HACKETT GROUP, INC. Q1 FY2026 earnings call

• Hackett has made disciplined, systematic investments over the past two years to build an integrated suite of proprietary AI platforms, including AI Explorer, Leeway Hertz's ZBrain, and new delivery platforms XT and AIX. - Focus on migrating to an AI platform - enabled sales and delivery model, which affects pricing, resourcing, and delivery economics. - Early indications from platform - enabled strategy are promising, with productivity improvements and expanding scope on engagements. - Won two large OneStream engagements driven by the differentiated impact of the OneStream AIX platform. - Executed and launched a global go - to - market collaboration with IBM. - Initiated client prioritization process and collaborated on new client pursuits. - Campaign to process mining users resulted in strong response to marketing offer to avail of AI Spore.

Global SMBT segment: Total revenues before reimbursements were $36.4 million in Q1 2026, down 15% year - on - year. Oracle Solutions segment: Total revenues before reimbursements were $15.4 million in Q1 2026, down 24% year - on - year. SAP Solutions segment: Total revenues before reimbursements were $16 million in Q1 2026, up 21% year - on - year. Total company: Revenues before reimbursements were $67.8 million in Q1 2026, down 11% year - on - year. Adjusted cost of sales was $39.2 million, or 57.7% of revenues before reimbursements in Q1 2026. Adjusted gross margin was 42.3% in Q1 2026. Adjusted SG&A was $16.1 million, or 23.7% of revenues before reimbursements in Q1 2026. Adjusted EBITDA was $13.8 million, or 20.3% of revenues before reimbursements in Q1.

• Total revenue before reimbursements for Q2 2026 is estimated to be in the range of $68.5 to $70 million. - Expect to incur an AI transition charge of approximately $500,000 in Q2 2026. - Estimate adjusted diluted net income per common share in Q2 2026 to be in the range of $0.33 to $0.35. - Expect adjusted gross margin as a percentage of revenues before reimbursements to be approximately 44% to 45%. - Expect adjusted SG&A and interest expense for Q2 to be approximately $19.5 million. - Expect adjusted EBITDA as a percentage of revenues before reimbursements to be in the range of approximately 20% to 21%. - Expect cash flow from operations to be up sequentially. - See Q3 as an inflection point where adjusted EPS should exceed last year's adjusted EPS on flat revenues.

Q: Ted, you talked about the short - term disruption and the pivot, and the challenges and 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, you know, the massive long - term opportunity, particularly with the IBM relationship? When do we start to see the impacts from that.

A: 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 deployed these platforms and realized the productivity improvements that come from them, there's a natural inefficiency in that, and I'll call it in right - sizing outcomes, 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, we will start realizing the productivity benefits from the change in that platform. That's also why the AI transition charts 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, and 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 skills, 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 in 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 and 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, 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. ROI - based AI transformation, and that requires a capability of all of our platforms. So we're not only talking about leveraging AI Explorer, which is so critical in Gen AI process design and the definition of AI opportunities and the sophisticated way we design agenda workflows. but the way we execute our business transformation engagements using XT. And then I've got to tell you, we've been just beautifully surprised by 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 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 create 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 and 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.

A: 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 want to mention something else, which is this acknowledgement that ROI in return on AI investments requires a deep process knowledge is becoming pretty well founded and spoken. And in fact, we've had two 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?

A: Well, the Oracle one, it's not a small one. 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 extend at any other area, 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 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.

Q: Jeff, if you're here, please check on the button. Sorry about that. Good afternoon, guys. Ted, I wanted to drill down on your comments about, you know, 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, you know, be ready and actually deploy it?

A: Well, let me first start by saying what I already covered, but that the demand for AI impact is very, very significant and continues to increase. So你're correct. There's a positive and a negative. Clients are clearly – clients don't like AI. 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 drives 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 that demand for our kind of capabilities and platforms will only increase.

Q: Ted, given the importance of understanding context and the gap that you have with your explorer 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?

A: You mean competitive gap? Yes. 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 Explorer are foundational ones. Our ability to analyze processes at a work step 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 it's 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 waste. 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.

Q: Is there anything new to report on the ServiceNow or Solonis relationships?

A: Well, the Solonis 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 Explorer. 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.