Perficient Inc (PRFT) 2021 Q2 法說會逐字稿

Thank you for standing by, and welcome to the Second Quarter 2021 Perficient Earnings Conference Call. (Operator Instructions)

It is now my pleasure to introduce Chairman and CEO, Jeff Davis.

Thank you, and good morning, everyone. With me on the phone today are Paul Martin, our CFO, and Tom Hogan, our President and COO. I want to thank you for your time this morning. We have a great call ahead. As usual we'll have about 10 to 15 minutes of prepared comments after which we'll open up the call for questions.

Before we proceed Paul would you please read the safe harbor statement?

Thanks, Jeff, and good morning, everyone. Some of the things we will discuss in today's call concerning future Company performance will be forward-looking statements within the meanings of the securities laws. Actual results may materially differ from those discussed in these forward-looking statements, and we encourage you to refer to the additional information contained in our SEC filings concerning factors that could cause those results to be different than contemplated in today's discussion.

At times during this call, we will refer to adjusted EPS and adjusted EBITDA. Our earnings release, including a reconciliation of certain non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with generally accepted accounting principles or GAAP, is posted on our website at www.perficient.com. We have also posted a slide deck, which includes a reconciliation of certain non-GAAP guidance to the most directly comparable financial measures prepared in accordance with GAAP on our website under Investor Relations. Jeff?

Thanks, Paul, and once again, good morning, everyone. Thanks for your time this morning. We're excited to be with you this morning to discuss our second quarter results and provide an updated outlook for the remainder of 2021 that reflects our accelerating momentum and ongoing optimism.

During the quarter, we built on our Q1 success and continued to gain new customers, expand existing relationships and take share. As we head into the second half of the year the business has never been stronger. On the heels of 42% organic growth in the first quarter, our offshore revenue grew organically 75% during the second quarter with total offshore revenue growth of 124% during the quarter.

Our aggressive global expansion is paying dividends. Not only does it continue to enhance our ability to win larger deals, but it's enabling us to scale more rapidly with existing clients and expand margins along the way. New and existing customers continue to embrace our differentiated delivery model, which I think is really key within the industry. It couples a strong and high-touch domestic presence with the nearshore and global delivery capabilities enterprises require today.

And during the quarter, we recognized the 1 year anniversary of expansion into Colombia, South America. Our acquisition of the team now known as Perficient Latin America has become a meaningful catalyst of growth. In fact, we've added nearly 100 billable resources in Colombia since acquisition and expect this group, like our entire global delivery footprint, to continue to expand even faster on a relative basis than our domestic delivery talent, which we're also scaling more rapidly than ever before. As a matter of fact in the first quarter of 2021 -- first half of 2021, North American billable headcount grew nearly 10%. And as the second quarter came to a close, we set a record hiring more talent in June than Perficient ever has in a single month before resulting in over 16% year-over-year growth for the quarter.

Now, Tom will share the full details regarding large wins during the quarter shortly but bookings obviously remained strong. Like Q1 we closed several 7-figure deals across industries as well as an 8-figure deal in the financial services industry, which is a vertical where we're seeing strong investment interest and intent in 2021.

The pipeline, as I mentioned earlier, remains robust and importantly it's comprised not only of opportunities to expand within existing accounts but we're also in meaningful discussions with net new logos around large and long term 7 and 8-figure work streams. In fact, net new client acquisition in 2021 is another success worth highlighting. Among the dozens of net new clients we've added this year there are nine we consider very substantial large enterprises -- large enterprise accounts where we believe the potential exists for us to build long-term relationship worth many millions of dollars a piece per year.

Our strong channel relationships and key partnerships remain a significant differentiator. In recent weeks, Perficient was named the 2021 Americas recipient of Sitecore's Partner Award for Excellence in Solution Delivery as well as an Optimizely Premier Platinum partner, one of just three partners in North America way -- in North America with this distinction by the way, and a global finalist for the Microsoft Healthcare Partner of the Year award.

Now, Paul will speak to the financial results shortly. We were again pleased with the key performance metrics including utilization, which was up 2 basis points domestically and 8 points in our global development centers. I should say, 2 points domestically and 8 points in our global development centers. Our global teams are fully integrated and collaborating constantly, and our leaders are proactively managing our quickly growing talent pool across the spectrum of accounts and opportunities.

