Welcome to The Hackett Group Third Quarter Earnings Conference Call. Your lines have been placed on a listen-only mode until the question-and-answer session. Please be advised the conference is being recorded. Hosting tonight's call are Mr. Ted Fernandez, Chairman and CEO, and Mr. 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, I'm here to answer your questions for Ted Fernandez, Chairman and Chief Executive Officer of the Hackett Group, and myself, Rob Ramirez, Chief Financial Officer. 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'll 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. Our 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 the call with some overview comments on the quarter. I will then turn it back over to Rob to comment on detailed operating results, cash flow, and guidance. We will then review our market and strategy-related comments, after which we will open it up to Q&A. This afternoon, we reported total revenues of $79.8 million and adjusted earnings per share of $0.43, both of which exceeded our quarterly guidance. Our Oracle and SAP segments continued their strong performance, but what is new is the emergence and increased revenue growth from our GenAI engagements, which grew strongly on a sequential revenue basis in the quarter. This new GenAI consulting revenue, driven by our AI Explorer, Capital XPLR platform, was offset by the weakness in our e-procurement group and resulted in our GSBT segment being flat on a year-over-year basis. We are seeing clients quickly moving from awareness and education about its GenAI adoption opportunity to budgeted projects, which we expect to further increase in the fourth quarter and continue throughout 2025. We believe GenAI is a generational opportunity which will fundamentally change the way companies operate as well as the way consulting services are sold and delivered. The GenAI platform capability we have developed in AI Explorer and now expanded with the ZBrain platform, which was part of the LeewayHertz acquisition, are highly differentiating and should allow us to compete strongly for the emerging growth in this important space. Our Oracle segment performance was consistent with the momentum we have experienced since early 2023, when Oracle re-established its dedicated sales team in its Enterprise Performance Management, or EPM, offerings. Our SAP solutions segment performed above expectations for the third quarter in a…

Thank you, Ted. As I typically do, I'll cover the following topics during my portion of the call. I'll cover an overview of our 2024 third quarter results, along with an overview of related key operating statistics. I'll cover an overview of our cash flow activities in the quarter, and I will then conclude with a discussion on our financial outlook for the fourth quarter of 2024. For purposes of this call, I will comment separately regarding the revenues of our global S&BT segment, our Oracle solution segment, our SAP solution segment, and the total company. Our global S&BT segment includes the results of our North America and international GenAI consulting implementation, benchmarking and business transformation offerings, executive advisory and IPaaS programs, and our OneStream and e-procurement implementation offerings. Our Oracle solutions and our SAP solution segments include the results of our Oracle and SAP offerings respectively. Please note that we will be referencing both total revenue and revenue before reimbursements in our discussion. Reimbursable expenses are primarily project, travel related expenses, passed due to our clients, and 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. 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 discussion from this call in the investor relations page of the company's website. For the third quarter of 2024, our total revenues were $79.8 million. Our revenues before reimbursements were $77.9 million, which was above the high end of our quarterly guidance. The third quarter of 2024 reimbursable expense ratio on revenue before reimbursements was 2.3%, as compared to 1.6% in the prior quarter, and in the same period in…

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 somewhat impacted by thoughtful decision-making as organizations assess competing priorities due to economic concerns. As we head into 2025, we expect client program budgets and allocations to increase to the rapidly emerging GenAI solutions area. While in 2024, GenAI budgets were primarily focused in developing awareness and AI, a dip-in-their-toe-in-the-water kind of approach, in 2025, we believe you will see an increasing amount of IT budgets specifically allocated to GenAI initiatives in high-feasibility and high-impact areas. We also expect to see an increase in investment in data quality and value initiatives which are critical to any GenAI strategy. The potential of AI will define an entirely new level of GenAI-enabled world-class performance standards, driving all software and services providers to extend the value of their existing offerings. We believe this will result in innovations which all organizations will have to consider. The shift is consistent with our aggressive pivot to GenAI-enabled transformations, which we believe positions a generational value creation opportunity for our organization. Strategically, we continue our focus on recurring high-margin IP-related services, but what is new is the accelerated focus and investment we're making on GenAI. The most significant investments have been in AI Explorer, as well as training and development of our associates. Our strategic acquisition of LeewayHertz, a highly recognized GenAI consulting and implementation firm, further expanded and accelerated all of our efforts. We are using the AI Explorer platform as the vehicle to integrate the GenAI capabilities and impact across all of our offerings. We also continue to hire and upgrade our skills in critical data and…

Thank you. [Operator Instructions] Our first question comes from George Sutton with Craig Hallum. You may go ahead.

