Perficient Inc (PRFT) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2005 Perficient earnings conference call.

(OPERATOR INSTRUCTIONS)

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

Good afternoon. This is Jack McDonald. With me on the phone today are Jeff Davis, our president and chief operating officer, and Mike Hill, our CFO. I'd like to thank you for your time this afternoon.

We're going to have about 10 to 15 minutes of prepared comments, after which we'll open the call up for questions. At this point, Mike Hill will read a 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 filings concerning factors that could cause those results to be different than contemplated in today's discussion.

Thanks, Mike. So Q1 was a great quarter for Perficient. We hit record services revenue, record EBITDA, operating income and earnings per share. We completed the integration of ZettaWorks, which was our late 2004 acquisition. That transaction has made Perficient the leading independent WebSphere and Tibco consultancy in the central U.S., positioning us well, I think, in a market that's growing rapidly. We continue to execute and demonstrate that we're on plan to reach 100 million in revenues this year.

Taking a quick review of the numbers, revenue from services and software was up 139% year over year and I would note that organic growth was 23% year over year, so we're hitting some very healthy organic growth rates above the 15 to 20% target that we talked about on prior calls. Net income was up 140%, diluted earnings per share were up 50%, EBITDA up 152%, and if you look at it now on EBITDA, this is currently a $12 million annualized run rate EBITDA business, so generating a very meaningful cash flow.

The first quarter was our eighth consecutive quarter of positive earnings per share and if you look at our growth on a sequential basis, from Q4 to Q1 looking at our core services revenue, we had 5.4% sequential growth, 5.4% sequential growth from Q4 to Q1. With the ZettaWorks acquisition and that sequential growth was 30%. But even factoring ZettaWorks out, that 5.4% equates to an annual growth rate again in that 20 to 25%, closer to 25% range. So this business is very healthy, this business is growing.

We did have a big year-end chunk of software resale, third party software resale like we get at the end of every year. And of course that doesn't repeat in Q1. Q1's results were a little bit lower in terms of total top line, but they're healthier results because they represent much more high margin services business. So again, we are growing 5.4% sequential growth. I'd also note that our earning per share at $0.06 beat the consensus analyst estimate of $0.05, so a 20% beat there on EPS.

We believe we're building an IT consulting leader and becoming a growing force in this industry, not only in the Midwest but in the entire country. We landed a number of new clients in the first quarter and Jeff Davis is going to address those in greater detail a little bit later. But what I will say on that is we are being invited to bid on and are winning larger projects. So some significant multimillion dollar wins in the first quarter that are really showing the benefits of scale as we now cross through 75, $80 million run rate on our way to 100 million and beyond. And also showing the benefits of synergy as we bring together the skill sets not only of legacy Perficient, but of the firms we've acquired to put together pursuit teams and project teams that are world class.

In terms of recruiting, and here's an interesting point, we've got solid demand, solid organic growth, and we've got a recruiting engine that's able to meet it. If you look at our headcount today, it's 470 total, up from 424 at the beginning of the first quarter. That's all organic. So we've increased headcount through a mix of full time hires and flex staff by almost 50 during that period of time. So we're demonstrating that we have the ability to add capacity to meet demand.

And, as you know, we made a decision not to proceed with that proposed secondary offering. By the way, we made that decision before we commenced with any roadshow related to the proposed offering. We made the decision because we felt that at the price at which we were trading, it was just too low a price to do a substantial equity raise. And given our strong results and the availability of alternative financing, like senior debt, there was more than one path to get to our goal of having the firepower, the war chest we need to make that 50 million in acquisitions. We had a tremendous amount of interest on the part of a number of senior lenders and we've got that capacity there to make acquisitions.

On that score, we've also got a strong M&A pipeline. I spent a lot of time over the past few months talking to a number of candidates. And again, the companies -- just the companies with whom we're in active discussions regarding an acquisition represent greater than $200 million in annualized revenue. And again, our intentions are to add at least 50 million in revenues this year through acquisitions. So we've got a very robust pipeline and more than enough supply to execute on our plan of adding 50 million in revenues through acquisitions. And with that bank financing in place and our operating cash flow, we've got the resources we need to make those deals happen.

So at this point, I'm going to turn the call over to Mike Hill who's going to discuss in detail our financial results for the quarter and then to Jeff Davis to provide some additional color behind those numbers.

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

For the quarter ended March 31st, 2005 we recognized revenue from services and software, excluding reimbursed expenses, of 19.1 million, or 139% increase over the first quarter of 2004. For Q1 '05 services revenue was 17.7 million compared to 6.7 million for the same period in 2004 and 13.5 million in the fourth quarter of 2004. This represents services revenue growth of 165% over Q1 2004 and 30% sequentially.

