Welcome to The Hackett Group fourth quarter earnings call. [Operator Instructions]. 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.

Good afternoon, everyone, and thank you for joining us to discuss The Hackett Group's Fourth Quarter and Fiscal 2017 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, CFO. A press announcement was released over the wires at 4:05 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 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. As I normally do, I will start the call by providing some overview or highlight comments on the quarter and then turn it over to Rob so that he could comment on operating results, cash flow and also our comments regarding our guidance or outlook. Rob will then turn it back over to me to make some market and strategic overview comments, and then we will open it up for Q&A. So let me start by welcoming everyone to The Hackett Group's fourth quarter earnings call. This afternoon, we reported gross revenues of $69.4 million, with net revenues coming in at $64.5 million, representing a 2.5% increase over the prior year, and pro forma earnings per share of $0.27. Revenues exceeded the high end of our guidance while pro forma EPS came in at the high end. As expected, our U.S. revenues, including our acquisition, were down from last year. However, they were stronger-than-expected, due in part to the stabilization of our on-premise EPM revenue which came in at a higher level than forecasted. Additionally, our European results and our emerging IP-as-a-Service revenues continue to bolster our results. Consistent with the last several quarters, the software market is rapidly moving to cloud, which led us to aggressively transition our Oracle group from being primarily focused on the implementation of Oracle EPM on-premise software to the entire Oracle Cloud Enterprise Suite. We believe the actions we took to expand our Oracle Cloud capabilities from EPM on-premise to the entire Oracle Cloud ERP Suite have strongly positioned us to take advantage of this secular cloud migration growth opportunity. Correspondingly, given the stabilization of our on-premise revenue in Q4, which is expected to continue into Q1 and with our strong cloud revenue growth, we now expect to resume our long-term…

Thank you, Ted. As I typically do, I'll cover the following topics during this portion of the call, an overview of our 2017 fiscal year and fourth quarter results, along with an overview of related key operating statistics; an overview of our cash flow activities during the quarter; and I will then conclude with a discussion on our financial outlook for the first quarter of 2018. For purposes of this call, any references to The Hackett Group will specifically exclude SAP Solutions. Correspondingly, I will comment separately regarding the financial results of The Hackett Group, SAP Solutions and the total company. Please note that all references to gross revenues in my discussion represent revenues including reimbursable expenses and any references to net revenues represents revenues excluding reimbursable expenses. Additionally, references to pro forma results specifically exclude noncash stock-compensation expense, intangible asset amortization expense, acquisition-related cash and stock-compensation expense and related transaction expenses, restructuring charges and assumes a normalized long-term cash tax rate of 30%. Acquisition-related cash and stock-compensation expense primarily relates to the portion of the purchase consideration for 2017 acquisitions that contain service vesting requirements and as such, are reflected as compensation expense under GAAP. Before I move to our fourth quarter results, I would like to discuss a few highlights regarding our annual results for fiscal 2017. Annual net revenues totaled $263.3 million, an increase of 1.3% over the prior fiscal year. Pro forma earnings per diluted share were $1 in 2017 compared to $0.94 in 2016, an increase of 6%. North American revenues were down 4%, with international revenues up 36% for the fiscal year. Pro forma EBITDA for the fiscal year was $48.9 million, an increase of 4% over prior year and represented 19% of net revenues. During fiscal 2017, we continued to utilize our strong…

Thank you, Rob. As we look forward, let me reiterate our thoughts on the evolving demand environment and more importantly, on the significant growth opportunities it offers. The rapid development and move to cloud apps and infrastructure along with improving analytics, mobile functionality and enhanced user experience is dramatically influencing the way businesses compete and deliver their services. This is redefining an entire industry at an accelerated pace, forcing organizations to fundamentally change and adopt these new capabilities in order to remain competitive. Traditional sequential and linear-based business models are changing to fully network the dynamic automated workflows and events with enhanced analytics. The 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 deliver and what changes in business models work and justify significant investment. In the U.S., these transformative technologies are resulting in increased demand as companies determine how to respond to the quickly changing competitive environment. In 2018, we expect the growth in cloud and digital transformation engagements to improve our growth prospects throughout the year. This is due to a combination of both stabilizing EPM on-premise revenue along with our rapidly growing cloud implementation revenues. In Europe, demand continues to be strong but growth will be more tempered due to the strong prior year comps. Europe has benefited from improved market conditions as well as from our EPM investments and our recent BPO and RPA advisory acquisition. In 2017, we believe we took the necessary actions to both optimize current-year performance and more importantly, be strongly positioned for the emerging digital transformation opportunities. Specifically, we have redefined our goal of benchmarking leadership by launching Quantum Leap, our new digital benchmarking and continuous improvement software-as-a-service solution. We continue…

[Operator Instructions]. Our first question come from the line of Frank Atkins with SunTrust.

I wanted to ask about international revenue growth. What are some of the major drivers hitting that line?

