Perficient Inc (PRFT) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q3 2004 Perficient earnings conference call. My name is Anika and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

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

Hi. This is Jack McDonald. Good afternoon. With me on the phone today I've got Jeff Davis, our President and COO and Mike Hill, our CFO. We'll have about 10 or 15 minutes of prepared comments, after which we'll open the call up for questions.

Mike Hill will now read a safe harbor statement.

Thanks Jack and good afternoon. Some of the things we will discuss on 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 discussions.

Q3 was a great quarter for Perficient. We saw record numbers on our revenue, on our earnings per share, on our EBITDA and net income. We completed the integration of two acquisitions that we did in Q2, Meritage and Genisys, and have already begun to see accretion from those acquisitions as we had forecast we would.

The company is really hitting on all cylinders and we're on plan to reach our objective of 100 million in revenues by 2006. We are definitely seeing the benefits of scale in the mid-west as we've now become the number one web sphere solutions provider in that region of the country. Our customer base is growing. We're seeing larger projects. We're seeing better flow in terms of our recruiting and strengthening our partnership everyday with IBM, which has been a great partner in going to market.

Mike Hill is going to review our financial results in a little bit greater detail in just a moment. But to highlight, our revenue was up 133% year over year, quarter over quarter. EBITDA up 148%. Earnings per share up to five cents from about three cents in this quarter last year. And if you look at the progression through this year, roughly 3.5 cents in the first quarter, about four cents in the second quarter and now five cents, actually 5.25 cents rounded back down to five cents here in the third quarter.

And I would note as I mentioned on other calls that that's a fully taxed EPS, fully taxed at 39%. Very happy to see our services gross margins held steady at 39% and that's even with the integration of these deals and as talked about we have structured these deals to be accretive at given fair rates and gross margins. So we see the potential for improving those and picking up additional accretion as we improve the go rates of the companies we've acquired.

Also SG&A as a percentage of revenue came in at about 25% and we've been trending into that range which is great. Significant improvement there from roughly 32% in this quarter last year. So we are seeing the benefit of scale and better leverage on our operating infrastructure. You can see from the Q3 press release, a number of the other highlights of the quarter and I won't repeat those here.

I will note, however, that we did renew our subcontracting agreement with IBM. So going into our fifth consecutive year under that agreement. And, again, what's really important is our overall relationship with IBM. The percentage of our revenue that we obtain under that subcontracting agreement is really just a few points. The bigger picture where IBM is concerned are the solutions that we've built around IBM products, the great relationship we have with IBM in terms of partnering to go to market, co-marketing activities and lead generation activities that we do jointly.

So, again, our strategy is growth organically and by acquisition and we're executing very well on that plan. With that I'm going to turn the call over to Mike Hill to discuss our financial results in greater detail, and then to Jeff Davis, our Chief Operating Officer, to provide some additional color behind the numbers.

Thanks Jack. I'll begin with a brief summary of the Q3 results and then go into some of the detail. For the quarter ended September 30, 2004 we recognized revenue from services and software of 16.8 million. That's 133% increase over the third quarter of 2003. For Q3 2004 services revenue was 13.5 million, compared to 6.5 million for the same period in 2003 and 9.7 million in the second quarter of 2004.

This represents services revenue growth of 106% over Q3 2003 and 39% sequentially. Software revenue in Q3 2004 was 3.4 million, compared to 700,000 for the same period in 2003 and 1.1 million in the second quarter of 2004. Net income was 1.1 million or five cents diluted earnings per share for the quarter compared to net income of 424,000 or three cents diluted earnings per share in the third quarter of 2003 and 810,000 or four cents diluted earnings per share for the second quarter of 2004.

Gross margin for services was 38.6% for the quarter compared to 41.6% in the third quarter of 2003 and 38.7% in the second quarter of '04. SG&A expense was 3.4 million in the quarter, which is an increase in absolute dollars from the third quarter of 2003 and the second quarter of 2004 due to the addition of acquired company operations.

However, SG&A decreased as a percentage of total revenue excluding reimbursed expenses to 20% in the quarter down from 26% in Q3 '03 and 22% in the second quarter of '04. During Q3 '04 our utilization rate based on the 2000 hour year was 86% excluding subcontractors. And our average billable headcount was 275 including 40 subcontractors.

Our quarter end cash balance increased to 2.8 million at September 30, 2004 from 2.6 million at June 30, '04. The cash balance as of today is approximately four million. During Q3 net working capital increased to 7.8 million as of September 30, '04. I'll now turn the call over to Jeff Davis to provide some additional clarity on some of these metrics.

