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 that 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.

Thank you, operator. Good afternoon everyone and thank you for joining us to discuss The Hackett Group's second quarter results. Speaking on the call today and here to answer your questions are Ted Fernandez, Chairman and CEO of The Hackett Group, and myself, Robert Ramirez, Chief Financial Officer. A press announcement was released over the wires at 4.05 PM Eastern Time. For a copy of the release, please visit our Web-site 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 Web-site. 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. 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. As we ordinarily do, I will open the call by providing some overview or highlight comments. I'll turn it back over to Rob so that he could provide some detailed commentary on operating results, cash flow, and also provide our guidance as well. Rob will then turn it back over to me where I will make some market and strategic overview comments, and then we will open it up to Q&A. So let me again welcome everyone to Hackett Group's second quarter earnings call. This was another very strong quarter. This afternoon we've reported revenues of $75.6 million, up 14%, and pro forma earnings per share of $0.24, which was up 26%. Both were above the high end of our guidance. The results are even more impressive when you consider that our pro forma EBITDA was up 32%. Consistent with last year, strong U.S. revenue growth continued across virtually all of our Hackett practices. As expected, we also saw improving European results, which are expected to continue into the third quarter. Our strategy to more closely mirror our U.S. capabilities by investing in EPM capabilities in Europe is starting to pay off. As I mentioned at year end, our growth in the U.S. is a direct result of several key strategies. The first one has been to continue to grow our wedge or as we refer to them, our benchmarking and best practice advisory offerings. These are the offerings which have the greatest intellectual capital and create strategic access to our leading global companies – that provide the strategic access to leading global companies. We have also made significant investments in the dedicated channel of both of these offerings. These offerings have also been resulting in increased downstream opportunities for our business transformation and…

Thank you, Ted. As I typically do, I'll cover the following topics during this portion of the call. I'll go through an overview of our 2016 second quarter results along with an overview of related key operating statistics. I'll also cover an overview of our cash flow activities during the quarter, and I will then conclude with a discussion on our financial outlook for the third quarter of 2016. For purposes of this call, any references to The Hackett Group will specifically exclude ERP, which consists of our SAP solutions group. Correspondingly, I will comment separately regarding the financial results of The Hackett Group, ERP Solutions and the total Company. Please note that all references to gross revenues in my discussion represent revenues including reimbursable expenses. Additionally, references to pro forma results specifically exclude non-cash stock compensation expense, intangible asset amortization expense, acquisition related charges and gains, and assumes a 30% long-term cash tax rate. As Ted mentioned, for the second quarter of 2016, total Company gross revenues were $75.6 million, and above our second quarter's guidance. This represents a year-over-year growth of 14%. The impact of foreign currency fluctuations on consolidated revenues was less than 0.5% and was immaterial to the quarter. Gross revenues for The Hackett Group, which exclude ERP Solutions, were $65.7 million in the second quarter of 2016, an increase of 17% on a year-over-year basis. Strong Hackett U.S. growth of 23% more than offset international revenue declines which decreased 3.5%, or 2% in constant currency. The decrease was primarily due to revenue declines in our Asia-Pacific operations as our European revenues were essentially flat. Hackett Group annualized gross revenue per professional was $397,000 in the second quarter of 2016, as compared to $392,000 in the second quarter of the previous year and $376,000 in the…

Thank you, Rob. As we look forward, let me take a moment to speak more broadly about the current demand environment as well as our future prospects. As I mentioned last quarter, the rapid development and move to cloud along with the extended mobile functionality being introduced into the marketplace by software and technology providers is dramatically influencing the way businesses compete and deliver their services. This will disrupt the entire industry at an accelerated pace forcing organizations to fundamentally change and adopt these new capabilities in order to remain competitive. The speed of change will only be limited by the ability of technology providers to deliver on their functionality and performance promises. But regardless of these delivery limitations, the mere threat or opportunity promise will lead to one of the most significant enterprise transformation periods of our lifetime. This will redefine traditional sequential and linear based business models and activities to fully network the dynamic automated workflows and events with enhanced analytics that will finally deliver on the promise of predicted analytics as well as artificial intelligence, as promised years ago. This so called digital transformation era is very attractive to our organization, since we believe our clients will increasingly turn to us to provide them with best practice insight on what technology can actually deliver on its promise and what changes in business models actually work and will justify significant investments. On a near-term basis, we expect continued growth in Q3 from our U.S. businesses across nearly all of our groups. In Europe, we expect our revenues to be sequentially flat to slightly down on a year-on-year basis on a reported basis. As we have previously mentioned, a key driver of our growth strategy has been to continue to expand our market-leading Enterprise Performance Management or business analytics…

[Operator Instructions] Our first question is from George Sutton with Craig-Hallum Capital Group. Your line is now open.

