Perficient Inc (PRFT) 2022 Q2 法說會逐字稿

Good day and thank you for standing by. Welcome to Perficient Q2 2022 Earnings conference call. (Operator Instructions)

I would now like to hand the conference over to your speaker for today, Jeff Davis, Chairman and CEO. You may begin.

Thank you and welcome everybody. Appreciate your time. With me on the call today is Paul Martin, our CFO, and Tom Hogan, our President and COO. We have 10 to 15 minutes of prepared comments per usual, after which we'll open up the call for Q&A. Before we proceed, Paul would you please read the CFO's 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 meaning of the securities laws. Action results may purely differ from those discussed these forward-looking statements and we encourage you to refer to the additional information contained during FCC 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 earning press release, including a reconciliation of certain non-GAAP financial measure to the most directly comparable financial measures prepared in accordance with generally accepted accounting principles or our GAAP. It 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, we appreciate your time this morning, as we discuss our second quarter performance and continued growth, as well as our optimism for the remainder of the year. Adjust earnings PER share was up 26% during the period with revenue of 21%. North American average bill rates remained in an all-time high and offshore rates increased by double digits. While there are always project cancellations and delays, there were more than a normal number in the quarter. In evaluating each of these, we are confident they are isolated incidents, and we do not believe them to be indicative of any broader trends. These events combined with an accelerated shift to offshore modestly impacted revenue in the quarter.

In fact, our bookings and pipeline remain robust with the quarter up more than 40% versus the prior year period. Let me repeat that. Q2 bookings were up 40% organically versus the prior year period. Representing also at an all-time high for Q2 bookings. Q3 is also off to a great start. July was an incredible month for bookings. Just last week, we closed more than $55 million of bookings at a single day at a single client and we continue to pursue nearly 207 figure plus opportunities in a number of deals well into 8 figures. Organic offshore revenue grew 44% of the quarter and offshore revenue grew 93% overall. Our fully integrated global delivery model continues to resonate with clients who value the combination of our local and global reach. Offshore ADR reached an all-time high, as I mentioned before, in double-digit range, and (inaudible) the percentage of revenue delivered by our non-US colleagues. So we're delivering more and more revenue offshore, which again, as I alluded to earlier, had some impact on the top line revenue in the quarter.

We continue to scale in both Latin America and India. We recently opened a new office in Argentina, increased our office base by nearly 60% in India, expanding into new territory in Hyderabad and Pune, adding satellite offices in both Chennai and Bangalore and adding space to our facility and net core. Industry analysts and partners continue to recognize us for our capabilities and expertise. In fact, recently Forrester named Perficient a strong performer in the modern application development service provider wave. And just this week, our enterprise partner Sitecore awarded us with their sales excellence award. So a solid quarter of continued growth and with that, I'm going to turn things over to Paul for more details on the numbers. Paul?

Thanks, Jeff. Services, revenue, excluded reimbursable expenses for the quarter were $219.8 million, a 21.3% increase over the prior year. Year over year organic services revenue growth was 14.1%. Services gross margin excluded reimburse expenses at stock count was 40% for the second quarter compared to 40.2 in the second quarter of 2021. SG&A expense was $40.9 million for the second quarter of 2022 compared to $37.4 million in the prior year. SG&A expense is a percentage of revenue decreased to 18.3% from 20.3% in the second quarter of '21. Adjusted EBITDA for the second quarter of 2022 was $51.2 million or 23% of revenues compared to $39 million or 21.2% of revenues for the second quarter of 2021.

