HACKETT GROUP, INC. Q2 FY2026 earnings call

AI Transition Strategy

• The company is undergoing a full transition from a traditional consulting/implementation delivery model to an AI-enabled, platform-led model, built on three core proprietary platforms: AI Explorer (AI solution ideation/design/build), XT (enterprise transformation), and AIX (software implementation). A new XDA platform focused on data assurance and quality was recently launched, and XT version 2 with integrated AI Explorer capabilities is scheduled for release immediately after the call.
• All platforms leverage the company's proprietary Hackett benchmarks, process best practice IP, and domain-specific Fine Language Model (FLM) to create a differentiated offering. The company has reached a key financial and operational inflection point after closing $30 million in new platform-led deals in late Q2, which will drive sequential revenue and YoY EPS growth in Q3.
• Clients increasingly prefer adding AI scope to existing enterprise transformation and application implementation engagements, rather than pursuing standalone AI-first projects, which aligns with the company's core capabilities and reduces reliance on channel partners. Over 90% of current lead flow comes through the new AI-enabled platform offerings, which are already driving higher gross margins via improved delivery productivity.

Strategic Partnerships

• A global go-to-market collaboration with IBM launched in Q1 2026 has been deferred by IBM, but the company continues to expand its channel strategy with ServiceNow, TCS, and Genpak, which are expected to contribute to Q3 pipeline and performance.

Operational and Financial Health

• The company generated strong operating cash flow in Q2, allowing it to reduce net debt by $6.1 million, repurchase ~$4 million in common stock, and maintain its dividend. The board of directors declared a Q3 dividend of $0.12 per share, payable October 2, 2026.
• Subsequent to quarter end, the company amended its credit facility to extend maturity and increase total borrowing capacity to $125 million.
• Talent competition for experienced, tech-agile delivery and sales leadership remains tight, but overall employee turnover stayed at acceptable levels in Q2.

1. Global SMBT segment: Total revenue before reimbursements was $35.6 million, a 2% sequential decrease, contributing 52.1% of total company revenue before reimbursements. Management expects sequential revenue and gross margin improvement in Q3 as AI platforms improve client acquisition.
2. Oracle Solutions segment: Total revenue before reimbursements was $15.3 million, a 1% sequential decrease, contributing 22.4% of total company revenue before reimbursements. Management also expects sequential revenue and gross margin improvement in Q3 driven by AI platform differentiation.
3. SAP Solutions segment: Total revenue before reimbursements was $17.4 million, a 9% sequential increase, contributing 25.5% of total company revenue before reimbursements. The increase was driven by higher software sales volume and corresponding implementation services.

Total company: Revenue before reimbursements was $68.3 million, a 0.7% sequential increase from Q1 2026. Adjusted gross margin on revenue before reimbursements was 44.1%, up 180 basis points sequentially. Adjusted SG&A was $17.4 million (25.5% of revenue before reimbursements). Adjusted EBITDA was $13.9 million (20.3% of revenue before reimbursements). GAAP net income was $4.4 million, or $0.18 diluted EPS. Operating cash flow was $15.2 million, ending cash balance was $14.2 million.

For the third quarter of 2026:

• Revenue before reimbursements is expected in the range of $68 million to $70 million, representing modest sequential growth despite a 2% headwind from fewer available working days due to summer holidays.
• Adjusted diluted EPS is expected in the range of $0.37 to $0.39, representing ~11.8% sequential growth at the midpoint, an upward expectation from prior implied outlooks that framed Q3 as the key inflection point for EPS growth.
• Adjusted gross margin as a percentage of revenue before reimbursements is expected to be 46% to 47%, a further sequential improvement.
• Adjusted SG&A is expected to be approximately $19 million, and adjusted EBITDA margin is expected in the range of 21.5% to 22.5%.
• A $1 million AI transition charge (primarily severance for headcount reductions aligned with AI-driven productivity improvements) is expected in Q3 and will be excluded from non-GAAP adjusted results.
• Segment-specific guidance: Global SMBT and Oracle Solutions are expected to grow sequentially, while SAP Solutions revenue is expected to decline sequentially due to lower planned software sales.
• Management expects the platform transition to drive favorable performance in Q4 2026 and set up a very strong full year 2027.

• Macroeconomic uncertainty and client uncertainty around AI ROI have slowed decision-making and pressured near-term demand, particularly for standalone AI-first initiatives.
• The IBM partnership deferral created unexpected disruption to planned joint go-to-market activities, though the company has offset this with other partner opportunities.
• Intense competition for experienced, tech-agile talent creates ongoing hiring and retention pressure.
• All forward-looking results are subject to unforeseen risks and uncertainties that could cause actual outcomes to differ materially from projections, as detailed in the company's SEC filings.

Q: Why has IBM deferred joint go-to-market activities, and what is the status of other partnerships with TCS, Genpak, and ServiceNow? / A: The IBM deferral was unexpected and tied to shifting internal priorities at IBM, and the company is waiting for further updates from IBM. The ServiceNow alliance has launched with a target list of joint clients, a meaningful TCS engagement is currently being closed, and a new Genpak joint initiative is launching with a list of target clients. All partnerships align with the company's core dynamic of winning AI opportunities through existing transformation and application entry points. (251 characters)

Q: What is the breakdown of the $30 million in new late Q2 deals, and how strong is the underlying pipeline? / A: The $30 million in closed deals includes multiple large engagements across OneStream and Oracle offerings, won with a very high win rate for platform-led proposals. Clients are impressed by the unique integration of the company's IP into its platforms, which accelerates execution and adds new capabilities like XDA's data assurance. The pipeline continues to hold similarly sized opportunities, and the successful AIX go-to-market model is being extended to the upcoming XT version 2 release. (332 characters)

Q: What are common focus areas for the new large platform-led wins, and over what timeline will the $30 million in revenue be recognized? / A: Most large recent wins are for OneStream and Oracle implementation engagements, where the platform model allows the company to deliver core work and extend scope to include AI-enabled capabilities end-to-end. This end-to-end platform delivery drove wins against top competing firms. The $30 million in deals will ramp up in Q3 2026 and extend through the end of 2027, with some larger engagements taking multi-quarters to complete. (316 characters)

Q: What progress has the company made on AI platform adoption, and how much margin improvement is left to capture? / A: Management estimates the company is currently capturing only ~20% of the full potential productivity and margin benefit from the AI platform transition, with a target of reaching ~50% of full potential by the end of 2026. Substantial margin improvement has already been seen sequentially from Q1 to Q2, with larger gains expected from Q2 to Q3, and the company expects to exceed Q4 2025 results even with lower planned low-margin VAR sales. (319 characters)

Q: How has generative AI changed demand for the company's benchmarking services? / A: Clients now require AI-specific world-class benchmarks broken down to the sub-process level, which the company launched as a new standalone capability in Q2. This capability leverages the company's existing decades of benchmark data and built-in process automation simulation that competitors cannot easily replicate. While this creates potential to shift the benchmark model from transactional to continuous, that shift is not complete yet, and increased benchmark demand is already driving larger scope in core transformation and implementation engagements. (366 characters)