Welcome to The Hackett Group Second Quarter Earnings Conference Call. [Operator Instructions] 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.

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, 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 maybe 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 to The Hackett Group’s second quarter earnings call. This afternoon, we reported net revenues of $69.6 million, a 3% increase over the prior year and pro forma EPS of $0.27, an 8% increase over the prior year as well. As expected, our U.S. revenues were up 8% from last year, with 20% plus growth coming from our strategy and business transformation group offset by a 5% decline in our ERP EPM and analytics Oracle Group as we continue to aggressively migrate from on-premise to cloud implementations. As a result of our focus on digital transformation initiatives, our strategy and business transformation group experienced strong growth across nearly all of the practices with strong performance from our eProcurement and IP-as-a-service offerings. While our Oracle ERP EPM and analytics business was down, our cloud revenues exceeded our on-premise revenue this quarter. As you know, this is something that we planned and targeted over a year ago. More importantly, when we look at our Q3 guidance, we expect this momentum to continue and for the group to be flat to up in Q3 as expected, cloud revenue growth will more than exceed the expected on-premise decline. To provide some context to the on-premise decline impact in our total company revenue growth, if our on-premises revenues were flat on a year-over-year basis, in Q3, our total company revenue growth would be approximately 7% higher than we reflected in our current Q3 guidance. The impact in Q2 was approximately 10%. This is why we look to our 2019 year with great promise. This growth and scale will also mean margin expansion for the group. We know we are quickly getting closer to being able to realize the benefits of our transition if we continue to migrate at our current…

Thank you, Ted. As I typically do, I will cover the following topics during this section of the call. An overview of our 2018 second quarter results, along with our review of related key operating statistics. I will 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 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 non-cash stock compensation expense, intangible asset amortization expense, acquisition-related compensation expense, acquisition earn-out adjustments 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 contain service vesting requirements and as such are reflected as compensation expense under GAAP. For the second quarter of 2018, our net revenues or gross revenue excluding reimbursable expenses, increased by 3% to $69.6 million when compared to the prior year and was within our revenue guidance range. The Q2 2018 reimbursable expense ratio on net revenues was 8.7% as compared to 8.6% for Q2 of the prior year. Reimbursable expenses are primarily project and travel-related expenses passed through to a client and has no associated impact to our margin or profitability. Including reimbursable expenses, company gross revenues were $75.6 million in the second quarter of 2018, which represents a year-over-year increase of 3%. Net revenues for The…

Thank you, Rob. As you have heard me comment here over the last probably 2 years, the opportunities that are available to us and in our industry relative to digital transformation, cloud and analytics are just significant. And it’s – probably everything that I will say is in that context. More specifically, the rapid development in machine learning, cloud applications, artificial intelligence along with improving mobile functionality and 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 the fully networked and dynamic automated workflows and events with enhanced analytics. It doesn’t matter which industry or which company, everyone is looking at digital as a way of remaining competitive and improving the way they sell their products and serve their customers. In the U.S., these transformative technologies are resulting in increased activity as companies determine how to respond to the quickly changing competitive environment. We are seeing the growth in cloud and digital transformation, improve our growth prospects as our digital transformation and cloud engagements continue to grow and the decline in the on-premise revenue slows and becomes a smaller part of our total company revenues, the complete benefits of our transition will become increasingly clear. In Europe, demand continues to be strong, but growth is expected to be more tempered due to strong prior year comps. Europe has benefited from improved market conditions as well as from EPM and BPO and RPA investments in that region. We believe we have taken the necessary actions to both optimize short-term performance and more importantly be strongly positioned for the high-growth digital transformation opportunities. Our…

Thank you, sir. [Operator Instructions] Frank Atkins with SunTrust, you may go ahead.

Thanks for taking my questions. First question is on the ADP relationship, can you give us just an update of how you are feeling that’s progressing and some of the new offerings, how you are seeing traction develop there?

We continue to make great progress and everything that we are currently discussing with them is to expand either the platforms or the access that how our program is offered to their client base. So I would say that our prospects there continue to go very well.

Okay. And as a second question, I wanted to ask about the Oracle on-prem decline, are you seeing any signals that, that is slowing relative to prior decline rates? And are the new cloud offerings integrating well with the remainder of the business and how do you see that kind of balance between the two shaking out as we approach the end of the year?