In Q1 2005 revenue from the sale of third party software was 1.4 million compared to 1.3 million for the same period in 2004 and 7.4 million in the fourth quarter of '04. Net income was 1.5 million, or $0.06 diluted earnings per share, for the quarter compared to net income of 621,000, or $0.04 diluted earnings per share, in the first quarter of 2004 and 1.3 million, or $0.06 diluted earnings per share, for the fourth quarter of '04.

New this quarter we are starting to disclose cash earnings per share, which is a non-GAAP measure defined as GAAP earnings per share but excluding amortization of intangible assets and stock compensation. We believe that cash EPS is an important indicator of performance, especially in light of the new accounting regulations around the expensing of stock options expected to be adopted in Q1 2006. A few companies in our industry are already disclosing this measure and it has been requested of us to do so as well. Cash EPS was $0.07 in the quarter compared to $0.04 in the first quarter of '04 and $0.06 in the fourth quarter of '04. Gross margin for services was 36.8% for the quarter compared to 42.9% in the first quarter of '04 and 38.4% in the fourth quarter of '04. Gross margin for software revenue was 16.2% compared to 13.3% in the first quarter of '04 and 12.7% in the fourth quarter of '04.

SG&A expense was 3.7 million in the quarter, which is an increase in absolute dollars from the first quarter of '04 and the fourth quarter of '04. However, SG&A as a percentage of services revenue was 21.1% in the quarter compared to 27.8% in Q1 '04 and 25.7% in the fourth quarter of '04.

EBITDA, a non-GAAP measure, was 3 million in the quarter compared to 1.2 million in the first quarter of '04 and 2.7 million in the fourth quarter of '04. During Q1 '05 our utilization rate based on a 2,000 hour year was 84%, excluding subcontractors, and our end of period billable headcount was 367, including 72 subcontractors. Our quarter end cash balance increased to 4 million at March 31st, '05 and during Q1 net working capital increased to 11.4 million as of March 31st, '05.

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

Thanks, Mike. I want to first talk a little about the ZettaWorks acquisition. As jack mentioned and as everyone knows, we completed that acquisition at the end of last year and really completed the integration of that acquisition in Q1. And there were some key events associated with that that I wanted to share.

First, we were able to lift the average bill rate for the first quarter by more than 10% from the fourth quarter, which really contributed heavily to the acquisition being immediately accretive. Zetta also substantially contributed to our new client sales column. More than half of our new client wins in Q1 came from the ZettaWorks acquisition. We also transacted the first IBM software resale for Houston in Q1 as well. Zetta added to Perficient's portfolio the ability, and this is a really exciting event that we hadn't disclosed before, but adds ability to market and resell or sell high margin Perficient developed software that ZW brought to the table. And we've already transacted a few if those deals in Q1 and expect to be doing the same in Q2.

In terms of new wins in Q1, we added more than 20 new clients in the quarter and I want to just provide a couple of updates or examples of some key wins associated with that. We were awarded a number of integration related contracts totaling more than $3 million at a large telecommunications company that is undertaking a substantial merger. Specifically, we're assisting them in leveraging an EAI platform, enterprise application integration platform, as the cornerstone to merging the business systems of the two entities that are merging.

We also executed a meaningful license agreement for them to purchase the software developed by Perficient that I referred to earlier. The software is a J2E based toolset that enhances the EAI platform by extending its functionality in the areas of exception handling and audit logging.

Another key win for Q1 was at an international agribusiness firm. Actually two projects there. The first project involves developing a portal strategy and roadmap to guide the implementation of PURL technology across the enterprise. The second engagement is a multiphase, multi-project undertaking to develop a solution to consolidate business systems across multiple divisions of the enterprise. From a technical perspective, this solution will involve WebSphere portal and Tibco integrating to SAP. Assuming all goes well, we expect this to lead to yet another multimillion-dollar engagement for Perficient in the late Q2, early Q3 timeframe.

Four Perficient business units, including former ZettaWorks, formed a pursuit team which competed for this opportunity against a field of seven competitors ranging from international systems integrators to regional firms. This again is a testament to the importance of the breadth and scale we've achieved.

Other significant events in the first quarter include the fact that we were one of 15 IBM business partners worldwide to be awarded a Business Partner Leadership Award at IBM's Partner Event in Las Vegas earlier this year. This is a result of our partnership contributions in 2004 to IBM, which included reselling $13 million of IBM software and being credited by IBM with influencing over $130 million where we assisted IBM in closing additional software and hardware sales.

One more comment on growth and then I'll turn it back to Jack. As you can see from the Q2 guidance, we're anticipating that we will again experience strong organic growth. In April alone we've added approximately 25 consultants to the team to enable us to deliver on that expectation. We now have four full time recruiters on staff in addition to the network of excellent recruiting firms that we routinely work with. As Jack mentioned earlier, we're prepared to continue to scale the business and, in fact, are delivering on those results. We're excited about Q2. Very pleased with the Q1 results and expect even better results from the second quarter.

