Perficient Inc (PRFT) 2004 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the quarter two Perficient earnings conference call.

[OPERATOR INSTRUCTIONS].

At this time I will turn the call over to your host Jack McDonald, Chairman and Chief Executive Officer. Sir over to you.

This is Jack McDonald. With me on the telephone this afternoon are Jeff Davis, our President and Chief Operating Officer and Mike Hill, our CFO.

I would like to thank you for your time this afternoon. We will have about 10 or 20 minutes of prepared comments after which we will open the call up for questions. Mike Hill will now read our Safe Harbor statement.

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 filing concerning factors that could cause those results to be different than contemplated in today's discussion.

We will follow a simple format for today's call. First a review of our business and financial performance in the second quarter and then our outlook on revenue for Q3 and again after that we will open it up for questions.

We had record performance in Q2 in revenue, in EBITDA and in net income and we significantly achieved our $50 million revenue run rate goal six months ahead of schedule. I think we are demonstrating that we are on plan to reach our objective of $100 million in revenue by the year-end of 2006. We are executing extremely well with the acquisitions that we just completed, we are now the number one IBM WebSphere solutions provider in the Midwest with a very strong partnership with IBM and I think the very good market presence and that market presence is giving us advantage not only in terms of our organic growth but also in terms of our M&A activities as our name becomes better and better known throughout the region. So I really think in a very true sense we are just getting started.

If you look at some of the accomplishments in Q2, revenue was up 66%, cash flow or EBITDA was up 99% and earnings per share up about 300% and once again those are all time records for those 3 metrics and it was our fifth consecutive quarter, Q2 was our fifth consecutive quarter of positive EPS. Mike is going to review all of the financials in more detail in a few minutes.

Couple of other highlights in the quarter. The Genisys and Meritage acquisition which are accretive in the first full quarter of combined operations for both transactions add substantially to our projected annualized revenues and also significantly extend our footprint throughout the Midwest. I would like to point out that as our plan indicated these transactions have added to this quarter's EPS.

Last quarter we reported $0.04 which was you know actually close to the $0.036 rounded up for standard practice, this quarter we are looking at a true $0.04 of EPS about a 14% sequential gain in EPS and a good portion of that is accretion related to those transactions particularly Genisys and Meritage, we only had maybe a week's worth of operations with Meritage in the Q2 numbers.

We also added new projects and follow-on engagements with a number of top tier enterprise clients. I won't read through that long list here as they are listed in our press release. Suffice it to say that we are continuing our track record of substantial repeat business from existing clients and opening up new clients throughout the Midwest and again as we achieve that critical mass in terms of scale we are more relevant to our customers able to offer a broader array of services throughout our network.

We become a more robust partner for our folks like IBM and other software companies with whom we work in terms of the sales channel we represent. It’s worth noting that post those two acquisitions we have now got a solutions sales team of 17 people. So we are really representing a significant and robust sales channel and also we are a more attractive employer. So we are having a better time with recruiting.

I will say for the first time in the five years that I have been here, we are really getting a significant inflow of applications from sales and engineering and consulting talent, people that have heard of Perficient in the marketplace now. But we are not in that situation where we have got to go out and seek them out. Folks are starting to flow to us and those are the kind of benefits of scale that we had forecast would accrue as we pass that critical $50 million threshold and it appears to be happening.

We raised additional capital during the quarter in two ways, one, we increased our facility with Silicon Valley Bank from 6 to 10 million and significantly added a merger and acquisition term debt facility under which we can borrow up to 4 million to finance the cash portion of acquisition and we drew down couple of million dollars under that facility in the second quarter to finance the cash portion or at least part of the cash portion of the Meritage acquisition.

Our goal there is to use a measured amount of debt going forward to increase the accretion associated with some of our acquisitions. It represents relatively cheap capital and now that we are in a position to have access to that through our partners at SCB, we intend to do that.

Second, we completed a private placement led by Cape Capital Partners. They are a good investor, a long term investor and we added about $2.5 million in a straight common deal with a small discount to market about 10% modest warrant coverage, no crazy converts or any other issues like that. So a very clean financing with a good private equity firm.

So this is our strategy, to grow both by acquisition and significant organic growth and to hit 100 million in revenue by the end of 2006. I would now then turn the call over to Mike Hill to discuss our financial results in greater detail and then Jeff Davis, our COO and President to provide some additional color behind those Q2 numbers.