So with that, I'll turn the call over to Paul who will share the financial results for the second quarter and first half. Paul?

Thanks, Jeff. Let me start with the second quarter results.

Services revenues excluding reimbursable expenses were $181.2 million for the second quarter, a 25.6% increase over the comparable prior year period. Gross margins for the quarter ended June 30, 2021, increased 80 basis points to 38.5% compared to the prior year period. SG&A expense was $37.4 million compared to $33.9 million in the comparable prior year period. SG&A expense as a percentage of revenue decreased to 20.3% from 23.1% in the second quarter of 2020. Adjusted EBITDA for the second quarter of 2021 was $39 million or 21.2% of revenues compared to $26.4 million or 18% of revenues in the second quarter of 2020.

The second quarter of 2021 included amortization expense of $6.3 million compared to $4.4 million in the prior year period. The increase is primarily associated with the PSL acquisition. Net interest expense for the second quarter of 2021 increased to $3.4 million from $2.1 million in the comparable prior year period primarily as a result of the August 2020 convertible debt offering. Our effective tax rate for the second quarter of 2021 was 27% compared to 31.8% in the second quarter of 2020. The decrease in the effective tax rate was primarily due to lower non-deductible acquisition costs partially offset by lower tax benefits recognized related to research and development as compared to the 3 months ended June 30, 2020.

Net income increased 151% to $16.6 million for the second quarter of 2021 from $6.6 million in the second quarter of 2020 primarily as a result of higher gross margins, lower SG&A as a percentage of revenue, lower acquisition costs and lower adjustments to fair value of contingent consideration. Diluted GAAP earnings per share increased to $0.49 a share for the second quarter of 2021 from $0.20 a share in the second quarter of 2020. Adjusted earnings per share increased to $0.84 a share for the second quarter of 2021 from $0.57 a share in the second quarter of 2020. Please see the press release for a full reconciliation to GAAP earnings.

I'll now turn to the year-to-date results through June. Services revenue, excluding reimbursable expenses, were $347.7 million for the 6 months ended June 30, 2021, a 21.9% increase over the comparable prior year period. Gross margin percentage for the 6 months ended June 30, 2021 increased 120 basis points to 38% compared to the prior year period. SG&A expense was $71.4 million compared to $67.1 million in the comparable prior year period. SG&A expense as a percentage of revenues decreased to 20.2% from 23% in the 6 months ended June 30, 2020.

Adjusted EBITDA for the 6 months ended June 30, 2021 was $73.6 million or 20.8% of revenues compared to $50.1 million or 17.2% of revenues in the comparable prior year period. The 6 months ended June 30, 2021 included an amortization expense of $13.4 million compared to $8.3 million in the comparable prior year period. Net interest expense for the 6 months ended June 30, 2021 increased to $6.7 million from $4 million in the comparable prior year period primarily as a result of the August 2020 convertible debt offering. Our effective tax rate for the 6 months ended June 30, 2021, was 23.6% compared to 22.8% in the comparable prior year period. The increase in the effective tax rate was primarily due to relative decrease in tax benefits recognized related to share-based compensation deductions partially offset by lower non-deductible acquisition costs compared to the prior year period.

Net income for the 6 months ended June 30, 2020, was $30.2 million compared to $15.6 million in the comparable prior year period. Diluted GAAP earnings per share was $0.90 a share for the 6 months ended June 30, 2021 compared to $0.48 in the prior year period. Adjusted earnings per share increased to $1.58 for the 6 months ended June 30, 2021 from $1.07 in the comparable prior year period. Our total global headcount at June 30, 2021, was 4,443, including 4,108 billable consultants and 335 subcontractors. In addition, we had ending SG&A headcount of 680.

Our outstanding debt net of unamortized debt discount and deferred issuance costs as of June 30, 2021 was $188.7 million. We also had $86.7 million in cash and cash equivalents as of June 30, 2021 and $199.8 million of unused borrowing capacity on our credit facility. Again, our balance sheet continues to leave us well positioned to execute against our strategic plan. Day sales outstanding on accounts receivable decreased to 69 days at the end of the second quarter compared to 71 days at the end of the second quarter of 2020.

