HCKT - NASDAQ

Welcome to the Hackett Group Second Quarter Earnings Conference Call. [Operator Instructions] Please be advised this 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.

Good afternoon, everyone, and thank you for joining us to discuss the Hackett Group second quarter results. Speaking on the call today and here to answer your questions are Ted Fernandez, Chairman and CEO of the Hackett Group; and myself, Rob Ramirez, CFO. A press announcement was released over the wires at 4:15 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 second quarter earnings call. As we normally do, I will open the call with some overview comments on the quarter. I will then turn it back over to Rob to comment on detailed operating results, cash flow and guidance. We will then review our market strategy-related comments, after which we will open it up to Q&A. This afternoon, we reported revenues before reimbursements of $77.6 million and adjusted earnings per share of $0.38, which were above and at the midpoint end of our quarterly guidance, respectively. Our quarterly results were as expected, but what is most distinguishing about the quarter is the level of breakthrough innovation we continue to develop, which are resulting in significant enhancements to our AI XPLR and

Thank you, Ted. As I typically do, I'll cover the following topics during my portion of the call. I'll provide an overview of our second quarter results for 2025, along with an overview of related key operating statistics. I'll provide an overview of our cash flow activities during the quarter, and I'll then conclude with a discussion on our financial outlook for the third 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 IPaaS programs and our OneStream and e-procurement implementation 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 revenue 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. Specifically, all references to adjusted financial measures will exclude reimbursable expenses, noncash stock-based compensation expense, all acquisition-related cash and noncash expenses, amortization of intangible assets and other nonrecurring items. 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 on the Investor Relations page of the company's website. For the second quarter of 2025, our total revenues before reimbursements were $77.6 million, an increase of 2% over the prior year, which was above the high end of our quarterly guidance. The second quarter reimbursable expense ratio on revenues before reimbursements was 1.6% as compared to 2.1% in the prior quarter and 2.3% when compared to the same period in the prior year. Total revenues before reimbursements for our Global S&BT segment were $43.6 million for the second quarter of 2025, an increase of 5% when compared to the same period in the prior year. The strong revenue growth from our Gen AI consulting and implementation offerings in this segment was partially offset by weakness in our OneStream implementation offerings during the second quarter. Excluding this decrease, our Global S&BT segment would have been up 10%. Gen AI momentum across all of Global S&BT is expected to continue to accelerate through the balance of the year. Total revenues before reimbursements from our Oracle Solutions segment was $20.5 million for the second quarter of 2025, a decrease of 7.5% when compared to the same period in the prior year. This decrease is primarily due to the post-collab wind-down of a large engagement as we've discussed last quarter. The replacement of the large engagement is taking longer than expected and will have its most significant year-over-year impact in the upcoming third quarter. Total revenues before reimbursements from our SAP Solutions segment were $13.5 million in the second quarter of 2025, an increase of 11% when compared to the same period in the prior year. This increase was primarily driven by implementation services that correspond to the volume of software sales from the last several quarters that will continue to favorably impact this segment. Approximately 21% of our total company revenues before reimbursements consist of recurring multiyear and subscription-based revenues, which include our executive advisory, IP as a Service and application managed services contracts. Total company adjusted cost of sales totaled $44.4 million or 57.2% of revenues before reimbursements in the second quarter of 2025 as compared to $43.8 million or 57.7% of revenues before reimbursements in the prior year. Total company consultant headcount was 1,382 at the end of the second quarter as compared to total company consultant headcount of 1,332 in the previous quarter and 1,145 at the end of the second quarter of 2024. Second quarter ending headcount was primarily driven by increased hiring from our Gen AI practices and the LeewayHertz acquisition. Total company adjusted gross margin on revenue before reimbursements was 42.8% in the second quarter of 2025 as compared to 42.3% in the prior quarter. Adjusted SG&A was $18.2 million or 23.4% of revenues before reimbursements in the second quarter of 2025. This is compared to $16.8 