Thanks Jack. I will begin with a brief summary of the Q2 results and then go into some of the details. For the quarter ended June 30th 2004, we recognized revenue from services and software of 10.7 million, a 66% increase over the second quarter of 2003. For Q2 2004, services revenue was 9.7 million compared to 6.1 million for the same period in 2003 and 6.7 million in the first quarter of 2004. This represents services revenue growth of 58% over Q2 2003 and 45% sequentially.

Software revenue in Q2 2004 was 1.1 million compared to 359,000 for the same period in 2003 and 1.3 million in the first quarter of 2004. Net income was 810,000 or $0.04 diluted earnings per share for the quarter compared to a (indiscernible) income of 177,000 or $0.01 diluted earnings per share in the second quarter of 2003. And 621,000 or $0.04 diluted earnings per share for the first quarter of 2004. Gross margin for services was 39% for the quarter compared to 45% in the second quarter of 2003 and 43% in the first quarter of 2004.

SG&A expense was 2.3 million in the quarter which is an increase in absolute dollars from the first quarter of 2004 and the second quarter of 2003 due to the addition of acquired company operations.

However, SG&A expense decreased as a percentage of total revenue to 22% in the quarter and down from 29% in the second quarter of 2003 and 23% in the first quarter of '04. During Q2 2004, our utilization rate based on the 2000 hour/year was 82% excluding subcontractors and our average billable headcount was 167 excluding subcontractors and Meritage employees.

As previously announced on April the 2nd 2004, we acquired Genisys Consulting and on June 18th 2004, we acquired Meritage Technologies. (indiscernible) certain purchase price adjustments we will have paid approximately 4.4 million in cash and 2.9 million shares of common stock. Approximately 1.6 million of these shares are subject to future holding restrictions which expire over the next one to three years.

Also during Q2 we paid off the Meritage AR credit line and other Meritage financial obligations aggregating 2.4 million. Acquisition costs paid during the quarter were approximately 750,000. All combined, the company used approximately $7.5 million in cash for these acquisitions during Q2.

In order to finance the Meritage acquisition we modified our existing credit facility with Silicon Valley Bank to add a $4 million term debt facility. During Q2 we drew 2.5 million on this new term debt facility which will have three months of interest only payments followed 36 equal monthly payments.

Thus far during 2004, we have not drawn on our AR credit facility. Additionally during Q2, we raised 2.5 million with the private placement of common stock lead by Tate Capital Partners. As a result of this activity, our quarter-end cash balance decreased to 2.6 million at June 30, 2004 from 4.1 million at March 31st 2004 and during Q2 our networking capital decreased $800,000 to 6.3 million as of June 30th 2004. I will now turn the call over to Jeff Davis to provide some additional clarity to (indiscernible) some of the metrics and the status of integration with Genisys and Meritage transactions.

Thanks Mike. As Mike mentioned, I wanted to talk a little bit about gross margin in particular. We have experienced a small decrease in gross margin in Q2 relative to Q1 and I wanted to drive into some of the details behind that. For Q2, gross margin was right about 39% versus 43% in Q1, about a 4% difference there.

Really the key contributors were two. About half of that is a result of lower rates and lower gross margins experienced by Genisys and Meritage. The other factor worth noting is the fact that we had one last work day or billable day in our terms in Q2 versus Q3. When you factor both of those things out that gap closes to about a half a percent which really falls within some of the variability that we would normally expect from quarter to quarter. There is no surprise there relative to Genisys and Meritage. We knew obviously what the rates and the gross margins were and despite that fact, these businesses are both profitable, were profitable when we acquired them and are profitable and accretive to us today. However, we see that really as a nice upside opportunity for us.

As we continue to develop new business and leverage our brand in the market within these businesses we anticipate that we will be able to drive those rates higher and obviously produce a higher gross margin as a result and really resulting in even greater accretion than we are already experiencing. Really we are already beginning to see some of the impact of that, some of the rates and some of the newer opportunities that we have engaged on are increasing in fact in both of those business units.

With regards to the acquisitions, I wanted to say too, that we are really excited about the early results of those transactions. I think what really validates those decisions in those businesses is that really from day one, we are seeing the employees from each of the legacy companies working together, teaming to pursue new work at clients as well as execute that work and we are also seeing the sales team sort of immediately leveraging new skills and the solutions that each of the companies brought to the table and selling those within our markets.