I'll now turn the call over to Tom Hogan for a little more commentary. Tom?

Thank you, Paul, and good morning, everybody. As Jeff mentioned, bookings remained strong in the second quarter. We booked 89 deals greater than $500,000 during the second quarter of 2021, which compares to 66 in the year ago period. And you may recall, in the first quarter we booked 92 deals greater than $500,000 compared to 71 in the first quarter of 2020. So combined, 181 deals greater than $500,000 during the first half of the year compared to 137 in the prior year period. I expect we'll see similar gains, by the way, throughout the remainder of the year.

Nearly 45% of our billable employees are now offshore, and that global talent is embedded into virtually every single large sale we win and deliver. One example of this is a recent multimillion-dollar win and account expansion at a state-licensed private health insurance company that wanted to consolidate the ongoing development of their membership experience platform under a single vendor, and selected Perficient as their primary partner. Our global team of experts will be responsible for digital experience development including new development, enhancements and testing for the provider's member portal deployment.

Jeff also mentioned the strength in our financial services vertical. We also recently expanded our relationship with a global fintech leader and our strategic partnership with a leading wealth management company to create a next-generation wealth management industry platform. Our team has been instrumental to developing, delivering, supporting and managing the program, which has resulted in improved financial advisor productivity, a richer client experience and completely digitizing their enterprise-wide operations. That success has now led to our involvement with data management, data integration and increased offshore support.

Finally, I want to take a minute to congratulate the 22 women who recently graduated from our inaugural Bright Paths program, which is designed to advance STEM education and opportunities for underrepresented constituencies and communities. We were floored with the level of progress these students made in the fully-funded 14-week program, and we're even more excited that the majority of them subsequently accepted offers to join our team full time. This pilot program was so successful, we're planning on announcing two more by the end of the year. So again, a great first half, and we're focused on even more of the same in H2.

And with that, I'll turn things back over to Jeff to discuss third quarter and remainder of the year.

Thanks, Tom. Perficient expects its third quarter 2021 revenue to be in the range of $186 million to $191 million. Third quarter GAAP earnings per share is expected to be in the range of $0.49 to $0.52. Third quarter adjusted earnings per share is expected to be in the range of $0.83 to $0.86, and Perficient now expects its full year 2021 revenue to be in the range of $723 million to $738 million. 2021 GAAP earnings per share to be in the range of $1.93 to $2.05 and 2021 adjusted earnings per share to be in the range of $3.20 to $3.30.

So with that, operator, we can open up the call for questions.

(Operator Instructions) Our first question comes from the line of Maggie Nolan with William Blair.

Tom or Jeff, I'm wondering if you can provide a little bit more detail on the growth of the offshore revenue. Is there any pattern there in terms of what type of clients or tenure, and then what type of project work that may be driving the growth here?

Yes. I'll start and let Tom add any color he may want to. But it's really a combination of a number of sources, not the least of which is existing accounts where we're expanding and taking share more into the offshore and nearshore space. So we've gained the scale in critical mass now where we're able to readily scale, as you can see, and take on more of that work at existing accounts. That said, there are many, many new accounts, most of which actually are opening up with some element of offshore or nearshore as a component of even those initial engagements. So I think it's driven from both sources. I think that continues. It's a strategic focus of ours. It's -- we're really leading with it now from a marketing and sales standpoint. So I think we'll continue to see that outpacing North America. Tom, anything to add?

No, I concur. Nothing to add.

Okay. Thanks. And then on the talent side of things, you're obviously adding a lot of talent are there any difficult geographies where you're running into trouble attracting talent or any areas where you're seeing spiked attrition? And then your kind of updated thoughts on how willing you are to use subcontractors.

