The Hackett Group Q4 2024 Earnings Call Transcript

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February 18, 2025
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Operator

Welcome to The Hackett Group Fourth 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.

Operator

Rob Ramirez, Chief Financial Officer. Mr. Ramirez, you may begin.

Robert Ramirez
Robert Ramirez
CFO & Executive VP of Finance at The Hackett Group

Good afternoon, everyone, and thank you for joining us to discuss The Hacker Group's fourth quarter results. Speaking on the call today, I'm here to answer your questions with Ted Fernandez, Chairman and CEO of The Hacker Group and myself, Rob Ramirez, Chief Financial Officer. A press announcement was released over the wires at 04:05PM Eastern Time. For a copy of the release, please visit our website at www.thehackergroup.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.

Robert Ramirez
Robert Ramirez
CFO & Executive VP of Finance at The Hackett Group

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.

Robert Ramirez
Robert Ramirez
CFO & Executive VP of Finance at The Hackett Group

At this point, I would like to turn it over to Ted.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

Thank you, Rob, and welcome everyone to our fourth quarter earnings call. As we normally do, I'll 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 and strategy related comments, after which we will open it up to Q and A. This afternoon, we reported total revenues of $79,200,000 and adjusted earnings per share of $0.47 both exceeded our quarterly guidance.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

Our results were driven by the over performance of our SAP segment and the strong performance of our GSPT segment, which continue to see increased revenue growth from our JENAI engagements. GenAI revenues have a higher margin than our traditional consulting and implementation revenues and are driven by highly differentiated capabilities of our AI Xplore XPLR platform and our recently acquired Z Brain platform, as well as the Leeway Hertz implementation team. We are seeing clients moving from awareness and education to budgeted projects, and we saw that really towards the end of the fourth quarter and we're also seeing it in the beginning of this quarter. Total GSPT segment revenues, which were up 4% were partially offset by the weakness in our e procurement practice. We believe Gen AI enabled transformation is a generational opportunity that will fundamentally change the way companies operate as well as the way consulting services are sold and delivered.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

The GenAI platform capabilities of AI Explorer have now been extended with Z Brain's ability to orchestrate and build complex multi agent workflows, which should allow us to compete strongly in this rapidly growing space. More importantly, what's most differentiating is the power of our combined end to end capability. AI explores capability to dynamically ideate and evaluate AgenTek Gen AI solutions with the advanced open source orchestration capabilities of Sebring is very unique. This capability allows us to serve clients from ideation to implementation in one fully integrated platform. It also provides a client with a single platform that they can license to fully support their entire AI center of innovation or as we refer to it, our AI COI.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

Although Oracle activity continues to be solid, the segment was impacted by the wind down of one of our large post go live engagements. We continue to see strong overall EPM activity resulting from Oracle's reestablishment of their dedicated EPM sales force. Our SAP Solutions segment over performed for the fourth quarter in a row as it closed several significant value added reseller transactions, which strongly benefited the quarter. This increased reseller activity is directly attributable to our decision to expand our sales force in that group. We are also experiencing increasing demand from our market leading life sciences services group after several years of tempered spend in the sector.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

We continue to see Gen AI opportunities emerge. We conducted hundreds of meetings with Global 2,000 organizations from our introduction of AI Explorer earlier in the year, these demo meetings and conversations have provided us with valuable adoption insight along with the implementation concerns and limitations of our prospects. These initial meetings are now starting to become new Gen AI enabled transformation opportunities that position us to serve our clients strategically and broadly. We also continue to innovate and make powerful improvements to AI Explorer. In fact, we will release a new version three during this first quarter.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

The most important of the enhancements in version three is our ability to dynamically simulate an organization's enterprise JNEI solutions by leveraging Hackett's proprietary IP to identify automation opportunities and related data source requirements at a work step level. This enables us to identify, design and evaluate meaningful AI use cases and identify the related AI agents required to build these solutions. Given the strategic access and proprietary and expanding platform capabilities of AIXplore, it was natural for us to extend our AI implementation capabilities to be able to fully develop and implement GenAI solutions that we were identifying. This is what resulted in our acquisition of Leeway Hertz at the tail end of the third quarter, a highly recognized provider of advanced GenAI solutions. This acquisition also included a sophisticated GenAI orchestration platform Z Brain, which we agreed to contribute into a joint venture with the Leeway Hertz founder.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