million or 22.1% of revenues before reimbursements in the prior year. The year-over-year absolute dollar increase is primarily due to foreign exchange fluctuations as well as the timing of incremental marketing events. Adjusted EBITDA was $16.1 million or 20.7% of revenues before reimbursements in the second quarter of 2025 as compared to $16.3 million or 21.5% of revenues before reimbursements in the prior year. GAAP net income for the second quarter of 2025 totaled $1.7 million or diluted earnings per share of $0.06 as compared to GAAP net income of $8.7 million or diluted earnings per share of $0.31 in the second quarter of the previous year. Second quarter 2025 GAAP net income includes noncash stock compensation expense from our stock price award program of $5.1 million and acquisition-related cash and noncash compensation and related expenses of $2.5 million which in total impacted our Q2 2025 GAAP results by approximately $0.25. Acquisition-related cash and noncash stock compensation expense relates to purchase consideration for the LeewayHertz acquisition. This consideration paid to the seller contains service vesting requirements and as such, is reflected as compensation expense under GAAP rather than purchase consideration. The acquisition of Spend Matters did not have an impact on our adjusted net income for the second quarter of 2025. Adjusted net income and diluted earnings per share for the second quarter of 2025 totaled $10.7 million or adjusted diluted net income per common share of $0.38 which is at the midpoint of our earnings guidance range and compares to prior year adjusted diluted net income per share of $0.39. The second quarter of 2025 results was negatively impacted by $0.01 due to unfavorable foreign exchange movements. The company's cash balances were $10.1 million at the end of the second quarter of 2025 as compared to $9.2 million at the end of the previous quarter. Net cash provided from operating activities in the quarter was $5.6 million, primarily driven by net income adjusted for noncash activity and an increase in accrued expenses, primarily offset by the timing of income tax payments made during the quarter. Our DSO or days sales outstanding was 73 days, both at the end of the second quarter as well as the previous quarter compared to 68 days in the prior year. The increase in DSO is primarily due to extended terms and milestone deliverables on several large client engagements. During the quarter, we repurchased 180,000 shares of the company's stock for an average of $24.50 per share at a total cost of approximately $4.4 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 $17 million. At its most recent meeting, subsequent to quarter end, the company's Board of Directors authorized a $13 million increase in the company's share repurchase authorization, bringing it to $30 million. Additionally, the Board declared the third quarter dividend of $0.12 per share for its shareholders of record on September 19, 2025, to be paid on October 3, 2025. During the quarter, the company borrowed $5 million from its credit facility. The balance of the company's debt -- total debt outstanding at the end of the second quarter was $23 million. I'll now be moving to guidance and outlook for the third quarter. Consistent with seasonal and third quarter trends, we expect the impact of the additional U.S. holiday and the typical increase in time off due to summer vacation in the U.S. and Europe to unfavorably impact available days by approximately 2% on a sequential basis. The company estimates total revenues before reimbursements for the third quarter of 2025 to be in the range of $73 million to $74.5 million. We expect Global S&BT and SAP Solutions segment revenue before reimbursements to be up when compared to the prior year. We expect Oracle Solutions segment revenue before reimbursements to be down by over 20% when compared to the prior year. As a result of the continued pivot of our business to generative AI, the company will incur restructuring charges in the third quarter of approximately $1.5 million to $2 million. These charges will primarily relate to severance costs as we reduced staff to be commensurate with our current demand and expected productivity improvements from the leverage of our Gen AI delivery platforms in our non-AI practices. These charges will be excluded from adjusted results. We estimate adjusted diluted net income per share in the third quarter of 2025 to be in the range of $0.36 to $0.38, which assumes a GAAP effective tax rate on adjusted earnings of 26.5%. We expect the adjusted gross margin as a percentage of revenues before reimbursements to be approximately 43.5% to 44.5%. We expect adjusted SG&A and interest expense for the third quarter to be approximately $18.5 million. We expect third quarter adjusted EBITDA as a percentage of revenues before reimbursements to be in the range of approximately 20.5% to 21.5%. Lastly, we expect cash flow from operations to be up on a sequential basis. At this point, I'd like to turn it back over to Ted to review our market outlook and strategic priorities for the coming months.

