Hackett Group, Inc. Aktie

Good evening, and welcome to The Hackett Group First 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.

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 CEO of The Hackett Group; and myself, Rob Ramirez, Chief Financial Officer.

A press announcement was released over the wires at 4:06 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 Q&A 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 usual, I'll begin with a brief overview, comments on the quarter and the progress we are making in our strategic transition. I will then turn it back over to Rob to comment on detailed operating results, cash flow as well as outlook. After Rob's remarks, I will return with market and strategy commentary, and then we will open the call for Q&A.

As I mentioned last quarter, while we do not control short-term market sentiment for software and services or near-term demand velocity, we do control the intrinsic value that we create. Our focus remains on building a structurally stronger, more differentiated Hackett Group, positioned to lead as enterprise AI shifts from experimentation to measurable value realization. Over the past 2 years, we have made disciplined systematic investments to build a cohesive and highly differentiated AI foundation.

We have now an integrated suite of proprietary AI platforms, including AI XPLR, which include our Hackett Process Intelligence IP, which informs our proprietary solution language model. We also acquired LeewayHertz, adding AI's engineering depth and agentic orchestration platform named ZBrain. Most recently, we introduced our latest delivery platforms, XT and AIX, which support the delivery of our business transformation and software implementation services. All of these bring critical capabilities to strategic solutions we deliver to clients.

With this foundation in place at the beginning of the year, we made our most significant move to date, which was migrating aggressively to an AI platform-enabled sales and delivery model. This shift affects pricing, resourcing and delivery economics. More importantly, it allows our business and software experts to accelerate and enhance client value, adds non-labor-based scale and expands actionable insight into the services we deliver. No one should underestimate the magnitude of this transition.

We're not only deploying these capabilities for clients, and we are also using the same technology internally to execute engagements and deliver our services more effectively. While disruptive in the near term, we believe it positions Hackett to lead a fundamental consulting industry transition and create an entirely new category from labor-based services to what industry analysts increasingly describe as service as a product.

Our message to the market is straightforward. Enterprises should not simply deploy AI tools. They must fundamentally rethink how work gets done and how it redefines their industries. We are applying the same principle internally to create our own structural competitive advantage. This afternoon, we reported revenues before reimbursements of $68.7 million and adjusted earnings per share of $0.34, which was at the low end of our quarterly guidance. Our results continue to reflect 2 realities: near-term demand pressure driven by macroeconomic uncertainty and elongated client decision cycles, primarily due to AI ROI uncertainty.

With that said, we believe that the increasing enterprise demand is unquestionable. We also believe our unique IP and platform capabilities are also unquestionable. This has driven our accelerated internal transition to AI platform-enabled delivery, providing our organization with a compelling value creation opportunity.

Early indications from our platform-enabled strategy are very promising. We have seen productivity improvements and expanding scope on engagements leveraging our platforms. Q1 project margins in our U.S. Strategy & Business Transformation Group increased by approximately 500 basis points through the leverage of our XT and XPLR platforms. However, in Q1, this benefit was offset by lower utilization as we used the quarter to adjust headcount to reflect the realized productivity improvements.

With the anticipated SBT growth in revenue in Q2, we expect the gross margin improvement will materialize in Q2 and continue to improve throughout the remainder of the year. In our Oracle segment, we have already seen projected margin increases from the deployment of the Oracle AIX platform in our second quarter margins. We have also experienced strong client and partner response in competitive pursuits. We recently won 2 large OneStream engagements in industry and markets where we had limited exposure. Brand and delivery capability were important, but it was clear, the wins were driven by the differentiated impact of the OneStream AIX platform.

As platform adoption scales across our client base throughout the year, we expect sequential improvements in both revenue and margins consistent with the guidance Rob will discuss. Overall, we see Q3 as an inflection point where adjusted EPS should exceed last year's adjusted EPS, and that's assuming flat revenues year-on-year.

From a business perspective, we believe this transition can drive revenue growth with higher margins and expand our addressable market by enabling us to help clients and strategic partners architect and implement their emerging enterprise AI transformation plans. While this pivot is disruptive given the magnitude of the change required, it creates clear focus on the highest value growth opportunities. Our strategy is to develop highly differentiated AI-enabled capabilities that leverage our globally trusted brand, expertise and IP.

The objective is not only to accelerate delivery, but to materially enhance the value and the scope of our solutions we deliver. A key challenge and a major market opportunity is ensuring that clients and strategic partners fully understand the importance of capturing, analyzing and validating their specific business process context. There is limited AI value realization without detailed understanding of the clients' real end-to-end process executions, and this must be done at a very detailed level. That is a foundation element of our solution language model as well as AI XPLR.

Our message to the market and to the clients is clear. Simply deploying AI tools will not work. You must reimagine how work gets done based on the specific and strategic requirements of your business and industry and then decide what technology will best support your efforts. Our AI leadership is being defined by our distinct capability to help clients identify, evaluate, design and deploy high-impact AI solutions using AI XPLR as well as our other platforms. We believe our platform-enabled delivery will create meaningful growth opportunities with attractive margins while helping clients capture this transformative opportunity.

We also believe channel partners can expand our pipeline -- product pipeline by increasing client access. During the quarter, we executed and launched a global go-to-market collaboration with IBM to jointly serve existing and new client pursuits. We have initiated an extensive client prioritization process to identify the most meaningful client opportunities. Additionally, we recently collaborated on a new client pursuit, which defines the framework for similar new pursuits.

Although we expect limited impact from this partnership in Q2, we believe the prospects to work together provide significant market opportunities as our joint efforts scale. We also continue to believe we can bring significant value to organizations that use process mining software, including Celonis. Our ability to ingest process execution data into AI XPLR improves and accelerates ideation and solution design, helping clients move faster on transformation initiatives. Our recent campaign to process mining users has resulted in a very strong response to our marketing offer to avail themselves to AI XPLR.

On the balance sheet, we expect to continue generating strong cash flow from operations, supporting our dividend and share repurchase program.

With that, let me ask Rob to provide details on our operating results, cash flow and outlook. I will return with additional strategy and market commentary following Rob's remarks.

Rob?

Thank you, Ted.

As I typically do, I'll cover the following topics during this portion of our call. I'll cover an overview of our first quarter results for 2026, along with an overview of related key operating statistics. I'll have 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 2026.

For the 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 programs and our OneStream and eProcurement 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 revenues before reimbursements in our discussions. 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, non-cash stock compensation expense, all acquisition-related cash and non-cash compensation reversals and expenses, amortization of intangible assets and other non-recurring items, including an AI transition charge. 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 discussions from this call on the Investor Relations page of our company's website.

For the first quarter of 2026, our total revenues before reimbursements were $67.8 million, down 11% from the first quarter of 2025. The first quarter reimbursable expense ratio on revenues before reimbursements was 1.4% as compared to 1.2% in the prior quarter and 2.1% when compared to the same period in the prior year. Total revenues before reimbursements from our Global S&BT segment were $36.4 million for the first quarter of 2026, a decrease of 15% when compared to the same period in the prior year. As Ted mentioned, elongated client decision-making persisted throughout the quarter.

During the quarter, we continue to see an increasing number of clients utilizing our AI delivery platforms, which is expected to increase throughout the balance of the year. More importantly, sequentially, we expect revenues to be up from Q1 to Q2, along with an improvement in gross margins due to the impact of an increasing number of new projects benefiting from our transition to AI platform-enabled delivery as well as headcount actions we took in the previous quarter to reflect the realized productivity improvements.

Total revenues before reimbursements from our Oracle Solutions segment were $15.4 million for the first quarter of 2026, a decrease of 24% when compared to the same period in the prior year. Sequentially, the segment has stabilized from the completion of a large client engagement, which will hurt year-on-year comparables until Q3 of this year. More importantly, we expect both revenue and gross margin improvements to sequentially improve in Q2. We also expect these improvements to continue to increase throughout the balance of the year.

Total revenue before reimbursements from our SAP Solutions segment were $16 million for the first quarter of 2026, an increase of 21% when compared to the same period in the prior year. This increase was primarily driven by implementation services that correspond to the increasing volume of software sales we experienced throughout 2025. Most of the software sales were coupled with significant implementation fees, and therefore, we expect demand for our SAP services to be strong throughout the balance of the year.

Approximately 24% of our total company revenues before reimbursements consist of recurring multi-year and subscription-based revenues, which include our executive advisory, AMS and Gen AI license contracts. We are seeing the natural migration of IPaaS requests to transition to the Hackett Intelligence IP capabilities, which are now embedded in our AI delivery platform-related revenues and our new executive advisory AI programs.

Total company adjusted cost of sales totaled $39.2 million or 57.7% of revenues before reimbursements in the first quarter of 2026 as compared to $43.1 million or 56.6% of revenues before reimbursements in the prior year. Total company consultant headcount was 1,247 at the end of the first quarter of 2026 as compared to 1,301 in the previous quarter and 1,332 at the end of the first quarter of 2025. The year-over-year decrease in headcount was primarily due to actions taken to reduce staff to be commensurate with productivity improvements we have realized from our AI delivery platforms.

Total company adjusted gross margin on revenues before reimbursements was 42.3% in the first quarter of 2026 as compared to 43.4% in the prior year. Q2 margin improvements are expected to increase and be noticeable in both our Global S&BT and Oracle segments in Q2, given our transition to AI-enabled delivery, which was launched at the beginning of the year.

Adjusted SG&A was $16.1 million, or 23.7% of revenues before reimbursements in the first quarter of 2026. This is compared to $18.4 million, or 24.1% of revenues before reimbursements in the prior year. The year-over-year decrease is primarily due to reduced variable compensation expense, commensurate with the quarter's performance.

Adjusted EBITDA was $13.8 million, or 20.3% of revenues before reimbursements in the first quarter as compared to $15.7 million, or 20.7% of revenues before reimbursements in the prior year. GAAP net income for the first quarter of 2026 totaled $4.3 million, or diluted earnings per share of $0.17 as compared to $3.1 million, or $0.11 in the first quarter of the previous year. Adjusted net income and diluted earnings per share for the first quarter of 2026 totaled $8.7 million or $0.34, which is at the low end of our earnings guidance range and compares to prior year adjusted diluted net income per share of $0.41.

The company's cash balances were $6.1 million at the end of the first quarter as compared to $18.2 million at the end of the previous quarter. Net cash utilized in operating activities in the quarter was $5.1 million, primarily driven by net income adjusted for non-cash activity, which is more than offset by increases in accounts receivable and decreases in accrued expenses, primarily due to the payment of 2025 performance bonuses.