The second quarter of 2022 included amortization of $6 million compared to $6.3 million in the prior year period. The decrease in amortization is primarily due to certain intangibles for acquisitions becoming fully amortized. That interest expense for the second quarter of 2022 decreased to $0.8 billion from $3.4 billion in the prior year, primarily as a result of adopting a new accounting standard for convertible debt in the first quarter of 2022. Our effective tax rate was 28% for the 3 months end of June 30, 2022, compared to 27% in the comparable prior-year quarter. That income increased 67.6% to $27.8 million for the second quarter of 2022 from $16.6 million in the second quarter of 2021, primarily as a result of higher revenues and lower SG&A as a percentage of revenue. Diluted GAAP earning per share increases 77 cents a share for the second quarter of 2022 for 49 cents in the second quarter of 2021.

Adjusted earnings per share increased to $1.6 for the second quarter of 2022 from 84 cents in the second quarter of 2021. You can see the press release for a full reconciliation between GAAP and adjusted earnings. I'll now turn to the year-to-date results. Services, revenue, excluding reimbursable expenses were $439.3 million for the 6 months end of June 30th, 2022, a 26.4% increase over the comparable prior year period. Year over year organic growth for services was 18.4%. Gross margin for the 6 months ended June 30th, 2022 increased 10 basis points to 38.1% compared to the prior year period.

SG&A expense was $83.1 million compared to $71.4 million in the comparable prior year period and SG&A expenses a percentage of revenues decreased to 18.7 from 20.2% percent in the 6 months ended June 30th, 2021. Adjusted EBITDA for the 6 months ended June 30th, 2022 was $98.5 million or 22.1% of revenues compared to $73.6 million or 20.8% of revenues in the comparable prior year period.

The 6 months ended June 30th, 2022 included amortization of $12 million compared to $13.4 million in the comparable prior year period. That interest expense for the 6 months end of June 30, 2022, decreased to $1.7 million from $6.7 million in the comparable prior year period, again, primarily as a result of adopting the new accounting standard for a convertible debt in the first quarter of 2022.

Our effective tax rate was 23.3% for the 6 months compared to 23.6% for the comparable prior year period. That income for the 6 months ended June 30, '22, was $54.9 million compared to $30.2 million on the comparable prior year period, primarily as a result of higher revenues, the lower SG&A has a (inaudible). Diluted GAAP earning per share increased to a $1.52 for the 6 months end of June 30th, 2022 compared to 90 cents for the prior year period. Adjusted earnings per share increased to $2.3 for the 6 months end of June 30, '22 from $1.58 in the comparable prior year period.

Our ending global headcount at June 30 '22 was 5,810, including 5,455 billable consultants and 355 subcontractors. SG&A head count at June 30 was 937. Our outstanding debt net of deferred issuance cost as of June 30, '22, was $393.5 million. We also had $38.9 million in cash and cash equivalents as of June 30, 2022 and $199.8 million of unused borrowing capacity on our credit facility. Our balance sheet con continuously was very well positioned to execute against our strategic plan. I'll now turn the call over to Tom Hogan for a little commentary behind the metrics. Tom?

Thank you, Paul, and good morning, everybody. As Jeff mentioned, booking's momentum continued during the second quarter and the third quarter is off to a very fast start. Historically, we've classified large deals as those worth $500,000 or more, and we've shared our progress each quarter, winning work in that range. Given our success in the scale, we now feel $1 million and greater is a more appropriate framework, so we'll be sharing those results moving forward.

And of course at some point the future, we'll reach a place where it makes sense to again, adjust higher. We've booked 45 deals greater than $1 million during the second quarter of 2022, which compares to 28 in the second quarter of 2021. Again, we've booked 45 deals greater than $1 million during the second quarter compared to 28 in the second quarter of 2021. And in addition to that large deal volume growth of greater than 60%, the average deal size went up as well. A couple of Q2 highlights I wanted to share. We're building on a long-term partnership with a global health services and insurance company. We recently secured multi-year 8-figure deal, one of the largest in our company's history, positioning Perficient as the trusted partner for health care data and analytics modernization.

Our multi-shore team will work across several technology stacks to build a platform that provides the company with better financial data, accurate financial transactions, enhanced reporting capabilities. Not only are our global teams contributing to many of our largest accounts, they're also generating meaningful bookings. Our Latin America sales team recently pursued in one a 7-figure project providing many services to a pharmacy benefit management health care provider.

