Perficient Inc (PRFT) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to Perficient's Q4 and year end 2004 financial earnings conference call. My name is Steven (ph) and I will be your coordinator for today. At this time all participants are in listen-only mode. We will facilitate a question and answer session toward the end of this conference. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. Information regarding the replay will be given at the end of the call.

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.

This is Jack McDonald, Perficient's CEO. With me on the phone this afternoon are Jeff Davis, our president and chief operating officer and Mike Hill, our CFO. I'd like to thank you all for your time this afternoon. We'll have about ten or 15 minutes of prepared comments after which we will open the call up for questions.

I'd like to ask Mike to read our Sfe Habor 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 filings concerning factors that could cause those results to be different than contemplated in today's discussion.

We're going to follow the same format we typically do on these calls which is a review of our business and financial performance for the past quarter and of course in this case for 2004 as a whole. And then we'll look at our outlook on revenue for the current quarter. And finally, as I mentioned earlier, we'll open it up for questions.

Before we get into it, some of you may have seen some exciting news we announced this morning which was our move up to the NASDAQ National Market. We think that's noteworthy achievement on two grounds. First it is a validation of the great progress the company has made over the past five years scaling our business. And secondly it's going to increase exposure, we believe, for the company both among the investment community and analysts and the media so we think it will be a real net positive for our business.

We saw in the fourth quarter record numbers again for Perficient and revenue and earnings per share and EBITDA and income. Late in the quarter we announced our third acquisition of the year which was ZettaWorks, a $16 million-dollar Houston-based consulting firm focused on enterprise application integration. Like our other acquisitions in 2004, we expect ZettaWorks to be immediately accretive and we're already seeing some very positive results from that acquisition, Jeff Davis is going to discuss those in a little bit greater detail later in today's call.

But with that acquisition, Perficient became the leading independent Web sphere and tipco (ph) consultancy in the central U.S. with the largest independent practices in both of those areas. So we continue to execute well on our plan and we've demonstrated, I think, that we are on target to reach our objective of $100 million in revenue by the end of 2005. As we indicated in the press release, this last year, 2004, was a meaningful year and market by a number of important milestones for our business. We gained about 170 new clients, we established locations in seven new cities, we tripled the size of our consulting force and we took our revenue run rate from $28 million going into 2004 to better than $75 million exiting the year and again, accelerated by a full year our goal of achieving $100 million in revenues.

So Q4 was a great close to a very good year and we anticipate that our business momentum will continue into 2005. Just a few highlights on the numbers and then I'll ask Mike Hill to discuss them in a little bit greater detail. But looking at the fourth quarter, revenue was up 180% with organic growth at 60% and obviously some additional growth through acquisitions. But 60% year over year organic growth rate and 180% top line growth in total, so some very, very good results in Q4.

Net income was up 150%. Our EPS was up 100% and cash flow or EBITDA up 171%. So really, some phenomenal results for the fourth quarter. For the full year of 2004, again, a very good story. Revenue up 99% with organic growth 32%. Net income up 273%. Diluted EPS up 171%. Cash flow, or EBITDA up 129%. So as you can see, very, very strong growth, profitable growth. Growth that has been accelerating through the year. Growth that is organic and being supplemented by a reasoned, measured strategic M&A program.

We believe that we are creating the clear leader in business consulting and technology services in the central U.S. as well as one of the more prominent providers in North America as a whole. So again, a great quarter and year and we believe our business plan is unfolding as targeted.

With that I am going to turn the call over to Mike Hill to review the numbers in a little bit greater detail and then to Jeff Davis to provide some additional color behind those numbers.

Thanks, Jack. I'll begin with a brief summary of Q4 and 2004 results and then we'll transition to Jeff Davis for the color.

For the quarter ended December 31st, 2004, we recognized revenue from services and software excluding reimburses expenses of $20.9 million, a 180% increase over the fourth quarter of 2003. For Q4 2004, services revenue was $13.6 million, compared to $6.2 million for the same period in 2003 and $13.5 million in the third quarter of 2004. This represents services revenue growth of 120% over Q4 2003 and 1% sequentially, which is notable as Q4 is typically lower due to seasonality caused by holidays and vacations.

Software revenue in Q4 2004 was $7.4 million compared to $1.3 million for the same period in 2003 and $3.4 million in the third quarter of 2004. Net income was $1.3 million or $0.06 diluted earnings per share for the quarter compared to net income of $534,000, or $0.03 diluted earnings per share for the fourth quarter of 2003 and $1.1. million or $0.05 diluted earnings per share for the third quarter of 2004.