Yes. I -- once again, I'll kick it off here and again, Tom, if you want to add anything. You may or may not be aware that talent acquisition along with HR actually reports to Tom now and has for some time. Obviously, talent acquisition is a key focus of ours. We've invested a lot in the talent acquisition team proper, including leadership and certainly at the recruiter level as well. Nothing stands out, specific to your question. There's no -- I say this all the time because it's true. Even when times are not as good as they are now, it's always tough to find good talent. So sure, in some of the really hot areas that we focus on in the digital space, it's a little harder to find folks, and we invest a lot organically in training and sort of growing our own. We're doing a fair amount of campus recruiting as well to supplement that. Attrition has picked up some as you might imagine. I think we had a sort of pent-up demand, if you will, and enjoyed some very low attrition during the COVID time frame or the peak of COVID, I should say. But that's I think a temporary thing and really it's only returned to kind of normal industry levels of around 20%, high-teens. So I don't think any industry -- I mean, any -- sorry, geography stands out particularly. As you can tell by the results we're having great success recruiting in India and Latin America as well as North America, and I think we're very optimistic that we'll be able to meet the demand that we're seeing. I probably didn't leave you much, Tom, but if you want to add anything go right ahead.

No, I think that's right and Maggie, you also asked about subcontractors and we continue to utilize subcontractors where it makes sense for certain skills. But we're competing quite nicely for talent. Although attrition has, as Jeff mentioned, picked up a little bit we continue to be a destination that people want to join. Our projects are exciting, our team is greater, value is great, and people really want to join an organization with the value proposition that we have. So feeling good about that right now.

Your next question comes from the line of Mayank Tandon with Needham & Company.

Let me also echo my congratulations Jeff and the team, a strong quarter. I wanted to start, Jeff, with your thoughts around the book-to-bill. I don't know if you are giving specific metrics around bookings, but if you could provide any sort of qualitative color if not quantitative around how that's been trending, maybe more by vertical if you're seeing strength across the board or are you seeing any sort of pockets of weakness that might end up picking up the slack, and then that could be a potential upside catalyst as you move through the back half of 2021 into 2022?

Yes. I think it's really kind of a tide lifting all boats. And I'll tell you, Mayank, I think a lot of it has to do -- I think there's a little bit of kind of pent-up demand if you will from -- again from the peak of COVID although I think it's far less that than it is the sort of culmination or coming to -- into fruition. All the investments that you've heard me talk about for some time now around our sales team as well as our marketing lead generation, all those things have matured very nicely over the last couple of years. And I think we were beginning to see some of that in '19. COVID was a little bit of a setback. But I think that's driving a lot of it now. In terms of industry, I mentioned during the prepared statements that financial services is really picking up nicely for us. We've got a very strong management consulting capability within that space, and I've always felt like we've been underrepresented on the technology side, and that's changing. We've mentioned an 8-figure deal there, we're seeing a lot of nice pickup there. I would say I feel pretty good about our representation across industries and don't really feel like there's any that necessarily represent any big opportunity or any big catalyst down the road outside of financial services. In terms of bookings, yes, we don't provide specifics but I can certainly provide some color. We are in the last -- about trailing 5 months is about the thing that we focus on most. And I can tell you that the bookings certainly reflect what we're seeing in the revenue, and there's more to come. We've had very, very strong bookings this quarter and particularly if you look at that trailing 5-month metric it looks very, very strong. I will tell you our backlog as we sit here today and even looking forward into 2022, particularly into the first quarter, because a lot of the bookings that we're realizing now will be again the highest correlation to revenue will be in the beginning of next year is very, very strong. The backlog is the largest it's ever been of course in absolute dollars no surprise there but it's also the largest as a percent of our look forward forecast. So we're very excited. We're very confident in the sustainability of what we're seeing right now based on the bookings we're enjoying right now and the pipeline behind that just continues to rebuild. So we've got a very, very great amount of confidence around again, the go-forward and the bookings are certainly supporting that.

That's very helpful color, Jeff, and then a really quick one around margins. Given some of the headwinds around wage inflation, given the strength of demand, you mentioned the attrition rates, et cetera. is pricing starting to uptick given the demand backdrop to help maybe offset some of those headwinds, along with the offshore mix to drive the margin expansion that you typically targeted or are you seeing any sort of changes on that front as you move forward?

