Ted Fernandez - Chairman and CEO Rob Ramirez - CFO.

Frank Atkins - SunTrust Jeff Martin - ROTH Capital Partners Vincent Colicchio - Barrington Research.

Welcome to The Hackett Group Second Quarter Earnings Conference Call. Your lines have been placed on listed-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, Rob Ramirez, CFO. A press announcement was released over the wires at 4:19 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 Q&A 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, to The Hackett Group's second quarter earnings call.

This afternoon, we reported revenues of $73.6 million, which excluding reimbursable expenses or net revenues, were down less than 1% on a reported basis and slightly up on a constant currency basis as well as pro forma earnings per share of $0.25, up 4% which came in at the midpoint of our guidance. Our U.S.

revenues were down from last year, including our acquisitions, consistent with our guidance. This decrease in Oracle -- the decrease in Oracle on-premise demand in the U.S. was partially offset by strong European results and our emerging IP as a Service revenues.

As we communicated in our guidance last quarter, we aggressively started to transition our EPM group, from being primarily focus on the implementation of Oracle EPM on-premise software to Oracle Cloud software implementation through a series of actions.

The first was through the acquisition of an Oracle Cloud implementation group and secondarily, by aggressively migrating our existing resources to match our new focus, including the increased leverage of our nearshore capabilities.

These moves have allowed us to significantly increase the addressable implementation market within Oracle from EPM to now cover the entire Oracle Enterprise Software suite. The expanded implementation capability also fully align us with the reorganized Oracle sales channel.

As a result of this expanded capability, our Oracle EPM opportunities have now increased by 20% since the acquisition.

In addition, our migration to a cloud resource model, which uses more off-site resources, will allow us to lower our cost to serve both our on-premise as well as our cloud projects, which should improve our competitive position and should be favorable to our gross margins in the future.

Correspondingly, we have been recognized by Oracle as one of their premier partners, which represents their top 10% cloud implementation partners. We have also aggressively invested in building a dedicated Oracle IP platforms -- platform, that aligns our benchmarking and best practice intellectual property with Oracle Cloud functionality by module.

We believe our ability to demonstrate to Oracle users that we can optimally and efficiently configure Oracle cloud software, leveraging our best practice IP, will allow us to further differentiate our offering and allow us to be recognized as one of their top partners in the near future.

As we have been articulating, the digital transformation era brings great long-term promise, but it comes with near-term market disruption, as our clients assess the technology provider's ability to sell and deliver on their desired functionality, security, and performance of emerging cloud applications.

Cloud application considerations also affect our client transformation initiatives, given the organizational change driven by these technologies.

The accelerating transition from on-premise to cloud applications and increasing considerations of Robotics Process Automation, or RPA, led us to move to a more aggressive acquisition and alliance strategy to address the market changes.

To ensure we stayed at the forefront of these emerging market opportunities, we acquired Jibe Consulting on the cloud side, and we acquired Aecus on the RPA side, and we also announced an alliance with Symphony to address the RPA-related offshoring service model opportunities.

We believe these moves, along with the recent expansion of our agreement with ADP, which I will discuss in more detail later, are introduction of new quantum leap benchmarking offering as well as our new Enterprise Analytics Training & Certification offerings, further accelerate our IP as a Service positioning and also expand our addressable market in key emerging areas, specifically in clouds, analytics, and RPA.

On the balance sheet side, we continue to generate strong cash flow from operation. This has allowed us to increase our dividend, buy back stock, and fund acquisitions. I also -- I will also comment further on strategy and market conditions, but let me first ask Rob to provide details on our operating results, cash flow, and also comment on outlook.

Rob?.

Thank you, Ted. As I typically do, I will cover the following topics during our call in overview of our 2017 second 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 of our financial outlook for the third quarter of 2017.

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, excludes 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 as well as transaction expenses and restructuring charges, and assumes a normalized long-term cash tax rate of 30%.