One of the key ones that we anticipate will result in some greater software sales for us down the road, is the fact that neither of these businesses was doing any kind of software reselling and obviously that is a portion of Perficient's business and we have been reselling software for IBM for sometime now and we have already begun to leverage that and in fact have closed our first software deal within the Meritage business unit.

Lastly along these lines, I wanted to just briefly describe the strategic internal initiatives that we launched recently that is really geared towards optimizing our growth potential and really optimizing these acquisition results, both of these and future acquisitions.

The initiative's primary objectives are to optimize our business in light of the new scale and to leverage the recent experiences that we have with Genisys and Meritage and make sure that we are leveraging those skill sets that I mentioned, the new solutions across the company as we have already begun to, we want to reinforce that. We also want to ensure that we have the organization structure, the systems and the processes in place that are going to be necessary to support a $100 million business and beyond.

As we stated several times, that is our stated goal for the end of 2006, to be at a $100 million run rate. And finally really to evolve our integration process, we really saw a tremendous improvement with the Meritage integration just based on the experience with Genisys and we really want to define that to a repeatable and comprehensive methodology in anticipation of additional acquisitions as we are headed towards that growth goal.

We anticipate concluding that initiative and implementing the changes and both structure and systems that I referred to by the end of this year and are really excited about the future and excited about being able to expand on what we have already done and build on it and learn from it going forward. With that I will turn the call back over to Jack for some outlook on Q3.

Thanks. For Q3, we expect total revenue, that is excluding reimbursable expenses of course of 12.3 to 12.9 million. Now that includes 600,000 of software sales that have already been booked. So services revenue then is 11.7 to 12.3 million; that is the range. That represents growth over the third quarter of 2003 of 80 to 89%.

So we are seeing some substantial growth, we are definitely seeing an uptick in spending among our clients along with continued strengthening of demand in the market for IBM products and related services and again I would note that per our standard conservative forecasting methodology we are only including in that number software sales actually booked as of the guidance date which is July 27.

Once again we are proud of our achievements in Q2. We have achieved our $50 million top line run rate early. We are hitting on all cylinders and moving towards our $100 million revenue goal and we are succeeding in our acquisition strategy. With that I would like to open the call up for questions.

Thank you sir.

[OPERATOR INSTRUCTIONS].

We will take you first question from Mr. Pete Heckmann of Stifel, Nicolaus.

Good afternoon guys, nice quarter.

Thank you.

In terms of looking at an internal growth number, it appears that if you look at software and services revenue combined, we are talking about having an internal growth number in the high teens, both for the quarter and for the first half and that is - it appears to be an uptick from what you saw in the second half of '03. Would that - is that correct, one and is that the type of internal growth you think we can continue to see based upon your bookings in the first half?

Yes the growth rate, quarter-over-quarter growth rate organically was - in the second quarter was about 20% of total revenue growth rate and our plan going forward is to grow organically at 15 to 20% and top that growth rate up with some strategic acquisitions that add market presence in key cities in the Central US. So I would say that is a good assumption.

OK. And then Mike, can you go over those headcount numbers again and talk a little bit about utilization and average bill rate in the quarter just so we can kind of flesh out our models in terms of trends?

So with Genisys, we added approximately 60 billable headcount. With Meritage we are adding 100, that is going to be 66 employees and 34 contractors but again that is not reflected yet in Q2. As far as the average billing rate, that actually went down from $130 an hour to 120 and that - you know that was expected and certainly you know as per what Jeff was talking about, the Genisys folks are coming in a little bit lower billing rate for right now and we’ll work on getting that up and it shows some opportunity for the future. The legacy you know excluding the acquisitions, the average billing rate was still up at over a $130 an hour.

OK.

Utilization. That was 82% excluding subcontractors and which is still strong, up from Q1 on both accounts, both combined with the acquisitions as well as you know legacy.

OK. And so beginning headcount for the third quarter?

Beginning headcount including subs is 281.

281. And excluding the subs?

233.

233. OK. Great. Alright thanks a lot.

Thank you.

We will take our next question from Steven Socanos (ph) of Proficient.

Hi, no it is not from Proficient, it is Peregrine (ph) Asset Management. Congratulations on the quarter guys, transition and all seems to be progressing pretty good.

Thank you.

Couple of questions, what is the current balance on your facility?

Facility drawing (ph) 2.5 million on the SB line, the total facility is 10 million, 6 million AR line and 4 million acquisition terms and so we drew down 2.5 of the term.

OK. So you have combined 7.53?

