Hackett Group Inc (HCKT) 2018 Q1 法說會逐字稿

Welcome to The Hackett Group First 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.

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, Rob 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 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 of the Investor Relations page on our website.

Before we begin, I would like to remind you that in the following comments and in the question-and-answer session, we will be making statements about expected future results, which may be forward-looking statements for the purposes of the federal securities laws. These statements relate to our current expectations, estimates and projections and are not a guarantee of future performance. They involve risks, uncertainties and assumptions that are difficult to predict and which may not be accurate. Actual results may vary. These forward-looking statements should be considered only in conjunction with the detailed information, particularly, the risk factors contained in our SEC filings.

At this point, I would like to turn it over to Ted.

Thank you, Rob, 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 will turn it back over to Rob and ask him to comment on the operating results, cash flow and also provide the details on our guidance. Then we will open it up. I'll provide -- he'll turn it back over to me, 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 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 and our emerging IP as a Service revenues continued to bolster our results.

Consistent with the last several quarters, the software market continues to rapidly move to cloud. This led to our acquisition of our 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.

Correspondently, we expect these initiatives will enable us to resume revenue growth and profitability targets within our long-term range objective in 2018. Another significant move we made during 2017 was to digitize all of our IP and to introduce our proprietary Hackett digital transformation platform.

By specifically building one of our first versions of our digital transformation platform around Oracle Cloud app's functionality, we have been able to quickly demonstrate how we can assess and optimize the configuration of Oracle Cloud applications. We believe these actions fully align us with the Oracle go-to-market strategy and allow us to use our unique best practice implementation IP to demonstrate the transformation of Oracle Cloud apps for the Oracle sales channels.

As we shared throughout 2017, these actions allowed us to quadruple our Oracle application's addressable implementation market and enhance our ability to grow our business. Instead of just selling EPM cloud-related software, we are now implementing Oracle Cloud software for finance EPM, HCM supply chain as well as customer experience.

Another key part of our digital transformation strategy has been to help our clients address their increasing consideration of Robotics Process Automation, or RPA, in their business transformation initiatives. By acquiring key capability and using our unique IP to help clients quickly assess their RPA opportunity, we are securing new and broader business transformation initiative, which is indicative of the growth rate we experienced in the quarter.

Last but not least, our successful introduction of our next generation benchmarking offering, Quantum Leap, in 2017, as well as our expanded -- expanding training and certification programs that further accelerated our positioning as a digital transformation and IP as a Service leader.

On the balance sheet side, we continue to generate strong profitability and cash flows from operations. This has allowed us to increase our dividend, buy back stock as well as fund acquisitions.

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'll 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; and 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. Correspondently, I will comment separately regarding the financial results of The Hackett Group, SAP solutions and the total company.

Please note that all references to gross revenues in my discussion represent revenues, including reimbursable expenses and any references to net revenues represents revenues, excluding reimbursable expenses.

Additionally, references to pro forma results specifically exclude noncash stock compensation expense, intangible asset amortization expense, acquisition-related cash and stock compensation expense, and 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 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 are project travel-related expenses passed through to a 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 excludes SAP solutions, were $58.9 million in the first quarter of 2018, an increase of 7% on a year-over-year basis. Hackett U.S. net revenues were up 6%, primarily as a result of the acquisition of Jibe in the second quarter of 2017, partially offset by greater-than-anticipated revenue decline associated with our on-premise revenues in the first quarter guidance.

International revenues led by Europe were up 13%, primarily a result of the acquisition of ICAS, also in the second quarter of 2017.

Net revenue from our SAP Solutions Group, which consists of our SAP reseller, implementation and Application Managed Service groups, or AMS, totaled $8.6 million in the first quarter of 2018, a decrease of 15% on a year-over-year basis, as expected.

Total company international net revenues accounted for 19% of total company net revenues in the first quarter of 2018 as compared to 18% in the same period of the prior fiscal year.

Our recurring revenues, which include our executive and best practice advisory and AMS groups, accounted for approximately 20% of our total company net revenues, and 27% of our total company pretax practice profitability in the first quarter of 2018.

Total company pro forma cost of sales, excluding reimbursable expenses, totaled $41.6 million in the first quarter of 2018 as compared to $40.2 million for the same period in the prior year. Both amounts represented 62% of net revenues.

Total company consultant headcount was 1,016 at the end of the first quarter of 2018 as compared to 1,011 in the previous quarter, and 922 at the end of the first quarter of 2017. The year-over-year increase is primarily due to the acquisitions closed in the second quarter of 2017, partially offset by the rationalization of resources resulting from the migration from on-premise software to cloud-based resource requirements.

