Welcome to the Hackett Group's First Quarter Earnings Conference Call. Your line have been placed on listen-only mode until the question-and-answer session. Please be advised 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 first 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, CFO. A press announcement was released over the wires at 4:29 p.m. 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. It is not contained in the release of the Investor Relations page on 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'd like to turn it over to Ted.

Thank you, Rob and welcome everyone to our first quarter earnings call. As we normally do, I will open the call by providing some overview or highlight comments relative to the quarter. I'll turn it back over to Rob ask him to comment on the operating results, cash flow and also provide the details on our guidance. Then we will open it up, he'll turn it back over to me and I'll make some market and strategic overview comments. And then, we will open it up for Q&A. So let me first start with our overview and highlight comments and again welcome everyone to our first quarter earnings call. This afternoon, we reported net revenues of $67.5 million a 3.7% increase over the prior year and the pro forma EPS of $0.26, a 13% increase over the prior year. As expected, our U.S. revenues including our acquisition were up from last year as we started to see the initial benefits of our transition from on-premise to cloud applications implementation focus. Cloud implementation revenue growth exceeded our on-premise revenue decline as expected. Revenue growth in the quarter was driven by digital transformation initiatives in our Strategy and Business Transformation group which was up strongly. Additionally, and consistent with last quarter, our European results in our emerging IP-as-a-Service revenues continue to bolster our results. Consistent with the last several quarters, software market continues to rapidly move to cloud. This led to our acquisition of Oracle ERP provider in the second quarter of last year as well as the migration to cloud implementations in our award-winning Oracle EPM group. We believe the actions 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 the secular cloud migration growth opportunity.…

Thank you, Ted. As I typically do, I will cover the following topics during our call. An overview of our 2018 first quarter results along with an overview of related key operating statistics an overview of our cash flow activities during the quarter. I will then conclude with a discussion on our financial outlook for the second quarter of 2018. For purposes of this call, any reference 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 non-cash stock compensation expense, intangible asset amortization expense, acquisition-related cash and stock compensation expense and assumes a normalized long-term cash tax rate of 25%. Acquisition-related cash and stock compensation expense primarily relates to the portion of the purchase consideration for the 2017 acquisitions that contained service investing requirements and as such a reflected as compensation expense under GAAP. For the first quarter of 2018, our net revenues or gross revenues excluding reimbursable expenses increased by 3.7% to $67.5 million when compared to the prior year which was towards the upper end of our guidance. The actual Q1 reimbursable expense ratio on net revenues was 7.8% versus the 9.8% for the first quarter of the prior year, which decreases our year-over-year gross revenue growth, however, has no impact on profitability. Reimbursable expenses, our project travel-related expenses passed through to client with no associated margin including reimbursable expenses company gross revenues were $72.7 million in the first quarter, which represents a year-over-year increase of 2%. Net revenues for the Hackett Group, which…

Thank you, Rob. And as we look forward my first thoughts is that the comments are pretty consistent with last quarter and that just goes to show you how I'm going to say how focused we are on our strategic objectives and of the fact that they are not changing. As we said now for really over a year, the rapid development to move to cloud applications and infrastructure along with improving analytics, mobile functionality enhanced user experience is dramatically influencing the way businesses compete and deliver their services. This is redefining entire industries 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 networked and dynamic automated workflows and events with enhanced analytics, significant change. The digital transformation era is very attractive to our organizations since we believe our clients will increasingly turn to us to provide them with best practice insights on what emerging technology can deliver and what changes in business models work and justify significant investments. In the U.S. these transformative technologies are resulting in increased activity 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 as well as lower on-prem revenue coming into the year along with the opportunity to grow our cloud implementations revenue throughout the year. In Europe demand continues to be strong, but growth is expected to be more tempered due to the start of 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. Last…

Thank you. At this time we will begin the Q&A session. [Operator Instructions] And our first question is from Franc Atkins of SunTrust. Your line is now open.