Given the increase in VAR-related revenue over the last 2 years that carry multi-year terms, we revised our DSO calculation to exclude those revenues and receivables. Our DSO was 67 days as compared to 55 days at year-end. The increase in DSO is primarily driven by milestone delivery terms on several large technology engagements. We currently expect a significant reduction in accounts receivable by the end of the second quarter of approximately $8 million to $9 million. VAR-related receivables of $4 million that were expected to be collected by the end of the first quarter were delayed by SAP and were collected in early Q2.

During the quarter, we repurchased 333,000 shares of the company's stock for an average of $13.94 per share at a total cost of approximately $4.6 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 first quarter was 22 million. At its most recent meeting subsequent to quarter end, the company's Board of Directors declared the second quarter dividend of $0.12 per share for its shareholders of record on June 22, 2026, to be paid on July 6, 2026.

I'm going to now have a discussion on our guidance for the second quarter. The company estimates total revenue before reimbursements for the second quarter of 2026 to be in the range of $68.5 million to $70 million. We expect both Global S&BT and Oracle Solutions segments to be sequentially up from Q1 and down from prior year. The year-on-year unfavorable comparables extend into Q2 for Oracle and Q3 for S&BT.

We expect SAP Solutions segment revenue before reimbursements to continue to be up on a year-over-year basis, but sequentially down due to lower VAR sales revenues in the second quarter. As a result of the continued transition of our business to AI platforms-related delivery, the company expects to incur an AI transition charge in the second quarter of approximately $500,000. These charges will primarily relate to severance costs due to headcount reductions from the increasing leverage of our Gen AI delivery platforms. These charges are expected to decrease, but may continue throughout 2026. These charges will be excluded from our non-GAAP financial results.

We estimate adjusted diluted net income per common share in the second quarter of 2026 to be in the range of $0.33 to $0.35, which assumes a GAAP effective tax rate on adjusted earnings of 26.6% as compared to GAAP effective tax rate of 27.2% in the second quarter of the prior year. We expect the adjusted gross margin as a percentage of revenues before reimbursements to be approximately 44% to 45%. We expect adjusted SG&A and interest expense for the second quarter to be approximately $19.5 million.

Overall, we see Q3 as an inflection point where adjusted EPS should exceed last year's adjusted EPS on flat revenues. We expect second quarter adjusted EBITDA as a percentage of revenues before reimbursements to be in the range of approximately 20% to 21% Lastly, we expect cash flow from operations to be up on a sequential basis.

At this point, I would 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 view of the near and long-term demand environment and the growth opportunity it creates for Hackett. Let me start with the AI reality check and why has value lagged. Enterprise AI adoption is widespread, but value realization remains the key question. Despite rapid model improvements and significant investment, many organizations are struggling to realize their targeted ROI from AI initiatives.

The limiting factor is not foundational LLM capability. It is critical detailed workflow intelligence and expertise that defines important critical AI opportunities, undocumented exceptions, fragmented systems and governance gaps. Most organizations began their AI adoption strategies with tactical low ROI initiatives, copilots, point agents, automation overlays without first understanding how work is actually executed and properly evaluated. This environment creates a clear market inflection.

The winners will be firms that combine deep process expertise, which allows them to accurately design high-impact ROI solutions with production-grade AI orchestration. Hackett's core strengths align directly with this shift. With the right exposure, we believe Hackett can capture a growing number of clients accelerated by partnership strategies as enterprises reset AI strategies from tools and tactical automation to truly reimagine ROI-based AI transformation.

So again, what's changed? Models are no longer the bottleneck. Cost accuracy and reliability have improved to production-ready levels. Enterprise workflows are the bottleneck. Many processes are not accurately analyzed or even considered and therefore, evaluated as executed. Not only do clients are not getting the right detailed information, they're assuming that standard operating procedures actually define the work -- how the work is actually being done, which in many instances does not.

AI overlays can fail silently. Copilots, point agents and AI-native applications can increase rework and risk with limited ROI. Then there's the issue of agent sprawl, also resulting in disconnected agents that introduce security, compliance and maintenance exposure. This means organizations must shift from AI strategy and tools to validate company-specific process requirements that drive accurate design, orchestration and ongoing monitoring and sound run operations.

Hackett's strategic edge is rooted in long-standing strengths that are now essential for AI to work. First, our benchmark-based process intelligence and KPI orientation focused on cycle time, throughput, error rates and return on investment, not theory. Second, our credibility in understanding what actually happens versus what is assumed to happen when compared, as I mentioned, by standard operating procedures. Third, AI XPLR's ability to validate true as-is workflows, automation footprints and data dependencies before AI design and deployment. It is not technology first. It is process first, domain-specific and orchestration driven.

Without validated company-specific enterprise process context, AI value realization will remain limited. We are entering the agentic era, which will dramatically expand enterprise automation footprints across organizations. As deterministic automation evolves into intelligent -- cognitive and intelligent systems, enterprises must manage increasing complexity related to security, compliance, monitoring and governance. This creates substantial opportunities, but only for the firms that understand both enterprise processes and agent behavior at production scale.

Hackett's role is to help organizations architect and execute their agentic enterprise transformation plans and actively support their AI centers of excellence. Partnerships will play an important role in expanding our reach and accelerate adoption. On talent, competition for experienced delivery and market-facing executives with strong technology agility continues. Overall, turnover remained at acceptable levels during the quarter, and we expect that trend to continue.

Finally, we believe we have the client base and offerings to grow organically. We will continue to evaluate acquisitions and alliances that strategically lever our IP, platforms and transformation expertise and add scope, scale and acceleration to our business plans. As always, I'll close by congratulating our associates on their contributions and thanking them for their tireless efforts. Please remain highly focused on our clients and our people.

Those conclude my comments. Operator, please open the call for Q&A.

[Operator Instructions] The first question in the queue is from George Sutton with Craig-Hallum.

Ted, you talked about the short-term disruption and the pivot that you are making and the challenges in sort of client decision-making. I wondered if you could address sort of how much longer do we see this disruption? And then how do we see the benefits from the massive long-term opportunity, particularly with the IBM relationship? When do we start to see the impacts from that?

Well, first, I know since we're all disappointed with the Q1 results, George, you'll wonder when I say that we actually saw some of those benefits start to accrue in the first quarter. But as we mentioned in our comments, since we were also taking people out as we deploy these platforms and realize the productivity improvements that come from it, there's a natural inefficiency in that, and I'll call it, in rightsizing both skill and scale to this new platform-enabled capability.

So, our best way to demonstrate how that progresses is; one, that we believe margin improvements will increase quarter-on-quarter. And if you look at what Rob guided based on what we consider a small revenue increase, which we expect, as Rob said, across most of our segments, that we will start realizing the productivity benefits from the change in that platform. That's also why the AI transition charge dramatically increases from Q1 to Q2.

We also mentioned the fact that if you then looked out -- if you went out and looked out another quarter and looked at the potential increase, small -- I'll just say, small potential increase in revenue, if you were to look at Q3 and how it compares with Q3 of the prior year, that our ability then to demonstrate EPS increases year-on-year will actually also start to emerge because to some extent, the transition started with changes that we implemented last summer. But that was just to start looking at talent skill mismatches, demand, if you want it, matching some demand with our resource plan. So, that was kind of the initial spot. But really, the bold move was, as I said on our comments, which is by literally launching all the platforms and putting all of our new engagements, leveraging these platforms is pretty significant.

However, both the success being realized in productivity improvements and the impact that we've had by some of the examples we cited in how differentiated and how powerful these platforms are impacting both the time that we deliver engagements, the way we deliver engagements and the value that we extend to the client has been significant enough to bring us some pretty significant wins. But did that also then distract us from, let's call it, less high-potential areas?

To some extent, we're having to give away some of the things we used to do because we believe we will not continue to do them and really put all our chips in to where the business is going and where the platforms and the clients need our help the most. And I define that broadly as ROI-based AI transformation. And that requires the capability of all of our platforms. So, we're not only talking about leveraging AI XPLR, which is so critical in Gen AI process design and the definition of AI opportunities in the sophisticated way we design agentic workflows. But the way we execute our business transformation engagements using XT. And then I got to tell you, we've been just beautifully surprised by our -- the competitive response on the proposals where we've had a chance to introduce AIX. That obviously has happened in a meaningful way in our OneStream group, but we're also seeing that happening in on the Oracle side as well.

So, a long way of saying we believe it's happening. It has started to happen. Yes, we don't eliminate all those. We created inefficiencies by affecting it. But we're dealing with the inefficiencies at the same time. And if we are correct, we'll see that improvement quarter-on-quarter. And as you then get toward the end of the year, as the percentage of engagements that are being supported by our platforms starts to really take hold, that's when you get to see then the long-term impact on the revenue growth that we would expect to see.

So, you answered my question very much on an AI internal process basis. I'm looking more at the go-to-market changes that you might see with these new partners who have a meaningfully larger footprint than you do in terms of bringing additional deals your way and when that might start to occur.

Well, we expect that to start to occur during the second quarter, but actually start being noticeable as we get into the third quarter since the number of opportunities and the scale of the opportunities are very substantial. But I also -- I want to mention something else, which is this acknowledgment that ROI and return on AI investments requires a deep process knowledge is becoming pretty well founded and spoken. And in fact, we've had 2 inbound calls from some of the large hyperscalers just asking for us to demonstrate our capability and why we believe it's so distinct and how we believe it both accelerates AI adoption, but more importantly, leads to accurate deployment of solutions, which provide the targeted investments, which everyone expects to realize.

Just one other question for me. Rob had mentioned Q3 inflection point. I think he's referring to the Oracle year-over-year getting easier. But I'm wondering what beyond that would you view as the inflection that comes in Q3?

Well, the Oracle one is not a small one. So it's -- and we're seeing not only does it give us -- right, you now start to see a stabilized Oracle with the platform benefits of AIX. But yes, as you know, we were trying to -- we had very tough comps all the way through Q3. And Q3 is -- if you recall, last year was a $72 million quarter. But let's call it, the comps -- if the comps extended any other areas. And by the way, this is removing value-added software sales, which you know can be lumpy and volatile.

So, I'm really talking about all else. We have some small comp then issues as we go into Q4. But what we're really saying is with some revenue growth from Q2 to Q3, our model starts to demonstrate the power, not all the way through to the bottom line. As you know, we manage this both for EPS growth, and we look at EBITDA and free cash flow very closely.

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

Jeff?

Yes. Sorry about that. Ted, I wanted to drill down on your comments about kind of the customer approach to deploying agentic AI. It sounds like that's both a headwind and a tailwind for what you're attempting to accomplish here. Could you maybe speak to both ends of that spectrum with respect to kind of customer readiness to adopt agentic AI versus your opportunity to help them be ready and actually deploy it?

