The Hackett Group's Q3 2025: Contradictions on Strategic Alliances, AI Demand vs. Capacity, and XPLR Licensing Progress

Date of Call: November 04, 2025

Financials Results

• Revenue: $72.2M revenue before reimbursements, down 7% YOY
• EPS: $0.37 adjusted diluted net income per share (at midpoint), down from $0.43 prior year; GAAP diluted EPS $0.09 vs $0.31 prior year
• Gross Margin: Adjusted gross margin 42.6% of revenues before reimbursements, compared to 43.2% in the prior year (cost of sales 57.4% vs 56.8%)
• Operating Margin: Adjusted EBITDA 21.2% of revenues before reimbursements, compared to 22.7% in the prior year (adjusted SG&A 22.9% vs 21.8% prior year)

Guidance:

• Total revenue before reimbursements for Q4 2025 expected to be $69.5M to $71.0M.
• GSBT expected down versus prior year (GenAI growth offset by other declines); Oracle Solutions down ~15% YOY; SAP Solutions down YOY due to lower software sales.
• Adjusted diluted net income per share Q4 estimate $0.38 to $0.40 (assumes 24.5% adjusted tax rate).
• Adjusted gross margin expected ~46%–47%; adjusted SG&A and interest ~ $18.7M; adjusted EBITDA ~22%–23% of revenues.
• Company launching $40M modified Dutch auction tender (price range $18.30–$21), to be funded via credit facility.

Business Commentary:

• Revenue and Earnings Performance:
• The Hackett Group reported revenues before reimbursements of $72.2 million for Q3 2025, slightly below quarterly guidance.
• Adjusted earnings per share were $0.37, at the midpoint of their quarterly guidance.

• The slight shortfall in revenue was due to weaker-than-expected results in the Oracle Solutions segment and the expiration of an IPaaS contract.

• GenAI and Strategic Alliances:

• GenAI consulting and implementation offerings showed strong growth, offset by declines in the OneStream and IPaaS segments.
• An alliance with Celonis was announced, integrating process intelligence into AI XPLR and ZBrain platforms.

• The company is actively pursuing additional strategic alliances to expand growth opportunities.

• Operational Restructuring:

• The company reduced headcount to align with current demand and enhance GenAI productivity benefits.

• This move was in response to continued development of AI accelerator and transformation XPLR platforms to improve delivery efficiency.

• Cash Flow and Shareholder Dividend:

• Strong cash flow from operations allowed the company to maintain its dividend.
• A $40 million Dutch tender offer was announced to acquire approximately 8% of the company's common stock, aimed at being accretive to earnings.

Sentiment Analysis:

Overall Tone: Neutral

• Mixed results: revenues $72.2M, down 7% YOY and adjusted EPS $0.37 (vs $0.43 prior year) offset by management optimism about AI XPLR v4 and GenAI pipeline ('game changing') and active steps (headcount realignment, $40M tender offer) to drive long-term value.

Q&A:

• Question from George Sutton (Craig-Hallum Capital Group LLC): You plan to announce alliances that could significantly change opportunities — what is practical to assume in terms of what you can accomplish and when?
  Response: Version 4 materially improved partner interest; management is in active talks with two potential partners and expects to secure one or two meaningful alliances in the near term.

• Question from George Sutton (Craig-Hallum Capital Group LLC): On the software side, you mentioned new business that should help make up weakness in Q4 — can you walk through that?
  Response: Post–v4 launch client engagement and pipeline have accelerated; GenAI-driven engagements should lift activity into Q4, with further upside from channel partners.

• Question from George Sutton (Craig-Hallum Capital Group LLC): Why conduct a Dutch auction now?
  Response: To aggressively repurchase shares after Q3 volatility via a $40M modified Dutch auction, increasing buyback efficiency while keeping leverage low (targeting ~1x EBITDA post-transaction).

• Question from Jeff Martin (ROTH Capital Partners, LLC): Update on licensing progress for XPLR and ZBrain; timing and propensity for version 4 licensing?
  Response: Expect to begin licensing AI XPLR late Q4 or by early Q1; many current opportunities should convert to XPLR licensees and a portion of those licenses will include ZBrain.

• Question from Jeff Martin (ROTH Capital Partners, LLC): Can you break down S&BT trends — you said it grew 4% excluding OneStream and IPaaS termination?
  Response: GSBT is the largest revenue/profit driver (majority of revenues and near two‑thirds of operating profit); GenAI engagements are expanding the pipeline and management expects GSBT to drive >75% of operating profit by end of 2026.

• Question from Jeff Martin (ROTH Capital Partners, LLC): Is decision-making among clients getting better or worse?
  Response: Clients are protecting 2025 spend so decision-making is tougher through year-end, but commitments and activity for 2026 — especially GenAI projects — are increasing.