Thank you for taking my questions. Wanted to ask first about international revenue, I believe in your prepared remarks you called out some year of your comps getting a little bit tougher, but what are you seeing in terms of demand in the pipeline for the business outside of the U.S.?

Activity remains very good. So we haven't seen the activity in Europe change at all. So we would say consistent with last year.

Okay. And then, what feedback have you gotten. And what are the initial reactions to Quantum Leap, if you could talk about just some client reactions to that?

Well, let me speak -- let me actually speak to all of our new digital initiative now that you ask Franc. We just completed our annual best practice conference -- our North American annual Best Practice conference which we hosted in Atlanta last week actually right across the street from your offices. And we opened the conference by doing something we never had actually we used the conference to really facilitate the opportunity for clients to share stories. That's really the premise of the conference. We're facilitators. We enable these activities and networking and information sharing and solution sharing and also have always received high marks for doing that. But I opened the conference this year by actually providing, I'll call brief demos of Quantum Leap along with our Hackett digital transformation platform along with our recently launched RPA assessment platform and also to give our participants, our attendees a much closer view at some of the underlying content that exist within our Hackett Institute and our recently launched programs. But first the reaction to Quantum Leap has been very positive. The opportunity for a client because of the digital format because of the enhanced analytics because of the enhanced extraction capabilities because of the enhanced opportunity to do project tracking and allow clients to utilize the platform both to leverage our IP as well as the track solutions. I think clients understand and believe, number one, that we are clearly the enterprise benchmarking leader globally. Number two, that our technology now has been enhanced to a point that I believe doesn't exist in the marketplace today. It allows us to capture. We believe nearly twice as much information as we previously had in approximately half the time. So overall reaction, very favorable, and we continue to see a decent percentage of those who are benchmarking with us ascribed to the multi-year program that now is the framework around Quantum Leap. If you recall in addition to Quantum Leap really enhancing all aspects of the benchmarking experience and the ease of use and the efficiency of data capture as kind of primary objective, it was important for clients to also see that they could leverage our IP and track those initiatives over a multi-year period. So we're glad to see that a good percentage of those new Quantum Leap users are extending the relationship beyond what was traditionally call it 12-week exercise and now we have clients that are doing multi-year signings as they want to, one, commit to the initial benchmark, two, consider benchmarking more frequently, and third, to use our platform to leverage our IP and to track those initiatives.

Okay. That's helpful. And maybe last one could you talk a little bit about the pipeline and remind us maybe of the seasonality as we look at SAP Solutions going forward for the remainder of the year?

Yes. I would say that seasonality is less of a factor other than if you recall in the first quarter of last -- in the first quarter we said we lost a pretty nice AMS client with that whose impact continues. I think other than that simply SAP is now -- I'm going to say SAP start being more aggressive with what they refer to as their SaaS offering which is where they both sell and host the software on behalf of clients and our traditional model has been to bring those clients in through our VAR into our implementations and then support them. So we're simply adjusting to that SaaS model in creating both an opportunity for SAP to bring our clients to us whether a) They come through our traditional channel which is through our value added reseller into implementation. And now just directly into an SAP hosted solution which we're seeing they are starting to more aggressively market.

Okay, great. Thank you very much.

[Operator Instructions] Your next question is from George Sutton of Craig-Hallum Capital. Your line is now open.

Thank you. Ted I was wondering if you could break down the mix of EPM versus the other Oracle work you're seeing today. And then just give us a sense what that mix might look like two to three years from now?

Well, as you know, the total market opportunity is 20% opportunity for Oracle relative to their total cloud suite that they make available to clients. I would say for us, EPM is probably running about 2 to 1 and that's a combination of not only -- we had a very strong EPM group which was not only award-winning in the on-prem environment, but just recently got the global cloud partner of the year. So we are seeing -- we saw two things coming into the year. We saw the stabilization of that on-prem EPM revenue and we also continue to see rapid growth in the cloud environment. So Rob correct me if I'm wrong about 2 to 1.

Just what?

EPM versus all Oracle today?

2 to 1.

