Perficient Inc (PRFT) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the 1st Quarter 2004 Perficient Earnings Conference Call. My name is Mike and I'll be your conference coordinator today.

[Operator Instructions]

I would now like to turn the presentation over to your host for today's call, Jack McDonald, Chairman and CEO. Please proceed.

This is Jack McDonald, Perficient CEO. With me on the phone today are Jeff Davis, our President and COO and Mike Hill, our CFO.

I'd like to thank everyone for their time this afternoon. We'll have about 10 to 15 minutes of prepared comments after which we'll open the call up for questions.

I'd like to ask Mike Hill, our CFO to read our Safe Harbor statement at this time.

Thanks, Jack and good afternoon.

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. 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.

Thank you, Mike.

Q1 was a great quarter for Perficient. It was an all time record for revenue, for cash flow, or for EBITDA, and for net income. It was our 4th consecutive quarter of positive EPS. So we're seeing a very strong business here and a business that's gathering momentum, as the economy improves.

We generated 1.2 million of EBITDA, and 4 cents of earnings per share. And I would know that that's fully taxed. A lot of companies out there have their earnings basically increase artificially through use of NOLs. That's a fully taxed 4 cents per share.

We added more than 14 new client relationships in Q1, and won a number of pieces of repeat business with our existing clients, as has been our practice over the past few years. A number of those clients are detailed in our press release.

We also completed a significant acquisition on April 2nd. we completed the acquisition of Genisys, a $10 million shop in Chicago. An important deal for a number of reasons. It creates critical Maths for us in that strategic Chicago market. It added a strong leadership team, in Chicago and a solid roster of Enterprise clients, great technical talent for good solutions sales delivery capability. It increases our annualized revenue run rate close to $40 million and the deal will be accretive to earnings.

We remain committed to our previously stated goal of achieving a $50 million run rate by the end of this year. We are planning one additional acquisition this year to get there, and it is expected to be in the Midwest. We're in the market right now and we're actively looking at deals.

I'm going to turn the call over now to Mike Hill to discuss our financial results.

Thanks Jack.

I'll begin with a brief summary of the Q1 results and then go into some of the details.

For the quarter ended March 31st 2004, we recognized revenue from services and software as $8 million -- a 12% increase over 1st quarter 2003.

For Q1 '04, services revenue was 6.7 million compared to 5.7 million for the same period in 2003 and 6.2 million in the 4th quarter of 2003. This represents services revenue growth of 18% over Q1 '03 and 8% sequentially. Software revenue in Q1 2004 was 1.3 million, compared to 1.4 million for the same period in 2003 and 1.3 million in the 4th quarter of '03.

Net income was 621,000, or 4 cents diluted earnings per share for the quarter, compared to a net loss of 85,000, or 1-cent loss per share in the 1st quarter of '03 and 530,000 or 3 cents earnings per share for the 4th quarter of 2003. Gross margins for services was 43% for the quarter compared to 43% for the 1st quarter of '03 and 45% for the 4th quarter of '03.

SG&A expense was 1.8 million in the quarter, which is a decrease from the 1st quarter of '03 and the 4th quarter of '03 due to cost management and improved operating efficiency. During of Q1 '04, our utilization rate, based on a 2000-hour year was 80%. And our average billable headcount excluding subcontractors was 115. Our financial position improved as a result of the positive operating results for the quarter.

Cash increased to 4.1 million at March 31st 2004, from 1.9 million at December 31st. This increase in cash reflects certain warrant and stock options exercises aggregating approximately 2.3 million during Q1. During Q1, net working capital increased 3.1 million to over $7 million as of March 31st '04. Also during Q1, we made no borrowings under our line of credit facility.

As Jack mentioned, on April 2nd 2004, we acquired Genisys Consulting based in Chicago, subject to certain purchase price adjustments. We will have paid approximately 1.5 million in cash and 1.7 million shares of common stock. A majority of these shares are subject to future holding restrictions, which expire over the next 1 to 3 years. We expect Genisys operating results to be accretive to our earnings. I'd now like to turn the call back over to Jack.

Thanks, Mike. I'm going to talk a little bit about our outlook on Q2 and beyond. We're definitely seeing an uptick in spending among our clients. We're also seeing a continuing strengthening of demand for IBM products and related services. One of the things that I'm really trying to get done to scale this business is to make sure that we not only stay relevant to IBM as a partner, but that they're really a key growth driver for us. But that, in fact, we take the position of being the number one IBM software solutions provider in the Midwest and Central United States.

And I think we've got that opportunity; I think we're incredibly well positioned from an organic growth standpoint based on our strong partnership with IBM and also from an M&A growth standpoint, which I'll talk more about in a moment.