It's Jason on for George. It seems like you're making really good progress on these IP-as-a-service opportunities with ADP, CIMA and Oracle. I'm just wondering if you can talk a little bit about the pipeline for new opportunities and if those three existing opportunities are at a point where they are referenceable for new clients or at what point those become referenceable and help you add additional capabilities?

I'm sorry, I had to un-mute. Back to your question, one, let me first comment on ADP, Jason, one, the original ADP alliance obviously has referenceable clients as we've been adding clients at an increasing pace quarter on quarter and we now are developing plans with ADP to not only continue that relationship but to expand the sale of our IP to other platforms in their product base and to do that through a number of different initiatives. So, we think that obviously we are seeing that that is referenceable, the value that clearly the sales and delivery teams are seeing by including our capabilities as part of the sale of their software. On the CIMA side, the reason I'm a little bit more cautious of our CGBS alliance side is because it's important to remember that we launched with the entry-level course only, and it wasn't only until the second quarter that we launched the second of three programs, which was the executive level course. So we have quite a bit of feedback coming back from clients that we signed up in the latter part of last year and in the first quarter who are now utilizing our course syllabus, course prep and are taking the exam. We're just starting to get some initial feedback on the course we just launched in the second quarter, and as I mentioned in my comments, our managerial level course will be launched in the third quarter. So the level of reference capability of feedback relative to all of those courses will just increase as we roll out the courses and the clients have a chance to actually go through the entire product suite and actually take the exam, and all of that is happening. But at this point there is nothing that we believe would get in the way of us not having a very successful launch across the two and obviously have learned from the first two and expect that to carry into the third level program as we head into the second half of the year. And then lastly, as you know, I've been very tempered about anything I've said around Oracle and the HPE product because there the product is simply sold with Oracle's new product and doesn't go to market on a standalone basis. So there the feedback of our product has been very good. Oracle's sales feedback to us relative to how it enhances their ability to present the capabilities of their offerings have also been favorable, but the activity there has been much more limited than in the other two where we fully control either the sales or both the sales and delivery of those offerings. Did that answer your question, Jason?

Yes, it does. Thank you. And one more, so you talked about the opportunity as we kind of adopt more Cloud-based solutions and in the transition to mobile. Just wondering if you can lay out maybe if this change is the long-term opportunity for Hackett in the market and what additional changes would you have to see externally to increase your opportunity to penetrate that further?

Look, we think the changes that are happening as a result of Cloud and Web technology are fundamental, and I'm not sure that our clients fully appreciate just how significant their business models will change as they adopt new technology. We believe it's significant. We believe that to adopt these technologies and realize the benefits require you to really reorganize and re-think the businesses in many ways. It drives tremendous operating efficiencies to the users of this technology and we believe that both the ability to interact with clients and their constituencies are significantly enhanced and the level of analytics also enhances. So when it comes to a client, simply understanding the opportunity to leverage this new technology we think we really have a bird's eye seat to help a client understand where the exact – how to sequence or how to develop a strategy to start leveraging that technology and the impact on organizational change, which is half of our business. When you then look at the other half of our business, which is business analytics and enterprise performance management, we love the fact that we have a very well branded and very strongly positioned analytics business and we think that it will expand to enterprise analytics that clients really learn to leverage analytics as new technology and new information is available to them. So as I mentioned last quarter, we like the changes that are happening in the marketplace and we think that they bode very well for the demand on our services, and we believe that the improved performance we've had now for the last several years, I think reflects on the fact that clients are undergoing that fundamental change and that our products and our credibility with clients is well aligned to the things they have to consider. So, having said that, we continue to look for any and all ways to then leverage and participate in this digital transformation era more broadly, and we think our way to do that is to try to embed more and more of our IP into client offerings and to help them position and differentiate the value of their offerings. If that third leg of the stool continues to grow through our existing alliances and we add new alliances, we think then the power of the entirety of our model will only show just how highly differentiated we really are.

