The Hackett Group, Inc.

Welcome to the Hackett Group Second Quarter Earnings Conference Call. Your lines have been placed on a listen-only mode until the question and answer session. Please be advised, this 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 Second Quarter results. Speaking on the call today and here to answer your questions is Ted Fernandez. Chairman and CEO of the Hackett Group, and myself, Rob Ramirez, CFO. 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 will 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 are related 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. Actual results may vary. These forward-looking statements should be considered only in conjunction with the detailed information, particularly the risk factors that are contained in your SSC filings. At this point, I would like to turn it over to Ted.

Thank you, Rob, and welcome everyone to our second 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 strategy related comments, after which we will open it up to Q&A. This afternoon we reported revenues before reimbursements of 77.6 million in adjusted earnings per share of 38 cents, which were above and at the midpoint end of our quarterly guidance, respectively. Our quarterly results were as expected, but what is most distinguishing about the quarter is the level of breakthrough innovation we continue to develop which are resulting in significant enhancements to our AI Explorer and ZBrain GenAI platforms. We believe our GenAI platform capabilities will attract clients and strategic partners, like the one we announced this afternoon with Salonis, which will accelerate our growth in this increasingly important area. Salonis is the leading provider of process intelligence software, which provides clients with critical operating insight. By teaming with Solonis, we will be able to ingest their process intelligence insight into AI Explorer and Seabrain to help identify, design, and build high ROI agentic AI solutions with unmatched speed, which accelerates value realization. This partnership will allow us to market this valuable joint offering to our vast client bases, creating significant channel expansion opportunities for both companies. This combination of AI plus PI, or process intelligence, will allow customers to quickly move from intention to action and measurable impact, resulting in large Gen AI-enabled transformation initiatives. Our quarterly results were driven by the performance of our GSBT segment, which included the strong revenue growth from our Gen AI-related engagements. Gen AI engagements also favorably impacted our gross margin, as they demand a higher margin than our traditional consultant and implementation revenues, and are driven by the highly differentiated capabilities of our AI Explorer and ZBrain platforms, as well as the related implementation teams. Clients continue to move from awareness to budgeted projects, a trend we expect to continue throughout the year. Total GSBT revenues, which were up 5% in the quarter, were partially offset by the weakness in our one-stream practice, Excluding the one-free practice, our GSBT segment was up 10%. We believe GenAI-enabled transformation 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 capabilities of our soon-to-be-released version 4 of AI Explorer, which leverages our proprietary solution language model, and Hackett Performance IP significantly accelerates the speed in which we can identify and design agentic ag solutions, and with Sebrain, orchestrate and build complex agentic workflows. Another critical distinction of our new version 4 is the way we are able to design the agentic solutions while considering the client-specific enterprise application ecosystem. This allows the client to clearly understand where existing automation ends and where JNI enablement extends and creates meaningful opportunities to improve enterprise performance. This is highly differentiated and allows us to compete strongly in this rapidly growing space. Our capabilities allow us to serve clients enterprise-wide from ideation to implementation in one fully integrated platform. It also provides a client with a single platform which they can license to fully support their entire AI center or innovation, or as we refer to it, the AICOI. We continue to see GenAI-enabled transformation opportunities emerge in most of our engagements as the need for GenAI capability and relevance continues to increase. These engagements also provide us the opportunity to serve clients strategically and broadly. These capabilities are only being further expanded through new strategic alliances, which we expect to continue to pursue, which should also significantly expand our strategic entry points. Our Oracle Solutions Group segment was down, as expected. Although activity continues to be solid, extended client decision-making has continued to make the revenue replacement of a large post-go-live engagement at the end of last year take longer than we planned. This adversely impacted the second quarter and will do so more meaningfully in the third quarter, giving the tough Oracle prior year Q3 comp. As a result of this transition, and given our continued development of Accelerator, our GenAI-assisted technology implementation platform, which allows us to deliver these engagements more efficiently, led to our decision to adjust our headcount to realize the expected GEN-AI productivity benefits. These reductions are addressed in a restructuring reserve, which Rob will discuss in more detail during guidance. Our SIP solution segment was up during the quarter as implementation revenues resulting from increased software sales activity at the end of last year started to ramp. We expect this momentum to continue through the balance of the year. On the executive advisory front, We continue to invest in growing our IP-based programs. We have integrated our Gen AI content into our executive advisory programs. We recently launched a premium Gen AI solutioning advisory program with a nationally recognized AI leader to fully leverage our solutioning innovation and implementation knowledge from our platforms and client engagements. This program will be directly targeted to AI leaders, CIOs, and CTOs who require this knowledge. On the balance sheet side, in the near term, you can expect us to use our strong cash flow from operations to continue our stock buyback program rather than just focus on paying down the remaining outstanding balance of our credit facility while continuing to invest in our business. With that said, let me ask Rob to provide details on our operating results, cash flow, and also comment on Outlook. I will make additional comments on strategy and market conditions following Rob's comments.