Well, first -- let me first start by saying what I already covered that the demand for AI impact is very, very significant and continues to increase. So, you're correct. There's a positive and a negative. Clients are clearly -- clients don't like the kind of returns that they've gotten from some of their, I'll call it, technology-first initiatives. But that's because we believe they were not as strategic and did not have the necessary business context that really drive high ROI returns. So, you've got some very strong technology companies, all of them, which we hear about every single day.

So, there's continuance marketing and demonstration of technology value. So, we think that also is creating demand -- is driving demand. But again, I think that there is now increasing acknowledgment that in order to get the kind of return that people are looking for across sophisticated areas of their business, the need for detailed understanding of the workflow requirements in that solutioning and in that process is becoming increasingly critical. If that is correct, and that is what we're hearing, we believe the demand for our kind of capabilities and platforms will only increase.

And then I know that IBM is a relatively new strategic partner. Just curious what you can share anecdotally about some of the introductions that have been made and the progress you're making with those potential clients?

Well, I mean, high level, the process started by trying to evaluate a list of over 500 existing clients and has now moved to discussions into new client opportunities. So, we're doing a lot of training, education. And yes, we're also being pulled in and asked to demonstrate the difference in our capability versus what others have brought to bear or what they bring to bear in order to further differentiate the capabilities of our firm as well as AI XPLR. We believe that those proof points continue to be very powerful.

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

Yes. Ted, given the importance of understanding context and the gap that you have with your XPLR capability versus the competition, it would appear that you've got a very substantial opportunity ahead of you. I guess my question is, is the gap narrowing? What does the competitive set look like?

You mean competitive gap?

Yes.

Look, there's innovation. We're seeing new approaches, playbooks, all of these things from many competitors. I'll go back. We think that the distinct difference in AI XPLR are foundational ones. Our ability to analyze processes at a WorkStep level, our ability to bring in automation context -- existing automation context so that clients don't spend money automating things that they already have the ability to from their existing AI investments, how that extends into data sources and how that drives to a detailed design of the agentic workflow and how -- I'm going to call it detailed and accurately we're able to do that, we still believe is a very powerful competitive advantage. And we're going to work as hard as we can to show that capability to all, I'll call it, partners that could really help us expand our client reach.

So, we believe that, that is probably -- the most important emphasis is not only to continue to innovate, but also to make sure that everyone understands the unique capabilities we have. As you know, as we were building it out, we were always concerned about competition and IP infringement and the like, but we realized we've got no time to wait. So, we've got to go ahead and let as many people see and touch our platforms and see how that drives the kind of revenue and margin opportunity we think is available to our organization.

Is there anything new to report on the ServiceNow or Celonis relationships?

The Celonis -- well, the Celonis relationship really has turned out to be a process mining marketing campaign, which we did launch in the quarter. And we're getting probably a higher response rate from our offer to those process mining users who avail themselves to AI XPLR. So, we'd like to see some of that come in, in Q2, but we think that creates a very substantial opportunity. With ServiceNow, we just got a little stuck in signing an agreement. It actually took a little longer with IBM as well and it related to the IP infringement rights that we're asking for in order to launch these initiatives and share our platform as openly as we would like.

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

Thank you, operator.

Let me again thank everyone for participating in our first quarter earnings call. We look forward to updating everyone when we report the second quarter. Thanks again.

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

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, sir.

Good afternoon, everyone, and thank you for joining us to discuss The Hackett Group's fourth quarter results. Speaking on the call today and here to answer your questions are Ted Fernandez, Chairman and CEO of The Hackett Group; and myself, Rob Ramirez, Chief Financial Officer.

A press announcement was released over the wires at 4:08 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 that's 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 are considered 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 fourth quarter earnings call. As we normally do, I will open up the call by providing 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&A.

This afternoon, we reported revenues before reimbursements of $74.8 million and adjusted earnings per share of $0.40, which were above and at the high of our quarterly guidance, respectively. While we cannot control the short-term market sentiment or demand volatility, we can control the value -- the intrinsic value we create.

Over the past 2 years, we have been systematically expanding our suite of GenAI-enabled platforms to lead in the rapidly emerging agentic enterprise era. By embedding our IP into our new platforms and models, we believe we will be able to generate new revenue with higher margins in entirely new ways that allow us to deliver breakthrough value to clients.

Our quarterly results continue to reflect the market and our own disruptive effects given our aggressive AI transition. Our strategy has been to develop highly differentiated GenAI-enabled capability that leverages our unique expertise as well as our proprietary IP. The goal was to be able to accelerate and more importantly, enhance the value of solutions we deliver to clients.

Our AI leadership and relevance is being defined by our distinct capabilities to help clients identify, evaluate, design and deploy high-impact AI solutions utilizing our AI Explorer or XPLR platform. We are not surprised by the changes required by the AI transition. We were early adopters and anticipated the required changes.

We started in January of 2024 when we first introduced AI XPLR's version 1 and in September of 2024, when we acquired the globally recognized GenAI engineering capabilities of LeewayHertz to expand our agentic design and build capabilities and also enhance our platform innovation as well as licensing efforts.

Our AI XPLR version 5 release is now licensable. AI XPLR is distinct due to its enterprise-wide solution simulation, ideation and detailed process and agentic design capabilities, which are supported by solution-specific ROI. AI XPLR is uniquely ours because it is powered by our proprietary Hackett solution language model and informed by our globally recognized Hackett process benchmarks and best practices process intelligence IP.

Although we started with AI XPLR, we have now introduced new platforms, which include XT to support our business transformation engagements and AIX to support our enterprise application implementation engagements and as Hackett, which we rolled out last summer to support the delivery of our executive applied intelligence programs.

As we recently announced, we now have a complete suite of GenAI-enabled platforms to support nearly all of our services. We believe we have been innovative leaders in our industry. As I mentioned, these platforms significantly accelerate and enhance the value of our services and should allow us to grow our revenues and realize meaningful margin increases as we move from labor-based delivery to labor-led services supported by our powerful GenAI delivery platforms and globally recognized IP.

Our job is to make sure our clients understand the importance of their business process context and the critical role it plays in the successful adoption of AI. There is little to no value realization without a detailed understanding of a client's specific business process and reimagining those specific client requirements by assessing the AI enablement opportunity of each work step.

That is the critical foundational element of AI XPLR. We believe that our platform-enabled delivery strategy will provide significant new revenue growth opportunities with higher margins while helping clients capture this unprecedented transformative opportunity. We also believe that channel partners can help us accelerate our efforts by increasing client access, which should also result in revenue growth.

We have spent nearly 6 months with a global technology and consulting company demonstrating and testing AI XPLR's powerful capabilities on global, highly complex client solutions that have resulted in our platform being described as game changing. We expect to execute and launch a go-to-market -- a global go-to-market collaboration agreement that will allow us to jointly serve new and existing clients.

We expect to finalize our agreement and launch our first client shortly. We also continue to believe that we can bring significant value to all organizations that utilize Celonis' software and other process mining software. Our ability to ingest their valuable volume and process execution detail into AI XPLR allows us to accelerate and better inform our ideation and solutioning recommendations, which allows customers to accelerate their transformation initiatives.

We also plan to launch a go-to-market pilot initiative with ServiceNow this month. We have been pursuing this opportunity for several months and are eager to see the outcome from our joint pursuits. On the balance sheet side, we continue to generate strong cash flow from operations, which has allowed us to maintain our dividend and continue our strong buyback program.

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?

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 the fourth quarter results for 2025, along with an overview of related key operating statistics, 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 2026.

For the 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 GenAI consulting and implementation licensing revenues, benchmarking and business transformation offerings, executive Applied Intelligence Advisory programs and our OneStream and eProcurement implementation offerings.

Our Oracle Solutions and our SAP Solutions segments include 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 and AI transition charges related to headcount reductions.

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 discussions from this call on the Investor Relations page of our company's website.

For the fourth quarter of 2025, our total revenues before reimbursements were $74.8 million, which exceeded the high end of our guidance. The fourth quarter reimbursable expense ratio on revenues before reimbursements was 1.2% as compared to 1.3% in the prior quarter and 2.3% when compared to the same period in the prior year.

Total revenues before reimbursements from our Global S&BT segment were $38.6 million for the fourth quarter of 2025, a decrease of 11% when compared to the same period in the prior year. As Ted mentioned, the market is moving to AI-enabled services. AI is becoming an increasing percentage of all of our client engagements as the convergence of traditional and new AI-oriented services is occurring at an accelerated rate.

Given our expanded platform delivery capabilities, we can accelerate value realization and realize productivity improvements utilizing our XT and AI XPLR platforms. We expect Q1 revenue to be up sequentially and gross margin to be up on a year-over-year basis and both to continue to increase throughout the year.

Total revenues before reimbursements from our Oracle Solutions segment were $14 million for the fourth quarter of 2025, a decrease of 20% when compared to the same period in the prior year. With the recent introduction of our AIX platform, which supports the delivery of our Oracle implementation engagements, we have started to realize delivery productivity improvements. Correspondingly, we expect both revenue and gross margin improvement in Q1 on a sequential basis, and we expect those improvements to continue to increase throughout the year.

Total revenues before reimbursements from our SAP Solutions segment were $22.2 million for the fourth quarter of 2025, an increase of 32% when compared to the same period in the prior year. This was primarily driven by strong software-related sales in the quarter, resulting from the increased sales investments we have made and the SAP success driving S/4HANA cloud migrations. The strong software sales were coupled with significant implementation fees, and therefore, we expect demand for our SAP services to be strong throughout the year.

Approximately 22% of our total company revenues before reimbursements consist of recurring multiyear and subscription-based revenues, which include our executive advisory, application managed services and GenAI license contracts. We are seeing the natural migration of iPass requests to transition to the Hackett Intelligence IP capabilities embedded in Ask Hackett, AI XPLR and ZBrain related recurring revenue opportunities.

Total company adjusted cost of sales totaled $40 million or 53.4% of revenues before reimbursements in the fourth quarter of 2025 as compared to $40.5 million or 52.3% of revenues before reimbursements in the prior year. Total company consultant headcount was 1,301 at the end of the fourth quarter as compared to total company consultant headcount of 1,317 in the previous quarter and 1,284 at the end of the fourth quarter of 2024.

Total company adjusted gross margin on revenues before reimbursements was 46.6% in the fourth quarter of 2025 as compared to 47.7% in the prior year. Adjusted SG&A was $20 million or 26.7% of revenues before reimbursements in the fourth quarter of 2025. This is compared to $18.4 million or 23.7% of revenues before reimbursements in the prior year. The year-over-year increase is primarily due to incremental commissions from increased license sales in the SAP segment.

Adjusted EBITDA was $15.9 million or 21.3% of revenues before reimbursements in the fourth quarter of 2025 as compared to $19.5 million or 25.2% of revenues before reimbursements in the prior year.