Well, first let me speak to the on-premise decline. We are expecting – the on-premise decline has clearly decreased from 2017 to 2018. We are expecting it to increase in the – continue to decrease, I am sorry, the declines continue to decrease in Q3 and Q4 of this year. When we look at the fact that our – just consider that the cloud growth rate is increasing at multiples of the on-prem decline decrease and that is why I wanted, Frank, to highlight the fact that if and when year-over-year on-prem numbers flatten out and if our cloud growth rates remain at numbers that are well in excess of 50% here for just even just the foreseeable few quarters and beyond that we would expect what has been on a growth perspective and even profitability, because it’s important to note that until we scale that cloud business properly, we are never going to fully realize the offsite benefits that come from the investments that we have made. So two things happen or are happening. One, it was important that the cloud revenues exceeded the on-prem revenue in Q2 for our Oracle business. Two, that delta is only increasing in Q3 as cloud growth continues and the on-prem decline slows. If you model that out in any way, shape or form at any shape you want, if it continues to be if one is changing at a multiple of the other and the on-prem number continues to decline, so that declines are in lower absolute numbers, the impact at FY ‘19 is, let’s call it, double-digit and greater growth opportunities. Even if we maintain some on-premise number that we continue to serve over the next, well, it could be around for 5 or 10 years. I mean, many clients are…

Okay, great. And last one for me, can you just talk a little bit about the talent environment you should have done some positive things on that side, but what are you seeing and what are you doing to attract and retain good talent?

Well, we are kind of the unique animal in that. As you know, we compete with multi-billion dollar businesses, which I think a lot of people – some people desire to work there. But there are many others that love the idea of being able to work with a company like ours where you are able to work with these large global 2,000 companies. But in a smaller company, you play a much more significant role as you do within The Hackett Group. So we have had no problems continuing to retain our talent and attract new talent. And I think it’s because we are a unique alternative to the sector that we compete with day-to-day where some of their scale and size may actually work against them for somebody who is looking for an alternative.

Alright, great. Thank you very much.

Thank you. [Operator Instructions] George Sutton from Craig-Hallum, you may go ahead.

Good afternoon guys, it’s Jason in for George. First of all, congratulations on the turning the corner with cloud revenue exceeding premise revenue, I know that’s been a big focus for some time, on that point Rob, I think you had mentioned and I think Ted, you just touched on a little bit the slowdown in ERP and EPM in Q2, I think I heard that right, can you help break that down, I mean cloud growth is increasing, premise is decelerating, help me in the context of a slowing ERP, EPM environment?

Well, let’s make sure that you understand. Slowing as it relates to on-premise business, not cloud. So we are talking about the fact that the slope of the decline in our on-premise revenues is starting to slow, meaning becoming more and more stable. So obviously, our goal is for that, at a minimum to simply flatten out on a year-over-year basis. And we believe that opportunity comes to us. If it doesn’t come to us in FY ‘19, okay, so let’s just call it over the next three quarters to four quarters, it won’t matter because those absolute numbers become immaterial to our total number. But to add some perspective, our cloud revenues in Q2 and Q3 are going to go well in excess of 50% and our on-premise decline is let’s just call it’s a fraction, half to a quarter of that over those two quarters. So you apply math to our numbers to that. If they continue to grow at any multiple of one another, especially since we have crossed over and since those numbers, the on-premise numbers have gotten much smaller, so those declines had a smaller impact each and every sequential quarter. And the cloud revenues are now larger numbers and those are growing at a faster pace so they are all – they are coming in at – and having higher sequential impact. There is a point here, if you model that out, where instead of negative 5%, you would see double digit growth or better in that group. So the question – we know we have never known the slope of either one and I come back and say that. We have done that with, what I call it kind of a very linear kind of planned transition. If we are able to – and I just believe it’s again, I know I am going to continue to jinx [ph] myself. I have been saying this for a couple of quarters. But if because of the tenure reputation within Oracle, relationship with our clients, we are able to get some significant engagements like the ones we have been on and we are continuing to bid on and compete for today, we will transition through that prism for lack of a better term at a much quicker and profitable pace.

Okay. And it was the slowing reduction I mean it was the double negative that I missed in the…?

Yes. The double negative, I am sorry.

No, that’s okay. Thank you for…

This is what happens in South Florida, come on.

Okay. We have got that straight, now moving on, you mentioned a couple of times the strength of the IP as a Service offering, I am just wondering if you can break that down into where you saw the pockets of strength and if you think there is – if there is any timeline around adding any more services there?

The answer is that timeline – look it’s for the existing clients that are in the offering, those revenues increase as one, you continue to build your client base and they give you access to more opportunity. Secondly, we have added the client at the beginning of the year and it was more data centric and more limited access to the full kind of transformation platform offering that we support and provide ADP with. And I continue to say that we continue to get increasing inquiries and we continue to speak to other strategic alliance partners that are looking for ways to leverage that strategy within – for themselves. And we believe that adding additional customers of scale could also be an inflection point. Everything that we discuss or plan would be just progressed based on known and existing transition. I consider a new IP as a Service client or a very significant win in cloud, whether it’s Oracle, SAP, inflection points from our current, if you want to call it progress.