Rob? Thank you, Ted. As I typically do, I'll cover the following topics during my portion of the call. I'll provide an overview of our second quarter results for 2025, along with an overview of related key operating statistics. I'll provide an overview of our cash flow activities during the quarter, and I'll then conclude with a discussion on our financial outlook for the third quarter of 2025. For purposes of this call, I will comment separately regarding the revenues of our global SABT segment our Oracle solution segment, our SAP solution segment, and the total company. Our global SMBT segment includes the results of our North America and international GenAI consulting and implementation and licensing revenues, benchmarking and business transformation offerings, executive advisory, market intelligence, and IPaaS programs, and our OneStream and eProcurement 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 revenues and revenue before reimbursements in our discussion. Reimbursable expenses are primarily project travel related expenses passed through to our clients that 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, specifically All references to adjusted financial measures will exclude reimbursable expenses, non-cash stock-based compensation expense, all acquisition related cash and non-cash expenses, amortization of intangible assets, and other non-recurring items. We have 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 discussions from this call on the investor relations page of the company's website. For the second quarter of 2025, our total revenues before reimbursements were $77.6 million, an increase of 2% over the prior year, which was above the high end of our quarterly guidance. The second quarter reimbursable expense ratio on revenues before reimbursements was 1.6%, as compared to 2.1 in the prior quarter and 2.3 when compared to the same period in the prior year. Total revenues before reimbursements for our global SMT segment were $43.6 million for the second quarter of 2025, an increase of 5% when compared to the same period in the prior year. The strong revenue growth from our Gen AI consulting and implementation offerings in this segment was partially offset by weakness in our one-stream implementation offerings during the second quarter. Excluding this decrease, our global SMBT segment would have been up 10%. GenAI momentum across all of global SMBT is expected to continue to accelerate through the balance of the year. Total revenue before reimbursements from our Oracle Solutions segment was $20.5 million for the second quarter of 2025. a decrease of 7.5% when compared to the same period in the prior year. This decrease is primarily due to the post-collab wind-down of large engagement, as we've discussed last quarter. The replacement of the large engagement is taking longer than expected and will have its most significant year-over-year impact in the upcoming third quarter. Total revenues before reimbursements from our SAP Solutions segment were $13.5 million in the second quarter of 2025, an increase of 11% when compared to the same period in the prior year. This increase was primarily driven by implementation services that correspond to the volume of software sales from the last several quarters that will continue to favorably impact this segment. Approximately 21% of our total company revenues before reimbursements consist of recurring multi-year and subscription-based revenues, which include our executive advisory, IP as a service and application managed services contracts. Total company adjusted cost of sales totaled 44.4 million or 57.2% of revenues before reimbursements in the second quarter of 2025 as compared to 43.8 million or 57.7% of revenues before reimbursements in the prior year. Total company consultant headcount was 1,382 at the end of the second quarter, as compared to total company consultant headcount of 1,332 in the previous quarter, and 1,145 at the end of the second quarter of 2024. Second quarter ending headcount was primarily driven by increased hiring from our general ad practices and the LeadWay Hertz acquisition. Total company adjusted gross margin and revenues before reimbursements was 42.8 percent in the second quarter of 2025 as compared to 42.3 percent in the prior quarter. Adjusted SG&A was 18.2 million or 23.4 percent of revenues before reimbursements in the second quarter of 2025. This is compared to 16.8 million or 22.1 percent of revenues before reimbursements in the prior year. The year-over-year absolute dollar increase is primarily due to foreign exchange fluctuations as well as the timing of incremental marketing events. Adjusted EBITDA was $16.1 million or 20.7% of revenues before reimbursements in the second quarter of 2025 as compared to $16.3 million or 21.5% of revenues before reimbursements in the prior year. GAAP net