Well, Frank, as you know, we invested heavily in Europe in '14, '15 and '16 and really started to realize some of the benefits of the investments we made primarily in the EPM and analytics area in really, over the last couple of years. So that has been the primary reason for our growth. I would say that the recent acquisition last May of the BPO advisory and RPA advisory firm has also been very successful in competing and winning work in the U.K. And both of those, that combined capability is just allowing to be more successful in the marketplace. So we consider that, along with the fact that it's a healthy market, that we continue to see good activity. All those things have contributed to that growth.

Okay, great. And could you talk a little bit about the M&A outlook going forward into 2018? Do you anticipate looking at other cloud-oriented or RPA properties or other areas of interest? And what attack might you take there?

Well, we continue to keep our eyes open for those kind of opportunities. One of the things we've learned as we look for organizations that have that capability is that they also bring with them, in many cases, a significant legacy business that requires for you to transform from. So I would say that given the investment and the amount of work we did in making sure that we acquired fully integrated and transformed the business that we acquired along with the transformation changes we made to focus our business on, I'll call them, what we expect to be high-growth digital transformation opportunities, it would take a special organization for us to acquire. Having said that, you meet the right team, you meet the right complement of resource regionally. And if we do, if you know our path, we don't do it often but we move very quickly when we do find them.

[Operator Instructions]. Our next question comes from Morris Ajzenman with Griffin Securities.

Question. You stated June – on your commentary that the on-premise revenues has stabilized in Q4. Can you give us an idea of what that run rate is and what that compared to at the peak? How many quarters you have to go back? What on-premise revenues were at a peak and what they are now? And then if you can supplement that during the same time periods, what the cloud-based revenues were back then and what they are now, just to give us some idea of the transition.

I don't want to provide information down to that level. But I would say that our on-prem revenues are probably down in the 60% range. I mean, it was a very significant drop that we experienced throughout 2017. The revenues did stabilize perhaps $1 million or so quarterly on where we expected, which was nice to see and probably consistent with the revenue beat that you saw in Q4. Our cloud revenues are growing in excess of 100% per year. I don't quote the numbers because again, since we're dealing with smaller numbers, I'd hate to put up a number that you would quote me on and could vary here over the next year or so. But suffice to say, the cloud revenue growth is very, very rapid for us on both the ERP and the EPM side and that the EPM revenues seem to be pretty stable and we're seeing some activity that would suggest that the number that has stabilized that is -- could be sustainable. So even though we'll plan for some of that revenue to continue to erode in 2018 and have considered that on our annual plan, we would love the pleasant surprise for it to really stabilize, and who knows, even perhaps even move up. As you know we serve very significant large EPM clients and those clients have very large on-premise Oracle install bases. So it's not surprising that we're seeing activity. I think it was probably more surprising, as you know, since you follow us so closely, how quickly it dropped throughout all of 2017. And I think a lot of that has to do with the fact that Oracle has worked very hard at trying to move its clients aggressively to cloud. And obviously, we've made all the changes to make sure we're fully aligned with that change. We'll let the clients decide where and how they allow those revenues to stabilize. But we continue to believe that this is about the accelerated cloud growth exceeding any on-premise decline. We're exiting the year with obviously a significantly smaller run rate that we started 2017. So our exposure to any on-premise revenue decline is significantly lower than it was a year ago. I think it's important to know though that some of the on-premise decline, as you know, happened throughout the year. So we're still facing some pretty strong comps that really turned more in our favor as we get to the second half of the year. So those are all things to consider as you look at our growth and profitability guidance and indications throughout the year.

Okay. As a follow-up to that -- and I'll get back on queue, in Q4, your net revenues of 2.5%, you're guiding at the upper end of the range of Q1 of 4%, and then you talked about your year-over-year typical comparison for on-premise revenues. I know you don't guide for the full year, but then into the second half, is it then feasible that you can see top line growth, high-single digits approaching 10% or so?

Well, I think our goal for '18 has been to be within our long-term range which is 5% to 10%. So that's what kind of we're shooting for. So could it grow as the year goes on? That's clearly our hope. So I'd like to leave it at that at this point. But again, keep in mind, the comps as well as the continued transition and growth of cloud as you model your -- as you analyze and model your numbers.

Our next question comes from Jeff Martin with Roth Capital Partners.

Ted, I was wondering if you could prioritize the sources of growth in 2018? I would assume cloud is among the top. But in terms of ADP or Hackett Institute, could you kind of list in order of priority what sources of growth you see in 2018?

Yes, I will. Give me a second, Jeff, to go back to the question that the last analyst asked, because I think it's important to go back and comment on something. If you also heard Rob's comment relative to the growth and the changes that are happening in Q1, keep in mind that we're expecting Hackett revenue growth to be 6% to 8% and that the reason that the growth is we're estimating at the high end of 4% was really more attributed to the Q1 performance and guidance of the SAP Group. I mean, if you look at The Hackett Group numbers in Q1 and think that we could maintain that, in that, I'll call it, mid to high single digits, then that would bode very well for us if SAP was just to stabilize in its normal course. So just to clarify that for the last analyst question. Back to your comment, sources of growth, Jeff. Without a doubt, that our opportunity, our sources of growth, number one will come from the increasing cloud implementation revenue that we will have throughout the year. We see a very rapid growth. And when we look at the pipeline and we look at the go-to-market strategies of those that we go to market with, that will be the number one source of revenue growth. Probably, right behind that will be what we'll call digital transformation. And for us specifically, that will be engagements that are looking -- clients that are looking to, for operating or performance improvement as they rationalize their businesses as they transition their businesses, leveraging more technology. Those will include what we're seeing since we're seeing quite a bit of new activity around our RPA or smart automation engagements. So call it some combination of broad business transformation…

Okay, great. That's very helpful. Could you also give us a sense of what are some of the bigger lessons learned on your transition to cloud over the past 6 to 12 months? And how you see the pipeline today versus how it was maybe 3 or 6 months ago?