As a result of the continued development and expansion of our nearshore and offshore delivery capabilities, we determined that metrics, such as rate per hour for our SAP Solutions Group, and revenue per professional for Hackett were no longer representative of the company's performance. We believe the best indication of our performance is gross margins. Additionally, we have added pro forma net earnings return on equity to our quarterly disclosures.

Our pro forma return on equity was 31% at the end of the first quarter of 2018 as compared to 33% in the same period of the prior year.

Total company pro forma gross margin was 38% of net revenues in the first quarter of 2018 as well as the first quarter of 2017.

Hackett group pro forma gross margins on net revenues was 39% in the first quarter as compared to 38% in the first quarter of the prior year.

SAP solutions pro forma gross margins on net revenues was 34% in the first quarter of 2018 as compared to 38% in the previous year. This decrease was primarily due to decreased revenues in the period when compared to the prior year.

Pro forma SG&A was $14.8 million in the first quarter of 2018 as compared to $14.4 million in the same period of the prior year, and both represented 22% of net revenues.

The increase in SG&A is primarily attributable to higher incremental cost absorbed with the acquisition transactions completed in the second quarter of 2017.

Pro forma EBITDA in the first quarter of 2018 was $11.6 million as compared to $11.2 million in the same period of the prior year, an increase of 4%, and both represented 17.2% of net revenues.

Total company pro forma net income for the first quarter of 2018 totaled $8.1 million or $0.26 per diluted share, which as Ted mentioned, was at the midpoint of our first quarter's guidance. This compares to pro forma net income of $7.3 million or $0.23 per diluted share in the first quarter of 2017. These results represent an increase of 11% and 13% on a year-over-year basis for pro forma net income and earnings per share respectively.

Consistent with our comments last quarter, our pro forma results include a long-term cash tax rate of 25% as a result of the decrease in U.S. federal statutory rates. As we disclosed last quarter, we have decided to use 2% of the 5% decrease in our pro forma tax rate with our associates by doubling our existing 401(k) contribution as well as the increased practice-related bonus programs.

GAAP diluted earnings per share was $0.23 for the first quarter of 2018 as compared to GAAP diluted earnings per share of $0.24 in the first quarter of 2017. The first quarter of 2018 has a $0.02 unfavorable impact due to income tax expense when compared to the first quarter of 2017 GAAP results.

The company's cash balances were $23.7 million at the end of the first quarter of 2018 as compared to $17.5 million at the end of the previous quarter. This increase in the first quarter was primarily attributable to net income adjusted for noncash items, partially offset by the payment of our second 2017 semiannual dividend, the repurchase of shares of several employee tax obligations for net vesting activities, and payments of incentive compensation bonuses paid relating to fiscal 2017.

Net cash provided by operating activities in the first quarter of 2018 was $17.2 million, which was primarily driven by net income adjusted for noncash items totaling $12.9 million as well as decreases in accounts receivables and increases in accrued expenses.

Our DSO, or days sales outstanding, at the end of the first quarter of 2018 was 65 days as compared to 72 days at the end of the previous quarter. During the first quarter of 2018, the company paid $4.8 million for its second semiannual dividend, which was declared in 2017. In its recent meeting, the Board of Directors declared the next semi-annual dividend of $0.17 per share, an increase of 13% over the last year, which will be paid in July 2018.

Entering the first quarter, we repurchased 228,000 shares of the company's stock at a total cost of approximately $4 million, primarily from employees, to satisfy income tax withholding triggered by the vesting of certain shares. Our remaining stock repurchase authorization at the end of the quarter was $2.2 million. However, subsequent to the end of the first quarter, the Board of Directors also authorized a $5 million increase to the share repurchase program.

I'm now going to discuss our guidance for the second quarter. We will continue to use a lower estimate of reimbursable expenses, which will unfavorably impact the year-over-year gross revenues comparisons by approximately 1%. 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 revenues, both which had historically drive much lower levels of reimbursable expenses. As such, the company estimates total net revenue for the second quarter of 2018 to be in the range of $69 million to $71 million. At the high-end of the guidance, this will represent a 4% increase from the previous year, with Hackett up 6% to 8% and SAP solutions down approximately 15%, consistent with the group's Q1 run rate.

The company estimates gross revenue to be in the range of $74 million to $76 million. The gross revenue outlook includes an estimated 7.5% for reimbursable expenses. We expect our pro forma diluted earnings per share in the second quarter of 2018 to be in a range of $0.26 to $0.28. The high end of this range, this will represent a year-over-year increase in pro forma earnings per share of 12%. We expect pro forma gross margin on net revenues to be approximately 38% to 39% in Q2.

We expect pro forma SG&A and interest expense for the second quarter to be approximately $15.5 million. We expect second quarter pro forma EBITDA on net revenues be in the range of approximately 17% to 18%. We expect our cash balances, excluding the impact of share buyback activity, to be down on a sequential basis due to the payment of estimated federal corporate income taxes in the quarter.