income for the second quarter of 2025 totaled $1.7 million, or diluted earnings per share of $0.06, as compared to GAAP net income of $8.7 million, or diluted earnings per share of $0.31 in the second quarter of the previous year. Second quarter 2025 GAAP net income includes non-cash stock compensation expense from our stock price award program of $5.1 million and acquisition-related cash and non-cash compensation and related expenses of 2.5 million, which in total impacted our Q2 2025 gap results by approximately 25 cents. Acquisition-related cash and non-cash stock compensation expense relates to purchase consideration for the Lee Warehouse acquisition. This consideration paid to the seller contains service vesting requirements, and as such is reflected as compensation expense under GAAP rather than purchase consideration. The acquisition of Spend Matters did not have an impact on our adjusted net income for the second quarter of 2025. Adjusted net income and diluted earnings per share for the second quarter of 2025 totaled 10.7 million, or adjusted diluted net income per common share of 38 cents, which is at the midpoint of our earnings guidance range and compares to prior year adjusted diluted net income per share of 39 cents. The second quarter of 2025 results was negatively impacted by one penny due to unfavorable foreign exchange movements. The company's cash balances were 10.1 million at the end of the second quarter of 2025, as compared to 9.2 million at the end of the previous quarter. Net cash provided from operating activities in the quarter was 5.6 million, primarily driven by the income adjusted for non-cash activity and did increase in the credit expenses, primarily offset by the timing of income tax payments made during the quarter. Our DSO, or day of sales, outstanding was 73 days, both at the end of the second quarter as well as the previous quarter, compared to 68 days in the prior year. The increase in DSO is primarily due to extended terms and multiple deliverables on several large client engagements. During the quarter, we repurchased 180,000 shares of the company's stock, for an average of $24.50 per share at a total cost of approximately 4.4 million, including purchases from employees to satisfy income tax withholding triggered by the besting of restricted shares. Our remaining stock repurchase authorization at the end of the quarter was 17 million. At its most recent meeting, subsequent to quarter end, the company's board of directors authorized a $13 million increase in the company share repurchase authorization bringing it to $30 million. Additionally, the board declared the third quarter dividend of $0.12 per share for its shareholders of record on September 19, 2025, to be paid on October 3, 2025. During the quarter, the company borrowed $5 million from its credit facility. The balance of the company's debt, total debt outstanding at the end of the second quarter was $23 million. I'll now be moving to guidance. and outlook for the third quarter. Consistent with seasonal and third quarter trends, we expect the impact of the additional U.S. holiday and the typical increase in time off due to some vacation in the U.S. and Europe to unfavorably impact available days by approximately 2% on a schedule basis. The company estimates total revenues before reimbursements for the third quarter of 2025 to be in the range of $73 million to $74.5 million. We expect global SMBT and SAP solution segment revenue before reimbursements to be up when compared to the prior year. We expect Oracle solution segment revenue before reimbursements to be down by over 20% when compared to the prior year. As a result of the continued pivot of our business to generative AI, The company will incur restructuring charges in the third quarter of approximately $1.5 to $2 million. These charges will primarily relate to severance costs as we reduce staff to be commensurate with our current demand and expected productivity improvements from the leverage of our Gen AI delivery platforms in our non-AI practices. These charges will be excluded from adjusted results. We estimate adjusted diluted net income per share in the third quarter of 2025 to be in the range of $0.36 to $0.38, which assumes a GAAP-effective tax rate on adjusted earnings of 26.5%. We expect the adjusted gross margin as a percentage of revenues before reimbursements to be approximately 43.5% to 44.5%. We expect adjusted SG&A and interest expense for the third quarter to be approximately 18.5 million. We expect third quarter adjusted EBITDA as a percentage of revenues before reimbursements to be in the range of approximately 20.5 to 21.5%. Lastly, we expect cash flow from operations to be up on a sequential basis. At this point, I'd like to turn it back over to Ted to review our market outlook and strategic priorities for the coming months.