Okay. One more because we don’t want to leave out Rob, the change in contingent consideration that flow through the P&L, I think that’s related to Jibe, help me just understand exactly what that means are you – is this an indication that you are expecting a lower earn-out related to Jibe?

That’s correct, they are not relating to Jibe. That was estimated at the beginning as less than we expect.

Is there a particular reason?

Well, yes. The profitability from that cloud acquisition is lower than the cap, which we established for them. We negotiated a number with the cap. We believe that they would hit that cap. If they would have hit that cap, then obviously you would see very different numbers throughout ‘18. When you look at ‘18 for us, the surprising things to us, just so that we can address that and others, one is that the transition of cloud to on-prem and especially the cloud transition has happened slightly slower and because it’s more limited in scale, we are getting lower margin and returns on it. That has been more than fully offset by the strength of the strategy and business transformation performance in the U.S., which we just said was up 20% on a year-over-year basis. And then the real surprise that we didn’t have at the beginning of the year that we kind of obviously found out as we reported Q1, is that SAP was down as much as it was on a year-over-year basis when we lost that one AMS client and we saw some channel transition as they started to – start aggressively positioning SaaS over what they call purchase. They used the term purchase for on-prem and they used the term SaaS for cloud just to compare the historical. So in their world, that disruption which Rob said we think that we understand what we have to do and have started to do is being reflected in the fact that we see stable revenues in SAP from Q2 to Q3 with lower available days. I don’t know if that’s more than you wanted, but – so yes, the liability take-down is the opportunity we now estimate from the cap that was established at the beginning that we believe will not be earned.

I always appreciate the additional color. Thanks a lot guys.

Alright.

Thank you. Our next question comes from Jeff Martin with ROTH Capital Partners. You may go ahead sir.

Thanks. Hi Ted and Rob.

Hi Jeff.

Hi, could you talk about – speak to the competitive dynamics and the overall landscape in cloud and how that – your competitive position has evolved over the course of the 12 months, it’s now more aggressively positioning and strategizing to approach that market?

Yes. Our – the competitive landscape is that there is two distinct groups. There is the – an enterprise group for larger companies and majors group, which is the middle market companies. We have continued because it was kind of – if you want to go back if Jibe came out of the majors or more middle market centric world and we were obviously serving both in EPM in our business transformation some of the larger enterprise clients. And competitively, you will see more regional organizations, slightly lower rate environments, smaller engagements in that majors group and you will see higher rate, much larger engagements that would include your typical competitors, the Big 4, Accenture, IBM and the like, which are no different than the ones we compete with in our EPM cloud business. Our standing in that group, we believe that the acquisition first was the first step. It told Oracle that we are serving Oracle Cloud broadly, enterprise-wide versus just say an EPM, a very important first step. And then secondly, last year at OpenWorld, we attended that and wanted to make sure the channel was fully aware of our digital transformation platform that we built to specifically support and optimize Oracle kind of platform. That introduction of that Oracle digital transformation platform capability has allowed us to establish, I think a very – a strong unique relationship with the Oracle channel at both levels, the higher and the, if you want to call it, enterprise and majors clients and one is probably competes a little bit more on price if you go lower end and the upper one competes a little bit more on scale and relationships as you would imagine, we believe since we do business, we compete for all of our business in the upper market that for us, it’s just a matter of time when we start getting the kind of engagements in that upper stream that are directly aligned with the client base that we have historically served. And we think that over the last year that relationship and capability with Oracles and the clients has continued to expand and it’s giving us visibilities to opportunities and hopefully it will result in us being able to close those and accelerate the pace of everything we are doing.

Okay. And if I recall correctly, the sales cycle is longer in cloud than it was in on-prem, is that accurate and how has the pipeline build progressed over the course of the last 3 to 6 months?

First, the sales cycles are not longer. It’s just a matter of whether the cloud – it’s longer only if the client is trying to – is taking a little longer to understand what that transition to cloud is for them and that could delay it for some clients, because of pricing cash flow benefits and the like, it actually facilitates it. So I am going to say that the timeline has not changed and the pipeline activity for us has continued to improve as our reputation and standing have continued to improve.

Okay, that’s helpful. Thanks. And then on the Hackett Institute side, I would imagine you are expecting that to really start to ramp in 2019 wondering if you could speak to that?