Okay. And then last for me, Ted, I always appreciate your commentary on the macro backdrop and I was a little surprised to hear your thoughts on looking out to Q3, the stability that you expect in Europe considering Brexit and what's going on over there, so just curious if you could add any additional detail on why you're seeing that stability overseas?

Look, at the very highest level, we believe Brexit brings some uncertainty to that market, and uncertainty is never good for business. Having said that, we also are very optimistic that the roll that the U.K. plays within the region and globally may change but it won't change the need and the roll they have played historically. So we hope that it's more of a distraction than a fundamental change in demand for the services in that market. Having said that, when you look at why we're seeing improved results and why we've carried that into the third quarter, it's the fact that we have finally seen the pay-off from the investments we started making in our business analytics or EPM business two years ago. We've been on this call now for probably eight or nine quarters and every time we've been talking about the fact that European revenues have continued to decline. The reason that they did decline is because the EPM capabilities that we have been investing and building are having success in the marketplace. So we think we are stronger in Europe now as a result of that investment which was our attempt to mirror U.S. capabilities, and we don't know whether this will be just a pure add-on where we just get the benefit from that growth, or in a worst-case scenario it will offset any volatility that comes from any indecision from Brexit related – if you want to call it Brexit related impact. Too early to tell, but at least for Q2, we saw improvement in results with Q2 and guidance into Q3 is that we would expect it to be stable into Q3. So, at least for the foreseeable future, obviously improving prospect for us.

Okay, great. Thanks for the color and congratulations on the results.

[Operator Instructions] Our next question is from Morris Ajzenman with Griffin Securities. Your line is now open.

Just a quick follow-up from the previous question, the improving results in Europe, is that sequential or also year-over-year?

I said we expect to be flat sequentially and flat to slightly down on a year-over-year basis. And actually on a constant currency basis, we actually think it would be a little bit better than that, but we do expect FX to be slightly negative in Q3. So, relatively speaking, we are carrying Q2 activities, we believe they will carry over into Q3 the same level of performance.

I'm sorry, I meant to say improving results Q2, was that sequential year-over-year or both?

Year-over-year.

Year on year. When we said 14% growth and 26% EPS improvement and 32% EBITDA improvement, those were all year-over-year improvements.

So, Morris, international year-over-year decreased 3.5% but only 2% in constant currency.

Okay, and it was up sequentially then?

Did we comment sequentially?

We didn't comment sequentially.

Let him take a look at that, Morris, and we'll comment as soon as he has that.

Thank you. Okay, let's move back to the alliances. Third quarter revenue guidance, $72 million to $74 million, is anything in that number from the alliances at this point?

Little to none. So, yes, we have new clients, they are starting out, it's starting to come in, right, but immaterial. So we'll continue to push to say that if we continue to build them the way we have build them, we are building them, and the products continue to have the acceptance we've seen, it becomes noticeable in 2017.

I'm not trying to pin you down but when do you think in 2017 it would be something that you could talk about?

We would have to do it in Q1.

I would expect us to be able to speak to it with more color in Q1, only to be limited by restrictions provided by our alliance partners.

Understand. And on the alliances, I know you always talk about looking to fund another strategic partner. Is anything in the works there that might be happening?

Yes, we continue to work very closely on several ideas and I'll stand by our comments that we would be disappointed if we didn't added a couple of new alliances by the end of the year.

Okay. And last question and I'll get back in queue here, you mentioned in the second quarter Hackett U.S. was up 23%. You talk about guidance in the third quarter Hackett U.S. being up. You didn't put a number on it. Would you want to try to put a number on that for us?

It will be in the teens, but don't forget two things. Probably the most significant thing would be the fact that we lose 4% to 5% available days in that quarter, and we are comping on slightly higher numbers. But Hackett, we expect both ERP and – ERP to be up some and Hackett U.S. to be up in the teens.