Our team will work with the provider to run all IT operations for their end client. This work will include software development, testing and support services for the end client core systems, and custom service applications. We continue to remain well diversified from a customer, industry, and platform perspective. During the quarter, health care remains solid and the financial services automotive, energy and utility verticals continue to demonstrate strong performance from a revenue of booking perspective. As we continue to land new enterprise clients and expand in existing accounts, we remain focused on investing in development of our internal systems and applications that enable us to scale more rapidly and create competitive advantages.

We've spoke in the Q4 in year-end calls about our investment in Compass, a custom-developed proprietary tool that provides our business and project leaders with incredibly detailed project performance metrics, including real-time project profitability data, as granular as the margins associated with an individual contribution to particular work streams. The tool also surfaces client insights, budget for dashboards, and even resource availability that ensures we're maximized utilization across the world.

We continue to add functionality to the tool that can further enable leaders to manage current and upcoming projects. We added alerts for senior leaders when projects or client performance metrics cross key thresholds, allowing us to proactively respond and improve financial outcomes. For project leaders, we made additional enhancements to further centralize project administrative tasks into one tool, freeing them to spend more time working directly with our clients.

Future innovation will include additional standardized reports and scale and certification management, which will make it easier to identify ideal resources for a specific project task at scale (inaudible) grow globally. And with that, I'll turn things back to Jeff to discuss the third quarter and the remainder of 2022.

Thanks, Tom. Perficient expects its third quarter 2022 revenue to be in the range of $227 million to $233 million. Third quarter GAAP earnings per share is expected to be in the range of $0.75 to $0.78. Third quarter adjusted earnings per share is expected to be in the range of $1.08 to $1.12. We expect full year 2022 revenue to be in the range of $907 million to $923 million, and we're reaffirming our 2022 GAAP earnings per share range of $3.08 to $3.19, and reaffirming our 2022 adjusted earnings per share range of $4.24 to $4.36. And let me just comment that the adjustment that we're making at the top line revenue reflects what I mentioned earlier, which were a couple of cancellations above the norm, but also a material impact of our advanced, or I should say accelerated shift to offshore, which actually is a positive. It's actually enhancing margins, which, of course, is what's enabling us to reaffirm earnings even while adjusting revenue somewhat down.

With that, we'll open up the call for questions. Operator?

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

A lot of good details here on how you're feeling about Q3 and the large deals, but I have to ask on the cancellations, just a little bit more info on what are the circumstances there? What gives you confidence that they're isolated rather than indicative of a trend? And then did they involve any maybe top 10 clients or hit any particular verticals?

That's one of the reasons that we're pretty confident or are quite confident actually that it's not a trend, it was not isolated to any particular industry. And as we looked at each of them again in isolation, it was really a function of shifting business priorities or business conditions which weren't macro-related. So again, this is a nature of the beast in this industry, it happens. It was unusual in terms of the number that we had in the quarter.

Okay. Understood. And then on the offshore impact to revenue, good to see that's a positive for profitability and that you reaffirmed bottom-line guidance, but I'm curious, is that accelerated move driven by client preferences or requests, or was it a matter of trying to absorb the amount that you had planned in the face of some of these cancellations?

No, it's really more a function of the market. So it is client preference, but a lot of it represents what would be incremental revenue to us. What I was really specifically referring to, I'll be very specific, we exceeded our forecast for offshore revenue in the quarter by more than $1 million. So if you translate that back to US revenue, it's about a $4 million difference. It's a 4-to-one ratio on the rates. And we're seeing that trend continue through the year. So again, in addition to the cancellations, that's a material component of the reason that we're adjusting revenue, and again, it did have some impact on the quarter.