For the second quarter of 2017, our net revenues, or gross revenues less reimbursable expenses, decreased by less than 1% when compared to prior year or slightly up on a constant currency basis and was at the midpoint guidance range provided.

The actual Q2 reimbursable expense ratio on net revenues came in at 8.6% versus the 10% that we used in our gross revenue guidance. This resulted in total company gross revenues of $73.6 million, which represents a year-over-year decrease of 3% or 2% in constant currency.

Net revenues for The Hackett Group, which excludes SAP Solutions, were $57.7 million in the second quarter of 2017, a decline of 3% or 2% in constant currency on a year-over-year basis. Hackett U.S.

net revenues were down by 12%, as revenue was adversely impacted as a result of the transition from on-premise to cloud application migration activity as expected and lower than anticipated activity in some of the other Hackett practices. As expected, acquisitions previously announced added $4 million to net revenues in the second quarter.

Hackett Group annualized net revenue for professional was $317,000 in the second quarter of 2017 as compared to $352,000 in the second quarter of 2016 and $322,000 in the previous quarter.

Net revenue from our SAP Solutions Group, which consists of our SAP reseller implementation and SAP application managed service groups, or AMS, totaled $10.1 million, an increase of approximately 14% on a year-over-year basis.

Total company international net revenues accounted for 21% of total company revenues in the second quarter as compared to 14% in the second quarter of 2016. This was driven by European growth of 41%, of which was 28% when you exclude the recent Aecus acquisition.

Our recurring revenues, which include our AMS Groups as well as our executive and best practice advisory practices in the second quarter of 2017, account for approximately 20% of our total company net revenues and 27% of our total company pretax practice profitability, up from 23% in the previous quarter.

This was primarily driven from increased revenues and contribution from our IP as a Service initiatives.

Total company pro forma cost of sales, excluding reimbursable expenses, stock compensation expense, and acquisition-related cash and stock compensation expense, totaled $40.9 million or 60.5% of net revenues in the second quarter of 2017 as compared to $41.9 million or 61.4% of net revenues in the previous year.

Total company consultant headcount was 1,002 at the end of the second quarter as compared to 922 in the previous quarter and 926 at the end of the second quarter of 2016.

The year-over-year increase is primarily due to the acquisitions that were completed in the second quarter, partially offset by the rationalization of resources, resulting from the migration from on-premise software to cloud-based resource requirements.

Total company pro forma gross margin was 39.5% of net revenues in the second quarter as compared to 38.6% in the second quarter of the previous year. Hackett Group pro forma gross margins on net revenues was 40.2% in the second quarter as compared to 39.2% in the second quarter of 2016.

SAP Solutions pro forma gross margins on net revenues was 35.7% in the second quarter, as compared to 30.7% in the previous year. Last year's margin was impacted by a project valuation reserve accrued for in that quarter.

Pro forma SG&A was $15.2 million or 22.4% of net revenues in the second quarter as compared to $15.1 million or 22.1% of net revenues in the previous year. Pro forma EBITDA in the second quarter of 2017 was $12.2 million or 18% of net revenues as compared to $11.8 million or 17.4% of net revenues in the second quarter of 2016, an increase of 3%.

Total company pro forma net income for the second quarter of 2017 totaled $8 million or $0.25 per diluted share, which as Ted mentioned, was at the midpoint of our second quarter's guidance. This compares to pro forma net income of $7.8 million or $0.24 per diluted share in the second quarter of 2016.

These results represent an increase of 3% and 4% on a year-over-year basis for pro forma net income and earnings per share respectively.

Total company pro forma net income for the second quarter excludes non-cash stock compensation expense of $2.1 million, acquisition-related restructuring charges of $1.3 million, acquisition-related stock compensation expense of $616,000, acquisition-related cash compensation expense of $423,000, and intangible asset amortization expense of $532,000, and acquisition-related transaction cost of $161,000.

Pro forma results also assumed a long-term cash tax rate of 30% or $3.4 million. Restructuring charges driven by our migration to cloud applications and RPA implementations taken in the second quarter were $1.3 million.