All right. I'm glad I wasn't corrected. But it's close enough. But the answer is that when you look at the 80:20 mix and you look at some of the engagement sizes that are in our pipeline. Over time we would expect that to become to really follow Oracle's pattern. So eventually you would expect that to be 80:20. How long would it take to do that? Maybe two or three years. We really don't want our EPM group to decelerate. We want our EPM group to still be market leading the way it was in the on-prem environment. And as you know what we want is our newly acquired ERP cloud capabilities. We want those cloud revenues to continue to grow as aggressively as possible. So there is a transition coming. We still believe that sometime in the summer, you'll see cloud -- total cloud revenues exceed our on-prem revenues and that kind of those will be my broad observations relative to Oracle Cloud and our transition.

You and I have talked about the macro for years in terms of the driver for your business. We currently are in a environment of what I would define as modestly to better GDP growth and generally very good performance. Is that not necessarily the perfect market conducive to your getting benchmarks and transformational assignments or is it getting overwhelmed in your view by the technology transformations.

Well, first let me make sure that you're asking a great question because the Hackett brand and the benchmark is so directly tied to strategic cost reduction that somebody could assume that a tougher environment represents people focused more on productivity improvement and in a faster growing environment they may not. Let me first say that because of in fact something you mentioned on your note because of the RPA focus because of the whole drive around how operations could be affected by machine learning, analytics that the transformation business activity is very strong. If you missed it in my opening comments they were strong year-over-year and expect that strength to continue. So clearly -- the current environment is favorable; it's favorable to that business. But I think what really overwhelm the economic environment. So let's assume that we're really going to be running closer to 3 then to 2 over or less the way we have over the last several years. So there's clearly more stimulus in the market and that should be favorably economically. I still believe the primary driver of activity today is the fact that all these emerging technologies allow companies, not allow demand at these companies consider how they impact their business and for clients to decide when and how to adopt in order to remain competitive. So I think that the secular growth opportunity comes from the digital transformation activity and technologies that people need to consider. And I think that the demand environment the economic environment will be second or not primary given that I'll call it current drive and migration to these technologies. And our clients are just eager to find out in understanding how important it is for them to assess and implement and consider these new technologies in order to remain competitive.

Got you. No that makes great sense. Thank you. One last question, you sort of slipped in your ADP commentary a pilot program that you just begin. Can you explain what that is?

It's really not a pilot program with SAP. In SAP we're simply making sure that SAP will note -- first you remember that our SAP business is primarily focused on -- SAP business is primarily focused on small and medium businesses. And did you say SAP or ADP?

No. I meant to say ADP.

I'm sorry that I misheard you. The pilot program with ADP if you remember we had and I want to thank our my wonderful IR person for correcting me here midsentence. One, that what we had, as we started with ADP with their enterprise ACM offering vantage late last year we launched their Workforce Now program, which really addresses more of their call it upper middle market clients and the pilot that we just launched is with one of their two outsourcing solutions groups. So the comment I wanted to slip in is that ADP continues to give us an opportunity to expand within their, I will call it services suite for lack of a better term. It's also important to note that I didn't put in my comments, but we also have installed base campaigns that we are executing during this quarter where we're going back to some other enterprise clients and making if you want the Hackett best practice program available to those which today has only been offered to clients who are either migrating or signing a new contract with ADP. So the overall activity with ADP continues to be good.

Perfect. Thank you.

Thank you. And our next question is from Jeff Martin of ROTH Capital Partners. Your line is now open.

Thanks. Good afternoon, guys.

Hi, Jeff.

Ted, I was wondering if you could comment when approaching a year into the whole cloud transformation for Hackett. How are you seeing yourselves competitively positioned and when you get new project proposals what the competitive differentiation?