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

Jeff, I wanted to just get maybe a broader sense of demand. Clearly, the bookings are positive and that's a good sign for the back half of the year, but given the economic uncertainty, and obviously you've lived through some trying times for the economy before, how is this different, if at all, in terms of client decision-making and client priorities as you look over the next 6 months and beyond?

I would say the current climate remains robust. We certainly don't want any surprises going forward, so we put what we believe is a pretty conservative guidance out there to also, again, reflect on things I mentioned earlier, but also reflect some of the volatility that exists. However, having said that, we don't believe these recent events are related to macro and the activity of the pipeline remain very robust from what we see right now. To your point, everybody in this industry is seen ups and downs and so the climate can change quickly, but I would say right now, I'm more confident than ever in terms of what we're seeing right in front of us, which is the pipeline in the bookings that we've already locked in.

Got it. And then turning to the supply side, I just want to get a sense of how are you navigating the cost pressures? I'm sure, like everyone in the industry, you're probably seeing some incremental wage inflation impact. Are you able to pass on these higher costs to your clients through price increases? Are there other levers you can pull beyond the offshore mix to help protect margins and earnings?

Actually, we are. I mentioned earlier that AVR for North America was actually up as well as substantially up offshore. Both of those increases, which I'm not going to disclose for proprietary reasons specifically, but both of those increases exceeded our cost increases, at least modestly. So we're having great success in terms of passing that on. It's the climate we're in, clients understand it, particularly new engagements in new clients, we have a lot of pricing control on that, and like I said, they're pretty reasonable and understanding.

In terms of additional capacity and other ideas, we've already begun to and will continue to bring in the largest campus recruiting groups that we ever had in our history. That's a relief area in terms of capacity, very exciting to get this new fresh blood in as well. It's great to see these guys and gals. And then also our Bright Paths program where we're pursuing underserved constituents and getting them in here as well. And those are a couple of areas that we're leveraging and I'll reiterate, and you mentioned it, but offshore is going extremely well. Very well received. And when I say offshore, I'm lobbing nearshore into that. So we're seeing a tremendous amount of demand both in Asia, specifically India, as well as (inaudible).

And just -- sorry, Jeff, one housekeeping item. I think you addressed this in response to Maggie's question, but what is the breakdown between the guidance adjustment for the cancellations versus the offshore revenue mix shift? If you could just give that detail, that would be helpful.

I don't have the specific numbers in front of me, but I would estimate it's about 50/50.

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

I know for North American billable headcount quarter end was lower than the average for the quarter, which was unusual for a growing company like Perficient is, and it's actually unusual for Perficient in general for the last several years. So with your growing revenue, I'm curious, in addition with bookings up 40%, what's behind that? Is it involuntary? Is it voluntary? Maybe some details would help.

Yes, sure, Brian. It's a combination of both and it was also a function of us allowing attrition, both voluntary and involuntary, to adjust the headcount to reflect those cancellations that we've been talking about. But, as you pointed out, that's North America. So we've continued to add headcount at a very accelerated pace for both offshore and nearshore. So again, a lot of it's the shift that we're experiencing.

Hiring in North America has picked back up in this current quarter, I assume.

Yes, that's likely.

Yes. My other question, I'm sure everyone's going to focus on the top line, given the commentary on the guidance, but in the second quarter, again, in the many years, I've covered Perficient, especially as you invest in growth, have rarely seen cash SG&A decline as much as it did sequentially in the second quarter versus the first. Was there a one-time benefit? Was there some cost cutting? Just maybe some detail behind that.

Yes, there were a number of areas where we cut cost, to your point. Obviously, we continue to enjoy scale. Q1 tends to be a seasonally high expense quarter and then, of course, a component of that, based on the Q2 result, is tied to bonus accrual. So that was substantially down from the first quarter.

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

Can you please elaborate on the comment about the client preferences for offshore? That's obviously been a secular theme for a while, but is it accelerating at this point or is there anything where you're getting a sense that there's client concerns around costs and budgets, and that's maybe perhaps driving a little bit more sensitivity to how they want their global delivery?