Well, without a doubt, because we made these changes in May and we've been working on every aspect of both channel alignment and both the alignment of our digital transformation to some of the software solutions that we support, I would state that the overall activity for us in that area is up nicely or even, I don't want to call it significantly, but up nicely and has been building -- as our credibility and our capability have been building throughout the year. So I would say that it bodes well for our growth prospects in those areas and it's consistent with the prioritization of the revenue growth question that you asked. Does that answer your question? Is there -- am I leaving an element out now, Jeff?

No, that's helpful, that's helpful. And then the final question surrounds SAP and the drag on growth that it's going to have at least in Q1. How do you see that playing out for the full year?

Actually the activity in the business, the more significant part of the Q1 performance simply is just the fact that some meaningful engagements started later in the quarter than we expected, so that part should be -- should, I'll call it -- that decrease should be significantly lower as we get into Q2. And then the AMS piece is several hundred thousand dollars a quarter. So when you look at where the revenue growth has gone, one of it is temporary and then a piece of it is permanent which we will have to make it up.

Our next question comes from George Sutton with Craig-Hallum.

Ted, I was wondering if I could test your long-term growth goal of 5% to 10% that you mentioned. As you become larger in the cloud portion of the business, can you not start to see growth rates that would be in excess of that over, say, a 3 to 5 year period?

Well, as you know, George, in '14, '15 and '16, we were running closer to 10%. And that 10%, as you also know, that we had EPS and cash flow growth in excess of 25% a year. So I will tell you, as a first step, one, we want to get in within the range. So that's been our first step, and we hope that we're able to prove that early in 2018 or at least in the first half. And then yes, we'd like to get back to the higher end of our range because we think the profitability in our lev business model leverage is very, very significant. To think beyond 10%, let me get to the first two stages first and I'll be delighted to talk to you about that as we get closer to it.

Got you. And I was wondering if you assume I was an existing benchmarking client, could you just give us a quick elevator pitch for Quantum Leap relative to what I would have been used to under your prior benchmarking capabilities?

Yes. And if you know anyone that you want to refer to us, please do after my pitch. But our message is really pretty simple. We think we can deliver now twice the information in less than half the time the client was involved in helping us gather that information, leveraging our new fully automated Quantum Leap product. So one is just the level of insight is significantly greater and the level of effort from the client is significantly less. When you then take that and couple it with the fact that the product now allows us to track each initiative and track the clients, I'll call it -- as the clients decide which initiative to pursue, it has a beautiful project tracking system that allows the clients to see the benefit realization and track that benefit realization on a quarterly basis, which we think has been very, very appealing. And then lastly, given that the product is fully digitized, the report out since we now can do this all on any electronic device, so the ability to look at this information, access it, analyze it, instead of having something much thicker that you may not turn to with the same level of frequency. So the reporting and analytics grounder are significantly enhanced. So we believe we took what we had, which is a market leadership and enterprise benchmarking, and we think we have just dramatically lengthened our lead to anyone who would say that they're dedicated to the industry the way we are.

Perfect. And lastly, of the ADP you've added the Workforce Now offering. Can you just give us an update in terms of how much that has added to your opportunity in terms of what you're seeing in deal flow?

The answer is we launched the actual product, the sales part of the product in October. That platform actually went live sometime in the middle of the quarter. So I would say it's early. But we expect it to be a strong contributor to our results throughout 2018. And we believe that ADP believes that our IP and our involvement in their -- embedding us into their offering is a significant value differentiator for them. So very high hopes.

Our next question comes from Vincent Colicchio with Barrington Research.

Ted, on the lost client on the AMS business, I was wondering if you can give us a little bit more color on that.

No, just a simple client that decided that it would get its support from somewhere else. And it chose to do that -- I believe, the European company chose to do that in Europe with a provider that we actually haven't heard of. So it was simple, the client found an alternative solution that they thought they wanted to give it a shot with and we wish them much success but we'll be waiting just in case the new provider fail.

And then, would you like to take the opportunity to maybe to frame the type of contribution you expect from the IP-as-a-Service business in 2018?

Unchanged. Last time I provided any real kind of numbers to it, I said that it became accretive in the second quarter of 2017 and that we would expect this contribution to the IP-as-a-Service contribution to our business to at least triple by Q2 of '18. We would hold to that.

I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Fernandez for closing remarks.

Thank you, operator. And let me thank everyone for participating in our fourth quarter and fiscal year-end call. We look forward to updating you again when we report our first quarter early May. Thanks again for participating.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great day.