These charges are severance costs, which primarily relate to the transition of resources driven by our migration from on-premise software to cloud-based implementations as well as the Jibe acquisition and the rationalization of global resources as a result of the emergence of RPA-related engagements considering our Aecus acquisition.

Acquisition-related cash and stock compensation expense relates to the portion of the purchase consideration for the Jibe and Aecus acquisition -- Jibe and Aecus acquisitions that contain service vesting requirements and as such, are reflected as compensation expense under GAAP.

GAAP diluted earnings per share was $0.15 for the second quarter of 2017 as compared to GAAP diluted earnings per share of $0.17 in the second quarter of 2016.

The current quarter was impacted by the acquisition-related restructuring and acquisition-related purchase consideration, which is recorded as compensation expense, which totaled approximately $0.05. The company's cash balances were $14.4 million at the end of the second quarter as compared to $17.1 million at the end of the previous quarter.

The cash decrease in the second quarter was primarily attributable to cash utilized for acquisitions and repurchases of common stock, offset by net cash provided from operations and from borrowings under our revolving line of credit.

Net cash provided by operating activities in the second quarter was $4.1 million, which was primarily driven by net income adjusted for non-cash items, which amounted to $9.5 million as well as decreases in accounts receivable, partially offset by decreases in accounts payable, primarily due to the timing of payments relating to our AMS business and decreases in income taxes.

Our DSO, or days sales outstanding, at the end of the second quarter of 2017 was 61 days as compared to 64 days at the end of the previous quarter and 57 days in the prior year. Cash utilized for purchase consideration for the two transactions amounted to $9.3 million in the quarter.

This does not include any stock purchase consideration or any contingent consideration that may be earned in the future on these transactions. During the quarter, we purchased 528,000 shares of the company's stock, at a total cost of $8 million or an average cost of $15.13 per share.

At its most recent meeting, the company's Board of Directors approved an additional $5 million increase to our share buyback authorization. As a result, our current remaining stock repurchase authorization is approximately $5.6 million.

The share repurchases and a portion of the quarter's acquisition activity was funded from our company's revolving line of credit. During the quarter, the company borrowed $11 million. The balance of the company's total debt outstanding at the end of the second quarter of 2017 is $20 million. I will now turn to our guidance for the third quarter.

Consistent with seasonal third quarter trends, we expect the impact of the additional U.S. holiday and the typical increase in time-off due to summer vacations in the U.S. and more meaningfully in Europe to unfavorably impact available days by approximately 4% to 5% on a sequential basis.

We will continue to use a lower estimate of reimbursable expenses, which will unfavorably impact year-over-year gross revenue comparisons by approximately 3%. The decrease in reimbursable expenses is primarily driven by lower expense ratios resulting from the recent acquisitions and the increase in IP as a Service initiatives.

As such, the company estimates total gross revenues for the quarter of 2017 to be in the range of $69.5 million to $71.5 million or net revenue to be in the range of $64.4 million to $66.2 million. The gross revenue outlook includes an estimated 8% for reimbursable expenses.

We expect our pro forma diluted earnings per share in the third quarter of 2017 to be in the range of $0.24 to $0.26. The high end of the range will represent a year-over-year increase of approximately 4%.

Our pro forma guidance excludes amortization expense, total non-cash stock compensation expense, acquisition-related cash and stock compensation expenses, acquisition-related transaction costs, restructuring costs and includes a long-term cash tax rate of 30%.

Sequentially, we expect pro forma gross margins in the third quarter to benefit from the seasonal reductions in U.S. payroll-related taxes, resulting from reaching FICO limits and the utilization of vacation accruals, offset by decreasing available days due to summer vacations.

As a result, we expect pro forma gross margin on net revenues to be approximately 40% to 41%. We expect pro forma SG&A and interest expense for the third quarter to be approximately $15.2 million. We expect third quarter pro forma EBITDA on net revenues to be in the range of approximately 18% to 20%.