I think it's really us taking share, more than anything. So certainly in this climate, it's been this way for a long time, you just made this point, where clients are always looking for more for less. I would too. And so that's a factor and it's been there for a while, but it's a space that we really didn't have the critical mass to go and pursue aggressively, and we do now. So a lot of it is our own strategy that's driving it and taking share away from others that would normally have gotten that work.

And when I talk about that work, I mean combined onshore, offshore with a significant offshore component. So it's a blend of the 2. We're not necessarily competing against guys that do everything offshore, which is why our rates and margins are substantially better, but it's a blend of the 2 and that blend is increasing on the offshore side.

Got it. And then just following up on the question about the cancellations, I realize it's been asked in a few different ways, but it sounded like there wasn't a pattern whether it was industry, but anything to do with maybe the types of projects that the clients were thinking or client durations, or was it truly just everyone was literally unique to internal client reorganizations? And put another way, is that potentially a theme where, again, if we have a deteriorating economic environment, we may see more internal deliberations at clients that may potentially impact work?

Yes, it really was shifting priorities. It was businesses that might be struggling on their own, but again not a trend for their industry as an example. And frankly, one or 2 of them, I should say at least one of these and sometimes is the case is the regime change. And with that come new priorities and often new partners. So some is that. Like I said, if you take each one and its story in isolation, you won't be able to put any correlation together among them.

And then a final question here on the revision to the metrics on the deal size. Any color on what the metric would be under the old methodology of project sizes greater than $500,000?

Yes. If you look at the over $0.5 million, we did 107 in the second quarter, and that compares to 75 in the second quarter of last year.

And then in terms of just further breakdown of that number, obviously, where does the breakpoints start to move at this point? Is it $2 million, is it $5 million projects? I know that in the past you've talked about potentially even pursuing 8-figure projects. But any kind of sense of the distribution of the deals that are greater than $1 million here?

Yes. Let me have a look here. So, we have the $1 million- plus deals making up about 50% of our revenue. And that's up substantially from 40% a year ago.

Our next question comes from the line of Jonathan Lee with Morgan Stanley.

Have you seen any notable changes to engagement type over the course of the quarter, whether that's because of shifting delivery or macro-related concerns? Any sort of color that would be helpful.

Yes, not much beyond what we talked about. If anything, it improved throughout the court. If you look at bookings, and then the types of projects, their size and duration, complexity, all are increasing. And I think that's a function of our building brand. And a lot of those are with repeat customers. Much of our revenue comes from repeat customers, which I think is a testament to our quality delivery, and them having more confidence and faith, and giving us more business and letting us take on larger and more complex engagements.

That said, we've got a lot of new engagements that are starting at a higher level. The way this business works and always has is, often in a new relationship you start pretty small and build from there as you gain trust. But we're actually seeing clients willing, I think because of reputation and brand and things like that, willing to bite off a bigger chunk out of the gate. So that's helping move up the average as well.

Got it. That's helpful color. And look, historically you've been very acquisitive. Any update as to how you're thinking about future acquisitions? What are you looking for in these acquisitions, and what's the current landscape or pipeline like for targets?

Yes, so all things digital, of course, as we move our focus more and more, almost exclusively to that in terms of our revenue base. But we also really like the nearshore. That's worked extremely well for us, as the offshore continues to. So we're going to continue to look for things that are digital that also have that component. That isn't to say we wouldn't do something that was North American only, but we like the combination and we like that back end for sure.

And we're pretty optimistic. It's been a while since we've gotten a deal done. We've been in a lot of discussions, a lot of talks, and we are in later stages now with a couple of firms. So we're optimistic that we'll have a deal done here probably in this quarter, and perhaps another one before the end of the year behind that, possibly even 2 more.

Our next question comes from a line of Puneet Jain with JPMorgan.