Yes, I think our margin expansion -- and I mentioned this at the beginning of the year. So at the beginning of the year I said we're expecting maybe 50 to 100 bps in gross margin, about $150 million to $200 million in EBITDA. The big difference there being scale and I think we're going to continue to see that. We're running about 40% adjusted gross margin right now and we like that. I think it's a healthy number for us, so we're not pressing to drive rates up too much. We're much more focused on that top line growth. That said, we do intend to maintain and possibly expand modestly that 40%. But again, I think we'll end up right in that sort of $50 million to $100 million range for the year. Next year, I would expect something similar. Again, it's too early to really say. But yes, I do think you're right. I think even in order to maintain the 40% the industry in general is tightening and we'll see some price upticks and we certainly are right now. At the same time, we're winning these really large deals that do require -- or I should say, are more competitive and require a little more aggressive pricing. At the same time, you have less turnover on those deals, right? So even though the rates may not be as high, the margin is still good because you've got higher utilization and you have less churn of the folks hitting the bench in between projects. So again, I feel very good about keeping that 40%, 40-plus percent intact and likewise I think we'll continue to see solid expansion of the EBITDA line.

Our next question comes from the line of Surinder Thind with Jefferies.

One of the things that I kind of wanted to get a little bit more color on is just understanding the visibility that you have in the quarter and how that progresses. So can you walk me through when you last provided guidance and then kind of where we ended up in terms of coming in above the top end of that guidance? Is that a case of where just there's so much client demand and the reservation or the conservation -- conservatism comes from being able to find enough people to fill that demand or how should we think about how demand is evolving and how that could potentially evolve on a go-forward basis?

Yes. I think, literally, as you noted it's a pretty dynamic forecast driven largely by a dynamic market of course. And I think we always try to build in some level of conservatism assuming that maybe not all these deals are going to close or that we're not going to be hitting necessarily on all cylinders. And I think things came together even better obviously than we expected. And we've tried to get a little more, I'd say, a little less aggressive or a little less conservative going forward, a little more aggressive in terms of what we put out there for this quarter and the rest of the year. But that -- at the same time we feel very, very comfortable in it. In terms of visibility, which you opened with, that tends to vary as well. But as I said earlier, we've got a bigger backlog, both absolutely and as a percent of our overall look forward than we've had before. So that's given us the confidence to sort of raise guidance obviously and feel very good about and very confident in what we've put out there. So we do try to be conservative. We were probably overly conservative in -- with the benefit of hindsight in the second quarter. That's a good thing, I think. And again, we've tried to get a little more aggressive or a little less conservative going forward because things are going that well, the pipeline is that strong, bookings continue to perform at a level above historical. And at the same time, I think that's sustainable.

That's helpful and then maybe as a follow-on it sounds like perhaps the win rates were maybe a little bit better than they have been historically, is that the right way to think about some of the commentary you just made about things coming out really good in terms of some of the deal wins and stuff or how should we think about things competitively at this point versus maybe where things were historically?

Yes. I think our win rates are in line with historical. I expect that, that will continue. I expect that they may even tick down. And what I mean by that is, I alluded to it earlier, but we've added a ton of capacity in sales and keep in mind that we added -- we've been adding at every year really every quarter, every month. And a lot of those folks that we've added are coming into their own. I mean, they're maturing, right. So if you go back people that we hired 2 years ago are really beginning to hit their stride. And so I think that's a part of what we're seeing right now and I mentioned this earlier is that we've gotten a lot more effective at recruiting, onboarding and supporting our sales team and their success and that's another factor in all this that is relatively new. Again I think we would have seen it last year if not for COVID, we saw a little bit of it in '19 but I think that's another major factor going forward. So in fact, win rates are great. We are still better than 50% against the competition and even playing field actually closer to 60%, around 60% but again, I wouldn't be shocked if that actually came down a little as we're getting more advanced.

Got it. And then related to just kind of the demand environment, can you talk a little bit about utilization? One of the things that I was looking at was the headcount growth? Obviously you're adding at a very fast pace at this point, how sustainable is some of that as you kind of look further on? Obviously, you're trying to balance or use a crystal ball to figure out demand longer term but at the same time is there any -- are you also addressing perhaps elevated utilization levels at this point or how should we think about that dynamic?

