Executive Summary / Key Takeaways

• The Hackett Group is undergoing a significant strategic transformation, pivoting aggressively to become a leader in Gen AI-enabled business transformation, leveraging its deep IP and proprietary platforms like AI XPLR and the ZBrain joint venture.
• Recent financial performance, particularly in Q1 2025, demonstrates the early impact of this pivot, with Global SBT segment growth driven by higher-margin Gen AI engagements, partially offsetting weakness in traditional areas.
• The planned joint venture combining AI XPLR and ZBrain aims to create a new Software-as-a-Service (SaaS) offering for Gen AI ideation through implementation, presenting a potential new stream of annual recurring revenue (ARR) and standalone valuation opportunity.
• Management's outlook for Q2 2025 and the remainder of the year anticipates continued growth in Gen AI revenue, increased IT budget allocation to high-impact AI initiatives, and strong demand in specific areas like SAP implementation, despite ongoing macroeconomic uncertainty.
• Key factors for investors to monitor include the successful execution and market adoption of the Gen AI platforms and JV, the pace of conversion from Gen AI awareness to budgeted projects, and the company's ability to scale its implementation capacity and navigate competitive dynamics.

The Foundation: IP, Expertise, and a Shifting Landscape

The Hackett Group, Inc. has built its legacy on a foundation of intellectual property-based strategic consulting and executive advisory services. With roots tracing back at least to the early 2000s, the company established itself as an authority in benchmarking and best practices, leveraging its proprietary Quantum Leap platform and Digital Transformation Platform (DTP). This IP, encompassing extensive benchmarking metrics, best practices repositories, and process accelerators, has enabled Hackett to conduct over 27,500 studies with major global organizations, including a significant portion of the Dow Jones Industrials, Fortune 100, DAX 40, and FTSE 100. This deep expertise and IP have historically served as a strategic entry point, generating a "halo effect" or downstream revenue impact of approximately 40% on its broader consulting and implementation services.

Operating within the competitive landscape of strategic advisory and technology consulting, Hackett faces established players like Gartner (IT), Accenture , Genpact (G), and IBM . While firms like Gartner excel in broad IT research and advisory, and Accenture and IBM offer vast scale in digital transformation and technology integration, Hackett has carved out a niche through its specialized IP and focus on enterprise performance management and specific ERP systems like Oracle and SAP . Historically, Hackett's profitability metrics, such as operating margins (around 15-20% based on recent non-GAAP figures), have trailed larger peers like Gartner (20-25%) and Accenture (15-18%), reflecting differences in scale and service mix. Similarly, its return on invested capital (ROIC) of 15-18% suggests less capital efficiency compared to leaders like Accenture (25-30%). However, Hackett's focused IP has provided advantages in specific areas, potentially enabling faster implementation times or more accurate performance benchmarking compared to more generalized approaches.

The consulting industry is currently undergoing a profound shift, driven by rapid technological advancements, particularly in Generative AI. This is creating both opportunities and disruptions. Clients are assessing competing priorities amidst macroeconomic uncertainty, including factors like high interest rates and potential impacts from tariff negotiations, which can lead to extended decision-making cycles in traditional consulting areas. Simultaneously, the potential of Gen AI is redefining efficiency and effectiveness across enterprise functions, prompting organizations to increase IT budgets with specific allocations for AI initiatives. This environment necessitates a strategic response from consulting firms – one that leverages technology to deliver new value and helps clients navigate the complexities of AI adoption.

The Pivot: Aggressive Investment in Gen AI Platforms

Recognizing the generational opportunity presented by Gen AI, The Hackett Group has made an aggressive strategic pivot to position itself as a key architect of clients' Gen AI journeys. This pivot is centered around significant investments in proprietary Gen AI platforms and capabilities.

The cornerstone of this strategy is the AI XPLR platform, launched in early 2024. This platform is designed to guide clients from identifying potential Gen AI use cases to designing and evaluating their feasibility and potential impact. AI XPLR has rapidly evolved, with Version 2.0 introducing simulation capabilities and Version 3.0, released in Q1 2025, adding advanced features for accelerating ideation, evaluation, development, and deployment. Management highlights that AI XPLR Version 3.0 enables the dynamic identification of thousands of potential AI solutions or use cases, allows for rapid custom design and evaluation of client-specific solutions, helps determine use case ROI, and suggests the required AI agents for implementation. Crucially, the company states that its platform allows this process to be completed "in a fraction of the time that other providers are offering," a key quantifiable benefit aimed at differentiating Hackett in the market.

To complement its ideation and design capabilities, Hackett acquired LeewayHertz Technologies in September 2024. This acquisition brought not only skilled AI implementation teams but also the ZBrain platform, a sophisticated Gen AI orchestration solution capable of building and deploying complex multi-agent workflows at scale. The strategic intent is clear: to offer clients an end-to-end capability from initial concept to full-scale deployment.