And at this point, I would like to turn it back over to Ted to review our market outlook and strategic priorities for the coming months.

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 the fact that they're not changing.

As we've said now for really over a year, the rapid development and 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 an entire industry at an accelerated pace, forcing organizations to fundamentally change and adopt these new capabilities in order to remain competitive. Traditional, sequential and linear-based business models are changing to fully networked and dynamic automated workflows and events with enhanced analytics. Significant change. The digital transformation era is very attractive to our organization since we believe our clients will increasingly turn to us to provide them with best practice insight on what emerging technology can deliver and what changes in business models work and justify significant investment.

In the U.S., these transformative technologies are resulting in increased activities 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 strong prior year comps. Europe has benefited from improved market conditions as well as from our EPM investments and our recent BPO and RPA advisory acquisition.

Last year, we took the necessary steps to both optimize the current performance and more importantly, to be strongly positioned for the emerging digital transformation opportunities. Specifically, we redefined our global benchmarking leadership by launching Quantum Leap, our new benchmarking software-as-a-service solution. This new platform allows us to deliver more information with significantly less client effort. It also allows our clients leverage our IP and track the transformation initiatives over the life of their respective effort.

Secondly, we launched our digital transformation platform to further differentiate our unique IP and capability. Our ability to fully digitize our IP and align proven technology and organizational solutions to help clients drive transformational change allows us to highly differentiate all of our offerings. In many ways, we believe our new platform is redefining how consulting services will be delivered in the digital era.

Leveraging our digital transformation platform to expand and attract new alliance partners that can leverage our unique benchmarking and best practice IP to help them differentiate and sell their software or services solutions. We believe this will also allow us to further expand our IP-as-a-Service solutions, which you know are contributing to our earnings nicely already.

Lastly, successfully grow and expand our Hackett Institute training and certification offerings that allow us to expand the way we use our IP to serve our clients in new and powerful ways and to also grow our business. Our long-term strategy is to continue to build our brand by building new offerings and capabilities around our fully digitized and unmatched benchmarking and best practices' intellectual capital, in order to serve clients strategically, and whenever possible, continuously. At the end of the quarter, we had over 300 executive and best practice advisory clients. And this excludes hundreds of new clients that we now serve through our IP-as-a-Service alliance or training solutions.

Lastly, we expanded our ADP offerings by launching our new ADP Workforce Now program. And we added another pile of program during the first quarter that will test our ability to help them sell and differentiate the comprehensive outsourcing solutions. These new programs expand our opportunities with ADP and are expected to grow in 2018.

In November, we launched the Hackett Institute and announced the acquisition of our partner's interest in the CGBS training and certifications programs. We have now fully transitioned to a new state-of-the-art learning system, we believe, which is better aligned with our client's demands. We have also launched, as you know, our enterprise analytics training and certification programs, and are launching some specified training in the RPA area as well. Given the unique nature of our best practice content and the favorable reaction to these new offering, we believe continuing education provides a significant high margin growth opportunity to our organization, and we expect them, both student count as well as the revenues to increase throughout 2019 as well.

Lastly, even though we believe that we have the client base and offerings to grow our business, we 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, in the first quarter, we started to see the initial benefits of our cloud and digital transformation focus and reported solid operating results. More importantly, we believe the investments we have made and continue to make in our digital transformation platform, our expanded cloud application and RPA capabilities, as well as our IP-as-a-Service offerings and alliances, will allow us to continue to drive structural growth.

As always, let me close by thanking our associates for their tireless efforts. And as always, urge them to stay highly focused on our clients, our people and the opportunities available to our organization. Those conclude my comments.

Let me now turn it back over to the operator and see if we have some questions. Operator?

(Operator Instructions) Our first question is from Frank Atkins of SunTrust.

I wanted to ask first about international revenue. I believe in your prepared remarks, you called out some year over year 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 initiatives now that you ask, Frank. We just had -- we just completed our annual Best Practices Conference, our North American Annual Best Practices Conference, which we hosted in Atlanta last week, actually, right across 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 in networking and in information sharing and solution sharing, and also -- and have always received high marks for doing that. But I opened the conference this year by actually providing, I'll call brief, but 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 exists 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 to track solutions, I think clients understand and believe, number one, that we're 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 ascribe 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 multiyear 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 a, call it, 12-week exercise. And now, we have clients that are doing multiyear signings as they want to: One, commit to the additional 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, 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, whose impact continues. I think other than that, simply, SAP is now, I'm going to say, SAP is piping more aggressive with what they referred to 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 into our VAR, into our implementation and support them. So we're simply adjusting to that SaaS model, and 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 there are -- they are starting to more aggressively market.

(Operator Instructions) Our next question is from George Sutton of Craig-Hallum Capital.