We expect cash generated from operations to be up on a sequential basis. At this point, I would like to turn it back over to Ted to review our market outlook and our strategic priorities for the coming months..

Thank you, Rob.

As I have been covering really over the last year or so, the rapid development and move to cloud applications and infrastructure, along with improving analytics, user experience and functionality being introduced into the marketplace by technology providers is dramatically influencing the way businesses compete and deliver their services.

These technologies will disrupt the entire industry at an accelerated pace, forcing organizations to fundamentally change and adapt new capabilities in order to remain competitive. The speed of change will only be limited by the ability of technology providers to deliver required functionality and performance.

But regardless of their 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 much anticipated predictive analytics and artificial intelligence expectation.

The 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 deliver and what changes in business models work and justify significant investments and transformational change.

On a near-term basis, the active considerations of cloud, Robotics Process Automation, and the related transformation transformative process -- promise disrupts the flow of on-premise and traditional transformation initiatives meaningfully.

In addition, the transition from on-premise to cloud software offerings are being further accelerated by the increasing sales incentives as these software companies try to aggressively sell cloud instead of on-premise software.

This transition from on-prem to cloud and the related sales channel changes has and will unfavorably impact our near-term U.S. growth rates.

However, we believe that as cloud offerings and sales channel capabilities mature, that there will be an accelerated migration to new cloud software that will create increasing activity and demand for our capabilities, especially our new and expanded capabilities.

In Europe, we expect our revenues to continue to be up strongly and be favorable to 2017 growth prospects. The decision to expand our EPM service offerings to more closely [Indiscernible] our U.S. makeup several years ago is clearly being realized. We also believe that Europe strongly benefits from our recent acquisitions and alliances.

We believe we have taken the necessary actions to both optimize current year performance and also be strongly positioned for the emerging digital transformation opportunities.

With that said, we now expect this transition will lower our 2017 growth rate below the low end of our 5% to 10% long-term growth rate -- growth range, but we should be able to resume this growth rate in 2018 and with improving margins as well as visibility.

I always like to mention that last year over 85% of our revenues came from former Hackett clients and users. We referred to this group as our Hackett user or installed base.

We believe this level of client loyalty and repeat business is directly attributable to the unique value of our intellectual property and is one of the key reasons we are so positive about our long-term growth prospects.

Our long-term growth strategy is to continue to build our brand by building new offerings and capabilities around our unmatched IP in order to serve clients strategically and whenever possibly continuously. At the end of the quarter, our executive and best practice advisory members totaled 1,110 across 330 clients.

These numbers exclude the new clients that we've been adding form our new ADP, CGF and CGSB IP as a Service alliances. By the end of 2018, we now expect our IP as a Service offerings client count to exceed the total numbers of clients that we are currently serving in our existing executive advisory business.

The average spend per client in these offerings will be lower, but the contract term and margin on these relationships will be much higher as these programs scale. As we announced last year, we are now seeing new opportunities to our new alliances and channels to use our IP and to help others sell and deliver their offerings.

We launched, in late 2015, the Hackett best practice advisory program for ADP's Vantage HCM solution. We recently amended our agreement to with ADP to add a second strategic platform called Workforce Now. This addition will significantly increase our addressable market with ADP and should allow us to increase the number of clients and revenues.

In addition to the Workforce Now platform initiative, we continue to develop plans with ADP to expand our offerings to additional platforms that migrate to Vantage as well as program into a targeted part of their existing installed base.

These new programs will expand our opportunities with ADP for the balance of 2017 and even more significantly in 2018. Relative to our certified GBS program alliance with CIMA, we continued to sign up new companies and build our pipeline with global organizations with significant GBS organizations.

We now have over 166 companies who are using our curriculum for their assessment. As companies complete their pilot programs, our goal is to be able to be larger and longer term commitment from these companies currently in our pilot program. This should enable us to increase our recurring revenue per client relationships throughout 2017.