GAAP net income for the fourth quarter of 2025 totaled $5.6 million or diluted earnings per share of $0.21 as compared to GAAP net income of $3.6 million or diluted earnings per share of $0.12 in the fourth quarter of the previous year.

Fourth quarter 2025 GAAP net income includes noncash stock compensation expense from our stock price award program of $1.8 million or $0.08 per diluted share and acquisition-related cash and noncash compensation expense of $1.1 million or $0.04 per diluted share.

2024 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 $2.3 million, which in total impacted our Q4 2024 GAAP results by $0.23.

Acquisition-related cash and noncash stock compensation items related to purchase consideration for the LeewayHertz acquisition. This consideration paid to the sellers contain service vesting requirements, and as such, is reflected as compensation expense under GAAP rather than purchase consideration.

Adjusted net income and diluted earnings per share for the fourth quarter of 2025 totaled $10.9 million or adjusted diluted net income per common share of $0.40, which is at the high end of our earnings guidance range and compares to prior year adjusted diluted net income per share of $0.47.

The company's cash balances were $18.2 million at the end of the fourth quarter of 2025 as compared to $13.9 million at the end of the previous quarter. Net cash provided from operating activities in the quarter was $19.1 million, primarily driven by net income adjusted for noncash activity and increases in accounts payable and accrued expenses, partially offset by an increase in accounts receivable.

Our DSO or days sales outstanding was 71 days at the end of the fourth quarter as well as in the previous quarter and 66 days in the prior year.

As Ted mentioned, we were pleased that during the fourth quarter of 2025, we were able to utilize our strong balance sheet and cash flow to return capital to our shareholders. By leveraging our credit facility, we completed our stock tender offer, which resulted in the repurchase of 2 million shares of the company's stock at a price of $20.29 per share, including transaction-related fees.

In total, including purchases from employees to satisfy income tax withholding triggered by the vesting of restricted shares, the company acquired 2.1 million of the company's stock at an average of $20.30 per share for a total cost of approximately $42 million. Our remaining stock repurchase authorization at the end of the quarter was $11.4 million.

At its most recent meeting, subsequent to quarter end, the company's Board of Directors authorized a $13.6 million increase in the company's share repurchase authorization, bringing it to a total of $25 million. Additionally, the Board declared the first quarter dividend of $0.12 per share for its shareholders of record on March 20, 2026, to be paid on April 3, 2026.

During the quarter, the company borrowed a net of $32 million from its credit facility to fund the tender offer. The balance of the company's outstanding debt at the end of the fourth quarter was $76 million.

Before I move to guidance for the first quarter of 2026, I would 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 2026 will reflect the sequential increase in U.S. payroll-related taxes and the sequential buildup of our vacation accruals.

The company estimates total revenues before reimbursements for the first quarter of 2026 to be in the range of $70.5 million to $72 million. We expect both global S&BT and Oracle Solutions segments to be down when compared to the prior year, but sequentially up from Q4. We expect SAP Solutions segment revenue before reimbursements to continue to be up on a year-over-year basis.

As a result of the continuing pivot of our business to generative AI, the company will incur AI transition charges in the first quarter of approximately $1 million to $1.5, these charges primarily relate to severance costs due to headcount reductions and the leverage of our JI delivery platforms. The company may continue to incur additional charges during 2026. These charges will be excluded from adjusted results.

We estimate adjusted diluted net income per common share in the first quarter of 2026 to be in the range of $0.34 to $0.36, which assumes a GAAP effective tax rate on adjusted earnings of 26.3% as compared to GAAP effective tax rate of 20.1% in the first quarter of the prior year, an unfavorable increase in taxes of approximately $0.04 per diluted share.

We expect the adjusted gross margin as a percentage of revenues before reimbursements to be approximately 44% to 45%. We expect adjusted SG&A and interest expense for the first quarter to be approximately $20 million. We expect first quarter adjusted EBITDA as a percentage of revenues before reimbursements to be in the range of approximately 19.5% to 20.5%.

Lastly, we expect cash balances, excluding the impact of share buyback activity, to be tempered due to the payment of 2025 performance-related bonuses and the payment of employee income tax withholding triggered by the net vesting of restricted shares.

At this point, I would 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 solid in traditional areas, it continues to be impacted by thoughtful decision-making as organizations assess competing priorities partly due to economic concerns and also partly due to the consideration and also confusion of emerging GenAI technologies and what they offer.

We have not been surprised by the powerful potential to the compute and inference power of the large language models to drive transformative change. But rather, the confusion created by the frequent introductions of new technology, primarily build capabilities is where we believe the confusion lies. What requires greater understanding is what is necessary to realize high returns from the deployment of the available emerging capabilities.

To assess and design high ROI solutions requires client-specific process knowledge in order to reimagine and enhance the new workflows to determine Agentic workflows, which should be designed and deployed, which can provide targeted returns. That is where our process knowledge expertise, benchmarks and the powerful capability of our Hackett solution language model, which powers all our platforms are distinct.

The rapidly emerging build capabilities which are being introduced by the client providers like Anthropic and OpenAI are only accelerating and reducing the cost to build agents and Agentic workflows. However, they do not eliminate the need to fully understand the exact client-specific business process requirements it's the client's existing automation footprint and the need to assess existing and potential data sources necessary to fully optimize the value of AI in the design, build and deployment of solution.

This is without even considering what it takes to fully then execute a highly -- a high-impact, high productivity solution, which impacts both the number of people that support that activity as well as the new cognitive capabilities that are going to be utilized and how.

We believe we are entering the greatest automation expansion area of our lifetime, which will dramatically increase the enterprise automation footprint of every organization, the opportunity of all technology players to provide the underlying application and infrastructure solutions is obviously massive, and therefore, their marketing is understandable.

But no one should underestimate the incumbent enterprise application providers' ability to thrive in this hyper-growth automation environment. Based on our estimates, the automation and expansion opportunity is somewhere between 3 to 5x the existing automation footprint, which exists today. Imagine all of the change that was to happen if you really were transitioning an organization from what is primarily static and rule-based automation to fully cognitive automation, which allows for the deployment of digital labor, again, do not underestimate the opportunity for software and services companies to be able to grow in this environment given the significant amount of automation, which will and can be deployed and the help they will need to affect those changes.

One of the critical questions that AI XPLR answers is what automation is required by a proposed AI solution, which already exists in the client's enterprise application footprint. Clients have no desire to duplicate any automation they have worked so hard to deploy.

So is the transition as disruptive as software and services companies and as the current stock market volatility of that sector suggests?

The answer is yes, yes. But again, at the same time, what has not been equally or properly reported is the total addressable market increase for enterprise automation, which -- that will be delivered when and as existing automation footprints extend into the cognitive and agentic workflows and therefore, who will provide it.

Increasing automation opportunity should more than offset any disruption that software and services provider experience if they expand their current application footprint and related services capability to capture the significant growth. All organizations will need to understand the potential productivity and intelligence force multiplier that will emerge when existing static rule-based automation starts to transition to cognitive automation.

We expect IT budgets to increase with increasing attention and allocations to the rapidly emerging GenAI solutions and the related opportunities and threats that it brings. Eliminating confusion, as I say, will only -- will be key to accelerating the adoption.

The unlimited potential of GenAI will define an entirely new level of AI world-class performance standards, driving all software and services providers to extend the value of their existing offerings with the introduction of 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 GenAI-enabled transformation, which we believe creates a unique value creation opportunity for our organizations.

We believe that the platforms that we have deployed and the unique capabilities of AI XPLR have already significantly expanded our opportunity to help clients address areas and opportunities that we were not previously pursuing. Another critical investment that we have made is to also build our own GenAI-assisted knowledge-based solution, which I previously shared is called Ask Hackett AI. Ask Hackett leverages our proprietary Hackett benchmarking executive advisory business transformation intelligence, which allows us to define and enable digital world-class performance for clients.

Our IP will also be increasingly leveraged across all of our market-facing service delivery platforms. We are continually ingesting and indexing all IP in order to make sure that it is available to support our clients as well as our associates.

On the talent side, competition for experienced executives with high technology agility continues. Overall turnover continued at acceptable levels during the quarter, and we expect that trend to continue.

Lastly, even though we believe that we have the client base and offerings to grow our business, we continue to look for acquisitions and alliances that strategically leverage our IP, platforms and transformation expertise and can add scope, scale or capability, which can accelerate our growth. As always, let me close by congratulating our associates on our innovation and performance and by thanking them for their tireless efforts and always urgent to stay highly focused on our clients and our people no matter what challenges we 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. Operator?

[Operator Instructions] Our first caller is George Sutton with Craig-Hallum.

Ted, you threw out a couple of big nuggets there, so I wanted to bite. First, on the 6-month demonstration and testing work that you've been doing with what sounds like an international potential reseller and partner. Can you just talk a little bit more about what the ultimate outcome you're looking for from that specific relationship would be?

Yes. Look, it goes without saying that I would have loved to have been able to announce the agreement on the call, but we expect to do so shortly. But with that said, look, the capabilities of AI XPLR are really distinct. I know it sounds repetitive, but I want you to know where we believe we are just -- we have extreme capability, which continues to be very distinct.

Our ability to first to simulate an entire industry's AI opportunities across 26 industries and our ability to do so with AI XPLR are distinct. Our ability to capture a client's automation footprint inside of the client so that we understand any automation considerations the client wants to consider or make, we believe, are distinct.

Our ability to evaluate the return on investment on any AI solution, which a client asks us to review, we believe it may not be distinct. But in that performance intelligence side, gosh, our IP is as strong or stronger than anyone.

And as you know, George, we've had -- that acquisition from LeewayHertz allowed us to expand the solution design module of AI XPLR to just incredible capabilities. We call this our ability to develop an 80% solution with specific client input that we require.

But our ability to do that to develop a detailed functional design and soon to extend that same capability within ZBrain to a technical design, we think are also going to be highly distinct. It is those capabilities that will allow a partner to provide us the required information we normally request or they provide us when they're trying to pursue a specific area of their business, or evaluate the performance of specific area of the business.

Our ability to use our AI XPLR capability to provide our partners with -- and their clients with significant productivity ideas supported by detailed agentic workflows with a Hackett prepared return on investment is very valuable.

And I believe that those organizations that are considering strategic alliances with us is because of the hack, the credibility of the brand and then the unique capability of AI XPLR. So that -- I would describe that relationship and leveraging that for existing or actually prospecting new clients would be where we intend to initially start.

Just to be clear on this relationship, if you do get this signed, that would be something you would announce intra-quarter hypothetically?