Our next question is from Bill Sutherland with Emerging Growth Equities. Your line is now open.

That was a pretty impressive revenue beat for Hackett Group in the second quarter. What kind of happened there after the mid part of the quarter that took it so far above your expectations?

I'm glad you mentioned that because all the questions are always kind of couched in the opposite direction. So I'll take a second to remind everyone that our results in 2014 were up 37% on a year-over-year basis, in 2015 were up 34% on that 37%, and in the first couple of quarters here we're up in the mid-20s on those very significant increases. And you're right, it's coming off a higher revenue increase. We've always said that our business would grow 5% to 10%, and at the 10% level we'd grow bottom line by 20% or better. But when we have a chance to grow over 10%, the way we have here for several quarters, you're seeing EPS results obviously in the mid-20s. And as we've said, they were only impacted slightly down from the EBITDA growth because of the higher weighted average share count, which we do get a chance to improve it by some of the buyback activity impacting Q3. But no, it's just the strength of the U.S. business across all practices strong and the EPM business very strong, and it's been a consistent message for us now for a couple of years.

But, Ted, did you – at mid quarter when you [indiscernible] second quarter guidance, I mean kind of what kind of surprised you guys because it is [$0.25 million] [ph] higher on the Hackett Group side?

No, we are slightly above the high end of our guidance, and as you know, we like to stay towards the high-end of that, if you look at that historically.

So it's a little bit more [indiscernible] than usual, all right.

Yes, so we got a little bit more than usual. It dropped right, we then beat the bottom line by some as well, and we are strongly positioned into Q3.

Okay. Rob, the gross margin in ERP, the margin was down how many points?

It was down about 7% on a year-over-year basis.

7%. In other words, year-over-year decline in the number not the margin?

No, it was in the margin.

In margin, at least that lower revenue from the implementation side of the business. The AMS side of the business pretty constant, the implementation side came in a little short on revenue, and obviously more than exceeded by beats in all the other practices and that impacted the margin unfavorably.

Okay. I was just trying to understand whether it was also a mix issue. So implementation, when that's light, it hurts your…?

On that SAP side, it was lighter than we expected in the second quarter. It was 30.7%, as I said in my script, this quarter versus 37.8% a year ago.

That group normally runs around 35%.

And the recurring revenue is still at 15%, which was where it was prior quarter. Is that being driven mostly by the contracts, [indiscernible] acronym for them?

The Application Management Services contract, that's both SAP and EPM, and our executive advisory business. So the way we [indiscernible] that, Bill, would be for our IP-as-a-services alliances to start to kick-in in 2017 and for the relative percentage on both margin and revenue, but more importantly on margins, to be the drive for us to impact that favorably.

Okay. And last one for me on CIMA, that's impressive, you've got 75 sign-ups already. Based on the first two courses, do you feel like you're likely to get uptake on, when you finally have the managerial out, all three? Is that more likely than just taking one course or another by a client?

Our goal is to continue to add clients to, if you want to call it, try-me phase, pilot phase, all being paid though. [Indiscernible], they are all being paid. But the idea would be, our goal is that you get a chance to look at one or all three, but our hope is that it is all three, and that we then going into 2017 or throughout 2017 we would convert those, hey, I took a look at your course, I liked it, and that we would develop a complementary strategy to the training programs that those organizations have. So our goal with this relationship is that we become a core complement to their training and that the students and the client then highly value the certification that is achieved by the student from the courses that they take from us. So it can be, as an example, it could be a relationship with a center because one of the entry points could have been through a center. We've had conversations with somebody who said, if we really like this, we would have all of our new hires then put through this curriculum as a matter of course. Everyone is looking at it differently. We've had people look at the courses and said, would you be willing to license some of the IP to help us complement some of the training or development programs we currently have. And the fact of the matter is that we are going to work with these large organizations to try to develop an integrated continuous relationship with them. We want to have the continuity of relationship with the organizations and we also want to have the continuity of the relationships with the individuals as they value that certification and want to maintain it on an annual basis.

Great. Needles to say, nice quarter. Thanks guys.