The question on margins for this year, given a potentially higher offshore, and with further expansion into Argentina, India, what should we expect for margins this year, EBITDA margins for this year or maybe for next year? Can you remind us the margin sensitivity with increasing offshore mix?

Yes. If you look at the guidance that we reaffirmed, that's going to point to probably about 150 basis points, or more, of adjusted EBITDA expansion. And we've got a serious opportunity there that will continue for some time in terms of the scale, particularly obviously in SG and A. In terms of gross margin, I've said for some time we're going to hold it intentionally, strategically, around the 40, low 40s, as a percent, because we want to stay as competitive as possible.

We're a little more concerned about growing the top line than we are necessarily expanding gross margins. Again, that said, even holding gross margins flat, we do have an opportunity to continue to expand EBITDA. I do think, however, that gross margin can and will expand gradually. But on the face of wage inflation and everything else, we're applying some of that additional margin on a location basis, to your point, more to pricing and more to the wage increase.

Got you. And then second, Jeff, if you take a step back, look at the business, you are lot more globally distributed in delivery now. The projects that you are trying to pursue are larger than what they used to be before. Is there a risk, or rather maybe not risk, is there a consideration about project management, or contract management? A few years ago I think you talked about inside platform, a proprietary platform for project management, internal project management. Is that something that you need to pay more attention to as you become larger, as you become more distributed and service global customers?

Yes. Most definitely. And I'm not sure if you made the early part of the call and the prepared statements, but Tom covered what we're referring to as Compass, or what is our internal proprietary tool that is custom, called Compass, that does exactly what you described. It's a tool that management can use to not only allocate resources and make sure we've got the right people aligned with the right opportunities but also monitor, in real-time, the performance of any given project in terms of financial, as well as progress. So, you're right. It is important to scale the entire business, including the infrastructure, not just headcount. And we're doing that with Compass.

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

Yes Jeff, I'm curious on the health care and financial services verticals, which have been mainstays for the company in terms of growth. They were down sequentially. Should we expect a rebound in the near future?

Absolutely. Both of those are actually very healthy. And I'll make no secret, we talked about Kaiser Permanente for a long time. We did $30-some-odd million in business with them last year. I've mentioned for a long time that we're exiting that account, and that's going to be down to single digits this year. So, some of the at least year-over-year basis is coming from just that account. At the same time, we're adding more and more, and growing the existing ones we have. So, we still continue to see robust demand in health care.

Super excited about financial services. You're going to see us, I think, increase that obviously absolutely, but also relatively going forward where we've finally gotten to the point where we've penetrated more on the technology side. We've done a lot of management consulting over the years in that space, but we've been under-represented on the technology piece, which we're gaining a lot of traction with right now, and starting up a lot of new accounts and new engagements, and existing accounts. And I think you'll see that move the meter pretty substantially, material here by end of year.

And any thoughts on the changes in Columbia's government, any impact they may have on the business?

I have some concern because you never know in those situations, and I think the individual has a reputation of maybe not being the most US-friendly. However, I was at least pleased that now he's saying, and shortly after the election he's enforced that he wants a good relationship with the US. And we'll just have to see how it goes and take it as it comes. But right now, from what we understand in talking to the folks that live there, of course, and understand the climate better than I do, they're pretty optimistic.

And one thing I had there, Vince, is we did the (inaudible) acquisition last fall, which essentially broadened our delivery capability in Latin America. And as Jeff said, on the M&A front, if we do something in Latin America, we would likely again further reduce our dependance on Columbia.

And one macro question. I think I know the answer, but any easing in wage inflation in any of your geographies?

I would say it is been surprisingly manageable. It's definitely increased, but not as much as you'd think, given the lack of supply. But a lot of these folks are, I guess, gen Z, not necessarily motivated just by money. Of course, everybody needs to make a good living, and that's an important sort of yardstick for where you are in your career. But there are other factors that come into that. I think we're seeing that come into play. And we're, I think, very competitive on both the wage increases as well as new hire wages, and we're faring well in terms of landing new people. So, I feel like we've got it at the right level, and right now it's very manageable. And as I said before, our rates are actually slightly ahead of it.