Yes. If we get it signed, they would like to announce it as -- I don't know as much as we do. But they obviously would like to announce that relationship as well.

Okay. And then separately, you actually mentioned ServiceNow and going forward with that partnership. Can you just give us a sense of how you'd be going to market with them? And any more details on that plan?

We were trying to do something with them for months, and they were looking for specific go-to-market areas to use, again, this unique capability we have and to see what the impact is in introducing their existing platform capabilities. So it's a pilot to target. We've recommended and we've discussed a specific industry that, again, the hope is to be able to launch that before the end of the month.

Got you. And just one final question. You mentioned transition costs from GenAI, meaning your headcount can actually now be reduced in certain areas due to GenAI. So that's interesting because, obviously, the other parts we're talking about our go-to-market strategies with AI. This would be your costs are actually starting to come down because of GenAI. Can you just give us a better sense there?

Yes. If you will recall, we launched 2 new platforms at the end of the year, which include XT for our transformation professionals. This is where we do operational modeling and transformation road maps for clients as well as AIX, originally known as Accelerator, which we use to help deliver our technology implementation solutions.

We've rolled out that on the transformation side. I believe that there's now 10 clients where we have -- we are leveraging this new capability to deliver the targeted outcome for the client. And we think we're seeing productivity improvements that will that could result in some numbers that will be in excess of 25%.

Let me just leave it there. And as you and I have mentioned, we don't quote rates anymore. We quote outcomes, and we put a value on that outcome and the client can determine whether that outcome can be delivered by anyone else as powerfully and as efficiently as we can. And if they can't, then we will realize margin expansion as we believe we've already started to experience in Q1.

The Accelerator platform launched initially through our OneStream group, and it's now rolling out into Oracle. And that platform -- the best story for that platform is that we were asked to jump in late in the game to a very significant OneStream opportunity in an industry we -- I'll just say, we have limited capabilities in.

The power of our platform to demonstrate how we are able to execute, configure, build, test that OneStream opportunity was powerful enough for us to come in late in the game and win this over a list of who's who -- we expect similar results. So we've now got it in front of 2 or 3 other opportunities. So we're just seeing some success, but we are -- we clearly know that we have built the initial capability looks at how to really eliminate what I'll call production or data gathering or execution costs that would have been generally done by some of our junior consultants, not that we have many of them because that's not the way our enterprise model works.

But there is no doubt that our ability to take that and deliver a much powerful outcome on a similar opportunity that we would have had without the new AIX capability is distinct, and it's significant. And if we're able to demonstrate that enhanced capability with a tremendous -- with a high level of confidence, leveraging the IP that and the brand -- the Hackett brand that people come to rely on and trust, we're going to capture a meaningful amount of those gains.

The client will get a higher and better result and accelerated speed, and we will be able to provide that with a -- I'll call it, people leading the -- obviously, leading the implementations, but being, gosh, powerfully supported by these new platforms.

Since we just rolled out the platforms and we started and launched these -- all these new engagements, we saw that there was both an opportunity that we were going to have additional people that we may not need under this new service delivery environment. So we decided that we should make sure that the marketplace knew that we were realizing those productivity gains and how they were impacting our operating results.

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

Ted, I wanted to dive in. You mentioned at the start of the call that your products are all licensable now. Just curious how things are progressing on the licensing front.

We just -- like we said, we announced that, I believe it was the first week of January. So we will -- we expect to start licensing the product here as we progress throughout the year.

The product has been utilized in the version 4 capabilities to assist the delivery of a consulting engagement. But after a consulting engagement, once the client is exposed to the platform, now if they would like to continue to either ideate discover opportunities on their own because the module now resulted in 2 modules, an ideation Explorer module and a solutioning module.

The client has the option to license either one or both depending on how they want to avail themselves to that capability. So we expect the clients to expose clients to version 5 as we are on any and all of the engagements that we're launching. And then we expect clients to decide how they would like to avail themselves to those platforms. So they'll make that determination.

Got it. And then you mentioned that you're not quoting on rate anymore, you're quoting on outcome. I was curious if you could elaborate on that so we can understand that from a financial model point of view.

Well, we evaluate each job and respond to the client requirements. And we quote the completion of the pass that the client has either in an RFP or whatever the detailed request is, and we quote that fee. If the client wants to have a rate discussion, which some may, then we talk about the licensing aspect of the platform during the engagement.

If the client wants to -- most of the clients want to focus on specific deliverables and the outcome from those deliverables, then we quote a fee. So we know we're in a transition period, but we are not making our platform available to clients for free.

Let's make sure that's clear. We believe that it results in an accelerated deployment, which the client values and value realization and greater value to any of these engagements that we have, whether we are doing AI discovery and solutioning with Explore, business transformation with XT or an Oracle or OneStream implementation for now using AIX.

Great. And then I was curious on this large international channel partner, would that be a relationship where you could leverage some of their implementation? Or would you need to continue to staff up additional implementation resources as you go along?

Entirely up to them. They obviously have been exposed and understand the capability of our engineering capabilities. So it will be determined on an engagement basis.

Our next caller is Vincent Colicchio with Barrington Research.

Ted, can you give us an update on the pieces within the SBT business, how they're trending?

Specifically, which ones are you thinking about, Vince? Is there something specific you have in mind or...

No, nothing specific, just to get a sense for how things are trending. You talked about AI, the AI piece.

Clearly, the number of clients that have an AI element is going to be increasing meaningfully throughout the year. The other big pieces that are in there, the advisory business actually did pretty well given the current environment. So the integration of our GenAI -- the introduction of our GenAI program and now the fact that we're also providing our members with access to ideation capabilities of AI XPLR so that they can get, I mean, exposed to actual actionable AI opportunity identification through their program, we believe, is also helping.

So that performed, I'm going to say, in the environment and seeing what others have presented, we performed pretty well. And OneStream, well, I mean, that group is up sequentially SPT, as Rob said, is expected to be up sequentially from Q4 to Q1, same with Oracle, same with SAP. Well, maybe not to go to SAP because of the bar, but year-on-year, SAP is in a very strong position.

So again, we -- look, in '25, we saw the -- if you want to call it, demand disruption and the confusion I referred to at the beginning. We believe that new capabilities, better understanding of adoption. And if the technology providers actually describe their capabilities a little bit more precisely, I think it will help all of us as well. But I don't know if that's the background that you wanted or you had some more specific.

That's helpful. And then with SAP and Oracle improving and expected to improve throughout the year, I assume we'll still see a mix shift towards AI for the next 12 months. Is that accurate?

Yes, absolutely. I mean the SAP performance, as we mentioned, has been coming on for a few quarters because SAP has done a terrific job with convincing clients to migrate to S/4HANA.

So that's reflective in our business. And the Oracle sequential decline is important for us. So we continue to be very hopeful that with that increase and with the AI accelerator capability rolling out inside of that practice that it gives our Oracle group an opportunity to start growing in 2026 -- resume growth in 2026.

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

I'd like to thank everyone for participating on our fourth quarter earnings call. Look forward to updating everyone again when we report the first quarter. Thank you, everyone.

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.

Welcome to The Hackett Group Third Quarter Earnings Conference Call. 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.

Good afternoon, everyone, and thank you for joining us to discuss the Hackett Group's third quarter results. Speaking on the call today and here to answer your questions are Ted Fernandez, Chairman and CEO of the Hackett Group; and myself, Rob Ramirez, Chief Financial Officer. Press in outer released over the wires at 4:09 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 Q&A 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. .

Thank you, Rob, and welcome, everyone, to our third quarter earnings call. As we normally do, I will 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 as well as guidance. We will then review our market and strategy-related comments, after which we will open it up to Q&A.

This afternoon, we reported revenues before reimbursements of $72.2 million just below our quarterly guidance and adjusted earnings per share of $0.37, which was at the midpoint of our quarterly guidance, respectively. What is most promising about the quarter is the level of breakthrough innovation, which has resulted in the highly differentiated capabilities of our AI Explorer platform version. Specifically, the reactions from both clients and potential channel partners to our version for release, which we announced on September 8, has been extremely positive with 1 potential partner specifically referring to our version 4 capabilities as being game changing.

Correspondingly, we continue to work closely with several global channel partners and expect to announce alliances that could significantly expand our growth opportunity. Our ability to identify, design and build Gen-AI solutions based on client-specific processes and enterprise application automation footprints in accelerated time is powerful. It is allowing us to position our platform as an enterprise AI Center of Excellence must have capability, which accelerates and enhances any client's Gen-AI adoption effort.

Our version 4 of a Explorer capabilities is attracting new clients, and it is resulting in an increasing pipeline and new engagements in this increasingly important area. During the quarter, we launched our alliance with Solovis, a leading provider of process intelligence software that provides clients with critical operating insight. By teaming with Solovis we have now demonstrated that we are able to ingest their process intelligence insight into AI Explorer as well as Sebring to help identify high ROI agentic AI solutions with unmatched speed and detail.

We are now finalizing a way for our clients to easily integrate the Solovis operating insight into explore that will allow us to promote a special ideation joint offering to all of our respective clients. The combination of AI plus PI or process intelligence will allow customers to quickly move from intention to action with measurable impact resulting in a Gentex transformation initiatives.

Our GSP segment revenues were favorably impacted by the strong Geni related revenue growth, which was offset by the expected weakness in our OneStream practice and the expiration of an iPass contract. Our iPass partner offered to redefine the agreement around an AI Explorer go-to-market partnership, which we rejected.

We believe the current channel partner relationships we are considering will generate significantly greater value than what we were offered. Excluding the OneStream practice and iPass contract, our GSBT segment was up over 4%. Our Oracle Solutions segment was down as expected, although activity continues to be solid, extended client decision-making has continued to make the revenue replacement of a large post-go-live engagement at the end of last year takes longer than we planned.

This adversely impacted the second quarter and the third quarter, which is our peak Oracle prior year Q3 comparison, and we will -- and will continue to impact us into the fourth quarter. The result of this large client transition and our continued development of AI accelerator, our Gen-AI assisted technology implementation platform that allows us to deliver technology engagements more efficiently led to our decision to more aggressively reduce our head count to realize the expected Gen-AI productivity benefits and align with current requirements.

Our SAP Solutions segment was up during the quarter as implementation revenues resulting from our increased software sales activity at the end of the quarter continued to ramp up. Although software sales in the quarter were lower than expected, we expect to make this back up with increased activity in the fourth quarter.

Our new platform and implementation capabilities allow us to sell clients enterprise-wide from ideation to implementation in 1 fully integrated platform. It also provides a client with a single platform, which they can license to fully support their entire AI Center of Excellence initiatives. We continue to see Agentic transformation opportunities to emerge in many of our engagements as the need for Gen-AI capability and relevance continues to increase. These engagements also provide opportunities to certify strategically and more broadly. These capabilities should further expand through the new strategic alliances, which I said we expect to launch in the near future.