In addition, we have started to rollout our Enterprise Analytics Training & Certification course and the introduction of the Hackett Institute.

We believe the importance of analytical skills will significantly grow over the next decade as companies realize the value of data and related insight and realize the need to extend these skills throughout the enterprise.

As I mentioned last quarter, we decided to launch our offering without an alliance partner, given the unique nature of our best practice content and the recognized value we have experienced from our CGBS offering, we now believe that continuing education provides significant -- a significant corporate revenue growth for our organization.

With our recent expansion of our ADP agreement, and our newly introduced quantum leap offering, which really further differentiates our benchmarking offering to anyone else's -- to anyone in the marketplace as well as our Enterprise Analytics Training & Certification programs, our IP as a Service offerings should continue to grow and be noticeable to our 2017 results and as we have previously communicated, and become meaningful to our 2018 results.

Lastly, even though we believe that we have the client phase and offerings to grow our business, we will continue to look for acquisitions and alliances that strategically leverage our IP and add scope, scale or capability which can accelerate our growth. In summary, we reported solid results under the circumstances.

More importantly, we took the necessary actions to quickly align our skills and resource model to address key emerging areas. We believe these investments, along with our growing IP as a Service opportunities and digital transformation focus, will continue to help us resume sustainable structural growth.

As always, let me close by thanking our associates for their tireless efforts and always urge them to stay highly focused on our clients, our people, and the exciting opportunities available to our organization. Those conclude our comments. Let me now turn it back over to the operator, so we can begin our Q&A.

Operator?.

[Operator Instructions] Your first question is from Frank Atkins with SunTrust. Your line is open..

Thank you for taking my questions. I wanted to ask a little bit about the ADP Workforce Now opportunity.

Can you quantify that in any way? And what type of opportunity do you think that has for growth going forward?.

Well first, Frank, let me first thank you and SunTrust for initiating coverage with our company after our second quarter guidance. It was welcomed and we really do appreciate your involvement with the Hackett Group. Let me go back to your question. So, the impact of Workforce Now and ADP in that relationship.

To provide some relative scale and size opportunity, we believe that the Workforce Now enhances the addressable market broadly as well as the addressable client base with ADP versus our exiting Vantage opportunity by more than fivefold, which is very substantial. So, that means we will -- this program extends into smaller clients.

So, it also means that ADP felt strongly enough about the value we were bringing to their Vantage offering that they were going to give it to what is, one, if not the most popular platform for ADP at the moment, clearly, a strategic platform to say the least.

But it's also important to note, Frank, that we're still working with ADP to also expand the Vantage opportunity across other dimensions, which is migrations to Vantage, payroll-only offering, as well as to offer a program for the existing installed base. So, we believe that some or all of those opportunities will develop with ADP.

But just a Workforce Now opportunity expands our opportunities significantly and I would say it's as an opportunity to more than triple what we would have expected to get over the next 12 months from them. It could even be more. So, it's very meaningful to us.

And even though we haven't quantified that, they do not provide that client count information publicly. Obviously, we would never dare do that. But for us, I think we could easily say that it has significantly expanded our total opportunity to at least threefold from the existing opportunity.

And if the other programs that we're currently working to finalize with ADP expanded, it could go beyond that threefold opportunity. So, it's very substantial, not only over the next 12 months, and obviously ramps over that period as we launch a new dedicated portal and series of offerings around the Workforce Now platform and allow that to ramp.

And so you can just assume that it should ramp nicely over the next 12 months. And if successful, when you look at the tenure of these clients with ADP, which are extremely long, I'll just say that the average tenure with a client, I'll let them provide liberty with that as well.

The multiyear opportunity, if you were to look then three to five years successful over the next 12 months becomes meaningful to our organization the way we hoped..

Okay, great. That's helpful.

And I wanted to know if I could get a quick status update on Jibe and Aecus in terms of their performance relative to your expectations? The impact on the pipeline?.