The integration of AI XPLR and ZBrain is planned through a joint venture with the LeewayHertz founder, expected to be formed in fiscal year 2025. This JV will focus on licensing the combined platform as a first-of-its-kind Gen AI ideation through implementation Software-as-a-Service (SaaS) offering. Management views this JV as creating an "entirely new value creation opportunity" for shareholders, driven by the growth of annual recurring licensing revenues (ARR) and the potential for the JV to raise capital and achieve standalone valuations based on its Gen AI software focus.

Beyond these core platforms, Hackett is also developing Ask Hackett AI, a Gen AI-assisted knowledge base leveraging its vast proprietary IP to provide faster and more personalized insights to clients and associates. Additionally, the Aixelerator initiative aims to use Gen AI to improve the efficiency and quality of technology implementation services, directly targeting operational improvements that can enhance margins and delivery speed.

These technological advancements are not just new offerings; they are intended to fundamentally change Hackett's go-to-market strategy. AI XPLR is being positioned as the primary strategic entry point to clients, expected to integrate Gen AI capabilities across all offerings and expand the traditional IP-driven downstream revenue impact beyond the historical 40%. This technological pivot is supported by increased investment in talent, with the company aggressively hiring and upgrading skills in data and tech architecture, specifically targeting a doubling of Gen AI implementation resources quickly.

Performance Reflecting the Pivot

The early impact of this strategic pivot is becoming visible in Hackett's financial results, particularly in the most recent quarter.

For the first quarter ended March 28, 2025, The Hackett Group reported total revenue of $77.9 million and revenues before reimbursements of $76.2 million, up 1% year-over-year. Adjusted diluted net income per common share was $0.41, at the high end of guidance.

Looking at segment performance (revenue before reimbursements):

• Global SBT revenue was $42.6 million, a solid increase of 6% year-over-year. Management explicitly attributed this growth to the strong performance of Gen AI consulting and implementation offerings, noting that Gen AI engagements "demand a higher margin." This growth was partially offset by weakness in OneStream and eProcurement practices; excluding these, the segment was up a more robust 13%. The higher margin nature of Gen AI work contributed to an improvement in overall adjusted gross margin, which was 43.4% in Q1 2025 compared to 41.4% in the prior year.
• Oracle Solutions revenue was $20.4 million, a decrease of 3% year-over-year. This decline was primarily due to the anticipated wind-down of a large post-go-live engagement, tempering momentum despite solid underlying activity, particularly in Enterprise Performance Management (EPM) driven by Oracle's renewed sales focus.
• SAP Solutions revenue was $13.2 million, an decrease of 8% year-over-year. This decrease was primarily attributed to the overperformance in Q4 2024, which benefited from strong software-related sales, tempering the Q1 results.

Overall costs reflected the strategic investments. Personnel costs increased, driven by the stock price award program and acquisition-related non-cash stock compensation from LeewayHertz. Selling, general and administrative (SG&A) costs also rose significantly (up 28% year-over-year to $23.4 million), primarily due to increased non-cash stock compensation related to the stock price award program, incremental costs from the LeewayHertz/ZBrain acquisition, and increased recruiting for Gen AI practices. Amortization expense of $145 thousand in Q1 2025 was directly linked to the intangible assets acquired in the LeewayHertz deal.

Despite the increase in costs related to investments and compensation, the higher gross margin from Gen AI work helped support profitability. Adjusted EBITDA margin was 20.7% of revenues before reimbursements in Q1 2025, compared to 20% in the prior year.

From a liquidity perspective, cash balances decreased sequentially from $16.4 million at the end of Q4 2024 to $9.2 million at the end of Q1 2025.

Net cash provided by operating activities was $4.2 million in Q1 2025, primarily driven by net income adjusted for non-cash items and increases in contract liabilities, but partially offset by increases in accounts receivable (DSO increased to 73 days due to extended terms/milestones on large engagements) and decreases in accrued liabilities (due to bonus payments). Cash used in financing activities ($9.7 million) included significant share repurchases ($11.7 million) and dividend payments ($3.0 million), partially offset by a $5.0 million drawdown on the Credit Facility. As of March 28, 2025, the company had $18.0 million outstanding on its Credit Facility, leaving approximately $82.0 million in capacity. Management reiterated its plan to use strong operating cash flow for stock buybacks and dividends, alongside investments in the business, rather than solely focusing on debt reduction in the near term.

Outlook and Strategic Trajectory

Management's outlook for the second quarter of 2025 and beyond reinforces the centrality of the Gen AI pivot to the company's growth strategy.