That provides us with the increased opportunities to sell our unique capabilities in the upcoming year. On the executive advisory front, we continue to invest in our growing executive and vendor intelligence program. We launched the Gen-AI premium program. We have integrated our donated content into all of our executive programs and we also expanded our e-procurement intelligence capabilities with the acquisition of spend matters.

On the balance sheet side, our ability to generate strong cash flow from operations has allowed us to maintain our dividend. And today, we are announcing a $40 million Dutch tender offer to acquire approximately 8% of the company's common stock. This tender offer should be strongly accretive and on a cash basis, the reduction of the dividend payment due to the buyback is expected to offset a meaningful portion of the net of tax interest expense that we expect to incur.

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?

Thank you, Ted. As I typically do, I'll cover the following topics during this portion of the call. I'll cover an overview -- I'll provide an overview of our third quarter results, along with an overview of related key operating statistics. An overview of our cash flow activities during the quarter, and I'll then conclude with a discussion on our financial outlook for the fourth quarter of 2025.

Performance of this call, I'll comment separately regarding the revenues of our global SMBT segment, our Oracle Solutions segment, our SAP Solutions segment and the total company. Our global SMBT 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 onstream and procurement implementation offerings. Our Oracle Solutions and RSP Solutions segments include the results of our Oracle and SV 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 such as restructure.

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 on the Investor Relations page of the company's website. For the third quarter of 2025, our total revenues before reimbursements were $72.2 million, a decrease of 7% over the prior year. The third quarter reimbursable expense ratio on revenues before reimbursements was 1.3% and as compared to 1.6% in the prior quarter and 2.3% when compared to the same period in the prior year.

Total revenues before reimbursements from our global SMT segment were $42.4 million for the third quarter of 2025, a decrease of 2% when compared to the same period in the prior year. Strong revenue growth from our Gen-AI a consulting and implementation offerings in this segment was more than offset by weakness in our onstream implementation offerings and the nonrenewal of a meaningful iPass contract during the third quarter.

Excluding this decrease, our global SMT would have been up 4%. The Gen-AI momentum is expected to continue in Q4 and accelerate in 2026. Total revenues before reimbursements from our Orca Solutions segment were $16.4 million for the third quarter a decrease of 25% when compared to the same period in the prior year.

This was higher than expected due to continued protracted decision making. Total revenues before reimbursements from our SAP Solutions segment were $13.4 million for the third quarter of 2025, an increase of 4% 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 through the last several quarters. Although software sales activity was lower than we expected in Q3, we expect this activity to be up meaningfully on a sequential basis in Q4.

Approximately 23% of our total company revenues before reimbursements consist of recurring multiyear and subscription-based revenues, which include our executive advisory, application managed services and Gen-AI license contracts. We are seeing the rapid migration of iPass to AI Explorer and Zebra related recurring revenue opportunities.

Total company adjusted cost of sales totaled $41.4 million or 57.4% of revenues before reimbursements in the third quarter of 2025 as compared to $44.2 million or 56.8% of revenues before reverses in the prior year. Total company consultant head count was 1,317 at the end of the third quarter as compared to total company consultant head count of 1,382 in the previous quarter and 1,262 at the end of the third quarter.

The third quarter reduction in head count was due to actions taken to reduce staff to be commensurate with current demand and the expected productivity improvements for the leverage of our Gen-AI delivery platforms. Total company adjusted gross margin on revenue before reimbursements was 42.6% in the third quarter of 2025 as compared to 43.2% in the prior year. Adjusted SG&A was $16.5 million or 22.9% of revenues before reimbursements in the third quarter of 2025.

This compared to $17 million or 21.8% of revenues before reimbursements in the prior year. Adjusted EBITDA was $15.3 million or 21.2% of revenues before reimbursements in the third quarter of 2025 as compared to $17.7 million or 22.7% of revenues before reimbursements in the prior year.

GAAP net income for the third quarter of 2025 totaled $2.5 million or diluted earnings per share of $0.09 as compared to GAAP net income of $8.6 million or diluted earnings per share of $0.31 in the third quarter of the previous year.

Third quarter 2025 GAAP net income includes noncash stock compensation expense from our stock price award program of $4.8 million or $0.17 per diluted share and acquisition-related cash and noncash compensation benefit of $2.1 million or $0.05 per diluted share. In addition, GAAP net income also includes a $3.1 million or $0.08 per diluted share restructuring expense for severance related costs to reduce staff to be commensurate with current transition demand and expected productivity improvements from the leverage of our Gen-AI delivery platforms.

Acquisition-related cash and noncash stock compensation items related to purchase consideration for the Leeway Hertz acquisition. This consideration paid to the seller contains service investment requirements and as such, is reflected as compensation expense or benefit under GAAP rather than purchase consideration.

Adjusted net income and diluted earnings per share for the third quarter of 2025 totaled $10.2 million or adjusted diluted net income per common share of $0.37 which is at the midpoint of our earnings guidance range and compares to prior year adjusted diluted net income per share of $0.43. The company's cash balances were $13.9 million at the end of the third quarter as compared to $10.1 million at the end of the previous quarter.

Net cash provided from operating activities in the quarter was $1.4 million, primarily driven by net income adjusted for noncash activity and a decrease in accounts receivable, partially offset by decreases in accrued expenses and contract liabilities. Our DSO or Day Sales Outstanding was 71 days at the end of the quarter as compared to 73 days in the previous quarter and 70 days in the prior year. During the quarter, we repurchased 1.1 million shares of the company's stock for an average of $20.70 per share at a total cost of approximately $22.9 million, including purchases from employees to satisfy income tax will hold being triggered by the vesting of restricted shares.

Our remaining stock repurchase authorization at the end of the quarter was $12.6 million. At its most recent meeting, suit the quarter end, the company's Board of Directors authorized a $40 million increase in the company's share repurchase authorization, bringing the available balance to $52.6 million in order to accommodate the Dutch tender offer announced today.

Additionally, the Board declared the fourth quarter dividend of $0.12 per share for shareholders of record on December 23, 2025, to be paid on January 9, 2026. During the quarter, the company borrowed $21 million from its credit facility. The balance of the company's total debt outstanding at the end of the third quarter was $44 million.

Before I move to guidance for the fourth quarter of 2025, I would like to remind everyone of the seasonality of our business. Specifically, the increased holiday and vacation time that is historically taken in the fourth quarter will decrease our available billing days by approximately 8% to 10% when compared to the third quarter -- to the third quarter.

Considering this, the company estimates total revenue before reimbursements for the fourth quarter of 2025 to be in the range of $69.5 million to $71 million. We expect global S&BT to be down as continued growth from Gen-AI revenues will be more than offset by other segment revenue declines. We expect Oracle Solutions segment revenue before reimbursements to be down by 15% when compared to the prior year.

We expect SAP Solutions segment revenues before reimbursements to be down when compared to the prior year because of lower software sales activity, given exceptionally strong software-related sales in the prior year. We estimate adjusted diluted net income per common share in the fourth quarter of 2025 to be in the range of $0.38 to $0.40, which assumes a GAAP effective tax rate on adjusted earnings of 24.5%.

We expect the adjusted gross margin as a percentage of revenues before reimbursements to be approximately 46% to 47%. We expect adjusted SG&A and interest expense for the fourth quarter to be approximately $18.7 million. We expect fourth quarter adjusted EBITDA as a percentage of revenues before reimbursements to be in the range of approximately 22% to 23%.

Now let me provide some details regarding our tender offer that Ted mentioned. The company announced today that it's planned to launch a tender offer to purchase up to $40 million in value of its common stock at a price not less than $18.30 or more than $21 per share. We expect to launch the tender offer tomorrow, which will mean it would expire on December 4, 2025.

We plan to conduct a tender offer through a procedure commonly called a modified Dutch auction. This procedure allows stockholders to select the price within the specified range set by the company at which stockholders are willing to sell their shares. Neither management nor our Board members will be participating in this Dutch.

The company will select a single lowest purchase price within the range that will allow the company to purchase $40 million in value of shares at such price based on the number of shares tendered. All shares purchased in the tender offer will be purchased at the same price. The tender offer will only be made pursuant to the offer to purchase, the related letter of transmittal and the other tender offer materials, which a company will followup tomorrow with the SEC.

Any specific questions should be addressed directly with the dealer manager or the information agent for the tender offer. The contact information will be included in the press release we will issue tomorrow announcing the tender offer and in the tender offer materials being filed with the SEC tomorrow as well.

We will utilize our existing credit facility for the purchase of the shares in the tender offer and the fees associated with this offer. Lastly, we expect cash flow from operations to be up strongly 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 the thoughtful decision-making. As organizations assess competing priorities due to economic concerns as well as the consideration of emerging Gen-AI technologies.

The unlimited potential of DNA will defined 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 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 transformation which we believe creates a unique value creation opportunity for our organization. We believe Agentic enterprise transformation is a generational opportunity, which will fundamentally change the way companies operate as well as the way consulting services are sold and delivered.

Our Gen-AI platform capabilities in the recently released version for of Xplore leverages our proprietary solution language model which, by the way, has a patent pending and Hackett process and Performance IP, which significantly accelerates the speed in which we can identify and design Agentic AI solutions. Another critical distinction of our new version 4 is the way we can design the Agentic solutions while considering the client-specific enterprise application automation footprint.

This allows the client to consider where existing automation supports Gen-AI enablement, allowing them to fully leverage the existing automation footprint where possible. This ability to evaluate and consider a client's current technology landscape to deploy a Gen-AI solutions further differentiates our AI Explorer capabilities.

We are clearly now at a point where AXL will become a fully licensable platform, which provides several modular options to our clients. This is critical to our multiyear ARR growth vision. The Leeway Hertz acquisition also included a sophisticated Gen-AI platform, Z-Ben which we agreed to contribute into a joint venture with the founder.

The JV will bring together Xplore and ZBrain platforms, and we'll focus on licensing the platforms and creating what we believe will be a first-of-a-kind Gen-AI ideation through implementation, Software-as-a-Service offering. We believe this save creates an entirely new value creation opportunity for our shareholders that should result from growth of ARR or annual recurring licensing revenues. It would also allow the JV to have the opportunity to raise capital and achieve stand-alone valuations due to the Gen-AI software focus, if that is deemed best.

Another critical investment that we have made is to build our own Gen-AI-assisted knowledge-based solution called -- at Hackett AI. At Hackett AI leverages our proprietary Hackett benchmarking Executive Advisory and Business Transformation intelligence, which allows us to define and enable digital world-class performance for our clients.

