had with AI Explorer, you know, what the pipeline looks for implementation projects. And you mentioned you expect acceleration throughout the year. How might that look as we progress into the back half?

Parties, please stand by. We're not getting any sound from the speakers. One moment please.

I'm sorry, Jeff. We were muted. Let me start again. Jeff, let me go back and specifically speak to the client interactions. What we continuously hear from the clients is the fact that our capabilities are very unique. Our ability to address ideation and evaluation, provide ROI assessments at a use case level, and associate all of that ideation and evaluation and assessment to specific AI agents that would be required to build those solutions is incredibly unique. That ability that we created from the onset to be able to evaluate the automation opportunities at a work step level and build that into full simulation now industry process flows is very, very unique. That is why we continue to say we’ve never been in such a prepared and complete and powerful opportunity as an organization around such a powerful cycle. So what does that mean? I’m going to say that at least half of the times that we have that interaction, the client engagement and discussions continue. We’ve been given an opportunity to provide proposals and win work and we’re starting new relationships. So it’s just been a very, very favorable reaction from clients. What we now notice that is unique and new is that we now notice that these large panel partners see how differentiated our capability is. So the question for us is whether we continue to pursue our own leads as we have been since the beginning of that since we launched AI Explorer and as we continued since the acquisition of

Very helpful. And then towards the end of 2024 you had completed I believe, correct me if I’m wrong, a doubling of the implementation capacity on AI on the AI side of the business. Just curious how you feel about your current capacity and what’s your plan to scale that further perhaps in 2025 and 2026?

Yes, it’s probably closer to about 60% to 70% increase since acquisitions since we acquired, had some people at Go and then we aggressively hired. But you can see from the G&A spend that Rob mentioned, we’re hiring and adding more resources, not only offshore around the

Okay. One more if I could and then I’ll pass it on. Could you give us an update on the progress of the joint venture with

First let me answer the last part of your question. We are continuing to add licensed clients to the

And our next question comes from George Sutton with Craig-Hallum.

Ted, we had a first on this call. You were silent for thirty seconds. No one has ever left you speechless. I found that interesting. So as a best practices consultant in an environment that’s going through huge change, I’m just curious how that potentially benefits your business, how that potentially challenges your business as we look forward.

We clearly did. What we did expect at the beginning of the year would be to develop any campaign around economic disruption. I mean if you said, hey you were developing 2025 plan, did you consider the fact that there could be some introduction of this ambitious tariff plan that could disrupt the economic activity or at least allow clients to pause and consider the impact on them? The answer is no. So as that relates to our business model, while we’ve clearly started communicating with our clients that to the extent they want to hunker down a little bit while they’re making any of these considerations and looking at the specific tariff related disruptions that obviously the nature of the work we do around strategic cost reduction and the deployment of addressing efficiency and effectiveness at the highest level. We have brought that back out of our bag more aggressively than we expected in 2025. As it relates to the Gen AI related work, no, we think that the client engagement around Gen AI related capability continues to improve. I believe those things are budgeted. Could budgeted ideas be disrupted by larger budgeted items? I guess it could. But the interest, the engagement, the interaction both from the clients and the channel partners is very high.

You mentioned a consequential impact on ‘25 results from the AI Explorer. I'm just curious if you can give us a better sense of what you mean by consequential.

To me, I saw it one of two ways. First, it’s already been consequential because the Gen AI growth obviously on a year-over-year basis is becoming more material each quarter. But the second consequence in my mind in 2025 that I still expect to realize is that if we see the licensing revenues, we haven’t started to license Explorer yet, although the offer has been made out there and we expect the licensing of Explorer to start in July, even though we wanted that to be quicker. For those who have a license interest in Explorer, we have this kind of 90 day kind of program which is a fully facilitated engagement which could then result in a license. And then the licensing activity in

One other question. When we think of the ideation to implementation, I assume in most cases LH would be involved. Can you share some example of kind of what the ideal situation has been and what you’d love to see implemented across a lot of other companies?