Thanks Mike. We've already been discussing we've had a strong third quarter and the sales front was no exception. The sales team did a great job. I wanted to provide a little detail, particularly the breakdown of these sales across our solution and services offering areas.

Even this infrastructure and application development represented about 33% of our new business sold in the third quarter. It's about even with the second quarter. Portal related solutions was 46% of our new sales in the third quarter, up about 20% from the second quarter. And EAI enterprise application integration services and solutions, 12% of our new sales, up almost 100% from the second quarter.

The remaining 10% made up from business intelligence, usability user center design and e-commerce solutions. I think what the results here show is continued strength in the market for our infrastructure and application development solutions. And most notably is a sizeable up tick in the portal and EAI solutions demand.

It's a continuation, I think, in both those areas of a trend we've been observing for the last couple of quarters. The e-business infrastructure services demand was led by a large application migration engagement over a million dollars that we were rewarded from a major brewery. The applications that we're migrating there are internal critical business applications supporting, among other things, brewery operations.

The increased sales in portal and EAI solutions were led by two large engagements we were awarded at a major medical insurance company and a banking institution, respectively. Both of which were in excess of a million dollars in services and software. For the medical insurer we're building CRM applications both sales force automation and customer service related applications. Which is an area where we continue to see strong demand, particularly in businesses with high customer touch services.

For the bank we're establishing an EAI foundation which will serve as the integration layer for all the banking applications currently in place and future applications that they'll develop. We expect these trends to continue and to help assure that we're top of mind for portal solutions and EAI solutions.

We conducted portal symposiums, four in the third quarter, with attendance of more than 125 customers and potential customers. So we're excited about that. We continue to work closely with IBM and our other partners in conducting those symposiums and bringing new business in the door. With that I'll turn it back over to Jack.

One additional comment I want to make on the Q3 results is that our organic growth was about 34%. So a very strong organic growth rate. So we're really hitting on all cylinders. Growth of 133% in the top line when you count acquisitions in. Organic growth of 34%, which is really moving along nicely.

In terms of our outlook for Q4, as you saw in the press release we're seeing total revenue in the range of 13 to 13.6 million and this includes one million dollars of software sales. Now regarding guidance I would say, as always, that we include only software sales actually booked as of the guidance date. In this case, today. So we - any additional software sales have come in behind that would be obviously additive.

The core services forecast that we're making, again, 12 to 12.6 million backing out that software number, represent growth over the fourth quarter of 2003 of between 95 and 105%. Couple of things I'd note there. We are considerably ahead of the revenue guidance we provided for Q3 when our total range was about 12.3 to 12.9. And we're ahead even in a quarter, the fourth quarter, where you've got less billable days due to the holidays.

Typically a quarter that's seasonally not the best company for service companies, and yet we're seeing an up tick in our guidance which is good to note. In general we continue to see good demand among our clients for all the services we offer and particularly around IBM products and services.

So, again, we're proud of our achievements in the quarter. We're hitting on all cylinders moving towards our 100 million dollar goal. Continue to be on the market looking at acquisition opportunities, focused on accretive deals, properly structured to require skinning (ph) the game on behalf of the entrepreneurs whose businesses we acquire. And we continue to see the benefits of scale and the shake out, frankly, that's occurred over the past few years where we're seeing less direct competition out there.

So with that I'll now open the call up for questions.

[OPERATOR INSTRUCTIONS]

Our first question comes from the line of Pete Hackman of Cecil Nicholas (ph). Please proceed.

Good afternoon guys. Nice quarter. Wanted to follow up on that utilization number of 86%. That number was real strong considering, you know, some of the seasonal aspects of August and vacation time. What do you attribute that strength in the utilization to come from, especially given that with the integration of the two acquisitions?

I think really it's a combination of factors. One, obviously, we're seeing a good degree of demand in the marketplace. But what we've done as an organization by really staying focused around a core set of e-business solutions and around a limited number of vendors like IBM and Tibco and a few others, is the ability to assign consultants among different projects much more easily than you could when you've got a very mixed bag of businesses.

So we believe that will allow us through time to manage to a higher utilization rate than would otherwise be the case. If you look at our utilization numbers year to date, they're running at about 83% excluding subcontractors, about 84% with subs. And we're confident given the pipeline and backlog and IP spending trends that we're seeing, that that's a rate that we can maintain in Q4 and we believe it to be a reasonable expectation moving into next year.

So you think you can maintain in the mid-80's despite holidays in the fourth quarter?

Yes. Again, I think if you look at our - I'm referring to what we've achieved over the first nine months of the year which is about an 83% utilization rate excluding subcontractors.

OK.

And that's what we believe we can maintain as we go forward into Q4.