Well, we are a year into it and I would say that in fact I have a chance if investors ask me this question I tell them on a scale of 1 to 5, when I look at where we are relative to cloud wins and in where we believe and more importantly operating margin because scale is important. I mean we're clearly migrating to the cloud aggressively, but when I look at the operating margin that is available to us from really scaling our cloud business which is the reason why we acquired Jibe Consulting. I would say we're at a 2.5. We're still operating at lower operating margins and what we're finding out since -- just go back to your question is that the onshore – offsite, onsite deployment model is important and we need to make sure that we scale that so that we are as competitive as we possibly be with that model. Since we're growing into our business where we're probably a little less competitive than we could be because of our scale or the lack of maturity and scale in that model. With that said, if you then said, the opposite question, which is where are we relative to the credibility with clients marketplace and Oracle relative to our ability to influence a transaction, demonstrate the transformation value of Oracle through the leverage of some of our IP. I would say that on a scale of 1 to 5, we are 5 plus. So when I look at the fact that when I look at our results and I look at the fact that that we will -- it will be a year this week that we acquired this company. And I look at the operating leverage of that business to-date. Our results are really very sound, very strong. Okay, being up 13%. Nice. But when I look at the operating leverage and margins that I can get from continuing to scale that cloud business, while we address some of the on-premise volatility which will still be there, right? The opportunity for us is a mess. And that's why when I get in front of investors, I tell people look inflection point for us is scaling our cloud -- Oracle Cloud business to a point where the leverage and profitability of that group is somewhere near our current business. And number two, the leverage of IP-as-a-service business is phenomenal and continue to grow and expand those two businesses. So we say ‘18 sets up ’19, but we know that anything across either of those two areas. When you consider the fact, if you listen to the previous question that our strategy and business transformation group is really performing pretty nicely and leveraging this digital transformation change pretty well right now, creates the kind of leverage that profitability and growth prospects that we hope to get back to as soon as we possibly can.

Okay. And then I have two quick follow ups. One is quick one might not be so quick. Rob what was the revenue from 1Q’17 from the AMS client?

From the single AMS client?

Yes. The AMS client that you lost.

It was about $0.01 a quarter, right?

Yes. It was about $0.01 a quarter. Yes. May be $0.025. So, not quite, say $0.025 a year. It was a nice hit.

That’s helpful. And then, Ted, if you were to rank your growth opportunity for the balance of the year by category, by service category, how would you rank them 1 to 3 or, 1 to 5?

I'm sorry. Our Groups or I want to make sure I have you're –

Between benchmarking, transformation and the…

I will be honest with you. We believe that our single biggest growth opportunity exists within Oracle Cloud. We believe our single profitability opportunity exists with IP-as-a-service. And our strategy of business transformation group is performing at such a level that I mean the answer is, they're performing at the level that is, up to our standard and the Oracle Cloud opportunity is nowhere near the kind of margin opportunities we think it can, but increase the greatest growth opportunity. And then the IP-as-a-service opportunity as you know may not look like a lot of revenue but it's a highly profitable part of our business very high value strategic to us and to those alliance partners. So we want to continue expand those. Those are our leverage points.

Great. Thanks so much.

Thank you. And our next question is from Vincent Colicchio with Barrington Research. Your line is now open.

Yes. Hi, Ted.

Hi, Vince.

I'm curious in terms of the market perception is you -- are you winning, gaining -- regaining interest from a large portion of your on-premise clients, pre-Jibe that we're kind of given you pushback in terms of the cloud?

Well, they were never really given a push back. I mean they're phenomenal clients of ours. We just knew that Oracle was offering cloud software to them. So if you're looking to grow you need to make sure that you are helping them with the cloud transition. So, we're not getting pushback that's just where the market is going. And relative to, I think your other question was pipeline activity. Well, look we're continuing to see it back. So for us it's a function of continuing to demonstrate the capability and maturity of the offering and not only continuing to win, but winning larger deals. Those are the things that will create the inflection we would love to have.

And then on the IP business, it sounds like there's been no change in expectations for the year just give us some sense of that? And then, have you thought about given that you're expected to have a better year this year than last year. Have you thought about breaking out the contribution?

The answer is I have, but I will not. Part of the reason is that as it becomes more diversified we don't think it's in our best interest or our alliance partners interest for us to do that.