Right.

OK. What about your acquisition program going forward? How is that looking? Do you expect that you may have another acquisition this year or are you done for the year?

It is quite possible we could have another one this year. We are in the market right now and having conversations with - oh probably at the top of our funnel better than 30 firms and again focused on markets in the Central US. There are some upper Midwest markets that we are still looking at and as I mentioned on our last call, we are also looking in the South-central to markets like Dallas and Houston and so those conversations are going on spending a decent deal of time on that right now and it is possible that another deal could happen this year. You know I would characterize all of this though as being in the early stages at this point our typical sort of market diligence and getting to meet some firms out there.

OK very well. Now another question concerning the gross margins, what is the main reason you can attribute that the gross margins were lower at the target firms?

Well you have got I think two different issues with the firms that we bought. In the case of the IBM shop that we bought, Meritage, they are providing really high caliber services and solutions and in many cases were pricing their services at below market rates and you often see that with smaller firms and particularly see it in the wake of the economic environment we are just emerging from now.

And of course for all existing clients we are going to honor all of our commitments and deliver high quality work under existing arrangements but as we add new business we do see an opportunity to achieve a better gross margin in those businesses by rates that you know reflect where the market is at.

So that is you know one example there. In the case of Genisys, Genisys had some additional .Net expertise which in general tends to price out in the marketplace a little bit less than the J2EE skills but that is not to say they had no J2EE skills there and in fact we are already seeing some nice progress which Jeff was alluding to earlier and driving some additional IBM products into Genisys' customer base which is significant and impressive. So we really see some opportunity to increase those rates and the gross margins overall going forward.

OK. Now what kind of a progression would we be looking at? We’re talking about two or three quarters or are we talking about over a couple of years?

I think - that is a good question and it is hard to sort of specify that as we sit here because it is dependent on a number of kind of variables. I would personally in our own planning we are looking at normalizing those gross margins over the next three to four quarters.

OK very well. OK well thank you very much and keep up the good work.

Thank you.

We will take our next question from Tom Wayne (ph) of Sigma Capital.

Hey Jack and the team. You guys have done a tremendous job again with the quarter and congratulations on that.

Thank you Tom.

Jack as you know I have been following the company for quite a while and in 2002 you guys did little over 20 million of revenue with under a half a million in EBITDA and now you are at 45 million, 50 million with over 6 million in EBITDA on a run rate basis. So your EBITDA and your earnings in general have been growing very steadily at an accelerating rate. As you make these additional acquisitions, can we expect to see that same type of acceleration and where do you think you are going to end up kind of topping off that in a rate increase on the EBITDA line.

Well right now as we look at it we are very much focused in on achieving $100 million in revenue and our publicly stated goal there is to get to that run rate by the end of 2006. Internally of course we are going to try to beat that. We see the opportunity that to sustained these rates of growth you know through $100 million and it may well be and I don't really know as I sit here today to be completely honest with you that we can do it beyond that, even at $100 million we are still a pretty small firm in the scheme of things.

So my view is that we have got really an open field running opportunity both in terms of organic growth because remember, you know 6, 7, 8 out of 10 of our public competitors got blown away in the tech crash and in terms of M&A growth because you have got a lot of great boutique firms out there that don't have really access to liquidity through any of the other avenues that might have been available during the bubble, great folks, great entrepreneurs that see the benefits of being part of a larger industry leading organization.

So we think the stage is set for some significant growth over the next few years and we've still got sort of the law of small numbers working in our favor as we move up to a 100 million and beyond that.

If you - follow on question, if you stay, one, will you remain focused on acquisitions in the Midwest or do you think at some point, you’ll branch out to the coast and if you do branch out to the coasts or anywhere beyond the Midwest, do you think you will still see the same level of EBITDA arbitrage you can get right now?

I think that through $100 million, we will definitely stay focused in the Central US and I think frankly we could build a $200 million business just in the Central US, but clearly our goal through a 100 million is to stay in the Central US. Beyond that, we begin to look at additional markets and I think at that point, the question will be what kind of markets do you attack and that will probably reflect - or impact, I should say the EBITDA arbitrage you could experience.

It might be different for example in Atlanta than it would be in New York City, so we are going to have to look at that more closely as we approach 100 million in revenue. You know, that said, we are out there and we do look at deals that occur you know throughout the country, particularly, you know if they are smaller shops and we monitor those multiples and there is nothing that I am seeing right now that argues for a significantly different EBITDA multiple prevailing strictly on the basis of geography.