The JV, which is to be named Z Brain, brings together the AI Explorer and Z Brain software platforms and will focus on licensing the platforms and creating what we believe to be a first of a kind JENAI ideation to implementation software as a service offering. We believe this JV creates an entirely new value creation opportunity for our shareholders that should result from the growth of ARR or annual recurring licensing revenues. It would also allow the JV to have the opportunity to raise capital and achieve standalone valuations due to the JENEI software focus. Our acquisition of Leeway Hertz resulted in accretive revenue growth in the fourth quarter and when combined with our AI Explorer and GenAI Consulting capabilities are expected to have a consequential impact on our 2025 results. There is no doubt that in just one year, our aggressive pivot to become the architects of our clients' GenAI journey is being well received and has significant value creation potential for our organization.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

On the executive advisory front, we continue to invest in our growing our IP based programs. We believe our move to fully integrate JENEi content, which is now being further augmented by our JENEi the content infused by the Leeway Hertz acquisition will be responsive to our clients' strong interest in this area. We experienced sequential and year over year revenue growth in the fourth quarter, driven by improved advisory program sales and renewals. We are now working on launching a premium GenAI solutioning advisory program to fully leverage our solutioning innovation and implementation knowledge from our platforms and clients engagements that will be directly targeted and the program will be directly targeted to AI leaders, CIOs and CTOs who require this knowledge. On the balance sheet side, in the near term, you can expect us to use our strong cash flow from operations to continue our stock buyback program rather than just focus on paying down the remaining outstanding balance of our credit facility, while continuing to invest in our business.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

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 Ramirez
Robert Ramirez
CFO & Executive VP of Finance at The Hackett Group

Thank you, Ted. As I typically do, I'll cover the following topics during my portion of the call. I'll comment and make a commentary on an overview of our twenty twenty four fourth quarter results, 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 first quarter of twenty twenty five. For purposes of this call, I will comment separately regarding the revenues of our Global SMPT segment, our Oracle Solutions segment, our SAP Solutions segment and the total company.

Robert Ramirez
Robert Ramirez
CFO & Executive VP of Finance at The Hackett Group

Our Global SMPT segment includes the results of our North America And International, Jenny Ag Consulting And Implementation 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.

Robert Ramirez
Robert Ramirez
CFO & Executive VP of Finance at The Hackett Group

We've 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 to the Investor Relations page of the company's website. Moving on for the fourth quarter of twenty twenty four, total revenue was $79,200,000 Our revenues before reimbursements were $77,500,000 which was above the high end of our quarterly guidance. The fourth quarter of twenty twenty four reimbursable expense ratio on revenues before reimbursements was 2.3% as compared to 2.3% in the prior quarter and 1.7% in the same period in the prior year. Total revenues from our global SMBT segment were $43,900,000 for the fourth quarter of twenty twenty four. Revenues before reimbursements for our global SMBT segment were $43,200,000 for the fourth quarter of twenty twenty four, an increase of 4% when compared to the same period in the prior year.

Robert Ramirez
Robert Ramirez
CFO & Executive VP of Finance at The Hackett Group

The revenue growth from our Gen AI consulting and implementations in the segment was primarily offset by weakness in our e procurement and OneStream implementation offerings. Total revenues from our Oracle Solutions segment were $18,200,000 for the fourth quarter of twenty twenty four. Revenues before reimbursements for our Oracle Solutions segment were $17,400,000 for the fourth quarter of twenty twenty four, a decrease of 6% when compared to the same period in the prior year. This decrease is primarily due to the post Go Live wind down of a large engagement, which will also impact the Oracle momentum in the first quarter. Total revenues from our SAP Solutions segment were $17,200,000 for the fourth quarter of twenty twenty four.

Robert Ramirez
Robert Ramirez
CFO & Executive VP of Finance at The Hackett Group

Revenues before reimbursements for our SAP Solutions segment were $16,800,000 for the fourth quarter of twenty twenty four, an increase of 51% when compared to the same period in the prior year, primarily driven by strong software related sales in the quarter resulting from the increased sales investments we made in late twenty twenty three. The over performance in the fourth quarter will temper our first quarter outlook, but we expect demand for our SMP services to be strong throughout the balance of the year. Approximately 22% of our total company revenues before reimbursements consist of recurring multi year and subscription based revenues, which includes our executive advisory, IP as a service and application managed service contracts. Total company adjusted cost of sales, which excludes reimbursable expenses, non cash stock based compensation expense and all acquisition related cash and non cash compensation expense totaled $40,500,000 or 52.3% of revenues before reimbursements in the fourth quarter of twenty twenty four as compared to $40,400,000 or 56.7% of revenues before reimbursements in the prior year. Total consultant headcount was 12 was $12.84 at the end of the fourth quarter as compared to $12.62 in the previous quarter and $11.68 at the end of the fourth quarter of twenty twenty three.