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 economic concerns and as well as the consideration of emerging Gen AI technology. 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. In 2025, we have seen the increasing amount of IT budgets specifically allocated to Gen AI initiatives in high feasibility and high-impact areas. The unlimited potential of Gen AI will define an entirely new level of world-class performance standards, driving all software and services providers to extend the value of their existing offerings with the introduction of a agentic AI capability. 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 creates a unique value creation opportunity for our organization. Given our strategic access and proprietary and expanding platform capabilities of AI XPLR, it was natural for us to extend our AI implementation capabilities to be able to fully develop and implement the GenAI solutions, which we were identifying, designing and evaluating. This resulted in the acquisition of LeewayHertz, a highly recognized provider of Gen AI solutions. This acquisition also included a sophisticated Gen AI orchestration platform,

[Operator Instructions] And our first question is from George Sutton with Craig-Hallum.

Ted, I wondered if we could talk about XPLR 3.0 and what interest you're seeing there, LeewayHertz,

We are seeing it on the services side, but we have not seen it yet on the licensing side for AI XPLR because we have made so many changes and continue to improve the product so meaningfully that we have yet to release a licensable AI XPLR product. We expect to do that shortly. We're glad that we didn't do it prior to this most recent quarter, which we believe, as I said, the level of innovation into that product is just really impressive. And we say impressive not only because of the responses we're getting for clients who are seeing it, but because of the conversations that we have had with potential channel partners, which have an increasing interest in seeing how they can utilize it jointly with us to go to market. So, is it all taking longer? Yes. But are the prospects tempered in any way? Absolutely not. The capability of the platforms, just like you said, is really well designed to take advantage of the market opportunity is emerging. And we believe that once we fully license AI XPLR and continue to bring in strategic channel partners that simply give us access to more clients, especially directly into the technology areas that you will see the expected revenue growth that we would like to see. With that said, our Gen AI-related revenues were up significantly in Q2.

Now on to the strategic partner side of this. Are you surprised we don't have a large strategic partner yet? Where do those kinds of negotiations stand? I'm just trying to get a sense of expectation.

Well, we announced our first strategic alliance today, as I mentioned, Celonis in our opening comments, which is the leading process intelligence company, which is going to significantly expand the introduction of our offering and their offering to our joint client bases. So that was just announced today, shortly after we released earnings. So we've been working with them all quarter to develop the joint offering and decide exactly how we want to engage clients, and that will be ramping up very quickly throughout the third quarter. Having said that, we also continue to have conversations with other potential partners. We turned down 1 SI partner because we wanted a better offer from the offer they had made to us to go to market together. But we have other options, and we continue to evaluate their offer to us. So, we expect to have more channel partner relationships expand throughout the balance of the year with large enterprise software companies and/or systems integrators.

One other thing you mentioned you were making AI-related adjustments to your headcount. And I'm just wondering if this is any indication of what you expect from the Oracle side of the opportunity given that you're challenged to fill in some of the Oracle piece. Is that just a suggestion that you're expecting a longer duration of a challenge there? Or am I conflating things?

Well, first, let me make sure you know we have an incredible Oracle implementation group. It's highly recognized and has had a lot of success. But yes, it has struggled to replace a large go-live client that we thought would have happened sooner, and it negatively impacted our Q2 results, and it will significantly -- it will do so more meaningfully in Q3, which was the height of the go-live efforts with that client show up in last year's Q3 comparison. So that led us to look at the fact that, "Hey, do we have more resources that we need in some of the areas that are not fully benefiting from Gen AI?" And secondly, that these implementation teams, both the Oracle and OneStream implementation teams are benefiting from the rollout of a product we call Accelerator, which has specifically been created to provide Gen AI-assisted support to those engagements, which is expected to drive productivity improvements in excess of 20%. So, when we looked at both of those, we looked at the relative impact, we said, "Look, why don't we just address all potential non-Gen AI I'll call them, potential headcount concerns that could negatively impact the balance of the year and 2026?" And that's why we decided to take that restructuring reserve to do so in the third quarter so that you could get a realistic idea of what the -- our businesses are producing without the severance of those individuals, and it should provide for a very clean Q4 comp.

[Operator Instructions] The next question in the queue is from Jeff Martin with ROTH Capital Partners.

I wanted to jump in -- sorry about that. I wanted to jump in on OneStream. Do you have a feel for when that might level off here and become not necessarily a headwind to growth because you are posting some nice double-digit gains in the last 2 quarters in Global S&BT.