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 2 to 3 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 2:1, and that's a combination of not only -- you know 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 2 things coming into the year. We saw the stabilization of that on-prem EPM revenue, and we also continue to see rapid growth into the cloud environment. So Rob, correct me if I'm wrong, about 2:1?

Is what?

EPM versus all Oracle today?

Close enough.

There you go. 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 it to be 80/20. How long would it take to do that? Maybe 2 or 3 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 we 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 an 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 that 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 in 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, 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 it clearly -- the current environment is favorable to that business, but I think what really overwhelms the economic environment. So let's assume that we're really going to be running closer to 3, than to 2 over the -- or less, the way we have over the last several years. So that's clearly -- there's clearly more stimulus in the market and that should be favorable economically. I still believe the primary driver of activity today is the fact that all these emerging technologies allow companies -- not allow, demand that these companies consider how they impact their business and for clients to decide when and how to adopt it 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 understanding how important it is for them to assess and implement and consider these new technologies in order to remain competitive.

Got it. That makes great sense, thank you. One last question, you sort of slipped in to your ADP commentary a pilot program that you just began. Can you explain what that is?

Well, no. It's really not a pilot program with SAP. With SAP, we're simply making sure that SAP...

SAP (inaudible)...

First remember that our SAP business is primarily focused on -- SAP business primarily focused on small and medium businesses. And did you say SAP or ADP?

No, I meant to say ADP.

I'm sorry, I misheard you. The pilot program with ADP, if you remember, we had -- and I want to thank my wonderful IR person for correcting me here mid-sentence. One, that what we had is we started with ADP with their enterprise HCM 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 2 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'll call it, services suite, for lack of a better term. It's also important to note, and I did put it in my comments, but we also have installed-base campaigns that we are executing during this quarter, where we're going back to some of their enterprise clients in making, if you want, the Hackett Best Practices 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.

And our next question is from Jeff Martin of Roth Capital Partners.

I was wondering if you could comment. We're 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's the competitive differentiation?

Well, we are here into it. And I would say that, in fact, I have a chance to -- if the 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 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 2.5. We're still operating at lower operating margins. And what we're finding out, since -- just to -- back to your question, is that the onshore of -- the offsite, on-site deployment model is important. And we need to make sure that we scale that so that we are as competitive as we'd possibly be with that model. Since we're growing into our business, 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 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 margin 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 immense. 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 our IP-as-a-Service business is phenomenal and continuing to grow and expand those 2 businesses. So we say '18 sets up '19. But we know that anything across either those 2 areas, when you consider the fact that 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 in profitability and growth prospects that we hope to get back to as soon as we possibly can.

Okay. And then I have 2 quick follow-ups. Well, 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? No? What is it?

No. It was about (inaudible).

Yes, maybe $0.025, so not quite. Say $0.025 a year. But it was a nice hit.

That's helpful. And then, 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 your -- hear you...

Well, between benchmarking, transformation...

Well, I mean, I'll be honest with you. We believe that our single biggest growth opportunity exists within Oracle Cloud. We believe our single profitability opportunity exists with our IP-as-a-Service. And our strategy and business transformation group is performing at such a level that, I mean, the answer is they're performing at a 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 it creates the greatest growth opportunity. And then 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 to expand those. Those are our leverage points.

And our next question is from Vincent Colicchio with Barrington Research.

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

Well, they were never really giving us pushback. They -- 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 needed to make sure that you were 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. Look, we're continuing to see [at bats] . 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 alliance partners' interest for us to do that.

And are there any large...

(inaudible) your interest, but 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.

Our next question is from Morris Ajzenman of Griffin Securities.

A quick follow-up to the past question. You made the acquisition about a year-ago and soon closed, you talked about the opportunity to bid on larger projects, which the previous question touched on. Can you give us the size and idea of what sort of projects you are now bidding on our plan to bid on? And how that compares to the size of the 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 deals of the scale which we started to see after we acquired that broader Oracle Cloud capability. But $5 million to $10 million deals is what we'd 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're able to demonstrate that sooner rather than later, obviously.

During 2018, do you believe you'll be able to tell us -- you'll be able to have won a deal of that size (inaudible) ?

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

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

I'd say the broad marks that I was giving. First, you got to remember that in '17, the on-prem decline was so precipitous, that there was -- 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, were 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 going to be continually compromised at an opportunity for cloud because of the way the software vendors are marketing their cloud applications, as the year goes on, or as time goes on and that on-premise number continues to decline -- and you got to consider 2 things. Since the absolute number's lower going into '18, the absolute decline for us will be lower to -- 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 businesses 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 lower 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 probability at the lower end of our long-term target. '19 should be a clean slate and opportunity for us to get back to what we experienced in '14, '15 and '16, hopefully.

At this time, I show no further questions. And I would 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.