Our IP will also be increasingly leveraged across all of our market-facing and service delivery platforms. we expect the integration of our valuable IP and content that leverages Jennie to significantly enhance and accelerate the delivery of our insights that we are asked to provide clients every day.

We are ingesting and indexing all of our proprietary IP, including benchmarking best practices, transformation and research IP to support the myriads of queries that are required to support our executive advisory and consulting clients and associates. We have also embarked on a new initiative called Accelerator, which intends to also address the efficiency and quality of the delivery of our technology implementation-related services.

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 will result in improved revenue growth margins. We see potential commercial value for these innovations be on our internal use.

Also in the works transformation Xplorer, which will support all of our management consultants and we are looking at special modules in data and governance, which we believe will also further support and differentiate the current AI Xplorer capabilities.

On the talent side, competition from experienced executives with high technology agility continues. Overall, turnovers continued at acceptable levels during the quarter, and we expect that trend to continue.

Lastly, even though we believe we have the client base and offerings to grow our business, we continue to look for acquisitions and alliances that strategically leverage our IP, platforms and transformation expertise and can add scope, scale and capability, which accelerate our growth. It's important to say that those kinds of acquisitions are not easily available.

As always, let me close by congratulating our associates on our innovation and performance and thanking them for their tireless efforts and always urge them to stay highly focused on our clients and our people, no matter what challenges we 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. Operator?

[Operator Instructions] Our first question comes from George Sutton with Craig-Hallum.

Ted, you mentioned a plan -- you plan to announce alliances that could significantly change your opportunities. And you've been -- I know having discussions for the last couple of quarters. I believe the range has been SIs and large software companies. Can you give us a sense of what's practical for us to assume in terms of what you think you can accomplish and when.

Excellent question, George. -- look, George, our ability to achieve that has significantly increased with the release of Version 4. I can't overemphasize what a significant, I'll call it, leap in capability Version 4 has resulted in the reaction from both prospective clients and prospective channel partners. So as you know, yes, we started -- we had initial conversations with an enterprise software company towards the tail end of Q2.

Those conversations move to companies like Celonis, also an enterprise application company, which resulted in their alliances. Then we walked away from an offer with 1 of the large SIs that just we believe there were opportunities with others that would be just a significantly greater value -- we're currently in conversations with 2.

We have every expectation that there's a strong desire on both parts to reach an agreement that's meaningful to both sides. I can also tell you that the enterprise application opportunity that surfaced late in Q2, which I somewhat have put us set aside as the -- again's, we have to do 1 thing. We stopped the licensing procedure to complete the latency procedure for version 3 as Q2 was finishing.

We worked our tails off to make sure that the innovation that we targeted for Version 4 was achieved. We launched that on September 8. We think that the capabilities are significant and are being clearly acknowledged by these potential partners -- what if I told you that before I got on the boat today, I had a request from 1 of the big 4 asking if our platforms were also available to purchase or license.

So I believe that the capability that we're demonstrating when we get in front of clients, is becoming more visible. I believe that it helps that these large partners are participating in the process, putting us through this to demonstrate proof points to demonstrate the capabilities of our platforms. That has also expanded, I'll call it, visibility to our capabilities. So yes, we remain confident that we will be able to attract 1 or 2 major alliance partners in the near future.

Got you. On the software side, you mentioned that you had signed some new business, and you should be able to make up some of the weakness in Q4. Can you just walk through that a little bit .

Look, -- there is no doubt -- again, I'll go back. The impact of version 4 and our ability now to move client more aggressively has accelerated since we introduced that on September 8, and Client engagement has improved pipeline activity has improved and the engagement that we see now considering I'll call it, meaningful kind of engagement with AI Xplorer as potentially picking up a significant level of responsibility for a client's AI Center of Excellence. All of those things is what's increasing our engagements and pipeline into Q4 around Gen AI.

We think that will continue to happen naturally. And yes, we want the acceleration from 1 or 2 or the right channel partners that would then really allow us to then dramatically improve our visibility and access to the largest Gen AI opportunity. So it's all of the above, George. It's all of the above. .

Okay. Last question for me. Just on the Dutch auction, I'm just curious why a Dutch auction and why do a Dutch auction now? .

Well, we had that question asked by some of our shareholders at the end of Q2, actually. And I didn't want to miss the opportunity to be able to acquire stock during what we knew was a more volatile Q3, given the guidance that we have provided, and understanding what that looked like. Now that we got through the end of the quarter, then I had the same question, do we continue to buy back our stock aggressively in the open market? And we thought the best way to start doing that was to tender for $40 million and provide the range that was articulated today so that we could be even more aggressive than we were in Q3.

As you know, we've got a pristine balance sheet. We've rarely used it. We believe that the debt post this Dutch and the aggressive cash flow generation we normally get anticipated in Q4, will have us somewhere around 1x EBITDA by the time this whole process is over. And we know that's that's virtually no leverage. So if we continue to believe our prospects are what they are, we will continue to be aggressive with our buybacks.

[Operator Instructions] I would now like to introduce Jeff Martin with ROTH Capital Markets.

Ted, could you give us an update on where you are with licensing progress so far with both brain and Xplore. I mean, obviously, Xplore version 4 being launched in September, likely not a ton of traction there yet, but maybe give us some perspective on those clients that were potentially looking at licensing version 3, propensity to license version 4 in the next 6 months or so? .

So as I mentioned in our comments, we were ready to have version 3 and fully licensable form for early in the third quarter. Once we saw the potential enhancements that were coming from version 4, we stopped all that licensing effort. It doesn't mean we didn't -- we don't have a lot accomplished, but -- we've completed version 4. We're still making some enhancements, but we expect to license -- start licensing Xplorer sometime late into Q4, no later than the beginning of Q1. And we expect that many of the opportunities that we're currently fielding or responding to will become Xplorer licensees.

And on the Z brain side .

On the Z brain side, since the ZBrain side is differentiated to AI Xplorer, yes, we would expect a portion. I don't know if it's half or 1/3 of the Xplore led licenses to incorporate ZBrain as well. .

Okay. And then I was just curious if you could break down S&BT a little more. You did mention it grew 4%, excluding OneStream and the iPass contract termination. But could you help us get a sense of the trends within the pieces of SMB .

I mean, look, the largest piece of ESBT is our Strategy and Business Transformation Group. So these are the teams that do large transformation initiatives. So that represents -- I'm going to go, I don't know. Clearly, more than half in GSBT, then you also have our executive advisory business, which includes our executive advisory programs as well as the market intelligence programs. We also have our benchmarking services in there. And it does include the OneStream practice, the licensing, which we had in iPass, and now it includes all of the Gen AI-related revenues. .

That business, I don't know, Rob will have to correct me, but represents more than half -- represented more than half of our revenues in the quarter. It represented nearly probably short of this, 2/3 of our operating profit, we believe that, that business by the end of '26 will probably drive over 75% of our total operating profits with Gen AI, I'll call it, lead transfer Agentic transformation or Gen AI transformation initiatives, which include both Gen AI, but also you have to deal with the existing clients if you call them, the existing business process and enterprise applications that also need to be transitioned when you're deploying Agenda workflows.

So we expect that halo effect, probably the best way to say it. We expect that the majority of our Strategy and Business Transformation business, executives will end up leading Gen AI initiatives and we expect once the Gen AI initiatives become more mature, you will also see halo effect back into these traditional transformation initiatives, which require you to fully implement the changes. So right now, we're in the ideation and solutioning, ideation, design and solutioning portion of these GAI engagements. As those engagements mature, they will create a halo effect to the largest portion of GSBT. That's why we always kind of look and say, GSBT, sometime in the future will drive a greater portion of our total profit.

Hopefully, it also comes with more recurring revenue, which will result in higher gross margins and will be a substantial portion of our total value creation, if you look a year out or 2 years out.

One other question. With respect to decision making, are you seeing any jamming of the logs there, is it getting a little better? Is it getting a little worse, the same? Just kind of some directional trend would be helpful. .

What I can say is clearly better as clients making a '26 commitment, but our clients protecting '25 spend since economic volatility and some of the tariff distractions ended up creating a more difficult 25 years. So I'm going to say economic volatility, tariff distraction, and to some extent, people pausing to decide the impact of Gen AI on their total IT and related initiatives are impacting it. .

But at the same time, do I see clients clearly positioning for an Agentic enterprise in an Agentic transformation world, which brings all I'll call, new and existing capabilities that will have to be transformed or better said. Yes, but is it really changing? No. We expected it to be tough through the end of the year. I see people protecting '25 earnings for obvious reasons. And -- but I see an increasing level of activity with people wanting to aggressively invest and expand on both I call it, traditional digital transformation as well as digital transformation that have a meaningful Gen AI component. We believe that meaningful Gen AI component will increase throughout 2026.

Our next question comes from Vincent Colicchio with Barrington Research.

Ted, do you currently have the labor resources in GSBT to meet current AI demand? And do you have any concerns about that?

Not at all, especially with the productivity improvements of our accelerator and transformation Explore products. I mean, Vince, what you've got to understand is that the work that we have done traditionally and will do going forward, will be increasingly done by platforms that allow you to do that, delivering more value to -- allowing it to be more compelling and complete for clients in reduced time frames. So growth will be less determined by head count growth, and it will be a combination of sophisticated platforms that bring talented professionals to bear to help clients identify opportunities, design opportunities and build and deploy those opportunities.

So No, I don't believe that head count is an issue for the balance of the year as we start 2026. If it had been, we wouldn't have taken the reduction that we did with our restructuring charge in the current quarter.

And circling back on version 4, just what is it that's game changing versus the other alternatives in the market? Is it the speed? Or is it more than that?

No, it's much more than that. First what we had built in version 3, that's still very compelling that we walk into a client in any area of the business across 26 industries and we can walk into a client and say, we have the ability to simulate and we have fully detailed thousands of AI solution opportunities for clients. So we start with this very strong simulation capability that we have built in version 3.

What really changed from version to version 4 on that was that our ability to inform the actual capability client's capability from its existing technology or automation footprint we got really, really good at driving that -- the way we inform that automation information down to process or, in some cases, subprocess level, by capturing that client's automation, existing automation footprint.

So that single step resulted in much more powerful ideation capabilities and that not only impacted our ability to get in front of a client and say, before I recommend something significant to you. I want to make sure that as I do that, we want you to know that we fully considered your automation footprint.

That capability did not exist in version 3, and it didn't exist at the level we've been able to take it down the process at subprocess level. So that was very, very meaningful. That also really opened up our ability to really gain more information around the data sources that we were going to be dealing with, both from the existing client technology footprint and our ability then to consider additional data sources to then improve clients, call it, data sources and knowledge base to make the solutions that we are recommending smarter, more compelling, so that was kind of also a meaningful step between version 3 and version 4.