Thank you, Rob. As we look forward, let me share our thoughts on a 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 impacted by thoughtful decision-making as organizations assess competing priorities due to economic concerns and as well as the consideration of emerging Gen AI technologies. We continue to expect IT budgets to increase with increasing attention and allocations to the rapidly emerging Gen AI solutions and the related opportunities and threats it brings to all industries. In 2025, we have seen the increasing amount of IT budgets specifically allocated to Gen AI initiatives in high feasibility and high impact areas. The unlimited potential of Gen AI will define an entirely new level of world-class performance standards driving all software and services providers to extend the value of their existing offerings with the introduction of a GenTech AI capability. We believe this will result in unprecedented innovations, which all organizations will have to consider. This shift is consistent with our aggressive pivot to GenAI-enabled transformations, which we believe creates a unique value creation opportunity for our organizations. Given our strategic access and proprietary and expanding platform capabilities of AI Explorer, it was natural for us to extend our AI implementation capabilities to be able to fully develop and implement the GenAI solutions, which we were identifying, designing, and evaluating. This resulted in the acquisition of Leeway Hertz, a highly recognized provider of GenAI solutions. This acquisition also included a sophisticated GenAI orchestration platform, ZBrain, which we agreed to contribute into a joint venture with the founder of Leeway Hertz. The JV will bring together the AI Explorer and ZBrain software platforms and will focus on licensing platforms and creating what we believe to be a first of its kind Gen-AI ideation through implementation software as a service offering. We believe this JV creates an entirely new value creation opportunity for our shareholders that should result from the growth of ARR or annual recurring licensing revenues, and would also allow the JV to have the opportunity to raise capital and achieve standalone valuations due to its GenAI software focus. With our meaningful market insight, we continue to innovate and make powerful improvements to AI Explorer. In fact, our most meaningful innovation to date is the soon-to-be-released version 4, which brings significant enhancements that allow us to highly differentiate our offerings further. The most important of the enhancements in version 4 is the ability to fully design sophisticated AI solutions and agenda workflows, which allow us to consider a client's technology landscape and identifying high ROI Gen AI solutions in record time. This enables us to identify thousands of Gen AI solutions and to rapidly custom design and evaluate AI use cases prioritized by our clients and also recommend specific agents required to build these solutions. Our platform allows us to do this in a fraction of the time that other providers are offering. Our unique combination of strategic access to clients along with the speed and solutioning provided by our platform is attracting large channel partners, which could increase our ability to introduce our platforms and related services and accelerate our growth. We are utilizing AX4 as the vehicle to integrate our Gen AI capabilities across all of our offerings. We also continue to hire and upgrade our skills in critical areas to further support our efforts. These efforts are rapidly allowing us to become key architects, advisors, and consultants of our clients' Gen AI journey. We now believe that AI Explorer will be our primary strategic entry point to clients, and we will use it to position our traditionally strong benchmarking, digital transformation, and executive advisory offerings and other platforms. that result in our largest consulting relationships. A halo effect or downstream revenue impact from our benchmarking executive advisory offerings to our implementation groups has traditionally been around 40% over the last several years. We believe this will only be expanded by our AI Explorer offering and the enterprise-wide strategic access it provides. AI Explorer significantly enhances the value of RIP and fully aligns it with the emerging GenAI world-class performance standards. Another critical investment that we have made is to also build our own GenAI-assisted knowledge base called ASK Hackett AI. ASK Hackett leverages our proprietary Hackett benchmarking, executive advisory, and business transformation intelligence, which allows us to define and enable digital world-class performance for our clients. Our IP will also be increasingly leveraged across all of our market-facing and service delivery platforms. We expect the integration of our valuable IP and content that leverages GenAI to significantly enhance and accelerate the delivery of our insights that we are asked to provide to our clients every day. We are ingesting proprietary IP, including benchmarking, best practices, and Research IP to support the myriads of queries that are required to support our executive advisory and consulting clients and associates. This product was rolled out at the beginning of Q2 and it had very favorable responses from all of the internal users that are currently availing itself to it. We have also embarked on a new initiative called Accelerator. which intends to address the efficiency and the quality of the delivery of our technology implementation services. All these initiatives are harnessing the power of GenAI to improve and accelerate the delivery of our solutions and services with the intent of differentiating our capabilities and result in improved revenue growth and margins. We also see the potential commercial value of these innovations beyond our internal use. On the talent side, competition for experienced executives with high technology agility continues. Overall turnover continued at acceptable levels during the quarter, and we expect that trend to continue. We are continuing to add videos of our new and expanding platforms on the investor relations page of our website that investors can review and become more familiar with our new and expanding capabilities. Lastly, even though we believe we have the client base and offerings to grow our business, We continue to look for acquisitions and alliances that strategically leverage our IP and add scope, scale, and capability, which can accelerate our growth. As always, let me close by congratulating our associates on our innovation and performance and by thanking them for their tireless effort and urging them to stay highly focused on our clients and our people, no matter what challenges we may encounter. Those conclude my comments. Let me turn it over to our operator. and let us move on to the Q&A section of our call. Operator?