Our next question comes from a line of Jack Vander Aarde with Maxim Group.

Jeff, good to see the EPS guidance range maintained for the year despite the lower revenue guide. I know you mentioned contract cancellations and offshore mix shifts as factors. But was there any other impact, maybe from currency fluctuations, stronger dollar, maybe delays in large projects, or just maybe a greater uncertainty of the timing of large projects? How much did that play a role?

That's a good question. We have FX pretty largely hedged, so it doesn't play much of a factor in reality. Of course, most of our revenue is -- no, North American revenue, so it's really more on the cost side. Again, we have that mostly hedged, and we'll continue to do that as we continue the expansion, obviously, in offshore and nearshore.

Okay, great. And then maybe just in terms of organic growth, and maybe Paul can help here, too. Any chance you can share what the overall organic growth rate was in the second quarter? And then, if you can, the implied organic growth for the third quarter guidance in the 2022 rev guide?

Sure. Yes. So the organic growth for Q2 was 14% and the guide is 11.5 to 14.5 in Q3. And 14 to 16 for the year.

Our next question comes from the line of Divya Goyal with Scotiabank.

I have a special question on the guidance for the year. You did cut the guidance down by approximately $10 million to $20 million, but you continue to maintain your EPS guidance. Do we anticipate material cost cutting here, or is it due to the offshoring, is why you see that benefit?

It's mostly offshore. We're not aggressively cutting any costs. We always try to manage costs carefully. In fact, we're actually making investments with -- obviously baked into that guidance above and beyond what we've done in most recent years, I would say. There's a little bit of a bonus reduction, but mostly it's scale.

That's great. On that same topic, could you talk to us a little bit about your expansion across India? And then currently all these offshore locations, are your cost basis, but do you see them becoming revenue basis eventually as you continue to expand your presence there?

Sure. We're going to continue to expand. I think we see the market primarily as delivery centers for US customers. The acquisitions that we did in Latin America, we do a modest amount of work for in-country customers and we'll continue to evaluate that with our scale in India and likely would pick up in-country customers, so to speak, over time there.

But there is no such plans for now?

Right now, not so much in India. We do actually do that in Latham and a little bit in China. China is actually servicing a client that we already had a preexisting relationship with in the US. But currently, no. We're managing India as basically a development center.

Perfect. And one more topic on the staffing side of things. You did mention that you're aggressively hiring and obviously, you do see a huge amount of demand, but something that is an industry-wide theme is tech services are doing well. All companies on the tech services front seem to be hiring, but could there be a risk of over-hiring or over-staffing considering your expansion across India and in general, this trend of college hiring?

Yes, I think that's a good question, and that's always a balance in this business. I think we're doing a good job with it. As I mentioned before, we've got tools in place, proprietary tools that we're using to manage the proper capacity. Again, mainly allowing attrition if we feel like we need to slow increase, more allowing attrition than slowing hiring. We've got a very real-time hiring model with 20-some-odd full-time people in our talent acquisition pool, and we'll continue to deflect that as we need.

And just my last question. On the M&A front, do you see M&A coming more from access to technology, or would it be more offshore? What are your general expansion plans in the next few quarters?

Yes, we're very interested in adding to our offshore and nearshore capacity, but also in a way that fills skill gaps, right? It isn't just a headcount play. These are targets that have a meaningful account base that we'll be introducing additional services into, but also a great talent pool that in many cases have either more depth or even unique skills that we don't have enough of, or have gaps in today.

Great. Sorry, can I just ask one more last question here? On Compass, is that an internal tool only, or is that an IP that you use externally as well?

Operator?

Yes. Can you hear me?

Yes.

All right. There was a question.

Do we have a question?

Your line is open.