Thank you. Guys, it's impressive to watch how AI has really shifted the opportunity here. Ted, I wondered if you could walk through Version 2.0. You've mentioned hundreds of meetings you've had with clients or potential clients. Can you just talk about the pipeline that is getting created? And you also mentioned a favorable impact in rates. I wondered if you could be a little more specific about what you mean there.

Version 2.0 is very significant. As you know, George, we conducted hundreds of meetings throughout the first, second, and nearly half of the third quarter. We started with a beta version of Version 2.0 probably halfway through the third quarter. I think it's also important to note that it was probably around that same time where our collaboration with LeewayHertz, even though it was pre-acquisition also accelerated. So the capability of Version 2.0 and the inclusion of their GenAI implementation skills significantly impacted I'm going to say the response we were getting from clients. And when we look at those meetings that we have held using Version 2.0, which include our new LeewayHertz leaders and associates, those conversion rates are meaningfully higher than anything we were previously experiencing. What makes Version 2.0 so compelling? What's been unique about our approach from the beginning was that we decided to understand how to enable a work step, which was the lowest component of we thought enablement that we could evaluate given our very strong business process knowledge. And that has turned out to be actually very favorable to us because that was not only a way to be able to simulate or anticipate and design and identify use cases, but it also becomes a very granular way to evaluate the related cost of any of the use cases that we're identifying. So what's important about Version 2.0 is that we can now walk into a client and provide a demo by having industry client information and their technology landscape and actually walk them through the use cases that are available throughout their entire enterprise, front mid, or back office. I know that sounds too good to be true and hard to believe, but that is exactly what we're doing. And it allows us to help clients quickly prioritize the areas that they deem to be important. It allows us then to, we believe, with very strong credibility, speak to why that use case opportunity exists, the benefits related to that use case, and now with the integration of LeewayHertz, what we call a detailed calculation of costs so that we can provide ROI. So the combination of all of those things, which was happening throughout the third quarter, probably more in the mid to the latter part of that quarter are the things that we've seen have impacted our close rate and allowed us to either go back or reengage with clients that have been exposed to Version 1.0, but approach them with a much more compelling, confident, detailed feasibility and impact presentation that we believe has started to accrue in our favor and has led to the success that we expect to continue from Q3 to Q4.

Ted, you talked about 2025 showing increased IT budgets for AI initiatives with ‘24 being just the toe in the water. I know Rob doesn't want me to get too crazy in terms of how we built that out in our model, but can you just talk about what you mean quantitatively relative to that statement?

We believe just for any software service consideration for clients, all software and service solutions providers that have the ability to engage clients strongly about relative their services. They should all see a marked increase in both the client engagement and the revenues that initially launch. I would expect then those engagements to then increase because what's happening is the first step was the call it awareness and education and clients depending. Obviously the highly sophisticated ones jumped out early, built out pretty strong AI centers of excellence with their own capability and tech platforms to do all that, but that wasn't the majority of these large clients. In fact, I would say it was the minority. So what you're now seeing is everyone now evaluating exactly what do they want to have in place, how much do they want to build themselves or outsource, where they should start, and what the return is for any of those initiatives. In that back opportunity when it comes to helping someone identify the opportunities across the enterprise and helping them have a pretty well defined benefit case feasibility impact ROI assessment that is where we play. So we believe that that benefit will accrue to us throughout the year. Time will tell just exactly how that impacts our ‘25 results, but we believe it provides a very meaningful opportunity as we close out the year and we prepare to go into 2025.

Great. Last question for me. You pay 40% historically. I'm not really sure what you're referring to there. I think you mean attachment of proprietary IP opportunities. I want to make sure I understand what you're referring to there and how that's going to shift in your view.