OK. And if I could have one follow up. In terms on the software side, clearly a huge quarter in terms of software bookings and recognized software revenue in the third quarter. Looks like the fourth quarter's off to a really strong start with the guidance of a million dollars. That's clearly exceeding where you were in terms of guidance for the last couple quarters.

Is there a catalyst in the marketplace? Is it an increase in deal size? Is it overall strong demand? A little bit of all of those? And in terms of when you're booking software, how do you look at that in terms of how it adds to the backlog and to services?

I'd say that I would agree. It's a little bit of all of those, but one of the things we're definitely seeing is an increase in deal size. We've talked about this before. Through a couple of the lean years we really were surviving on much smaller project sizes, but we nurtured those customer relationships. We kept them alive. And now we're beginning to see the size of those deals grow. So whereas at the bottom of the trough we may have been at, you know, 7,500 150,000 dollar transactions. Now, as Jeff was referring to earlier, we're seeing those one to two million dollar deals, thankfully, with much greater frequency.

And so that is definitely part of it. And you make a good point regarding the back log impact. That is every one of these software deals is accompanied by services. So each one has a services tail and it's really a great forward looking indicator in terms of where our business is going. You see that large chunk of software where we will be building solutions around that software over the next six to nine months. So it's a very bullish sign on our business going forward.

OK. And then just one more question and I'll let someone else in. But in terms of the third quarter, fourth quarter, are you seeing any software sales contribution from the acquisitions? You had talked originally about that wasn't something that especially Meritage had focused on. Are you seeing some opportunities to sell software into those customer base?

Yes. Definitely. Let me get the exact number. Meritage - where was it? About a million dollars ...

... A little over a million ...

... in Q3.

OK.

And so there was a great opportunity. Meritage really a great shop, good solid management team, good solid folks there, great IBM skills. They had been outsourcing the software piece to a third party. So there was potential margin that we're able to begin recapturing immediately.

And I know that Meritage represents probably a third of the million dollars that we've already got in of booked software deals for the fourth quarter. So they've been executing extremely well. One other point while I'm on the subject of that acquisition, we've talked about this before. Raising rates. We're already seeing with Meritage about a 10 or 12 dollar an hour average rate increase post acquisition.

And those are exactly the kind of things we're looking to do which is bring great firms like Genisys and Meritage into the fold and then look to implement business process improvements, generate better lead flow through our partnerships and raise rates to very competitive but market levels. And we feel they were a little bit below market pre-acquisition.

So we're seeing some success on all of those fronts.

OK. Thanks much.

Your next question comes from the line of Tom Whey (ph) of Sigma Capital Partners. Please proceed sir.

Hi. This is Nedan Rothbloom (ph) from Sigma Capital Partners. First, congratulations on the continued strong performance. Jack, you mentioned that you expect to reach 100 million dollars in revenues by 2006. Could you please elaborate on the acquisition pipeline and sources of capital financings?

Sure. Our game plan for getting there we think is a relatively conservative one. It would require roughly 15 to 20% organic growth per year and two 10 million dollar acquisitions per year in order for us to hit that 100 million dollar number by 2006.

We have identified a large pipeline of potential acquisition candidates in the central U.S. They are companies that range in size from five to 20 million dollars in annual revenues. Our sweet spot is really in the middle of that, 10 to 15 million dollars. We will continue to finance deals with a large equity component. We have done transactions with roughly three quarters of the transaction value represented by stock.

I think we'll continue to see going forward stock representing at a minimum half and up to three quarters of transaction value. And as a result of that and the fact that we're buying business that are EBITDA positive and or become EBITDA positive at acquisition with the cost synergies we're able to immediately implement. Our cash needs around those acquisitions are not as great as they would be if we were doing all cash purchases.

I think in terms of capital, we've got a 10 million dollar line with Silicon Valley Bank. We've currently got just 2.5 million drawn down on that, and for a business that generated about 2.2, 2.3 million in EBITDA in this quarter and so if you were to annualize this quarter, roughly a nine million dollars EBITDA run rate. Obviously that's a very, very manageable level of indebtedness and we think that we could draw down more on that line.

We're also, as Mike Hill was referring to earlier, building our cash position. So we think we'll be in a position to fund additional acquisitions out of the debt line and operating cash flow. That said, if we see an opportunity to raise capital at an attractive price and we see near term opportunities to put that to work on accretive transactions so that the net-net of all that is growing earnings per share and growing our share price, then we're going to be in a position to be ready to take advantage of that.

OK. Thank you.

Once again, ladies and gentlemen, to ask a question please press star followed by a one on your touchtone telephone. Your next question comes from the line of Larry Brooks (ph) of Maloney Securities. Please proceed.