Robert Ramirez
Robert Ramirez
CFO & Executive VP of Finance at The Hackett Group

Fourth quarter ending headcount was primarily driven by increases from our GenAI acquisition and increasing hiring in our GenAI practices. Total company adjusted gross margin on revenues before reimbursements, which exclude reimbursable expenses and non cash stock based compensation expense and all acquisition related cash and non cash compensation expense was 47.7% in the fourth quarter of twenty twenty four as compared to 43.3% in the prior year. The improvement in gross margin was primarily driven by higher value added reseller sales during the quarter and the higher margin generic consulting and implementation revenue in global SMBT. Adjusted SG and 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 $18,400,000 or 23.7% of revenues before reimbursements in the fourth quarter of twenty twenty four. This is compared to $15,400,000 or 21.6% of revenues before reimbursements in the prior year.

Robert Ramirez
Robert Ramirez
CFO & Executive VP of Finance at The Hackett Group

The year over year absolute dollar increase is primarily due to incremental commissions from increased SAP segment sales and increased incentive compensation expense commensurate with company performance. Adjusted EBITDA, which excludes non cash stock based compensation expense, all acquisition related cash and non cash expenses, amortization of intangible assets and one time legal settlements was $19,500,000 or 25.2% of revenues before reimbursements in the fourth quarter of twenty twenty four as compared to $16,300,000 or 23% of revenues before reimbursements in the prior year. GAAP net income for the fourth quarter of twenty twenty four totaled $3,600,000 or diluted earnings per share of $0.12 as compared to GAAP net income of $7,900,000 for diluted earnings per share of $0.28 in the fourth quarter of the prior year. Our 2024 GAAP net income includes non tax stock compensation expense from our recently approved stock price award program of $5,100,000 and acquisition related cash and non cash compensation and related expenses of $2,300,000 which in total impacted our Q4 twenty twenty four GAAP results by $0.23.20 23 GAAP net income includes the Gartner legal settlement and related costs of $1,200,000 or $0.03 per diluted earnings per share. Adjusted net income and diluted earnings per share, which exclude non cash stock based compensation expense, all acquisition related cash and non cash expenses, amortization of intangible assets and onetime legal settlements for the fourth quarter of twenty twenty four totaled $13,600,000 or adjusted diluted net income per common share of $0.47 which is above the top end of our earnings guidance range and compares to prior year adjusted diluted net income per common share of $0.39 Acquisition related cash and non cash stock compensation expense relates to a portion of the purchase consideration for the Leeway Harris acquisition completed in September 2024.

Robert Ramirez
Robert Ramirez
CFO & Executive VP of Finance at The Hackett Group

The consideration contains either performance or service vesting requirements and as such is reflected as compensation expense under GAAP rather than purchase consideration. The company's cash balances were $16,400,000 at the end of the fourth quarter, as compared to 10,000,000 at the end of the previous quarter. Net income added from operating activities in the quarter was $20,600,000 dollars primarily driven by net income adjusted for non cash activity, increases in accrued expenses and decreases in accounts receivable. Our DSO or days sales outstanding was sixty six days at the end of the quarter as compared to seventy days at the end of the previous quarter and sixty five days in the prior year. During the fourth quarter of twenty twenty four, the company paid down $7,000,000 on its credit facility.

Robert Ramirez
Robert Ramirez
CFO & Executive VP of Finance at The Hackett Group

The balance of the company's total debt outstanding at the end of the fourth quarter of twenty twenty four was approximately $13,000,000 During the quarter, we repurchased 117,000 shares of the company's stock for an average of $30.95 per share at a total cost of approximately $3,600,000 Our remaining stock repurchase authorization at the end of the fourth quarter was $27,500,000 dollars At its most recent meeting, the company's Board of Directors authorized a 9% increase in its annual dividend from $0.44 to $0.48 per share to be made quarterly and declared the first quarterly dividend of $0.12 per share for its shareholders of record on 03/21/2025 to be paid on 04/04/2025. Before I move to guidance for the first quarter of twenty twenty five, 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 previous years, our first quarter guidance for 2025 will reflect the sequential increase in U. S. Payroll related taxes and sequential buildup of our vacation accruals.