For Q2 2025, the company estimates total revenue before reimbursements in the range of $76 million to $77.5 million. Global S&BT segment revenue is expected to be up approximately 5% year-over-year, indicating continued, albeit perhaps moderating, growth in this core strategic area. Oracle Solutions and SAP Solutions combined revenue before reimbursements are expected to be down year-over-year, reflecting the Q1 dynamics and ongoing transitions in these segments. Adjusted diluted net income per share is guided to be in the range of $0.37 to $0.39, with adjusted gross margin expected to be approximately 43% to 44%, maintaining the higher margin profile seen in Q1, likely supported by the Gen AI mix. Adjusted SG&A and interest expense are projected at $18.6 million, reflecting continued investment. Adjusted EBITDA margin is expected to be in the range of 21% to 22%. Cash flow from operations is expected to be up sequentially in Q2 2025, and management anticipates a reduction in DSO.

The broader outlook for 2025 is underpinned by several key assumptions and strategic initiatives:

• Increased Gen AI Budget Allocation: Management expects IT budgets to increase in 2025, with a shift from awareness-focused spending in 2024 to specific allocations for high-feasibility, high-impact Gen AI initiatives. This move from "awareness to budgeted projects" is a trend expected to continue throughout the year.
• Continued Gen AI Revenue Growth: Sequential revenues in the Gen AI area are expected to continue increasing strongly, driven by the differentiated platform capabilities and increasing client readiness for implementation.
• SAP Momentum: Despite the Q1 dip, demand for SAP services is expected to be strong throughout the balance of the year, driven by implementation services related to the volume of software sales in late 2024 and early 2025.
• JV Progress: The joint venture combining AI XPLR and ZBrain is expected to finalize its agreement and begin increasing licensing activity throughout the year, creating the potential for ARR growth and standalone valuation opportunities.
• Scaling Capabilities: The company is actively working to scale its Gen AI implementation capacity, with an initial goal to double resources quickly, to meet anticipated demand.
• Partnerships: Hackett is exploring strategic channel partnerships with large systems integrators and enterprise software companies to increase its ability to introduce its platforms and services and accelerate growth, potentially reaching beyond its traditional Global 1000 focus.

The strategic trajectory is clear: leverage the differentiated Gen AI platforms and IP to capture a significant portion of the emerging market opportunity, expand the scope and value of client engagements, and potentially create a new, high-growth SaaS revenue stream through the JV.

Risks and Challenges

Despite the promising strategic pivot and early signs of success, several risks and challenges could impact The Hackett Group's trajectory:

• Macroeconomic Uncertainty: Ongoing economic concerns, including high interest rates and potential impacts from tariff negotiations, could continue to lead to thoughtful or extended decision-making by clients, potentially impacting demand for traditional consulting services and even influencing the pace of new Gen AI project approvals.
• Competition: The Gen AI space is rapidly evolving and highly competitive. While Hackett believes its integrated platform approach is differentiated, larger competitors like Accenture (ACN) and IBM (IBM) possess greater scale and broader technology integration capabilities. Furthermore, enterprise application vendors like Oracle (ORCL) and SAP (SAP) are rapidly integrating AI agents into their own offerings, which could be disruptive to third-party implementation partners. Hackett must effectively communicate and demonstrate the unique value proposition of its platforms and services to stand out.
• Talent Acquisition and Retention: The aggressive hiring targets for Gen AI implementation resources highlight the challenge of attracting and retaining experienced executives and skilled professionals with high technology agility in a competitive talent market.
• JV Execution: The success of the joint venture depends on finalizing the agreement, effectively integrating the platforms, building a successful licensing model, and potentially raising external capital. Execution risks inherent in forming and operating a JV could impact the realization of the anticipated ARR growth and standalone valuation.
• Technology Adoption Pace: While management is optimistic about the shift to budgeted Gen AI projects, the actual pace of enterprise adoption and the scale of implementation engagements could be slower or more uneven than anticipated.

Conclusion

The Hackett Group is at a pivotal juncture, aggressively transforming its business model to capitalize on the generational opportunity presented by Gen AI. By leveraging its deep IP foundation and investing heavily in differentiated platforms like AI XPLR and the ZBrain JV, the company is positioning itself as a key architect in helping enterprises navigate and implement Gen AI-enabled transformations. Early financial results, particularly the growth and higher margins in the Global SBT segment driven by Gen AI engagements, provide tangible evidence that this strategic pivot is gaining traction.

While macroeconomic headwinds and intense competition in the evolving AI landscape present challenges, Hackett's integrated approach, combining ideation, evaluation, implementation, and platform licensing, offers a compelling value proposition. The potential for a new ARR stream through the JV and the expected expansion of the traditional IP-driven downstream revenue impact underscore the significant long-term value creation potential. Investors should closely monitor the company's progress in scaling its Gen AI capabilities, the market adoption of its platforms, the execution of the joint venture, and its ability to convert increasing client interest into large-scale, multi-year implementation engagements. The success of this strategic transformation will be key to driving future revenue growth, margin expansion, and ultimately, shareholder value.