The answer is that first -- and I think this is part of our comments. Rob mentioned that we were at the high end of what we expected both Jibe and Aecus to do it together in the quarter. We have momentum to further expand into Q3.

What we have seen is by simply integrating the two capabilities, and going back and readdressing the Oracle sales channel, we -- and less than 90 days, we've been -- our recognition within that entire channel has expanded significantly.

And that it's impacted not only we believe we can impact the wins in the level of client that the Jibe team can pursue with the Hackett brand and with our Hackett capabilities, but it's also influence the increase of our EPM pipeline.

Because, if you will recall, part of the issue that we faced exiting Q1 was not that we were not only missing out on Oracle ERP cloud opportunities that we did not have the skill to provide, but that since Oracle had integrated the EPM and Oracle ERP channels, we were losing opportunities in the EPM Channel.

So, we think we've started to reverse that EPM channel impact and it started to grow that pipeline. And I mentioned that it's growing 20% since the acquisition of our pipeline. So, that's very favorable.

I can also tell you that we significantly impacted the Jibe pipeline and that we're already competing for opportunity that they would have not seen on their own, and obviously, we would not have seen without the capability. So, we need time to build that business and then as we say Hackett has the offering, and let me spend a second on that.

If you recall, Frank, the ADP offering aligns our best practice repository intellectual capital to the functionality of ADP Vantage's functionality by module, which we're now going to also extend it to Workforce Now and create that dedicated functionality.

We have invested aggressively expect to fully completed by the end of third quarter in building out that alignment of our best practice to the Oracle ERP suite, the entire suite, by module.

And what that allows, it allows the client to quickly and in a fully automated way, if they decide, to align their business requirements to the functionality and capability of the software.

And for us, since we then have a best practice configuration tool, we can then take that client input and then allow us to create a configuration or setup plan for the client that can be significantly greater than they would get from a traditional Oracle implementation.

So, one, the acquisitions have worked well and it's worth both ways in the way we've influence channel, and we've aggressively moved to build and integrate our IP to the entire Oracle suite that we believe will start paying off as we have a chance to complete it and take it to market with these expanded capabilities Jibe brought to us..

Okay, great. Thank you very much..

Thanks Frank..

[Operator Instructions] Your next question is from Jeff Martin with Roth Capital Partners. Your line is open..

Thanks. Good afternoon Ted.

And Rob, how are you?.

How are you Jeff?.

Hi Jeff..

Doing well.

Ted could you help to better understand how the transition to cloud needs to be addressed from a service offerings standpoint? From a sales channel perspective? Just trying to get a better sense on what all is involved in the transition? What you're doing specifically? And at what kind of -- to help understand what kind of timeframe this might take..

Well, let me start right at the top. The very first thing we needed to do is to make sure that Oracle knew that we had this expanded capability. But as you can imagine, that only becomes meaningful if you have a chance to get in front of that Oracle salesforce and demonstrate how well you've integrated the two capabilities and integrated the messages.

And for us, it's integrating what differentiate Hackett, which is how we use our best practice IP to go-to-market. So, relative to quickly gaining Oracle recognition across the channel, I think we've done an exceptional job with that.

And getting in front of the channel with now meaningful opportunities, we've had a chance to get involved in some sizable ones, which is given them a chance to see us compete against what they believe are their top one or two partners in the entire Oracle integration system, and see how well we differentiated and held our own.

So, we don't expect to knock some of those out and take them from some of those integrators right off the back, but we expect to win our fair share as we build the pipeline and get our relative fair share, which we are getting as that pipeline build.

But it's a process to, one, make sure the Oracle knows what with expanded capabilities are, integrate the go-to-market message and to do that in front of a client in the Oracle channel in a very seamless way, then come back, pick up and now more formally integrate and build that Hackett IP into your message, which we're building with that Oracle platform, which that will rollout throughout the third quarter, and then, as soon as you start influence deals and closing deals, and conveying the power of Oracle Cloud apps in some differentiated way, which we have the ability to do because of our IP and we demonstrated that in EPM space, I think we will end up just getting that kind of loyalty and support the we had from the Oracle channel when it was just individually-focused on the EPM side.