Robert Ramirez
Robert Ramirez
CFO & Executive VP of Finance at The Hackett Group

The company estimates that total revenues before reimbursements for the first quarter of twenty twenty five to be in the range of $75,000,000 to $76,500,000 We expect global SWT segment revenue before reimbursements to be up 5% to 10% when compared to the prior year, driven by strong Gen AI revenue growth, partially offset by declines in OneStream and RE procurement practices. We expect both Oracle Solutions and SAP Solutions segment revenue before reimbursements to be down when compared to the prior year. On a combined basis, we expect them to be down 8% to 10%. We estimate adjusted diluted net income per common share in the first quarter of twenty twenty five to be in the range of 0.39 to $0.41 which assumes a GAAP effective tax rate on adjusted earnings of 22%. We expect the adjusted gross margin as a percentage of revenues before reimbursements to be approximately 43% to 44%.

Robert Ramirez
Robert Ramirez
CFO & Executive VP of Finance at The Hackett Group

We expect adjusted SG and A and interest expense for the first quarter to be approximately $18,800,000 We expect first quarter adjusted EBITDA as a percentage of revenues before reimbursements to be in the range of approximately 21% to 22% Lastly, we expect cash balances in the first quarter, excluding the impact of share buyback activity to be tempered primarily due to the payment of twenty twenty four performance related bonuses. At this point, I'll turn it back over to Ted to review our market outlook and strategic priorities for the coming months.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

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 the 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 the consideration of emerging Gen AI technologies. In 2025, we 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 of AI, in 2025, you will see increasing amount of IT budgets specifically allocated to Gen AI initiatives in high feasibility and high impact areas.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

We'd also expect to see an increasing investment in data quality and value initiatives that are critical to any Gen AI strategy. The unlimited potential of AI will define an entirely new level of GenAI 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 Jinai enabled transformations, which we believe positions a generational value creation opportunity for our organization. Strategically, we continue to focus on recurring high margin IP related services, But what is new is the accelerated focus and investments we are making in all of our Gen AI capabilities.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

The most significant investments have been in the development of our AIXplore platform and in the training and development of our associates. Our strategic acquisition of Leeway Hertz further expanded and accelerated all of our efforts. This will further accelerate as we fund the expansion of our joint venture. We are utilizing the AI Explorer platform as the vehicle to integrate the JENEI capabilities and impact across all of our offerings. We also continue to hire and upgrade our skills in critical data and technology architecture technology architecture resources to further support our efforts.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

These efforts are rapidly allowing us to become key architects, advisors and consultants of our clients' Jet AI journey. We now believe that AIXplore will be our primary strategic entry point to clients that we will use to position our traditionally strong benchmarking digital transformation and executive advisory offerings and the platforms that result in our latest digital transformation and cloud application consulting relationships. The halo or downstream revenue impact of these offerings has traditionally been around 40% over the last several years. We believe this will only be expanded by our AI Explorer offering and the enterprise wide strategic access it provides. AI Explorer significantly enhances the value of our IP and fully aligns it with emerging Gen AI world class performance standards.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

Another critical investment that we have made is to build our own Gen AI assisted knowledge based solution called App Hackett AI. We expect the integration of our valuable IP and content that leverages JENEI to significantly enhance the delivery of our insight that we are asked to provide to our clients every day, but much faster and with significantly more personalized insight. We are ingesting proprietary IP, including benchmarking best practices, research IP to support the myriads of queries that we're required to support our executive advisory, consulting and consulting. We have also embarked on a new initiative called Accelerator. It intends to address the efficiency and quality of the delivery of our technology implementation related services.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

All these initiatives are harnessing the power of Gen AI to improve and accelerate the delivery of our solutions and services with the intent of differentiating our capabilities and result in improved revenue growth and margins. We also see the potential commercial value of these innovations beyond our internal use. On the talent side, competition for experienced executives with high technology agility continued. Overall, we saw turnover continue to moderate and remain low during the quarter. We expect that trend to continue.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

We also continue to explore strategic partnerships and acquisitions that will allow us to extend our JENEI capabilities and sell our IP through new channels that will allow us to reach beyond our current Global 1,000 focus in an efficient manner. We are continuing to add videos of our new and expanding platforms on the Investor Relations page of our website that investors can review to become more familiar with our new capabilities. Lastly, even though we believe 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 and 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 ask them to remain to stay focused on our clients and our people no matter what challenges we may encounter. Those conclude my comments.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

Let me turn it over to the operator who will move us into the Q and A section of our call. Operator?