In terms of our guidance for Q2, as we indicated in the press release, we are looking at a guidance range of 9.1 million and 9.5 million, which includes $500,000 in software sales. I'd note that this is $2.6 million above our guidance for the 1st quarter -- our original guidance for Q1. So, we acquired a $10 million business and it's a little bit higher even than that.

I'd note as well, of course, that we have a conservative forecasting or guidance methodology, which only includes software sales actually booked as of the guidance date. The service revenue that we're forecasting would represent growth of between 41% and 47% over Q2 of last year and roughly 29% to 35% sequential growth over Q1. Obviously, the acquisition impacting that. I'd also note that there's probably roughly 75,000 in revenue for the 1st couple of days of Genisys operations in this quarter, which is not included in that number since the transaction didn't close until the close of business on April 2nd.

I want to say, again, that we are committed as a company to achieving a $50 million revenue run rate by year-end. So, we're targeting, basically, 50% of better revenue growth this year. This comes after last year, where we did about 35% organic growth. Based on the 1st quarter, we're already on an EPS run rate of 16 cents annually. And that's, obviously, before the Genisys acquisition. And as I mentioned, we are planning an additional acquisition this year to get to that run rate and are actively in the market right now, looking at deals.

Turning to the longer time horizon, our goal, once we hit 50 million is to, again, double the business to 100 million within 24 months. I believe we're ideally positioned to consolidate smaller players in the Midwest and Central United States. Most of our public competitors died during the crash. So, there are basically no competing buyers out there that have public share currency and for whom doing $10 million to $20 million deals are strategic. The Big Four are not looking to buy firms that are that small. For us, these represent strategic add-ons as we move first through 50 million and then 100 million. As we talked about before, I believe -- and we're already starting to see this is that the amount of interest our stock will get, whether it's from analysts or institutional buyers, will increase dramatically as we move through that $50 million threshold, and obviously, as we get closer to $100 million.

So, we think there are a number of benefits from a Wall Street perspective, if you will, in achieving those growth milestones. Perhaps, more importantly -- or more importantly from an operating standpoint, we think there is margin enhancement to be had as that growth allows us to better leverage our existing G&A investment. We also are a more attractive employer for top-notch sales, consulting and engineering talent. We're a better service provider for our customers in terms of being a larger organization that can provide a broader array of services throughout our network. And finally, we're a more robust partner for the software companies with whom we work, like IBM. We are a -- begin to represent a meaningful part of a sale channel, at least in the e-business software category.

So with those comments I'd like to ask the operator to open the call up for questions.

Thank you, sir. [Operator Instructions]. Our 1st question comes from Brian Harvey with Kingfisher Capital. Please go ahead.

Hi. Good afternoon, Jack. I just wanted to go over a few numbers regarding the IBM business. The first being the direct IBM business percentage versus IBM reference. And then, if the acquisition that you just completed -- if they had any existing IBM business. And what sort of utilization rates they were running at?

Sure. In terms of percentage of business under -- where IBM is the customer, it's about 33% -- was about 33% in Q1. I expect with this acquisition that percentage goes to around 25%. And as we achieve a $50 million run rate at the end of the year, we'll look at that business going to around 20%. The one thing I'd note with respect to the IBM business is it's not business that represents the costs center within IBM. In other words, they mark up our services and resell them to a variety of customers. So, it's a profit center within IBM and it's a service to their customers. So, I think that's important to keep in mind that there are a number of end-user customers behind IBM, with respect to that relationship.

Ok. So, with the acquisition and other organic growth, they're going to, maybe, become less -- from 33% to 20% of your business, thereabouts?

That's right.

Ok.

And that, just to be really clear on this, that's the IBM work that we do under a -- on a subcontract basis.

Correct.

For IBM as a customer. There's a tremendous amount of work that we do, better than two-thirds of our revenue, where it's a direct to the customer relationship or a Perficient owns the customer relationship. But we're using IBM technologies. And in many cases, we're going to market in partnership with IBM through cold marketing arrangements and working with their sales people. That, to me, is the bigger long-term growth opportunity for the business, and we see that growing through time.

Ok. Regarding cash, did cash flow from operations figure for the quarter, excluding the warrant conversion and all?

Right. The basic cash position at the end of Q1 was around $4 million. But, that excludes monies that will be paid out in the Genisys acquisition because that ...

Ok. So, that's a net -- that's what I was trying to get to. That's net of the acquisition? The $4 million is net of the acquisition that you recently made?

No. no it's not. Net of the acquisition, our cash number is closer to 2 million.

Ok. And you have a line of how much?

We have a $6 million line and we've got zero drawn under that line.

Ok.

