HACKETT GROUP, INC. Q3 FY2024 earnings call

Overview of Quarter

• Total revenues for the third quarter were $79.8 million and adjusted earnings per share were $0.43, both exceeding quarterly guidance.
• Oracle and SAP segments continued strong performance, and GenAI engagements grew strongly sequentially. GenAI consulting revenue from AI Explorer and Capital XPLR platform was offset by weakness in e-procurement group, making GSBT segment flat year-over-year.
• GenAI opportunities are emerging with clients moving from awareness to budgeted projects, and GenAI platform capabilities like AI Explorer Version 2.0 and LeewayHertz acquisition are impacting conversion rates and downstream revenue opportunities.
• Strategic access and platform expanding capabilities of AI Explorer, along with acquisition of LeewayHertz, are creating new value creation opportunities. Pre-acquisition collaboration with LeewayHertz led to strong sequential GenAI revenue growth in Q3, expected to continue into Q4 and impact 2025 results.
• On balance sheet, using strong cash flow from operations to accelerate stock buyback program, with $20 million added to existing authorization.

Operating Results Details

• Total company adjusted cost of sales was $44.2 million, or 56.8% of revenues before reimbursements in Q3.
• Total company consultant headcount was 1,262 at end of Q3 2024.
• Adjusted gross margin on revenues before reimbursements was 43.2% in Q3, compared to 42.5% in prior year.
• Adjusted SG&A was $17 million, or 21.8% of revenues before reimbursements in Q3.
• Adjusted EBITDA was $17.7 million, or 22.7% of revenues before reimbursements in Q3.
• GAAP net income was $8.6 million or diluted earnings per share of $0.31 in Q3 2024.
• Adjusted net income was $12.1 million, or adjusted diluted net income per common share of $0.43 in Q3 2024, above earnings guide range.

For the third quarter of 2024, the global S&BT segment had total revenues of $44.1 million, with revenues before reimbursements of $43.3 million, essentially flat compared to the same period last year. The Oracle solutions segment had total revenues of $22.8 million, and revenues before reimbursements of $21.8 million, an increase of 7% compared to the same period last year. The SAP solutions segment had total revenues of $13 million, and revenues before reimbursements of $12.9 million, an increase of 17% compared to the same period last year. Approximately 22% of the company's total revenues before reimbursements consisted of recurring, multi-year, and subscription-based revenues.

Fourth Quarter Guidance

• Estimates total revenue before reimbursements for Q4 2024 to be in the range of $73.5 to $75 million, with total company up 3% to 5% compared to prior year.
• Estimates adjusted diluted net income per common share in Q4 2024 to be in the range of $0.41 to $0.43, assuming a GAAP effective tax rate on adjusted earnings of 27.6%.
• Expect adjusted gross margins percentage of revenues before reimbursements to be approximately 45% to 46%.
• Expect adjusted SG&A and interest expense for Q4 to be approximately $17.2 million.
• Expect fourth quarter adjusted EBITDA as a percentage of revenues before reimbursements to be in the range of approximately 23% to 24%.
• Expect cash flow from operations to be up on a sequential basis.

Q: George Sutton asked about Version 2.0, 2025 IT budgets for AI initiatives, and the historical 40% mentioned.

A: Ted Fernandez responded that Version 2.0 is significant with higher conversion rates, 2025 will see increased IT budgets for GenAI initiatives in high-feasibility and high-impact areas, and historically 40% refers to the halo effect of IP-based services which will be expanded by AI Explorer.

Q: Jeff Martin asked about conversations post-LeewayHertz acquisition, implementation scaling, and market intelligence offerings.

A: Ted Fernandez said conversations are more demanding with need for CIO, CTO, or AI leader participation, plans to aggressively increase GenAI implementation capabilities, and the individual leading market intelligence returns later this week.

Q: Vincent Colicchio asked about e-procurement weakness and seasonally adjusted strength in Oracle and SAP.

A: Ted Fernandez said e-procurement weakness year-over-year impact goes away at end of Q1, and all segments will grow with 3% to 5% year-over-year growth as per guidance.