As you recall historically, our strategic entry point when it came through our IP-led offerings, which are primarily our benchmarking and executive advisory and then subsequently market intelligence program was the way clients would engage us and then from those who relied on our IP and valued it ended up becoming meaningful consulting clients. So our historical results that those entry points were driving approximately 40% of our total revenues over the last several years. The point I wanted to make is that AI Explorer will only add to that because AI Explorer is, I'll call it IP rich on steroids and with its capabilities that we would expect more of our halo effect or downstream revenue to come from our traditional entry points but also through our AI Explorer capability, which by the way also envelopes our benchmarking and best practice insight that our clients value in our executive advisory programs. So that 40% should increase throughout 2025 when we look at IP-based entry points into the delivery of consulting or technology implementation services.

That's clear. Okay, thank you very much.

Thank you. [Operator Instructions] Our next question is from Jeff Martin with ROTH Capital Partners. You may go ahead.

Thank you. Good afternoon. Ted, was curious if you could compare and contrast the types of conversations that you're having now post-acquisition of LeewayHertz with client prospects versus when you were going without LeewayHertz.

It's significantly different. Some of it driven by our, I'll call it this new additional capability, but we also learned as we started qualifying those demo meetings that we were taking, we started learning what were more educational and awareness-related opportunity versus which had higher engagement opportunities. So what happened as we, I think, started Q3, we started becoming much more demanding on who needed to be on the call in order for us to do an AI Explorer demo. It became only more increasingly demanding as we got closer to releasing Version 2.0. At the beginning, we were just delighted that a, I'll call it a global 1,000 client wanted to learn more about our new capabilities. As we got into Q3, it was clear that we wanted to really qualify the opportunity more. And we understood by then that having a strong GenAI implementation partner with us on those calls could significantly influence the impact and credibility of the call. So as we went through Q3, we then became more demanding and said it's got to be a CIO, CTO, or AI leader within that organization, along with any of our traditional C-level officers across other functions that we have very strong relationships with. But we realized that we needed to have both strong implementation capability and credibility, which that initial partnering, which you could have called pre-acquisition collaboration became very helpful, especially as we were completing our acquisition due diligence, but also understanding that at the end of the day, you needed AI leadership or IT leadership to participate in a strategic engagement around either ideation or evaluation of GenAI opportunities. So we became just more demanding. Now, as we have full simulation capabilities, we're becoming more demanding because we believe we are delivering a lot of value in that initial introductory call by virtue of this simulation capability.

Thank you. On the implementation side, could you talk about what it takes to scale that, what your plans are perhaps for investing in personnel and anything else you might need in order to really build out further implementation capabilities?

Our plans are to aggressively increase the GenAI implementation capabilities that either came with the LeewayHertz acquisition or that were part of Hackett, part of our development in GenAI efforts pre- LeewayHertz acquisition. So, I mean, initial goal here is to double those resources as quickly as we can.

Great. The last one for me is on the market intelligence side. One of your key hires, I believe, had a non-compete inhibitor to being able to really focus on that business. I believe we're near the end of that non-competition term. Could you provide us an update there and what the plans are for further build out of the market intelligence offerings?

The answer is that that individual actually returns to us on the 7th. So he was the global leader of our executive advisory and that includes our market intelligence program, so all of our subscription based products. So we are welcoming him back later this week. And obviously, I'm sure he can't wait to get started and try to re-engage with that team and try to impact our year-end results and 2025 plan.

Thank you.

Our next question is from Vincent Colicchio with Barrington Research. You may go ahead.

Yeah, Ted, shifting gears. What should we expect on the e-procurement side? Should we expect this weakness to be extended?

If it just remains flat to where it is right now, that year-over-year impact goes away at the end of Q1. So we will no longer have that, but that negative impact actually, without that negative impact, GSBT would have been up close to 5% in the quarter.

Nice quarter with nice growth with Oracle and SAP. On a seasonally adjusted basis, should we expect to continue to have strength there?

The answer is that you should consider strength as Rob just provided in his guidance comments. All three segments will grow and we expect our guidance rates indicate 3% to 5% year-over-year growth. So follow Rob's guidance.

Thank you.

Thank you. At this time, I show no further questions. I will now turn the call back over to Ted for final remarks.

Thank you, operator. Let me thank everyone for participating in our third quarter earnings call. We look forward to updating you on the fourth quarter in our annual results when we report our fourth quarter results in the early third quarter of February. Is that correct, Rob?

Third week.

Third week. I'm sorry. Early third week. Mid-February. Thank you for participating. We'll look forward to catching up soon.

Thank you. That does conclude today's conference. Thank you all for participating. You may disconnect at this time.