Operator

Yes. The first question in the queue is from George Sutton with Craig Hallum. Your line is open.

George Sutton
Senior Research Analyst at Craig-Hallum Capital Group LLC

Thank you. Ted, it was nice to hear you call out some revenues and the influence that Gen AI had in the fourth quarter and will have in Q1. I wondered if you could give us a little more detail on the breadth of what you're working on, give us a sense of what the pipeline might look like?

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

Well, let me say at the highest level, let's just say that both the our client entry points or meetings that we're having and even the content, which our executive advisory and market intelligence clients are leveraging is being significantly skewed to GenAI related questions and comments and interests. So that really drives our meeting counts, it drives our client engagements. And look, George, you know we've worked really hard to get out in front of this by launching axillary at the beginning of last year. All of that work we did in 2024, when you bring that together with the acquisition of Leeway Hertz and the fact that they bring not only great engineering capability, but an orchestration, an AgenTic workflow orchestration platform really allows us to be incredibly competitive. We believe we're at the tip of the spear on these opportunities.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

So look, whether it's meeting counts, whether it's discussion with clients and or revenue that we booked and saw on a sequential basis. Look, the opportunities are expanding for us. And I think we're just if you look back just the year, very dramatically different organizations with we believe very unique capabilities, which we've assembled throughout 2024. And so hopefully that provides some context to your question.

George Sutton
Senior Research Analyst at Craig-Hallum Capital Group LLC

So I thought about you immediately when I really understood what DeepSeek had done, which was dramatically reduce the power of compute and or the cost of compute. And it seemed right down central to really accelerate the application side of AI, which I thought you would be a direct beneficiary of. Can you give us a sense of how that news might have affected things in your pipeline?

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

Well, the capability of these foundational large language models is key and central to this Gen AI revolution. And it powers the JENAI solutions, which we identify, evaluate and are working with our clients with. So one to see capabilities expand, supposedly the price points relative to those capabilities go down in my mind is very positive for the end user. It infers that you're going to get greater you're going to get access to this knowledge base with all of this GPU power and now with growing capability on its ability to infirm reason and help you and assist you in many ways. For us, our capability, we have focused and believe we are experts at solutioning a GenAI opportunity from ideation all the way through a fully deployed solution at scale.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

So, I can tell you that the innovation that we've had in developing our capability with every version of ax core that we've released with the third one coming out this quarter. And now the addition, I can't tell you how capable this Leeway Hertz team, its founder is an incredibly talented individual and the Sebring platform that they bring. But look, the capabilities are improving across all dimensions of Gen AI deployment and the DeepSeq, I'll call it wake up call, I think is great news for end users and people that plan to adopt Gen AI capabilities throughout these next few years.

George Sutton
Senior Research Analyst at Craig-Hallum Capital Group LLC

One other question, if I could. SAP is typically fairly lumpy business for you. Sounds like it really picked up this past quarter. Can you just give us a duration expectation? Is this a new level for the SAP business given the investments you've made or are these more one time projects?

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

Look, we strongly benefited from the sale of software at the tail end of the year. It was the highest level we've ever achieved. In fact, unfortunately, I can't say that we can continue at that pace from Q4 to Q1, primarily because one is end of the year activity and the other is first quarter. But our SAP demand when we look throughout 2025, we're expecting it to be very strong and that's before we see some of the SAP AgenTek capabilities that it's now starting to count. So, we hope it's a strong year for SAP and our SAP group.

George Sutton
Senior Research Analyst at Craig-Hallum Capital Group LLC

Okay. Thanks guys.

Operator

The next question in the queue is from Jeff Martin with Roth Capital Partners. Your line is open.

Jeff Martin
Director of Research & Senior Research Analyst at Roth Capital Partners, LLC

Hey, good evening, Ted and Robert. How are you?

Robert Ramirez
Robert Ramirez
CFO & Executive VP of Finance at The Hackett Group

Hey, Jeff. Good, Jeff.