So, what does that mean for us? We set the targets that we would be very disappointed if sometime in the first quarter we were not considered one of their top partners, no differently than we experienced and how their support in the EPM space.

So, give us a few quarters to get in front of as many of those people as we can, demonstrate how will we know Oracle software, and how clearly we differentiated using -- how depreciated we use it at our IP, get some wins, influence him, but should be no different than we did in EPM, so I tell -- when I speak to the investors, I tell them I cannot speak to how well we can manage the on premise decline and volatility, we know how we can get -- we can reduce the slope of that decrease.

But we feel very, very certain that we will build a top tier Oracle Cloud across the entire Oracle enterprise suite, and that that should not take us much longer than early 2018..

Okay. And then I want to make sure I understand your commentary surrounding 2018, basically, that you expected back to that 5% to 10% growth rate for the year.

Is that accurate?.

That's right. If we're correct, if we continue to build the pipeline and the pipeline we're currently building turns into wins, and we can start demonstrating a change in the cloud wins and how that scales relative to the on-prem business that.

We think we should be able to show progress to each and every quarter and that if we do that the way we think we can and start the year to where we think they can and with the status we think we can, then yes, we should be able to get back to our 5% to 10% long-term growth rate and the EPS growth rate that you've been accustomed to..

Okay.

And then could you provide some commentary around how the consultants and the salesforces is responding to this change?.

Well, the Oracle -- well first, the Oracle salesforce I think I've addressed. Our internal salesforce obviously is delighted with the expanded capability because they were starting to get this. And listen I prefer to deal with somebody that covers our entire suite instead of partial.

So, our internal sales force is obviously dramatically more motivated. On our consulting side, it is -- it's a mixed bag, and let me tell you why.

If you'll recall, the on-site requirement and the capability of a cloud versus on on-prem implementation are different, which has led us to quickly move to try the not-only certify the on-prem resources on clouded, but to also decreased the headcount, which we did in Q2 on the on-prem side, and start to aggressively hire and develop that capability nearshore, since those nearshore capabilities are going to come, in some cases, at a third to a half of our existing resources and could deliver as much as two-thirds of a cloud implementation engagement.

So, that process we have missed -- moved through swiftly. It obviously has impacted the resources we've had -- we're training as many other people as we can, as quickly as we can.

We've had to let the people go that we believe were not part of that future vision and started to aggressively hire that cloud capability, both onshore, but more aggressively, nearshore, to dramatically increase our flexibility on pricing as well as the efficiency of the delivery of the product.

Does that answer your question?.

Yes. No, that's very helpful. And then my last question is you mentioned about some opportunity for margin expansion, particularly into next year.

I was curious if you could either quantify that or give us kind of an idea of magnitude, now we're talking about 100 basis points, several hundred basis points?.

Well, let's follow the discussion I was just giving to you on that on-prem transition. The revenue per similar engagement decreases on a cloud versus on-prem transaction -- delivery. However, when you're able to deliver two-thirds -- at least two-thirds of the engagement offsite, it's also going to give us a chance to significantly reduce our costs.

So, the gross margin per implementation, cloud versus on-prem, increases. So, -- then it becomes a revenue dollar exchange. Are we going to exchange one for one? We believe that the acceleration of the cloud will be greater than the deceleration from on-premise. And we expect to find that transitioning slope no later than the beginning of 2018.

So, one, that's the dollar-for-dollar, but the profitability of that -- of the cloud versus on-prem implementation will increase. Suffice to say, is that we've got estimate. So, for me to simply put a gross margin target right now, I would rather not do that.

But I can tell you that we're targeting -- we believe that the cloud implementation gross margins would be similar or more closely resemble the kind that we see in the Hackett non-technology business or non-EPM business. So, the opportunity could be several hundred basis points..