Gross margin for services was 38.4% for the quarter compared to 45% for the fourth quarter of '03 and 38.6% in the third quarter of 2004. Gross margin for software revenue was 12.7% compared to 24.7% in the fourth quarter of 2003 and 14.1% in the fourth quarter of 2004. SG&A expense was $3.5 million in the quarter which is an increase in absolute dollars from the fourth quarter of 2003 and the third quarter of 2004 due to the addition of acquired company operations. However, SG&A as a percentage of services revenue was 25.7% in the quarter compared to 34% in Q4 of 2003 and 25.2% in the third quarter of 2004.

EBITDA was $2.7 million for the quarter compared to $1 million in the fourth quarter of 2003 and $2.3 million for the third quarter of 2004.

During Q4 2004 our utilization rate based on a 2016 hour was 82% excluding subcontractors and our average billable headcount excluding ZettaWorks was 278 including 45 subcontractors. Going forward, Zettworks adds 71 billable headcount including 35 subcontractors, which brings our total to 369 billable consultants including 80 subcontractors.

For the year ended December 31, 2004, we recognized revenue from services and software excluding reimbursed expenses of $56.5 million, a 99% increase over 2003.

For 2004, services revenue was $43.3 million compared to $23.5 million for 2003. This represents services revenue growth of 77% over 2003. Software revenue in 2004 was $13.2 million compared to $3.8 million for 2003. Net income was $3.9 million or $0.19 diluted earnings per share for 2004 compared to net income of $1.1 million, or $0.07 diluted earnings per share in 2003.

Gross margins for services was 39.2% for 2004 compared to 43.5% in 2003. Gross margins for software revenue was 13.9%, compared to 18.6% in 2003. SG&A expense was $11 million in 2004, which is an increase in absolute dollars over 2003 of $7.9 million due to the addition of acquired company operations. However, SG&A as a percentage of services revenue was 25.5% in 2004, compared to 32% in 2003.

EBITDA was $7.8 million in 2004, compared to $3.4 million in 2003. And our quarter end cash balance increased to $3.9 million at December 31st, 2004 from $2.8 million at September 30th, 2004.

During Q4, net working capital increased to $9.2 million as of December 31st, 2004.

I'll now turn the call over to Jeff Davis to provide some additional clarity behind some of these measures.

Thanks Mike, I appreciate it. As Jack mentioned, we had a great Q4 and I first want to talk about the ZettaWorks acquisition, the highlight - a key element to Q4. Like our other transactions we expect the ZettaWorks transaction to be immediately accretive, which is a key element to that deal. It also accelerates our capabilities in the quickly growing business integration market.

Also, the ZettaWorks facility in Macedonia, which we are very excited about, coupled with our existing offshore relationships is a solid foundation for the on-sight offshore hybrid capabilities we've been building over the last (ph) into several of our products.

Finally, the ZettaWorks deal offers us expansion opportunities in the south central U.S. and brings five additional sales people to our team.

I would also like to speak a bit about our software sales. Clearly we realized a large quarter for software retail in the fourth quarter. It is important to highlight for two reasons. First, the solid (ph) dedication that our acquisition strategy is working. As we bring more sales professionals on the team, educate them on the software retail process and leverage the vendor and client relationships we already have, our capabilities and potential around re-sale is growing. As an example, prior to our acquisition of Meritage, they were not directly reselling software, yet on the fourth quarter a large percentage of our software sales, in fact, about one third was attributable to that business unit.

So the point is beyond the back office synergies and bottom line improvements that we're making with these businesses, we're also improving on the top line through front office synergies yielding top line results.

Second point on software sales is that nearly all instances we're selling software in conjunction with a services opportunity around the software implementation. On the software we sold in the fourth quarter, about 70% involved implementation services and we expect more to follow. All in all, our strong Q4 software results leave us very optimistic about the services revenue outlook for 2005.

Another important point I want to make about Q4 is that we also have very robust new client services sales. We added 11 new clients with a high concentration in the area of insurance and financial services. We continue to see this sector as an area of continued growth fueled by the high customer touch environment and the need for secure, robust, real-time integration. These are areas in which we excel due to our deep expertise in portals, user center design and application integration.

The last metric I want to highlight from Q4, and this is a key area as well, is average bill rate. We were able to increase in Q4 our average bill are by $2 an hour from the baseline in Q3. While that may not sound like much, it really results in a significant contribution to EBITDA. As an example, working off our third quarter base, that $2 increase, which is a little less than 2%, yields multiples on that 2% to EBITDA, of course, holding all other factors constant. All other costs constant.

So we're beginning to see the benefits of scale here, leveraging Perficient's brand, reputation and relationships to demonstrate higher value and as a result, higher rates within the acquired business units. Very, very strong quarter, very excited about Q1 and the rest of 2005 and our continued M&A strategy. With that I'll turn it back over to you, Jack.