And my gut is we'll probably have some additional warrant exercises and option exercises, which will drive that cash number up in addition to the fact that we're generating cash.

Ok. Ok. I'll let someone else go. Thank you.

Thanks.

The next question comes from Steven Socanos (ph) with Perylene Asset Management. Please go ahead.

Congratulations on the quarter, Jack.

Thank you.

A couple of questions -- margins. Do you expect to, given that you're acquiring companies, do you expect to maintain the same margins going forward?

Yes. If anything, our goal is to increase our EBITDA margins and thus our pre-tax margins. You really look at this business 2 ways. You've got a gross margin number and then, of course, we look at our EBITDA margin and how that drops to the bottom line.

From a gross margin perspective, we target between 43% and 45% gross margin on services. And our gross margins in this quarter on services were about 43%, roughly where they were throughout last year, as a whole. What you'll find typically in our business is you've got -- and a lot of businesses, I guess, but particularly where you've got a -- the labor component we do, FICA (ph) and State unemployment insurance are higher in the 1st quarter than they are later in the year, because as the year progresses, minimums are met. And so, you'll have a slightly higher direct cost of sales and thus a slightly lower gross margin in the 1st quarter.

And we are, by the way, I think, beginning to see some hints of a little bit of pricing power in the market. So, potentially, looking at some improvements there. In terms of EBITDA margin, our near-term results have been coming in at around 15%, when you look at the business, overall. And a little bit higher than that if you look at just the services piece, about 16% or 17%.

Our goal, as a business, is to raise those EBITDA margins to 20% and I believe we're going to be able to do that as we scale the company and are better able to leverage our G&A investment and the cost of being a public company.

Ok. Now, with respect to the margin expansion, how do you expect to attain that? Is that -- is the Indian component -- does that play into it or is it through purely operating efficiency due to your acquisition?

Well, I think it's -- first and foremost, it's operating efficiencies due to the acquisitions. Indian and subcontractor work, this quarter, was roughly 7% of revenues, about where it was in Q3 and Q4. I think we had 1 quarter -- I think Q3 was, maybe, 10%. Q4 was 5%. So, we're starting to get to that average. I see that number growing over time. To me, the offshore component is, first and foremost, about margin retention, being able to continue to leverage our U.S. resources at top dollar, using Indian resources for the commoditized elements it deals, providing a very attractive, blended average rate for the customer that's extremely competitive in the market, but still allowing us to achieve our target gross margins on projects.

So, I see the Indian outsourcing piece as a smart and prudent market response that allows us to be more competitive rather than as a margin expansion tool.

Ok. All right, now, secondly, you're 100 million run rate. When you say 24 months out, are we talking about 24 months from now or 24 months from year-end?

From year-end.

Ok. So, you're talking about from now, roughly close to 2 years out?

Yes.

Ok. Perfect. Ok. Thank you very much.

Thank you.

The next question comes from Paul Droop (ph) with Stifle Nicholas (ph). Please go ahead.

Good quarter, Jack.

Thank you, Paul.

I was calling about -- in terms of recruiting, if you've been able to recruit some other people -- and they're good sales people et cetera? And also, your capacity.

Yes. Good question. We're definitely aggressively in the market for additional sales people and additional consulting and engineering talent. We have added a few -- couple of sales people. And so, but we've also netted 1 or 2 out that were under performing and that's the process, that churn process, which is just continually going to happen. You've really got to, I think, be willing to move aggressively on sales people. We've actually done very well. I mean our average sales person does better than 2.5 million in annual sales, which is really quite a good performance from an industry perspective.

And from a consulting standpoint, we're doing better than 200,000 a year per head, which again is very good performance. Our goal is to start growing a little bit more aggressively on the organic front to really start seeing those headcount numbers move up. We really, if you look at this over the last year, we haven't used -- we haven't really grown our full time head-count of billable revenues -- all that -- billable consultants all that much per say for the Genisys acquisition. We've achieved better revenues through higher productivity and I think you're going to see that change, I think, we're going to start adding some additional heads. I still think we'll be able to maintain these same margins but we're seeing a lot of market demand out there and so we're out there aggressively recruiting.

Thank you.

Thank you Paul.

The next question comes from Robert Maley with Proficient; please go ahead.

It's with Gilford Securities -- I wish I was with Proficient. Jack, great quarter, and congratulations on the Genisys acquisition. You just touched on one of the questions I had on recruiting -- I guess, if you could expand a little bit on that and the market overall? It's getting more competitive, less competitive but -- and also, if you can touch on utilization rates, bench time for the consultants.

Yes. In terms of the market, I think it's sort of an ideal environment right now. We're beginning to see a little bit of pricing power creep into the market. On the clock (ph) side and availability side on talent, it's really not that bad on the consulting side. I'll confess to you that finding good sales people is always a challenge and that's the one, again, where I said, you've got to be willing to deal with a little bit more churn in that.