Jeff Martin
Director of Research & Senior Research Analyst at Roth Capital Partners, LLC

I wanted to drill in a little bit more on your meetings in the past quarter or two specific to AI Explorer. Are you seeing those convert into implementation contracts? And what kind of visibility do you have on pipeline conversion over the next couple of quarters here?

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

We see increasing activity, but more importantly, we see clients with budgeted twenty twenty five initiatives planned, which really changes the engagement for us. So it's a combination of both, we're better prepared and than when we were a year ago and clients don't need to be convinced about the Gen AI opportunity, what it means to their industry of them. So we think that we're just going to see velocity in the pipeline and we're also hoping that entry points are just that entry points in a client that learns how to leverage the Gen AI capabilities that we have to develop and build and deploy solutions will be spending will increase their spend throughout the year with us. So we're hoping for a combination of both a better budgeted client. We're significantly, I'll call it, more prepared than we were twelve months ago.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

And the fact that an entry point is just that. Once you're able to demonstrate value with a select or a few use cases or solutions as we refer to them, we believe that clients will continue to increase their spend in the category. So look, it's very promising.

Jeff Martin
Director of Research & Senior Research Analyst at Roth Capital Partners, LLC

And then wanted to get your perspective on implementation projects, both in terms of scale and scope, what kind of duration are we looking at, what kind of average implementation projects are you doing today and where could that go one to two years out from here?

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

Well, if you really think through the 2024 cadence, right, and then the fact that we didn't close Leeway Hertz until the September. So consider that as you think of the progress that we've made in our capabilities today versus what was at the beginning, mid and now at the beginning of twenty twenty five. Both our capabilities and the opportunities are just better defined, our clients are better prepared to have a conversation on how to prioritize. And to give you some examples, look, we go all the way from offering a client something we call a Fast Start program. So they have a chance to become familiar with our platforms and our capabilities.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

And they have resulted in licensing agreements that have been as long as three years. But know that all of these contracts and all of this activity kind of happened in the tail end and toward the second half of the year. So just know I'm just adding context to how they're building and how they built for us. But I can't tell you the difference between budgeted clients with knowledge of Gen AI versus educating clients, trying to understand and assess their opportunities in 2024 without having meaningful budgeted dollars last year. I think it's a significant difference.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

And we'll have a significant difference in the number of clients that we bring on board and the way clients scale throughout the year.

Jeff Martin
Director of Research & Senior Research Analyst at Roth Capital Partners, LLC

And then last question for me is, you mentioned e procurement in OneStream were headwinds to the fourth quarter. I was just curious if you could quantify that and then also give us a sense of what your outlook is for those two areas for the balance of this year?

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

Well, there is no doubt that the let's call it the GenAI, I'll call it opportunities, are somewhat or can be disruptive to the enterprise application companies. So as you've seen just in recent weeks, I'm not even going to say months, virtually every enterprise application company has announced some form of extended AI and their first introduction of AI agents or AgenTek workflows that extend the value of their existing enterprise applications. So that will be disruptive. But if you go to the person who I'll say moved, earliest to capture the power of foundational model, which was Salesforce and you look at the kind of momentum that they're seeing both in their new agent force, as well as what it's meant to their, I'll call it, traditional cloud application sales, I think you get a feel for both the opportunity, which I think Salesforce is starting to harvest. But if you go back and look at Salesforce maybe six months earlier as it was building out its Einstein capability, They had some disruption as well as they were looking at what Gen AI meant to them.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

So are we surprised that it's creating a little bit of a pause when people think of their technology investment? The answer is no. Are the enterprise applications quickly responding to the challenge? The answer is yes. And you're

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

going to

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

see it's the fight for, I'll call it, agentic workflow and the delivery of enterprise functionality, utilizing and leveraging foundational models either through an enterprise application or through, I'll call them independently built solutions is just going to be fun to watch. Clients are going to have significant opportunities to improve and they're going to have technologies available to them they didn't have eighteen months ago, but that does not come without some disruption. So I'm not surprised that we're seeing that happen and we'll see that happen as people integrate AgenTek capabilities into their current cloud apps.

Jeff Martin
Director of Research & Senior Research Analyst at Roth Capital Partners, LLC

And then are you able to quantify the headwind from eProcurement and OneStream in the fourth quarter?