We actually really feel good about utilization. We've talked about kind of 80%, 81% is a sustainable goal across the year, right, and that's seasonal to some degree. So first quarter, fourth quarter are going to be a little bit lower end of that or maybe even in the high-70s percent although I think this year it will be in the low-80s percent. And then it does peak up, tends to peak up in Q2 and 3. So we're running 82.5% I think or something like that in the first quarter in North America and similarly, offshore. Interestingly, most of our competitors run higher utilization offshore than we do simply to -- because we're recruiting as much as we are and hiring ahead so that we're prepared for that -- have that capacity to be prepared for that additional demand. So I think we're comfortable, very comfortable with where utilization is right now. As I mentioned before the recruiting arm is -- talent acquisition arm is working extremely well both in North America and elsewhere. We're having great success. Tom mentioned it. People are excited about the Perficient story, so we're taking employees away from competitors. And at the same time, as Tom mentioned, with Bright Paths, I mentioned with college recruiting, we're also bringing in new sources, right, new sources of supply and doing training on our own and we're really ramping up the capacity and scalability of that as well. So I think things have gone really well. I think that will continue going forward. And I think, honestly, we just continue to tune that and get better and better at it. Now like I said, I think the -- as Tom mentioned earlier, I think the Perficient story from a recruiting standpoint is super strong.

Our next question comes from the line of Brian Kinstlinger with Alliance Global partners.

As you continue to shift your mix in delivery I guess I'm curious -- and you mentioned you're not going to get much higher than 40% margins maybe at short term, I don't know if it's long term, I'm curious what the long-term adjusted operating margin or EBITDA margin however you're looking at it is, where do you think long-term offshore onsite delivery mix can mature to for your company?

Yes. It's a great question. I mentioned during the prepared statements that onshore is growing extremely well, and I think this is really important for people to understand something that's extremely unique about us compared to our competition onshore, offshore or nearshore is that we have the combination of all three. We've got a phenomenal onshore capability that's high-touch, strategic, helps clients drive their business goals and understand that, and how to support those through systems and technology. And then we've got this great delivery development capability of super bright, intelligent, great folks offshore and nearshore. So if I had to guess I'd like to see us getting to about a 50-50 mix in terms of revenue but on a positive note onshore keeps growing too. So I think it's the combination is that model that continues to grow together. Now of course offshore is a nearshore outpacing, so I do think that it will be a while maybe before we get to kind of the 50-50 mix. But it's a really powerful combination and it's really resonating very well. I was just with one of our largest clients the other day and they commented that -- and this is them comparing us to Accenture and larger competitors that no one else has presented us with the sort of global capability of offshore or nearshore or onshore, and the strength that they've witnessed in each of those in terms of our delivery capability and the skill set. So I think that's a very differentiated model, and it's something that's working extremely well. If you look at us compared to offshore or nearshore competitors, I won't name we all know who they are, we're growing 75% and they're doing great. They're growing at 25%. But if you look at the like-for-like, right, that $35 to $40 an hour range of services we're growing 3x as fast as they are. So -- and I think that's because of that combination.

So does that suggest that you can sustain roughly 100 basis points plus or minus in a given year margin expansion as long as you grow double digits?

Yes. And so -- yes, I'm sorry, back to your EBITDA question. I think so. I do think we continue to expand EBITDA. Now keep in mind that we will want to, and we already are, but we're going to want to continue to reinvest in the business. But I do think adjusted EBITDA continues to expand. I think we'll end the year around 20% maybe above 20% literally end the year above 20%, but have for the total year 20-or-so plus percent. I think that's implied in our guidance. And I think we can add to that next year. I think 100 bps is a real reasonable expectation for next year. And again, it's the power of -- the economies of that scale as we continue to grow the business at the pace we are, I think absolutely can deliver that kind of expansion.

Great. My other question is, it's been quite some time by Perficient standards since you've completed an acquisition. Is that because there's so much organic opportunity, are valuations too high right now or maybe some other reasons? So if you can just maybe help us or walk us through what you're thinking today about M&A?