Yes. It’s increasing quarter-on-quarter. We continue to add client. We have had to make sure that clients understand that – make sure that they understand that we have fully transitioned to a new platform, because I think some of the issues we ran in – with some of our pilot clients is that they did not like the technology that CIMA had really developed for the joint venture, which we fully replaced at the beginning of this year, but we are seeing increasing activity. The biggest uptick actually happened, because we highlighted the institute, I think at a more meaningful way during our U.S. Best Practice Conference and it led to a pretty significant increase in volume into that group. So, we would expect that, if you recall, that group was accretive, we then took over all of the costs of our joint venture partner, which then made it – that it became slightly dilutive. We believe now that it is back to slightly accretive and we would expect that contribution. It’s very small at the moment, but we expect that contribution to expand through the balance of the year and into ‘19 and beyond.

Okay. And then your 20% growth rate in strategy and business transformation is that a rate that you see as sustainable help us kind of get our arms around what the impact to the overall growth rate that means?

The answer is we don’t know, but since I have a long-term growth rate of 5% to 10%, I guess the answer will be no. We really believe that both the strategy and business transformation group and our ERP and EPM and analytics group, if that – once we had year-on-year comps on on-prem that are either – the year-on-year comps become immaterial or the declines are very small, we believe that given the digital transformation demand, it’s double digit growth opportunity for both groups. So at least in the near-term, if we can eliminate the on-premise anchor, I mean for lack of a better term.

Alright. And then I noticed your single customer, top five and top ten, as a percentage of revenue increased pretty significantly, well sequentially and year-on-year, I was wondering if you could help provide some detail around that?

I mean, it’s a long standing client, but we are continually working with five or ten clients on some major transformation or technology initiative. So if you want to call it, this is a client that had a combination of both. But we have others, if you look at that top five or ten that are at or near that same scale, especially when you look at the mix of work and the profitability it contributes and the like. But it’s a global 50 company as probably the other top five are.

Okay. Thanks very much.

Thank you. Vincent Colicchio from Barrington Research, you may go ahead.

Yes. Most of mine have been asked, just a couple here Ted, just what needs to happen to hit the high end of expectations in the Q3 period?

We need – well, first of all let me – you are asking a very good question since you are accustomed to and our investor base is accustomed to us hitting the high instead of the mid. So it is important to realize that for us, it’s not what we like to do. And obviously, we consider that as we guided Q3. But I think the answer is just not have any different, any greater volatility than we currently see primarily in that Oracle business, alright. It’s just the on-premise decline surprises us in anyway, the cloud increase supposed – seems to be pretty strong. We expect it to slow and we expect it to continue to slow. So hopefully, each and every quarter that is only increasing.

Okay. Are there any changes that you are considering or need to make in the SAP business to better position yourself with the growth of the cloud?

It’s a great question. And it’s important to make sure that we characterize the SAP transition for us to be dramatically different than the Oracle transition. That is because one, our focus is on small and medium markets and a great 80% – 75%, 80% of our business is in life sciences. We are just a highly recognized SAP life science provider. Our capabilities extend to either on-prem or cloud. Our capabilities in S4 are just exceptional. It doesn’t matter to us whether the client decides to go on-prem or cloud, which is entirely different than the capabilities that we had in Oracle. Our capabilities in SAP extend throughout the entire, if you want to call it SAP suite, the entire ERP suite, which is more stable and obviously a lot harder to transition from than just the simple EPM Oracle business that we had. So it’s been a combination really from two sides. One, that SAP, clearly at the beginning of the year, clearly stepped on the gas on the incentives and its desire to sell cloud versus purchase, to use their term or sell SaaS instead of purchase to use their term. And both sales force, if you want to call it, confusion as – if it change any channel. And our – we needed to also quickly adapt and clearly understand that at the end of the day, depending on who is facilitating the client mind share, we need to follow the client script. If the client wants to go purchase instead of SaaS, they will do that, we were able to serve both. If the client wants to go fully hosted, private or public cloud we need to be able to do that. And we needed to make sure that SAP knew that even though we had been predisposed to selling and maintaining the software. We are able to do everything for a client. So we needed to make sure that any confusion for the channel was clarified and any confusion certainly for us was clarified. The only thing I can tell you about our activity there is that the early year activity that we first had experienced in Q1 relative to the activity in pipeline that we are now seeing as we go into second half is significantly improved. So we expect us – we expect to deal with it dramatically differently than we dealt with any of the Oracle transition.

Thanks guys. Nice job in the quarter.

Thank you. Vince, to you and anyone else I would always expect us to be at the high, we understand. That’s where we want to be. And I understand the question, our goals have not changed. Any other questions?

Thank you. At this time I show no further questions. I would now like to turn the call back over to Mr. Fernandez.

Okay. Then let me thank everyone for participating in our second quarter call and look forward to updating everyone when we report the third quarter. Thanks again.

And thank you. This concludes today’s conference call. You may go ahead and disconnect at this time.