Both Oracle and OneStream's comp peak are in the third quarter. So the relative comps, especially for Oracle goes down significantly from Q3 to Q4. And for OneStream, it also decreases. So, the impact will be -- should be, I want to call it, meaningfully eliminated. And as I said, provide for a clean Q4 comp.

And then I was hoping you could give us a sense of maybe some examples of the types of applications or maybe the more common applications that your clients are engaging you for Gen AI-related engagement.

We've seen a different number. But if I went the 2, I would say that solutions dealing with customer service, customer attrition and revenue management, customer sales effectiveness has been one area that's received significant focus from our clients where we have been delivering -- have delivered solutions that have already gone live. We're also seeing a very significant increase in large organizations, GBS organizations coming in and really understanding that further improvements, operating improvements, which they're trying to realize require the leverage of Gen AI that the automation functionality currently being provided by their core ERP systems have limitations, which can be really gapped very strongly and really smartly with Gen AI automation. So I would call those 2 areas, the areas where we're getting the most significant of both -- where we've had the engagement and where we're seeing the opportunity that exists in our current pipeline.

Great. And then last one for me is there was quite a bit of discussion on the elevated uncertainty last quarter delaying client decisions. Are you seeing -- are you getting any clarity on that, the cloud lifting here? And do you think large projects are still kind of being delayed or pushed out until we have further clarity here?

Jeff, my personal opinion is that the initial, if you want to call it, uncertainty that emerged relative to tariffs in April had little to no impact on Q2 and may have had extensive decision-making, but the quarters that most of the services companies' Q2 results were primarily in place. You can look at research advisory companies. You could look at the largest systems integration companies. And you can look at the big 4, and I believe that they are all inferring in suggestion and suggesting that in their guidance that Q3 was being affected instead of what I believe happened in Q2, I think most people were at or near their projected Q2 numbers. So, I believe that it is playing out as we speak and some combination of lower interest rates, a reduction of noise in tariffs which don't confuse our clients and our clients just continuing to develop a much stronger understanding of how strong the potential to deploy Gen AI technology is beyond their current technology landscape. I think all of those 3 are going to emerge and create the kind of demand that we all expect around software and services that are associated with these solutions. It's first inning. It really is first inning. Is Palantir an exception? Yes, very unique capability. But for someone other than Palantir, no. So that would be my personal opinion on both market conditions, how it's affecting it. And I can see that everyone is making all sorts of resource changes and alignments. We saw the announcements. And when we looked at our numbers and we looked at how meaningful it was to our technology implementation groups, we said we should probably address it now. But it also was followed by the fact that we think we've got a pretty powerful product that will bring productivity improvement into the delivery of those services. So, we're positioning both.

And the next question in the queue is from Vincent Colicchio with Barrington Research.

Yes. Ted, do you currently have the labor resources you need to meet the current AI demand in the GSBT segment?

Yes, but we did continue to add resources in that space throughout the quarter. So, the answer is yes, partly because we're seeing operating improvements from our platforms, even in the Gen AI area. So, it's amazing the capability of these platforms and how they accelerate design and development of these solutions. But don't focus only on headcount, focus on the ability to provide services along with platform value, which is the way that at least we will be serving our clients.

And is your utilization rate -- I would assume that your employees are involved in a lot of training and upskilling. Wondering if your utilization rate has been impacted by that.

No. I mean we have some ramp in the Gen AI area. So that takes a little time as we hire and then bring them up and bring them up to speed with our platforms, both on the XPLR and on the

And then the last one for me. I'm curious how your XPLR product stacks up against the competition. You've said some very favorable remarks in the past. Perhaps you could talk about the most recent feedback you've had on version 3 and then how version 4 might separate you.

Well, all I can tell you is that I made a version, let's call it, 3.5 presentation to one of the leading AI enterprise software companies today and the feedback we got from the individuals, which were very skeptical of our assertions before we demoed our product. And this is free full version 4, which they will get to see shortly. Their comment back to us was excellent that they had not seen anything as complete and thoughtful as our platform. And that is coming from a senior person at one of the most successful Gen AI enterprise application companies.

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

Let me thank everyone for participating in our second quarter earnings call. We look forward to updating everyone again when we report the third quarter. Again, thank you for participating.