• Question from Vincent Colicchio (Barrington Research Associates, Inc.): Do you have the labor resources in GSBT to meet current AI demand and any concerns?
  Response: No constraint — management expects platform-driven productivity (Accelerator, Transformation XPLR) to allow growth without proportional headcount increases.

• Question from Vincent Colicchio (Barrington Research Associates, Inc.): What makes version 4 game changing versus alternatives — speed or more?
  Response: v4 adds deep automation-footprint analysis to process/subprocess level plus a sophisticated solution language model, enabling rapid (hours) generation of detailed, high-confidence Agentic AI solution proposals and faster, more accurate ROI estimates.

Contradiction Point 1

Strategic Partnerships and Channel Engagement

It involves the company's strategic partnerships and channel engagement, which are critical for business growth and market expansion.

Can you outline realistic goals and timelines for these alliances? - George Sutton(Craig-Hallum Capital Group LLC, Research Division)

2025Q3: Our ability to achieve this has significantly increased with the release of version 4. Conversations are ongoing with enterprise application companies, leading to interest and potential alliances. We are confident in securing 1 or 2 major alliance partners in the near future. - Ted Fernandez(CEO)

Are you surprised by the lack of a large strategic partner, and where are negotiations with potential partners? - George Frederick Sutton(Craig-Hallum)

2025Q2: We have announced our first strategic partnership with Celonis. There are ongoing negotiations with other potential partners. Expectations are high for more channel partner relationships to expand throughout the year. - Ted A. Fernandez(CEO)

Contradiction Point 2

AI Demand and Labor Resources

It involves the company's ability to meet AI demand with its existing labor resources, which is crucial for sustained growth and market competitiveness.

Does GSBT have sufficient labor resources to meet current AI demand? - Vincent Colicchio(Barrington Research Associates, Inc., Research Division)

2025Q3: Productivity improvements from Accelerator and transformation XPLR products address labor resources. Growth will be less dependent on headcount, and current reductions align with expected demand. - Ted Fernandez(CEO)

Are labor resources sufficient to meet current AI demand in the GSBT segment? - Vincent Alexander Colicchio(Barrington Research)

2025Q2: Yes, resources are being added, and utilization rates are strong. Gen AI platforms provide operating improvements, enhancing the ability to meet demand. - Ted A. Fernandez(CEO)

Contradiction Point 3

AI Implementation Capacity and Hiring

It involves the company's ability to scale its AI implementation capacity, which is crucial for meeting client demand and growth.

Can you explain how new software business signings will offset Q4's weakness? - George Sutton (Craig-Hallum)

2025Q3: Since September 8, client engagement has improved with AI XPLR, leading to increased pipeline activity. Version 4 is driving more meaningful client engagement, and we expect acceleration from potential channel partners. - Ted Fernandez(CEO)

What are your plans to scale AI implementation in 2025 and 2026? - Jeff Martin (ROTH Capital Partners)

2025Q1: We've increased our capacity by 60-70% since the acquisitions. We're hiring both offshore and onshore to support new engagements with AI capability enhancements. We're expanding both front and back ends of our capabilities. - Ted Fernandez(CEO)

Contradiction Point 4

Alliance and Partnership Opportunities

It highlights differing expectations and progress regarding alliance and partnership opportunities, which are crucial for expanding market reach and revenue growth.

Ted, you mentioned alliances that could significantly alter your opportunities. What practical expectations should we have regarding your accomplishments and timelines? - George Sutton (Craig-Hallum)

2025Q3: Our ability to achieve this has significantly increased with the release of version 4. Conversations are ongoing with enterprise application companies, leading to interest and potential alliances. We are confident in securing 1 or 2 major alliance partners in the near future. - Ted Fernandez(CEO)

How is the AI Explorer implementation pipeline progressing in client interactions? Do you expect acceleration this year? - Jeff Martin (ROTH Capital Partners)

2025Q1: We anticipate growth through these partnerships, expanding our entry points beyond current Global 1,000 clients. - Ted Fernandez(CEO)

Contradiction Point 5

AI XPLR Licensing and Progress

It involves the timeline and progress of licensing for AI XPLR, which is a critical component of the company's AI strategy and revenue growth.

Can you provide an update on the licensing progress for ZBrain and XPLR? - Jeff Martin(ROTH Capital Partners)

2025Q3: We expect to start licensing XPLR by the end of Q4. - Ted Fernandez(CEO)

Has there been any progress with the joint venture between AI XPLR and ZBrain? - Vincent Colicchio(Barrington Research)

2024Q4: Licensing agreements are starting to materialize. ZBrain's capabilities will enhance AI XPLR. The joint venture will offer consulting and licensing options, with expectations for increased licensing activity. - Ted Fernandez(CEO)