You know where you’ve seen sort of a movement away from the median, it is usually been factors separate from geography like the particular focus of that shop for example, somebody is you know, positioned in a hot technology area or in a vertical market that proceed this high growth. So, I don't think there is going to be any implicit geographic kind of disadvantage when we move beyond central.

Well, as always, great execution and I look forward to the next announcement of growth. Thanks guys.

Thank you.

[OPERATOR INSTRUCTIONS].

We will take another follow-up question from Pete Heckmann. Please go ahead.

I just wanted to follow up, in terms of the SG&A in the quarter, looked like there was good integration and some cost synergies with the Genisys acquisition. In the back half of the year, as a percent of revenue, does it seem appropriate to kind look at SG&A in terms of you know a little bit higher as a percent, maybe 22 to 24% of revenue, does that sound about right?

Yes, I think, one distinction I would draw there is SG&A expense as a percentage of services revenue versus total revenue because the software piece is going to be a little bit lumpier. So, as a percentage of services revenue, we are about 24% in Q2 that is down from 28% in Q3.

As a percentage of total revenue, it was 23% in Q1, down to 22% in Q2. I would say, our goal longer term, as we scale to 100 million is to bring SG&A as a percentage of services revenue down to the sort of 21% to 22% range. That is our longer term goal, but there will be some investments we make in some of the initiatives that Jeff was describing earlier so I see us sort of staying roughly in the category we are in right now and then moving down a bit over time, over the next couple of years as we hit that $100 million scale.

OK, and then could you just comment in terms of IBM in the WebSphere suite of products, what seems to be relatively stronger in terms of some of the applications that they have within that suite and are there any particular industry verticals that seem to be relatively stronger than others?

Well, you know, there is no question that enterprise portal software is on fire right now. That is very, very hot and I would say that probably 40 plus percent of the activity that we are seeing right now was around portal software and what is great about portal among other things is that it brings in the backend integration work, the collaboration work, the BI work, the business process management work that we specialize in, so it really is a portal, if you’ll pardon the phrase, to a much larger kind of solution that you can deliver for the client and really add value for them.

Our clients are seeing tremendous business value around these kind of implementations and so that is driving the growth we are seeing. A couple of other points I would make there, IBM has made some very smart acquisitions over the past few quarters. Most recently, the acquisition of AlphaBlock which is the business intelligence firm, but also Trigo (ph) in the product information management area and Asterix in the content management area, and the WebSphere platform is growing stronger with each one of those acquisitions and the mass of spend of course that IBM makes on R&D generally and I know they noted in their Q2 release about a 5% pickup in market share points in those kind of core application infrastructure middleware markets.

So, we are seeing a lot of demand there. We are also seeing a continuing trend and I say continuing here because we have seen this for a while on the part of enterprise customers to move towards larger vendors who are stable and can offer a broader platform of products, as opposed to smaller ISVs that are coming in with more of a best of breed kind of positioning. While that sold well a few years back, there is a lot of skittishness among enterprise clients as to the staying power of some of those smaller vendors and that is really favoring IBM and thus Perficient in this market.

OK, and then in terms of just the verticals, I am just looking at this list you have in your press release, it appears as financial services....

Yes, I am sorry. As always financial services, healthcare are two that you always see at the top of the list and because historically those industries tend to be great consumers of technology and technology services.

We will also have a little bit more of an exposure on manufacturing on automotives with some of these recent acquisitions, although you know there are a number of financial services clients we have picked up, basically every firm that we look at out there in the sort of 10 to $20 million range has financial services as their number one vertical, has health care as their number 2 vertical and then depending on the regions of the country that they are in, you might see general manufacturing or you might see automotive at sort of number three.

OK, alright, helpful, thanks.

Thank you.

[OPERATOR INSTRUCTIONS].

Currently, I am showing no questions at this time. I would like to turn the call over to the host for closing remarks.

OK, thank you very much. We are very pleased with the quarter and we look forward to getting back together with you next quarter and with that, I will ask the conference call operator to read the call playback information.

Ladies and gentleman, thank you for joining us on the conference call today. If you would like to listen to the conference call, it will be available to you one hour after the call duration.

You may dial toll free 888-286-8010 and for those of you outside the US, you may dial, 617-801-6888. The password for the conference call is 83579828.

Again, the conference call password is 83579828. This brings our conference call to close. You may now disconnect your lines.