Sorry, Jeff. I was just asking about Compass, as a tool. Do you use that internally or do you use that as a proprietary tool externally as well, and sell it to external customers?

Currently, it's internal, but of course, a lot of it, the information data coming out of it is geared towards driving client success. The future plans for it is to extend it actually to the client where they can log in and see a lot of these details directly.

We have a follow-up question from the line of Brian Kinstlinger with Alliance.

In your presentation, health care is 25% of revenue compared to 31% in the prior second quarter and using back of the envelope, suggesting industry contribution's down despite M&A. If I used that same methodology, retail and CPG were down as well. Last quarter, you talked about the natural conclusions of some projects. So, with the 40% increase in bookings and the solid pipeline you're discussing, when should we expect these verticals are going to return to growth?

I think you'll see it this year. I'm not sure if you caught it earlier, but some of the contributor on a year-over-year basis, material contributor on a year-over-year basis to health care, is KP. We talked about that in the past. Substantial decrease there this year, and as I think I mentioned earlier, financial services decreasing. Retail CPG, it's an interesting climate out there. Consumer-driven economy, we'll see what happens. I'm not as probably bullish on that in general as I am in health care. I do think that we'll see it increase there. I think some of the percentage of declines are actually dilution from increases in other industries.

We have a follow-up from the line of Surinder Thind with Jefferies.

A question about just your expansion in India and the addition of the new global delivery locations. Can you talk a little bit about that in terms of the relative cost of opening up a new location versus maybe expanding an existing location? Also in terms of the selection of the location, perhaps moving to smaller cities. Is there maybe a more of a work-from-home model there? How should we think about the forward-looking expansion plans versus existing real estate footprints?

During the pandemic, and what we're doing, there's a lot of work from home that was happening in India. We were pretty strategic in where we made those hires, (inaudible) worked remotely. Actually, the infrastructure we're building is just a supply for the individuals we've hired specifically in certain areas. We are expanding in Chennai, a very large city. We're actually expanding to another side of Chennai, which helps us there. Costs are relative, are good position for us there. As well as when we look at Pune, (inaudible) we have a infrastructure of team that we're providing a place them to work as they now come back into the office and provide better collaboration and get out of their homes and work more at our office space. So, the locations are very specific to hiring that we did during 2021 and currently.

I was going to say on the cost side of that, you asked about. You probably know well, it's very effective and pretty low cost. However, as part of your question, we are actually expanding in existing facilities where we can, so it's a pretty darn low-cost gamble.

Got it. And then a follow on the M&A question earlier. Sounds like you're in the process or maybe a deal this quarter, maybe something thereafter in the following quarters. Can you talk a little bit about valuations? It seems that it's been more difficult to get deals done simply because valuations are higher and they haven't quite reset the way the public markets have. Any color there in terms of the attractiveness in consideration of valuation versus the strategicness of the deal?

Absolutely. There is a higher premium today than there was a year ago and the year before that. We really haven't seen a lot of a pullback, maybe a little bit. I think the difference between that and the public market is that there are other factors impacting the public market that aren't impacting these private businesses, or our own in terms of demand. I mean, other than what we've already talked about, these folks are very optimistic. They're not desperate, and they continue to be a premium. However, again, we work hard, look at a lot of different businesses and a lot of different elements of those businesses and whether they're going to be a fit for us or not. And we will walk away from deals that we think are just too expensive, and have.

And one final housekeeping question, under the new large project metric, are you able to provide the numbers for last quarter?

Where is it? (inaudible).

Yes. 53 deals over $1 million in Q1 of '22, and 47 in the summer quarter last year.

I'm showing no further questions in the queue. I will now like to turn the call back over to Jeff for closing remarks.

Well, thank you all for your time today. While the results, I'm sure, from many perspectives were mixed, I think the outlook is fantastic. Hopefully, we conveyed that result. Thank you. And we'll be back here in 90 days with another great result. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.