Thank you. So for the first quarter of 2005, in terms of our guidance, we expect total services and software revenue of $18 million to $19.2 million, so $18 million to $19.2 million total revenue for the first quarter of 2005. Of that, we have a guidance range of $800,000 to $1.2 million in software. So to put it another way, we are forecasting $17.2 to $18 million in services revenue. That services revenue represents growth of between 158% and 170% over the first quarter of 2004, so we are seeing a continuation of the rapid growth that we have enjoyed in 2004, continuing now on into 2005.

In addition, I would like to point out that this guidance is significantly higher, for example, than the initial guidance we provided for the fourth quarter where, you'll recall, we initially guided $12.8 to $13.4 million and subsequently raised that guidance and beat it so we're feeling very good about the forecast and good about the prospect as we move into the first quarter.

A little bit of summary before we move to the question and answer section. Over the past five years we have grown Perficient from a startup to a $75 million run-rate business and much of that has been done through a brutal economic and industry backdrop. We're talking about a compound annual growth rate of close to 100% and that's a growth rate that continues through to today. And we've got operating margins that lead the pack of our peers, other domestic commercial consultancies.

The future now looks brighter than we have ever seen it. We are seeing positive trends in the marketplace. If you look at some of the economic and industry data out there, the signs are quite good. Equipment and software spending was up about 15% in the fourth quarter according the most recent Commerce Department report of late January. That was following growth of 17.5% in Q3 and better than 14% in Q2. So we're seeing some strong growth in capital spending, particularly around software.

Cash on corporate balance sheets is at record high levels and literally post-war levels of cash on corporate balance sheets which can fuel additional spending. Spending on integration software - business integration software, the area that we focus on is also showing strong growth. If you saw IBM's Westsphere (ph) sales up 18% in the fourth quarter. Tibco (ph) license revenue up 75% year over year so this is a multibillion dollar market. It's a market that's growing rapidly and the analysts are forecasting this growth to continue. Gardener, for example, projecting compound annual growth rates in these areas of better than 18% over the next three years and we've shown, I believe, an ability to grow at a rate clearly far beyond the market as a whole.

So our position is stronger now than it's ever been. We enter 2005 as the largest pure play business integration consultancy in the central U.S. with a ton of room to grow and we're really just beginning to see the benefits of scale. Scale benefits in terms of winning larger deals, in terms of easier recruiting of top notch people. As Jeff alluded to earlier, we're looking at adding 70 to 80 folks this year on an organic basis, maybe as many as 30 in the first quarter. Our brand name in the marketplace is stronger than it's ever been. We've got a better inflow of qualified candidates than we've ever had.

And also, scale benefit through better lead flow from our partners. We are moving a significant amount of software of our partners and we're getting benefits from that in terms of better lead flow which is helping to cut our sales costs and cut our sales cycle times.

We're also, I believe, getting better recognition from the investment community and it's move up to the NASDAQ National Market today will assist in that, although, frankly, to a large degree we're still beneath the radar and that's something we intend to remedy in 2005.

Finally, this strength in scale enhances our M&A efforts significantly. We've got a stronger currency now. We were effective as an organization doing acquisitions when we had a stock that was trading at $1.50 or $2 and volumes of just a few hundred shares a day. Now with a stock that is in the range of $7 or $8, trading multiple hundreds of thousands of shares a day, we are in a much, much stronger position as a buyer. So we're able to buy better companies, buy them at better prices and drive more accretion and we still see an M&A environment where there are not a lot of competing buyers for the $10-20 or $10-30 million shops that we're looking at. Our current active M&A pipeline today, and that's just the firms with whom we're in some level of active discussion, and it represents a small subset of the overall opportunity, but just that active M&A pipeline represents more than $250 million in annualized revenues.

So we're talking about a very significant opportunity for continued growth on the M&A side, coupled with the very strong organic growth we've shown and expect to continue into the future.

So with that, I would like to open the call up for questions.

Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press star followed by two. Questions will be taken in the order received. Once again, that is star one if you would like to ask a question.

And our first question comes from Pete Heckmann of Stifel Nicolaus.

Good afternoon guys. Nice quarter.

Thanks.

In terms of the strong software reselling in the quarter. Can you talk a little bit about how that business breaks up in terms of what were some of the - dominated by a couple large deals? Was it a number of smaller deals? And then as we go throughout 2005, how do you expect to start work on those services or some of the already in progress or will they ramp into the second quarter?