Yes, absolutely. No, we've been very active on the M&A front and I think it's a combination of all those things that you mentioned, not -- except the organic. Like I said we're still as active and aggressive on M&A as we've always been. Valuations in some cases have gotten a little nutty and I think if you've followed Perficient for very long you know that we've got a very disciplined program and we're happy to wait for things to come around if we need to if we feel like a deal is that overvalued. However, that's not necessarily the issue. I think a lot of these entrepreneurs are looking around at a very healthy environment and are feeling like they're going to hold on to their businesses. So we're seeing a combination of all those things. Frankly, I think the cap gains rate uncertainty is a factor as well and the threat of that being retroactive I think has impacted us. All that said, we are actually in advanced stages right now with an acquisition. So I do think we'll get another deal or two perhaps even three done before the end of the year. It's just been a matter of again, those things aligning to our standard, to be honest.

Your next question comes from the line of Puneet Jain with J.P. Morgan.

Jeff, how do we reconcile a strong pipeline and bookings and the comments around improved win rates with sequentially flattish to modestly up revenue growth implied in the guidance? From Q1 to Q2, you grew 10% on a sequential basis and do not expect as much growth in the second half, is it just like the normal seasonality or is there some conservatism baked in the guidance?

Well, I think on a year-over-year basis the guidance implies basically the same growth for the second half that we enjoyed in Q2, which is actually higher than the first half, which would imply better growth in the first half. Comps pick up a little bit in -- particularly in Q4, so I think the comps weigh into that. And I think we're trying to be reasonably conservative. As I said before, we got a little more aggressive than perhaps we've been in the past, but I think we're still trying to be conservative and make sure that we deliver what we say we're going to deliver.

Got you. And I'm sorry, you might have addressed this before, what are you seeing for wage inflation like a lot of your peers specifically in India are talking about seeing a spike in attrition rates, spike in wage inflation, are you also seeing increased inflation rates among your employee base?

Not really, actually. I think that speaks again to the uniqueness of the opportunity that we have here. Firstly, I'll say that I think we already pay a competitive wage. I think that's one of the reasons that we're able to attract the talent that we attract from some of our competitors, and that is -- that I think we've got a better compensation and benefits package than they do anyway. So I think we've already got that advantage. And so right now, we're not seeing sort of runaway wage inflation. We're anticipating a sort of standard merit increase levels that we've basically applied over the last couple or 3 years, maybe 0.5 point more. But for the most part -- and the attrition by the way both in Latin America and India have been quite similar to here. And really, our experience I think is far better than our competitors. And again, I think it's all those things that we talked about before. I think it's culture, I think it's already paying a competitive wage to begin with and quite honestly, I assume they've got some catching up to do.

And our next question comes from the line of Vincent Colicchio with Barrington Research.

Yes. Jeff, I'm curious with the nice growth in larger deals, are you seeing a flattening of the pyramid benefit margin?

Yes. I think so. And now of course, the base of that pyramid is shifting more to offshore or nearshore, I want to be careful about that. They have their own pyramid as well. Those folks are similarly or equivalently talented, skilled, experienced as onshore. But yes, obviously, there's some scale there with these larger deals. At the same time those deals do tend to be a little more price competitive. So I think it's a balance or balance is there. I do think -- we made some temporary discounts to some of our larger accounts that we're seeing kind of roll off now. So again, I think it's quite possible we'll see rates pick up a little bit in the second half. But I'll tell you, our primary focus right now is preserve margins, expand modestly gross margin, you heard me say it before, and focus on top line revenue growth.

And my understanding is the pandemic has been fairly rough in Colombia, has that caused any challenges in terms of employees getting sick and needing to increase a cushion of lower utilization rates to kind of protect yourself there?

Yes. It's been -- our experience has been pretty positive. The demographic, right, of our employees is a little different than probably the average in both India and Colombia. And so without getting into anything geopolitical our experience has been pretty good. I mean, obviously, the whole pandemic's a travesty and has a lot of -- made up of a lot of personal tragedies but our folks are younger, they tend to be healthy, and the biggest disruption sadly tends to be a family member falling ill or worse and them needing to take some time to deal with that. But in spite of that, utilization has maintained or even ticked up. So knock on wood, so far, I would say that our teams have been resilient and done an amazing job of dealing with a terrible situation and really the impact to Perficient has been minimal.