And then the star of the show is that -- we were able to take solutions that we have been delivering. This is not only detailing the to-be process of a solution that was going to be significantly influenced by Agentic workflow and that integration of both, but our ability to now identify those enhancements and that to be processed, be able to integrate the agents and explain the role of the agents in those changes and do it at the level of detail that we're currently delivering was more significant than version 3, but we were doing the version 3 work primarily, I'll call it, through hours through deployed expertise and what really happened is that our Hackett solution language model has just gotten so sophisticated that we were able to take something that was happening over a 6-week period with numbers of professionals and do that now in what we just find as an 80% solution in less than an hour, the proposed solution, which then allows us then front and engage the client on validating the output so that we can get really detailed, really specific so that recommendation of both complexity, the details required, the benefit that you're going to deliver that we then carry into POC.

It's just been dramatically improved I think once we were able to get those capabilities in front of our clients, the way we have post call mid-September when we were able to do -- show this to potential partners and have partners literally say, so what do you need? And we say, give us this information and allow us a couple of days to come back to you with detailed recommendations in an area that they were, I'll call it, for whatever reason, evaluating in 1 of their current clients or in a future contract in our ability, and that's what we're currently doing with them.

What we're doing right now are proof points by taking specific live situations and demonstrating that the capability of Xplorer version 4 is actually distinctly better, more detailed, more accurate, which allows for a better estimation of effort of determining complexity so that when you align benefits to those costs, the ROI is significantly improved.

That capability is what's allowing us to now impact either a new client and say, let us show you how different it is. And now these channel partners, let us show you how different it can be. and they'll literally say, well, we have one.

We were working through 1 on a very significant client prospect for 1 of the clients, and they gave us this high-level information said, can you give us this information of specifically the process you're targeting, the information you have around that targeted process. And they said to us -- so look, when am I going to be able to see this? Am I going to be able to see this in a month or what? And I said, call us back in 2 days and we literally get that and use our 2 days then to validate what Xplorer is creating.

And it's just -- it's just really, really impressing them. And yes, to the point where 1 of them simply said, this is game changing. And we hope they really mean it. We hope they become a great partner with us. and as soon as possible.

Appreciate all the color. .

I think it's important because we -- the future of the firm depends on unique capability, which is enhanced by very talented people, but without the unique platform capabilities and improving that solutioning language model and informing that solutioning language model with all of the Hackett IP that we have all the way down the process and subprocess level, including benchmark. I think it's hard to replicate.

I may wake up tomorrow and somebody say, hey, I've got something dramatically better. Right now, these sophisticated clients and the sophisticated channel partners are saying -- we have not seen anything that produces the outcomes that you're currently providing to us as part of our, if you call it, proof points.

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

Thank you, operator. Let me thank everyone for participating in our third quarter earnings call, and we look forward to updating you again when we report the fourth quarter and our total annual results. Thank you again. .

Thank you for your participation. Participants, you may disconnect at this time.

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 ZBrain Gen AI platforms. We believe our Gen AI platform capabilities will attract clients and strategic partners like the one we announced this afternoon with Celonis, which will accelerate our growth in this increasingly important area.

Celonis is the leading provider of process intelligence software, which provides clients with critical operating insight. By teaming with Celonis, we will be able to ingest their process intelligence insight into AI XPLR and ZBrain to help identify, design and build high ROI agentic AI solutions with unmatched speed, which accelerates value realization.

This partnership will allow us to market this valuable joint offering to our vast client bases, creating significant channel expansion opportunities for both companies. This combination of AI plus PI or process intelligence will allow customers to quickly move from intention to action and measurable impact, resulting in large Gen AI-enabled transformation initiatives.

Our quarterly results were driven by the performance of our GSBT segment, which included the strong revenue growth from our Gen AI-related engagements. Gen AI engagements also favorably impacted our gross margin as they demand a higher margin than our traditional consulting and implementation revenues and are driven by the highly differentiated capabilities of our AI XPLR and ZBrain platforms as well as the related implementation teams.

Clients continue to move from awareness to budgeted projects, a trend we expect to continue throughout the year. Total GSBT revenues, which were up 5% in the quarter were partially offset by the weakness in our OneStream practice. Excluding the OneStream practice, our GSBT segment was up 10%.

We believe Gen AI-enabled transformation is a generational opportunity, which will fundamentally change the way companies operate as well as the way consulting services are sold and delivered. The Gen AI platform capabilities of our soon-to-be-released version 4 of AI XPLR, which leverages our proprietary solution language model and Hackett performance IP significantly accelerates the speed in which we can identify and design agentic AI solutions and with ZBrain, orchestrate and build complex agentic workflows.

Another critical distinction of our new version 4 is the way we are able to design the agentic solutions while considering the client-specific enterprise application ecosystem. This allows the client to clearly understand where existing automation ends and where Gen AI enablement extends and creates meaningful opportunities to improve enterprise performance. This is highly differentiated and allows us to compete strongly in this rapidly growing space.

Our capabilities allow us to serve clients enterprise-wide from ideation to implementation in one fully integrated platform. It also provides a client with a single platform, which they can license to fully support their entire AI center of innovation or as we refer to it, the AI COI.

We continue to see Gen AI-enabled transformation opportunities emerge in most of our engagements as the need for Gen AI capability and relevance continues to increase. These engagements also provide us the opportunity to serve clients strategically and broadly. These capabilities are only being further expanded through new strategic alliances, which we expect to continue to pursue, which should also significantly expand our strategic entry points.

Our Oracle Solutions Group segment was down as expected, although activity continues to be solid, extended client decision-making has continued to make the revenue replacement of a large post go-live engagement at the end of last year take longer than we planned. This adversely impacted the second quarter and will do so more meaningfully in the third quarter given the tough Oracle prior year Q3 comp.

As a result of this transition and given our continued development of Accelerator, our Gen AI-assisted technology implementation platform, which allows us to deliver these engagements more efficiently, led to our decision to adjust our headcount to realize the expected Gen AI productivity benefits. These reductions are addressed in a restructuring reserve, which Rob will discuss in more detail during guidance.

Our SAP Solutions segment was up during the quarter as implementation revenues resulting from increased software sales activity at the end of last year started to ramp. We expect this momentum to continue through the balance of the year.

On the executive advisory front, we continue to invest in growing our IP-based programs. We have integrated our Gen AI content into our executive advisory programs. We recently launched a premium Gen AI solutioning advisory program with a nationally recognized AI leader to fully leverage our solutioning innovation and implementation knowledge from our platforms and client engagements. This 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.

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?

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, ZBrain, which we agreed to contribute into a joint venture with the founder of LeewayHertz.

The JV will bring together the AI XPLR and ZBrain software platforms and will focus on licensing platforms and creating what we believe to be a first-of-its-kind Gen AI ideation through 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 and would also allow the JV to have the opportunity to raise capital and achieve stand-alone valuations due to its Gen AI software focus.

With our meaningful market insight, we continue to innovate and make powerful improvements to AI XPLR. In fact, our most meaningful innovation to date is the soon-to-be released version 4, which brings significant enhancements that allow us to highly differentiate our offerings further.

The most important of the enhancements in version 4 is the ability to fully design sophisticated AI solutions and agentic workflows, which allow us to consider a client's technology landscape and identifying high ROI Gen AI solutions in record time. This enables us to identify thousands of Gen AI solutions and to rapidly custom design and evaluate AI use cases prioritized by our clients and also recommend specific agents required to build these solutions.

Our platform allows us to do this in a fraction of the time that other providers are offering. Our unique combination of strategic access to clients, along with the speed and solutioning provided by our platform is attracting large channel partners, which we could -- which could increase our ability to introduce our platforms and related services and accelerate our growth.

We are utilizing AI XPLR as the vehicle to integrate our Gen AI capabilities across all of our offerings. We also continue to hire and upgrade our skills in critical areas to further support our efforts. These efforts are rapidly allowing us to become key architects, advisers and consultants of our clients' Gen AI journey.

We now believe that AI XPLR will be our primary strategic entry point to clients, and we will use it to position our traditionally strong benchmarking digital transformation and executive advisory offerings and other platforms that result in our largest consulting relationships.

The halo effect or downstream revenue impact from our benchmarking executive advisory offerings to our implementation groups has traditionally been around 40% over the last several years. We believe this will only be expanded by our AI XPLR offering and the enterprise-wide strategic asset it provides. AI XPLR significantly enhances the value of our IP and fully aligns it with the emerging Gen AI world-class performance standards.

Another critical investment that we have made is to also build our own Gen AI-assisted knowledge base called [App Hackett] AI. [App Hackett] leverages our proprietary Hackett benchmarking, executive advisory and business transformation intelligence, which allows us to define and enable Digital World Class performance for our clients.

Our IP will also be increasingly leveraged across all of our market-facing and service delivery platforms. We expect the integration of our valuable IP and content that leverages Gen AI to significantly enhance and accelerate the delivery of our insights that we have asked -- that we are asked to provide to our clients every day.

We are ingesting proprietary IP, including benchmarking best practices and research IP to support the myriad of queries that are required to support our executive advisory and consulting clients and associates. This product was rolled out at the beginning of Q2, and it had very favorable responses from all of the internal users that are currently availing itself to it.

We have also embarked on a new initiative called Accelerator, which intends to address the efficiency and the quality of the delivery of our technology implementation services. 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 continues. Overall, turnover continued at acceptable levels during the quarter, and we expect that trend to continue.

We are continuing to add videos to of our new and expanding platforms on the Investor Relations page of our website that investors can review and become more familiar with our new and expanding capabilities.

Lastly, even though we believe we have the client base and offerings to grow our business, we continue to look for acquisitions and alliances that strategically leverage our IP and add scope, scale and capability, which can accelerate our growth.

As always, let me close by congratulating our associates on our innovation and performance and by thanking them for their tireless effort and urging them to stay highly focused on our clients and our people no matter what challenges we 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. Operator?

[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, ZBrain. When we look at those in combination, they're seemingly a perfect solution for the current AI-first environment we're all living through, and you've mentioned higher budgets attached to that. It doesn't feel like we're seeing that impact yet. Can you just talk to that in terms of the opportunity? And are we seeing what you would have expected?

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 ZBrain side.

But no, I mean, look, where we saw the weakness in utilization is in the technology groups, which we mentioned last quarter, which we took a look at this quarter and said, "Let's deal with it right now" and really make a more aggressive pivot to the Gen AI reliance that we're seeing on.

I'm going to say that over 50% of our new engagements include some element of Gen AI involvement. So, it's not just Gen AI-specific opportunities we're seeing. The Gen AI team is being brought into traditional transformation and in some cases, traditional technology implementation engagements.

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.

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