Very good. Appreciate you taking the questions..

Okay Jeff..

Your next question is from Vincent Colicchio with Barrington Research. Your line is open..

Ted, you probably answered this, but I'm just wondering, to what extent are you relying on an acceleration in cloud adoption versus your execution to get back to the 5% to 10% growth next year?.

Well, we're really following what the software provider is seeing themselves and we're seeing how aggressively they are trying to sell cloud over on-prem. So, it is directly following the path that we're seeing from the software providers.

So, we would expect our executions -- now go back to Jeff's question, we just expect our execution and our integration and message and ability to deliver that and therefore execute at a higher level to improve each and every quarter.

So, we're expecting cloud volumes to simply follow what the software companies are experiencing, and we believe those are significantly higher. And then secondly, we expect our ability to execute to improve just by sheer number of days.

We're less than 90 days from those acquisitions, and I think our positioning and the progress we made in 90 days for us, we believe, has been very substantial..

On the sales side, historically, I recognize that your brand and word of mouth has been an important sales driver for you.

Just curious with your -- the current situation, are you planning to or have you started to expand the salesforce?.

We have not. I mean, we've took on a pretty significant salesforce from the acquisition. But no, we -- the salesforce has stayed with -- it is with some minor exceptions, right? As we're trying to shift again, we're looking on the sales side and looking at who then makes that transition from the current on-prem channel relationship to that.

But overall, look, we've had a pretty high performing channel. We've had a strong relationship with Oracle. We have equally contributed to each other's success. Our relationship with the clients are trusted and strategic.

We've been able to demonstrate how well we understand their app and we would expect that to simply happen over the next several quarters and to just go back to the same relationship and positioning we enjoy with EPM. That's what we're expecting. We don't expect anything less..

Okay. One more for me. Actually, it looks like you had a pretty good quarter.

Should we expect strength to continue there? And can you give us more color on why it was strong?.

Well, the strength came -- well, a combination. It was really a consulting opportunity following some bar activity at the beginning of the year. We do not expect it to -- for that strength to continue into Q3, but it's nothing traditionally. I mean, our activity with the channel through our bar continues to be very good.

As I mentioned, our introduction to cloud, because we're an SMB provider, we're not in the Enterprise space in SAP, has come earlier than our traditional competitor. So, we're seeing some cloud opportunities and we expect that to expand meaningfully.

So, we expect that group to perform like -- within the long-term operating range and contribute to the operating margins that we've traditionally [Indiscernible] to the marketplace..

Thanks Ted. Thanks for answering my questions..

Okay Vince..

Your next question is from George Sutton with Craig-Hallum Capital. Your line is open..

Good afternoon. This is Bill for -- calling in for George. Thanks for taking my questions. Just I understand you're optimistic about getting back to the 5% to 10% growth for next year.

But can you help us understand what you're assuming for the on-premise business? I understand that you expect the cloud to accelerate, but what are we thinking was going to happen to on-prem? Thank you..

We think the on-prem business, as we realigned our channel and resource, after we complete our realignment, will decline at about a 10% rate annually. And we expect our cloud application sales, since -- you got to remember two things. We'll more than exceed that decline once we have that slope where we want it.

And we believe that because just remember that the on-prem business is only an EPM on-prem business and that we're now -- the expanded capability significantly increases the size of the Oracle suite and therefore, the per client opportunities that we're going to pursue.

So, the combination of, what, three to four times the addressable market for us and that's what we're looking at. That expanded addressable market improved, recognition by the Oracle channel, and looking at on-prem to normalize at about 10% decline..

Okay. Thank you..

All right..

And I'm showing no further questions. I would now like to turn the call back to Mr. Ted Fernandez for any further remarks..

First, let me thank everyone for participating in our second quarter call. We look forward to updating everyone when we report the third quarter. Again, let me thank you for participating on our call. Look forward to catching up next quarter..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Everyone have a great day..