And what was your organic growth in the quarter? I missed that.

21.5%.

Your next question comes from the line of Jack Vander Aarde with Maxim Group.

A couple of questions maybe for Jeff. Clearly, organic growth has been solid, it's really rebounded. It sounds like from another analyst question there's a lot of activity going on behind the scenes still for acquisitions, that's good to hear and I know you guys are very thoughtful in finding the right fit, so that's all fine. I guess I want to revisit your bigger picture kind of multi-year outlook view for organic growth. I think prior to COVID you guys were targeting like -- maybe like a general rule of thumb like a 10% or so organic growth kind of like a sustainable target you're far outpacing that for this year now in 2021 obviously, but just -- is there anything change in terms of when you look at like the next 3 years, 4 years out? Any reason you'd expect changes to your kind of target organic growth outlook of say, 10% or whatever it is?

Yes. I think that's right. I mean I think it's sort of a stair-step function, right. Once you get to one level then you raise the bar and move to the next level. So I feel like 10% is probably in the rearview and yes, we feel really good about moving that target up to probably mid-teens or better sustainably. And again, I'll go right back to what I had said before about the maturity and the effectiveness of our marketing, everything from the whole sales cycle, right. Everything from marketing, lead gen, our partnerships and probably most importantly, the capacity and the management team that we've added around sales that we continue to build on. So we continue to add capacity ahead of growth so that we're fueling that next level. So yes, I would say that again hopefully the 10% is behind us and we're moving on to 15-plus percent.

Fantastic. And then question for Paul maybe more of a clarification or definition kind of question on organic growth. So when we're looking at the third quarter revenue guidance I guess first question is, is there an underlying organic revenue growth in your third quarter revenue guidance?

Yes. So the guidance is, I think, 18% to 21% in Q3 and because of the timing of acquisitions essentially everything will be organic effective for Q3 because we haven't closed any acquisitions since June of last year.

Okay. Great. So that was the question I was kind of walking towards is the denominator in your organic growth formula now is much more simple. When I see your organic and your total revenue growth for the third quarter, we've passed the 1 year mark now from the last acquisition, so organic is synonymous now with total revenue growth.

Right. And then of course if we close another deal then that will change a bit. But yes, for now that's where we are.

Great. And then just a follow-up question on revenue. The revenue beat for the second quarter and then the full year revenue guidance raise, I think the second quarter revenue will beat the midpoint of your guidance by about $8 million or so. And then -- but the full year '21 revenue guidance was significantly increased but well above that beat which tells me you have a lot of confidence. Obviously your comments about the pipeline and the backlog is strong, everything seems very solid here. But just because of the size of the full year raise of revenue, is this -- would you attribute this -- can you split this between organic growth outperformance offshore and onshore and then I guess that's really the only way to split it at this point now. So how much of that raise is offshore and onshore outperformance?

Well, keep in mind that offshore is still -- even though it's growing very, very quickly still only about 15% of revenue. So it's -- I would say that, let's call it, 20%. And the lion's share of that is still going to be onshore just by the -- what is it, 4x rate differential. So probably something around 15% and 5%, somewhere in that range. We did -- I mentioned, at least from a headcount standpoint, we grew onshore 16% organic in the second quarter. So I think we're seeing that demand and that mix of demand continuing. I think offshore will still be above 50%. I don't know if it will hit 75%, could well do that. But I would say the breakdown is probably something along those lines, 15% and 5%.

Thank you. I'll now turn the call back over to Chairman and CEO, Jeff Davis, for any closing remarks.

Well, once again, everyone, thank you for your time today. Obviously, you can see and hopefully hear our excitement and what I think is another sort of era for Perficient, and you can also tell I think that we're very bullish and confident. In fact, I'll leave you with this thought. Our focus and attention is more on 2022 right now than it is the rest of 2021, which given that we're only halfway through the year that's kind of a unique statement for us. And -- but that will give you some idea again about our confidence in our outlook. So thank you for your time today and look forward to talking again in another 90 days. Take care.

This concludes today's conference call. Thank you for participating and you may now disconnect.