Our last question comes from Jeff Martin with Roth Capital Partners. Sir, you may begin.

Could you give us a sense of what you expect to be the impact of rolling HPE into the offering by year-end? Do you expect that to be material updraft to your engagement size or your client base? Maybe give us kind of what you're thinking internally from an expectation standpoint?

We obviously make the investment believing that it will do two things. It will allow clients to engage us, first for us to deliver the product with more ease, capture the client information with more ease, and then also encourage the client to utilize our benchmarking offering on a more recurring basis instead of a once every three or four year event. So we think if we improve the user interface in how easily a client can populate, receive the information, update the information, it would do that. Do we have anything embedded in our program right now for that specific improvement? The answer is, we do not, but we believe, as we refer to it, that this is quantum leap for us and that at a minimum as we – no different than we demo HPE today, when a client looks at their ability to engage us in our benchmarking services, that there should be no one that would provide that level of capability, innovation and obviously our database is unmatched. So hopefully, it further differentiates, it means the clients will use more of these benchmarking services. You know if the client used these services to understand, as we call it, the art of the possible to improve, that then that leads to both transformation and EPM engagement. So look, we are incredibly hopeful that it will simply continue to strengthen what we believe is a global leadership position in benchmarking further, and that will allow clients to use us more frequently, and hopefully in some cases on a more continuous basis instead of more event driven the way it is today.

Does it shorten the timeframe in terms of a project size if someone wants to benchmark, i.e., does it speed up the revenue recognition cycle, does it affect the margin profile of the business at all?

Our goal was to decrease the time and client involvement by 50%. So the answer is, yes, it will be a more – hopefully it's not only a better product, it's a more efficient product. And then the question then becomes right strategically, do you share, do you keep the margin that you get from this innovation.

Okay. And then the second question that I wanted to touch on was, you mentioned larger engagements, so I was just curious if you'd give some detail around that, what specifically are you doing that makes those engagements larger and do you think that's a recurring thing?

We're seeing our opportunities for large engagements clearly improve and we've seen that throughout the last 24 months. So we believe that simply expanded permission in a certain number of our client base, but we still think it's early on. When you look at the number of our total clients that we serve, both through benchmarking and advisory or some level of what we'll call it blueprinting, and you consider the opportunity, that our wallet share to these really large clients is really we think minuscule today. We think that revenue per client increase. So to use us more broadly across more functions or to use us both across the entire enterprise and to include transformation as well as analytics on a combined basis should only increase. So we think it's a strong indicator again allowing us to play a broader and more strategic role with clients, and at our scale, that's pretty important. And I think some of the reason that we are clearly growing beyond this sector is that our permission and influence is expanding. So we hope it continues.

Okay. And then just to touch on a little bit in the past, in terms of the U.S. Hackett Group having grown at great attractive pace over the past year or so, at what point do you start to worry that you're something up against difficult comps and you may not be able to continue a double-digit growth rate there?

We've never changed our – we've never said more than 5% to 10%. So if the demand continues the way it is and our permission with clients expand, we hope we stay at the high end of that. Obviously if we stay at the high end, if we stay around 10%, we're going to make 20% plus. But we also say that if it's somewhere in between, we could also live with 15 plus percent long term growth rate. What we hope influences our profitability and really changes the value of the entity is that if in addition to these results whatever range we settle into, and obviously we're performing above what we would define our historical range, that if we complement those core businesses with these new IP-as-a-service alliances, that both expanded value margin expansion and multiple expansion comes from the higher gross margin recurring revenues coming through new channels. So our bet is that it's a combination thereof. I know you're asking about what we are now calling base, but if it's true that transformational change in this digital era will be very transformative, then we would hope that historical growth rates will increase for service providers that are well-positioned and for software and technology providers that are well-positioned. We think we are part of that mix and we hope the IP-as-a-service opportunity is icing on the cake.

Great. Great to see you doing well. Keep up the good work.

And we show no further questions at this time. I would now like to turn the call back over to Mr. Fernandez.

Thank you, operator. Let me thank everyone for participating in our second quarter call. We look forward to updating you again when we support the third quarter. Thanks again.

Thank you for participating in today's conference call. All parties may disconnect at this time.