In terms of average deal size on software, it was about $325,000 in the fourth quarter so we had a good distribution of that revenue in a number of existing and new client accounts. The largest deal was about $2.2 million, but, again, average across the board was about $325,000 and work's begun on a number of those deals already. As you know, typically in our industry you see a services load which is a multiple of the license revenue, so for a dollar, let's say, of software license revenue you might see $3-5 of services associated with that software over the lifetime of the installation. It doesn't all come in the first year.

But we're seeing a lot of services activity now spun up around those software deals and as we look out into 2005 we expect to see some continued good levels of software sales.

OK. And then as a follow-up, could you repeat the average headcount for the period including subs? Could you repeat what ZettaWorks contributed including subs and then provide the ending head count so we can get an idea of the starting base for the first quarter?

Yeah. Let me take that one, Pete. So for Q4 we averaged 278 billable consultants. That included 45 subcontractors and that excluded ZettaWorks. So then with ZettaWorks we add on 91 billable headcount.

91?

91.

OK.

Which includes 35 subcontractors.

I got you.

So that takes us to a go-forward of 369 billable consultants including a total of 80 subcontractors.

OK. And do you anticipate, given the current pipeline that you're going to be in the mid 80s, do you anticipate adding headcount organically in the first half?

Absolutely, you know, our target, if we could hire 30 people this quarter we would do it and we would anticipate adding at least 70 to 80 for the year. So there is a significant amount of demand out there and we are fully engaged in recruiting to fuel that organic growth.

Great. I appreciate it.

Thank you.

And our next question comes from George Mahalis (ph) of Guilford Securities.

Hey guys. Great quarter.

Thank you.

A couple of questions. Can you provide us with a breakdown by verticals for the quarter?

Sure. The largest was financial services and insurance which was about 25% of revenue.

OK.

After that came manufacturing, which was about 17%, which is also of interest because that percentage increase relative to where it had been over the last four or five quarters, six quarters. Not surprising, I guess, given the relative strength that we're starting to see in the manufacturing sector. And healthcare was about 8%. So with those three combined you're looking at about 50% of total revenues and after that, really, it's a mix.

Got you. You had mentioned the strength in the Websphere (ph) numbers reporting by IBM. Can you give us a sense as to what the software quota that they're putting out there for the Midwest region is? Do you have a sense of what that is or ...

Basically what we have heard is that we're - IBM is targeting about a 20% increase in software sales for the Westsphere (ph) suite in the central region for 2005.

OK.

But I want to be clear. We don't have a definitive number from IBM on that. But I will say we are seeing accelerating strength and IBM's value proposition is very strong in the marketplace and they've got a great track record across the board and in particular in the central U.S. so we would expect that that's a reasonable target for the year.

OK. In - a few more - two more questions, actually. What tax rate should we be modeling going forward?

Going forward it should be - we've been at 39%...

Yes.

A little bit above that. Going forward into 2005 we expect that to come down slightly, so in between 38%, 39%.

OK. And that stems from the ZettaWorks acquisition? Is that helping you out over there or ...

Actually, no. The ZettaWorks acquisition was structured as an asset purchase and so yes, we do get to deduct the goodwill ratably over 15 years as a tax deduction, but that's only cash tax deduction as opposed to affecting our P&L. So we record that as a asset as part of the purchase accounting and therefore we get to make less - dollar payments to the IRS but it does not impact that rate I just gave you.

OK. And the last thing. What variables are you factoring into Q1 guidance in terms of billing rate and headcount?

Well, we're factoring in, typically I would say that we come at guidance from a top-down perspective in terms of it being driven by customer demand so our guidance methodology where services is concerned is a double netted methodology. In other words, we only count opportunities that are better than 50% in probability and then only count them to the extent of their probability factor and of course we add that to our contracted backlog and then we then discount the whole amount so in terms of coming at our guidance it's really driven by real demand in the market as opposed to a headcount equation.

Final thing I'd add, by the way, is on software we go through those first two steps and then we cut the number in half to triple net that just to be extra conservative given the lumpy nature - potentially lumpy nature of software sales. But I would say to you that there are no particularly optimistic assumptions in headcount or rates to drive that. So, in other words, modest increases in headcount, not even that full 30 number that we talked about, continuation of the same average rates that we had in Q4, which is running at about $112 an hour after giving effect to those acquisitions and a continuation of the sort of low to mid 80s utilization rate based upon a 2016 year that we've seen prevailing throughout much of 2004.

OK, thank you.

Thank you.

As a reminder, please press star one if you wish to ask a question.

It appears there are no further questions, sir.

Great. Well, I would like to thank everyone for their time on today's call and we look forward to speaking to you next quarter. Thank you.

Ladies and gentlemen, to access a replay of today's call, please dial 888-286-8010 and use pass code 27598716. We thank you for your participation today. This does conclude the presentation. You may now disconnect.

Have a good day.