Hi. Good afternoon. In the past it seems like you had a goal of an acquisition, but what I though was about one per year. Is this changing now where you're looking at doing maybe closer to two or what's the story there?

Yes. I think that we stated probably maybe it was 12 months ago, that in connection with our goal of hitting 100 million in revenue by 2006 that we were going to look to do two acquisitions per year of firms roughly in the 10 million dollar annual revenue range.

And we think that that's a level of acquisitions that we can do quite competently given our current infrastructure. Frankly, I think if we wanted to we could do more than that. But that's sort of the baseline. That and a target organic growth rate of 15 to 20%. Obviously we've been exceeding that growth rate, but that's sort of the baseline or budget, if you will, to get to the number that we're looking at.

I do think, Larry, that there's an opportunity right now to rapidly scale this business in light of the fact that our public competitors got taken out of the game when the bubble burst. And so there's a little bit of a vacuum out there that I think Perficient can fill. We're seeing a great opportunity for organic growth but also you don't have a lot of buyers for these smaller shops out there.

So I think we're in a relatively good position where the acquisition market is concerned. And in terms of what I think about or worry about running this company is making sure that we take advantage of that opportunity to scale the business. While, frankly, we've got, you know, an attractive environment for doing it.

OK. Also in your accounts receivable it looks like they moved up, and I'm wondering if they moved up percentage wise greater than your growth. Do you see anything unusual there?

Let me say, I'll have Mike Hill answer that in a little bit greater detail. But basically we had a very large chunk of software hit at the end of the quarter, and some of that is characterized as deferred revenue. So when you back that our we're really within our industry kind of norm and our target range. But let me let Mike address that more specifically.

Yes. Just to kind of take off there where Jack left off. You know, we had over 600,000 dollars of deferred revenue that went into receivables at the end of September 30, that was not in the revenues. As well, we had 1.2 million dollars worth of cash collections on AR, just in the first week of October.

So had we received those a week earlier then obviously AR would be down as well. And then, of course, the spike in the software itself as Jack just mentioned there at the end of Q3. So, you know, when we do the calculations for day sales outstanding, you know, we get up into the low 70's if we don't factor those things in.

Once you factor in the things that I just went through, it brings the day sales outstanding down to the low 60's. And in our industry typically, you know, day sales outstanding, you know, the reasonable range is usually 55 to 75 days. So we feel like it's manageable and, frankly, the AR is just - the increase in AR is just a result of the improved revenues.

OK. In the past you talked about with your agreement with IBM you had, it seems to me 70 people working on that. Is that about the same now? What's the number working on that?

Well I think you need to look at our relationship with IBM sort of on three levels. One, we've got a subcontracting agreement where we've got an identified group of people on which IBM guarantees us utilization, a certain utilization rate.

Two, we've got a general subcontracting relationship with IBM where we provide services on projects that IBM sources. Three, we've got a go to market partnership with IBM and deep expertise around IBM products and solutions that we've built around the IBM platform. The first two of those, the agreement and the subcontracting relationship generally probably cover between 50 and 75 people.

Of those, the number on that contract are really a handful. I'd say a dozen people today. That's why when I was referring earlier to the contract, it's important sort of more on a symbolic sense and less important to us at this point in our business from an economic sense. It really is important in that it represents a marker of our strong relationship with IBM and there are benefits we get in terms of behind the firewall access, access to the labs et cetera.

But you really need to look at our subcontract relationship as a whole. Now if you do that, you'll see that in the quarter we generated about 70% of our revenue from IBM. And that's down from roughly 34% last year this same quarter. So even though the absolute number went up, we are diversifying a way from the subcontracting work. That said, a large percentage of our work, probably close to 70 is around IBM technologies but they are deals where Perficient owns the customer relationship and Perficient is delivering the work direct to the customer.

We may go to market with IBM, get co-marketing dollars, you know, lead generation. That type of thing. That has really been our business plan over the last couple of years. We started with a subcontracting business, in my opinion that was not a longer term model. But we had this tremendous reservoir of people and a good will within IBM. And so the point was lets leverage that to build a direct solutions business. And happily that's what we've been able to do over the past couple, three, years.

OK. Sounds good. Thanks.

Thank you.

Gentlemen you have no further questions in queue. As a reminder I would like remind our listeners that this conference will be available for replay approximately one hour after the call concludes and will be accessible for seven days.

The dial in numbers are 888-286-8010 or 617-801-688. The access code for the replay is 11042607. Again, the replay access code is 11042607. Now I'll go to our speakers for closing remarks.

Again, thanks for your time this afternoon and we look forward to speaking to you next quarter. Good afternoon.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.