Ideal situation is the overwhelming majority of the clients were introduced to AI through Copilot. And some of what I will call it employee productivity or individual productivity initiatives driven around the deployment of Copilot or other, if you want to call it, chatbot related extended AI opportunities. The major opportunities to deploy GenAI is when you identify the enterprise wide opportunity for a company. So instead of saying, a client saying, gosh, I’d like to get introduced to AI and let me pick an area that is of lower risk and lower ROI as a way of educating and launching our efforts. I would say that a majority of the clients are in that, what I call bottoms up process. Our value proposition comes by being able to engage clients top down, providing the clients with an enterprise-wide opportunity of the AI solutions. And in the best scenarios that we’ve had is when the organization then says, I’d like to pursue a basket. But they clearly include the more breakthrough or transformative solutions that require some level of sophistication the way you bring data sources together to create a knowledge base that allow clients to make decisions that they wouldn’t ordinarily be able to make, either as quickly or as precisely as you would expect. So I call that exponential intelligence. In the middle layer of the solutions, our clients then say, okay, I want to transform processes. So you’re looking for significant both improvements in efficiency and effectiveness. I’m going to say that is where more of the ambitious opportunities are. I would talk about the exponential intelligence opportunities to be those that have been moving to organizations the way you saw that I mentioned on CNBC, some of the solutions that Palantir has taken on. But there’s just a myriad of those opportunities that go way beyond a Palantir, I’ll call it dedicated solution. And then at the bottom of those incremental is when you extend AI and just improve the capability and extend the capability of enterprise software, its use, its analysis, the way Salesforce has done so beautifully with Agentforce, and others are now trying to emulate that Salesforce lead. So perfect scenario, a client that looks at it top down, select sophisticated, middle of the road, transformative and incremental solutions and then you are building then you’ve got a client that’s committing to a multi-year plan and you’re talking of millions of dollars to build that solution program out for the client. And then for us, we would like for them to not only look at that opportunity broadly top down, but we see the combination of AI Explorer and

And our last question comes from Vincent Colicchio with Barrington Research.

Yes, Ted. What portion of revenue -- excuse me, what portion of AI revenue was implementation revenue in the quarter and how should that change going forward?

Rob is looking at me knowing that he hasn't provided me this information, but I would estimate that it would be 50/50 if I have to say, and that 50/50 split as the business grows, the actual building and deployment of solutions should become significantly greater than the discovery, ideation and evaluation of the opportunities, multiples of it.

And are you seeing cross selling from your Gen AI consulting clients and into other services as of yet?

The answer is yes. We've done it twofold. First, we want to make sure that our team stays focused on the traditional work, because it's such a significant part of our 2025 plan. So what's probably been most prominent for us is to provide a digital transformation engagement that includes a Gen AI scan, a way to enhance that digital transformation initiative with something that would be more powerful and more ambitious that would come with a Gen AI solution. But there is no doubt every time we walk into the client to have a conversation about Gen AI; you have a conversation of pain points; those pain points refer specifically to I’ll call it more traditional digital transformation work we do. So the answer is yes, it goes both ways. We like obviously that we have bigger numbers in the traditional entry point and clients, traditional clients. So that idea of taking clients from digital transformation to GenAI enabled transformation with the AI scan makes our opportunity enterprise wide, makes the opportunity broader. That would be a perfect path for us to be able to start traditionally, move into GenAI and then leave a client with a complete AI COI platform that supports all of their AI solution efforts.

And then how is the pipeline looking for Oracle? And should we expect sequential flatness or any help on the direction of that as we move through the year?

No, I think Rob said that Oracle and SAP would be down. I would expect Oracle's activity is probably down. SAP's momentum is clearly up at Oracle's demand. Overall activity is solid. But as we mentioned, we're still trying to fill gaps from the large post go live engagement that we had in Q4 and into Q1.

And at this time, I show no further questions. I will now turn the call back to Mr. Fernandez.

Thank you, Operator. Let me thank everyone for participating in our first quarter earnings call. Look forward to bringing everyone back up to speed and once we have a chance to report the second quarter. Thank you for participating today.