Thank you. The phone lines are now open for questions. If you would like to ask a question over the phone, please press star 1 and record your name. To withdraw your question, press star 2. One moment for the first question, please. And our first question is from George Sutton with Craig Halep. Your line is now open.

Thank you. Ted, I wondered if we could talk about Explorer 3.0 and what interest you're seeing there, Leeway Hertz, ZBrain, when we look at those in combination, they're seemingly a perfect solution for the current AI-first environment we're all living through, and you've mentioned higher budgets attached to that. It doesn't feel like we're seeing that impact yet. Can you just talk to that in terms of the opportunity, and are we seeing what you would have expected?

We are seeing it on the services side, but we have not seen it yet on the licensing side for AI Explorer because we have made so many changes and continue to improve the product so meaningfully that we have yet to release a licensable AI Explorer product. We expect to do that shortly. We're glad that we didn't do it prior to this most recent quarter, which we believe, as I said, the level of innovation into that product is just really impressive. And we say impressive not only because of the responses we're getting for clients who are seeing it, but because of the conversations that we have had with potential channel partners which have an increasing interest in seeing how they can utilize it jointly with us to go to market. So is it all taking longer? Yes. But are the prospects tempered in any way? Absolutely not. The capability of the platforms, just like you said, is really well designed to take advantage of the market opportunities emerging. And we believe that once we fully license AI Explorer and continue to bring in strategic channel partners that simply give us access to more clients, especially directly into the technology areas, that you will see the expected revenue growth that we would like to see. With that said, our Gen AI related revenues were up significantly in Q2.

Relative to the strategic partner side of this, are you surprised we don't have a large strategic partner yet? Where do those kinds of negotiations stand? I'm just trying to get a sense of expectation.

Well, we announced our first strategic alliance today. As I mentioned, Solonis and our opening comments, which is the leading process intelligence company. which is going to significantly expand the introduction of our offering and their offering to our joint client basis. So that was just announced today, shortly after we released earnings. So we've been working with them all quarter to develop a joint offering and decide exactly how we want to engage clients. And that will be ramping up very quickly throughout the third quarter. Having said that, we also continue to have conversations with other potential partners. We turned down one SI partner because we wanted a better offer from the offer they had made to us to go to market together. But we have other options, and we continue to evaluate their offer to us. So we expect to have more channel partner relationships expand throughout the balance of the year with large enterprise software companies and or systems integrators.

One of the things you mentioned, you were making AI-related adjustments to your headcount, and I'm just wondering if this is any indication of what you expect from the Oracle side of the opportunity, given that you're challenged to fill in some of the Oracle piece. Is that just a suggestion that you're expecting a longer duration of a challenge there, or am I conflating things?

Well, first let me make sure you know we have an incredible Oracle implementation group. It's highly recognized and has had a lot of success. But yes, it has struggled to replace a large go-live client that we thought would have happened sooner. and it negatively impacted our Q2 results, and it will significantly, it will do so more meaningfully in Q3, which was the height of the co-life efforts with that client show up in last year's Q3 comparison. So that led us to look at the fact that, hey, do we have... more resources that we need in some of the areas that are not fully benefiting from GenAI, and secondly, that these implementation teams, both the Oracle and OneStream implementation teams, are benefiting from the rollout of a product we called Accelerator, which has specifically been created to provide GenAI-assisted support to those engagements which is expected to drive productivity improvements in excess of 20 percent. So, when we looked at both of those, we looked at the relative impact, we said, look, why don't we just address all potential non-gen AI, I'll call them headcount, potential headcount concerns that could negatively impact the balance of the year and 2026. And that's why we decided to take that restructure and reserve to do so in the third quarter so that you could get a realistic idea of what our businesses are producing without the severance of those individuals. And it should provide for a very clean Q4 top. All right.

That's it for me.

Thank you. Thank you, George.

As a reminder, if you would like to ask a question over the phone, please press star 1 and record your name. The next question in the queue is from Jeff Martin with Roth Capital Partners. Your line is now open.

Thank you. Good afternoon, Ted and Rob. Ted, I wanted to jump in. Sorry about that. I wanted to jump in on one stream. Do you have a feel for when that might level off here and become, you know,

not necessarily a headwind to growth because you are posting some nice double-digit gains the last two quarters in in global sbt both oracle and one streams comp uh peak are in the third quarter so the relative comps especially for oracle goes down significantly from q3 to q4 and for one stream uh it also decreases so The impact should be, I want to call it, meaningfully eliminated. And as I said, provide for a clean Q4 comp.

And then I was hoping you would give us a sense of maybe some examples of the types of applications or maybe the more common applications that your clients are engaging you for you know, a gen-AI-related engagement?