Okay. And are there any large…

Your interest Vince, it’s not good for us. So I hope you can understand that.

On the cloud side, are there any large deals in the pipeline that could drive above trend growth.

Absolutely. There continue to be large deals coming into the pipeline.

Okay. That's it for me. Thanks. Nice quarter.

Thank you, Vince. Thank you.

Thank you. And our next question is from Morris Ajzenman of Griffin Securities. Your line is now open.

Hello.

Hi, Morris.

Hi. A quick follow-up to the past question. You made the acquisition about a year ago and in ensuing calls, you talked about the opportunity to bid on larger projects, which the previous question touched on. Can you give us a size, an idea of what sort of projects you are now bidding on or plan to bid on? And how that compares to the size of projects that you bid on before the acquisition?

Well, first remember we weren't bidding on any before the acquisition we had no capability in ERP. So we never got a chance to bid on the yields of the scale, which we started the after we acquired that broader Oracle Cloud capability. But $5 million to $10 million deal is what we love to see and come in and be able to close. And anything of that scale or smaller ones of that to start, you can look at our revenues. I mean they will become meaningful to us. So we think we're getting stronger at it every quarter and better at it. And we hope we'll able to demonstrate that sooner rather than later obviously.

June 2018, do you believe you will be able to tell us -- you will be able to have won a deal of that size $5 million to $10 million?

We will be very disappointed if the whole 2018 goes without us being able to close deals of that size. Yes.

Okay.

Yes.

And one other question. When you started the call you talked about the rate of decline on-premise being less than the rate of growth of off-premise. Is there anyway. I mean I don’t know how much you can tip your hand but they give some sort of an idea of the dollar change over the last couple of quarters, off-premise the actual dollar decline versus the actual dollar gain. So we can have some sort of road marks, so we can kind of look at how that's been playing out. And then, we can make any sort determination how that might play out in the near future, we can help us with that.

The broad -- I say the broad markets that I was giving, first, you got to remember that in ’17, the on-prem decline was so precipitous that it was impossible for any new gains in cloud that we were making to offset them. So the fact that we actually got there in the fourth quarter and exceeded them in the first quarter. As far as we're concerned we’re very significant marks for us. The next mark that I have said and communicated to the marketplace is that we believe cloud outstrips on-prem sometime this summer. So to us, right, if you want to look at it logically and you assume that on-premise is, is going to be continually compromise that an opportunity for cloud because of the way the software vendors are marketing their cloud applications. And as the year goes on or the time goes on and that on-premise number continues to decline. And you've got to consider two things, since absolute number is lower going into ‘18. The absolute decline for us will be lower through -- significantly lower in ‘18 than ’17. Having said that, you still got very significant comps from last year that come from much higher on-prem numbers. That's why I always comment on the fact that ‘17 was the aggressive migration to digital and the launch of all of our initiatives, ‘18 is now our ability for cloud to outgrow on-prem and for the other areas of the business is to grow and IP-as-a-service to grow. And then ‘19 allows an investor to see then either a) the diminution of on-prem to such a low number that it becomes totally immaterial plus the large comps of on-prem that we had in place throughout -- clearly in the early part of ‘17 but really throughout most of the year even though it declined throughout the year to have a much cleaner comp number to go against in ‘19. So I'll go back and say ‘17 was transition, ‘18 restore growth and profitability at the lower end of our long-term targets, ‘19 should be a clean slate an opportunity for us to get back to what we experienced in ’14, ‘15 and ‘16 hopefully.

Thank you.

All right.

Thank you.

Thank you. At this time I show no -- I'm sorry go ahead.

No, no I just want to make sure there were no other questions operator.

At this time, I show no further questions and I’d like to turn the call back over to Mr. Fernandez.

Thank you so much. Well, then let me -- this will conclude our call. I want to thank everyone for participating in our first quarter earnings call. Look forward to updating everyone again when we report our second quarter. Thanks again.

And that concludes today's call. Thank you for your participation. You may now disconnect.