We've got a great team of 10 sales people today. They've been doing a great job and we're going to be moving to expand that. But on the consulting side, our company has got some momentum, our name in the market place, our reputation within IBM and the job of developer community is growing stronger and stronger. And that really helps from a recruiting perspective. So, I'm more optimistic on the recruiting side than I've been really in quite some time.

From a utilization standpoint, if you look at our 1st quarter numbers, frankly, if you look at our numbers over the last 3 quarters, we've averaged about 80% utilization on our 2000-hour year. That's a more conservative way to calculate it. Some of our peers were using 1880-hour year to shorten the -- if you reduce the denominator, you wind up with a higher -- if you want to look it that way, it's closer to 85%. So we're running at very good utilization levels but at levels that we believe are sustainable.

We really are focused as a firm around core technologies and enterprise application integration in portal and middle ware and app servers. And it allows us to really have a high degree of cross-pollination. Different consultants can work on different projects, involving different technologies, because we keep it all in the same family. And when you do that, you're able to manage the business to higher utilization rates than if you had very distinct specialties. It's one of the many benefits of focus. It also helps you to own a piece of the client's mind in terms of, when do they call Proficient in. So I'm happy, very happy about our utilization rates and look forward to maintaining them.

Again great job Jack and the rest of the company.

Thank you.

Thanks.

The next question comes from John Shadow (ph) with Central Florida Asset Management.

Congratulations on a great quarter gentlemen.

Thank you.

2 real easy questions, 1 is the acquisition you discussed earlier, does that plan to be accretive, and, well, I'll let you answer that one 1st.

Yes, the acquisition will be accretive ...

Ok.

... you know, the opportunity we have out there is -- we are paying a fair price in the market, of roughly 6 times EBITDA, and we are trading at probably closer to 15 times EBITDA, so, we have an opportunity to make each one of these deals accretive from a financial standpoint.

And then, of course there are operating synergies on top of that, which we realize after bringing these companies into the Perficient fold, which allow us to essentially lower the effective EBITDA multiple that we've paid. And we are committed as a company to only doing deals that are accretive to earnings.

Ok and my 2nd question is one that comes from all my retail clients, in regards to the insider selling, that happens a lot, and I was wondering if you could just clarify for me, what's that all about and ...

Sure.

... yes.

I can speak to the 10B51 Plan that I personally have had out there. I guess what I would say, there is, other than in that 10B51 Plan, I have not sold any stock for 4 years.

The only exception to that, I think there was one year, where I sold maybe 5,000 shares to generate tax loss, but really on a -- if you look at it materially, I haven't sold any stock for 4 years.

In fact, since April 2000, I've personally bought $600,000 worth of stock, both in the market, and at times at private placements, when Perficient needed to raise money. So I was looking for some, you know, orderly diversification, and on the advice of some folks did a 10B51 Plan, that was kind of a daily plan, because folks told me that was the best way to do it to avoid impact in the stock price.

I did a 250,000 Share Plan. That plan is now done; the final shares were sold under that on April 23rd. I hold, just by way of contacts, 2.5 million shares and options, so, what that Plan had in it, was roughly 10% of my holdings.

Ok.

And you know, so there will be no -- my thought was to perhaps to sell as much as 20%. Although at this point I'm going to hold off on doing any additional sales, and I'm going to rethink the - you know whether the Daily 10B51 Plan is the best way to do it frankly. Again if it sort of the way that was recommended, and it just creates a drip-drop kind of thing that gets a little trying over time.

Sure. Ok thank you, congratulations again.

Thanks.

We have a follow-up question from Steven Socanos (ph) with Perylene Asset Management. Please go ahead.

Yes, Jack, I may have been cut off at some point during the call. With respect to organic growth, putting aside the acquisitions, what do you expect your grand organic growth to be for 2004?

Yes for planning purposes, I mean if you look at Q1, and really I think the number you need to look at is Core Services growth, because the Software numbers are a little bit lumpier, but the Core Services growth in Q1 was about 18%, and our goal was to meet or exceed that kind of a number on an organic basis, and to add to that, with additional growth through M&A.

Ok great thanks.

[Operator's Instructions].

There are no questions in queue at this time sir.

Ok thank you very much for your time and I'd like to ask the operator to wrap up the call.

Thank you sir. Ladies and gentlemen, a replay of this event is available at 888-286-8010, with a replay code of 16-36-58-40. Once again the replay can be reached at 888-286-8010 and the replay code is 16-36-58-40. Once again thank you for your participation in this call. You may now disconnect.

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