We've seen a different number, but if I went to two, I would say that solutions dealing with customer service, customer attrition, and revenue management, customer sales effectiveness has been one area that's received significant focus. from our clients where we have been delivering, have delivered, solutions that have already gone live. We're also seeing a very significant increase in large organizations, GPS organizations, coming in and really understanding that further improvements, operating improvements, which they're trying to realize require the leverage of Gen AI that the automation functionality currently being provided by their core ERP systems have limitations which can be really gapped very strongly and really smartly with Gen AI automation. So I would call those two areas the areas where we're getting the most significant of both, where we've had the engagements and where we're seeing the opportunity that exists in our current pipeline.

Great. And the last one for me is there was quite a bit of discussion on the elevated uncertainty last quarter, delaying client decisions. Are you getting any clarity on that, the cloud lifting here? And do you think large projects are still kind of being delayed or pushed out until we have further clarity here?

Jeff, my personal opinion is that the initial, if you want to call it, uncertainty that emerged relative to tariffs in April had little to no impact on Q2. It may have had extended decision-making, but the quarters that most of the services companies Q2 results were primarily in place. You can look at research advisory companies. You could look at the largest systems integration companies. And you can look at the big four, and I believe that they are all inferring and suggesting that in their guidance that Q3 was being effective instead of what I believe happened in Q2. I think most people were at or near their projected Q2 numbers. So I believe that it is playing out as we speak. and some combination of lower interest rates, a reduction of noise and tariffs, which don't confuse our clients, and our clients just continuing to develop a much stronger understanding of how strong the potential to deploy Gen-AI technology is beyond their current technology landscape. I think all of those three are going to emerge and create the kind of demand that we all expect around software and services that are associated with these solutions. It's first inning. It really is first inning. Is Palantir an exception? Yes. Very unique capability. But for someone other than Palantir, no. So that would be my personal opinion on both market conditions, how it's affecting it. And I can see that everyone is making all sorts of resource changes and alignments. We saw the announcement, and when we looked at our numbers and we looked at how meaningful it was to our technology implementation groups, we said we should probably address it now. But it also was followed by the fact that we think we've got a pretty powerful product that will bring productivity improvement into the delivery of those services. So we're positioning both.

Appreciate it. Thank you.

And the next question in the queue is from Vincent Colicchio with Barrington Research. Your line is now open.

Yeah, Ted, do you currently have the labor resources you need to meet the current AI demand in the GSBT segment?

Yes, but we did continue to add resources in that space throughout the quarter. So the answer is yes, partly because we're seeing operating improvements from our platforms. even in the Gen AI area. So it's amazing the capability of these platforms and how they accelerate design and development of these solutions. So don't focus only on headcount. Focus on the ability to provide services along with a platform value, which is the way that at least we will be serving our clients.

And is your utilization rate, I would assume that your employees are involved in a lot of training and upskilling. Wondering if your utilization rate has been impacted by that.

No, I mean, we have some ramp in the Gen AI area, so that takes a little time as we hire and then bring them up and bring them up to speed. with our platforms, both on the Explorer and on the ZBrain side. But no, I mean, look, where we saw the weakness in utilization is in the technology groups, which we mentioned last quarter, which we took a look at this quarter and said, let's deal with it right now and really make a more aggressive pivot to the Gen AI reliance that we're seeing on, I'm gonna say that over 50% of our new engagements include some element of Gen AI involvement. So it's not just Gen AI specific opportunities we're seeing, the Gen AI team is being brought into traditional transformation and in some cases, traditional technology implementation engagements.

And then the last one for me, curious how your Explorer product stacks up against the competition. You've said some very favorable remarks in the past. Perhaps you could talk about the most recent feedback you've had on version 3 and then how version 4 might separate you.

Well, all I can tell you is that I made a version, let's call it 3.5 version, presentation to one of the leading AI enterprise software companies today, and the feedback we got from the individuals, which were very skeptical of our assertions before we demoed our product, and this is pre-full version four, which they will get to see shortly, was their comment back to us was excellent, that they had not seen anything as complete and thoughtful as our platform. And that is coming from a senior person at one of the most successful Gen AI enterprise application companies.

Okay. Thanks, Ted.

Yep.

At this time, I show no further questions. I will now turn the call back over to Mr. Fernandez. Yes.

Let me thank everyone for participating in our second quarter earnings call. We look forward to updating everyone again when we report the third quarter. Again, thank you for participating.

This concludes today's call. Thank you for your participation. You may disconnect at this time.