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

Well, they were meaningful enough for us to mention. So for us to say that our GSVT group, four percent, Let's just say that without that disruption that GSBT group would have been up meaningfully higher, just to give you some reference. But it was meaningful enough to affect the reported growth of the segment.

Jeff Martin
Director of Research & Senior Research Analyst at Roth Capital Partners, LLC

Fair enough. Thank you. That's helpful.

Operator

And the

Operator

next question in queue is from Vincent Colicchio with Barrington Research. Your line is open.

Vincent Colicchio
Managing Director at Barrington Research Associates

Hey, good afternoon, Ted. So what is your what are your thoughts on the outlook for Oracle as we move beyond Q1?

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

Oracle activity remains, as I said, strong on the EPM side, which we've strongly benefited from here over the last twenty four months with them, probably stronger than on the ERP side. But look, we expect the enterprise application companies to participate in this extended AI capabilities delivered through agents. I think Salesforce has proven that.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

I expect Oracle, SAP, OneStream, all others to benefit in similar ways. They'll have to explain the additional value that comes from these new capabilities to clients. And look, it may impact some of the velocity in their pipeline for some, it may not for others.

Vincent Colicchio
Managing Director at Barrington Research Associates

And do you need to ramp your Gen AI labor capabilities to meet your demand expectations for 2025?

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

Well, you saw that you saw the headcount increase both year on year and quarter on quarter.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

And I think Rob mentioned that most of that headcount increase was in our Gen AI groups.

Vincent Colicchio
Managing Director at Barrington Research Associates

And are you seeing any incremental interest in the joint venture? Any update there would be helpful.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

I can report that it's starting to sign licenses. We are working through the details of the final, I'll call it, agreement.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

So AIXplore and Z Brain will be both reside inside of the joint venture. It will allow us to fully leverage, explore use some of those Z Brain infrastructure capabilities, which are going to be very valuable to explore. And we will offer the clients three options, the ability to again, we offer both facilitated full consulting engagement or licensing, which attaches a rate card to the license, but we give the client a chance to either license these capabilities or have a consulting facilitated engagement be part of it. And so we expect the licensing activity to increase throughout the year.

Vincent Colicchio
Managing Director at Barrington Research Associates

Okay.

Vincent Colicchio
Managing Director at Barrington Research Associates

That's it for me. Nice quarter, Ted.

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

Thank you, Vince.

Operator

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

Ted Fernandez
Ted Fernandez
Chairman and CEO at The Hackett Group

Well, thank you everyone for participating in our fourth quarter earnings call. As you can see 2025 is expected to be a very exciting year. So we look forward to updating you when we report the first quarter. We'll see you in a few months.

Operator

This concludes today's call. Thank you for your participation. You may disconnect at this time.

Executives
    • Robert Ramirez
      Robert Ramirez
      CFO & Executive VP of Finance
    • Ted Fernandez
      Ted Fernandez
      Chairman and CEO
Analysts
    • George Sutton
      Senior Research Analyst at Craig-Hallum Capital Group LLC
    • Jeff Martin
      Director of Research & Senior Research Analyst at Roth Capital Partners, LLC
    • Vincent Colicchio
      Managing Director at Barrington Research Associates
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Key Takeaways

  • In Q4 the company reported total revenues of $79.2 million and adjusted EPS of $0.47, surpassing guidance on the strength of its SAP and GenAI-driven GSPT segments.
  • GenAI momentum continues as clients move from awareness to budgeted projects, fueled by enhancements in the AI Explorer platform, the acquisition of Leeway Hertz and the formation of the Z Brain JV, positioning the firm for high-margin ARR growth.
  • By segment, GSPT revenues rose 4% (offset by e-procurement weakness), Oracle Solutions fell 6% due to a post-go-live wind-down, and SAP Solutions surged 51% on value-added reseller deals and expanded sales-force investments.
  • Adjusted gross margin improved to 47.7% and adjusted EBITDA reached 25.2% of revenues before reimbursements, with operating cash flow of $20.6 million, $16.4 million in cash and an ongoing $27.5 million buyback alongside a 9% dividend increase.
  • For Q1 2025 the company guides revenue of $75–$76.5 million and adjusted EPS of $0.39–$0.41, expects continued GenAI-led growth and will maintain investments in AI talent, technology and strategic M&A.
AI Generated. May Contain Errors.
Earnings Conference Call
The Hackett Group Q4 2024
00:00 / 00:00

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