With that, I'll turn it back to Jack.

Thanks, Jeff. One point I'd note there, we're putting that infrastructure in place really across the board to accommodate the additional organic growth opportunity we see in the market as well as the M&A growth and we're doing so and yet still increasing our EBITDA and operating margins. Now we got help from a couple of items in Q1, but the EBITDA margins in Q1 were 16%, which is extremely high and I think really tops in terms of publicly traded domestic IT consultancies.

So the benefit to scale and leverage on our G&A spend are such that we can increase the infrastructure investment we need to make and yet still grow our operating margins as we scale revenue. And we see that situation existing from where we are today at 75 million through to a couple hundred million dollars.

In terms of the outlook for Q2 that Jeff referred to a moment ago, you can see from the press release that we're forecasting a continuation of strong growth going into Q2. We expect services and software revenue in the range of 18.7 million to $20.1 million. That includes 900,000 to 1.3 million of revenue from sales of third party software. We are forecasting 17.8 to 18.8 million in services revenue and that would represent growth on a year over year basis of between 84 and 95% and again, the sequential similar to what we had from Q4 to Q1. So looking at organic growth in that 20 to 25% category for the year.

So with that, I'd like to -- I'll actually make one other point on those Q2 numbers. If you look at where we are right now, backlog at this point in the quarter, we're about $2 million ahead in contracted backlog of where we were in Q1 at this time. Now, that doesn't mean we're come out doing $2 million more in services revenue because I think we've just been more successful. We've sold ahead and we're going to be subject to how much capacity we've got to deliver that revenue in the quarter, although we're hiring as fast as we can to get there. But I think that's a bullish sign that we're $2 million ahead at the same point in Q2 relative to where we were in Q1.

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

(OPERATOR INSTRUCTIONS)

Your first question comes from Pete Heckmann of Stifel, Nicolaus. Please proceed.

In terms of looking at your SG&A, you had great leverage over operating expenses in the quarter. Was the G&A, were there any items that were benefiting that number in the quarter? I would assume that number grows a little bit into the second quarter or do you think that might be pretty close to a decent run rate?

From a -- looking at it from an EBITDA margin perspective is kind of the flipside of that coin. We expect in general to be running around 14 or 15% going forward. Again over time as we scale to 150 million, I think we can pick up a couple of points of EBITDA margin. This quarter we came in at 16% because we had a couple of items that I mentioned briefly earlier that were a help to us. And I'll let Mike Hill talk specifically about what they were.

Yes, Jack. There were a couple of things that stand out. One is vacation accrual forfeiture. Based on our vacation policy, every March 31st if the user loses -- if you haven't used your vacation by then, then our employees forfeit and start over. That was about a $100,000 pickup in Q1 that helped out our numbers there, so it's a one-time thing.

Secondly would be a little over $100,000 in bonus accruals based on our bonus plan for management and the general managers. There's a requirement to meet a certain minimum EPS and we were right on that as we came out at an even $0.06 for the quarter. And because of that we were a little bit light on the -- as far as looking at 100% bonus target, we were a little over $100,000 less than we otherwise would be on that, too.

So there's a couple of things that'll bring the SG&A number up a little bit in the future.

Okay, that makes sense. And then how about as regards the ZettaWorks as well as Meritage, you made a brief comment on how they're picking up in terms of software reselling. You had obviously a great second half activity there. Do you think there's the same opportunity with ZettaWorks to drive some software -- increases in software reselling revenue?

Yes, I do think there's a really good opportunity there. If you look at first in the case of Meritage, prior to our acquisition of them they weren't selling software at all and now, if you look at it, roughly half of our software, our third party software resale's being generated out of Meritage. So that's a material development. And there's some significant margin associated with that and so it's a real positive in terms of making that deal even further accretive to our earnings.

In the case of ZettaWorks, I'm happy to say that we closed our first piece of IBM software at resale out of the ZettaWorks office, former ZettaWorks office in the first quarter. So that process has now begun as we sort of brought them under the Perficient umbrella and made the appropriate relationship building introductions into IBM. And so I would expect that to continue.

And then in addition to that, there is Perficient developed IP software that comes out of the Macedonian offshore facility that we maintain that Jeff Davis referred to earlier. And we're looking at potentially a 200,000, $0.25 million in that revenue in this quarter and that's 100% margin revenue. So that's got a very good impact in terms of bottom line.

Okay. So it depends upon mix, that would be recorded in the software line and depending upon the mix that could potentially help the software reselling gross margins?

Yes, although actually I think the way we're going at it is to record that in the -- we are recording it with software, all right. I know that in the press release disclosure we've talked about it both ways. But yes, in the actual income statement that would help the software gross margins.

Okay, great. And then just one last question. Mike, you had mentioned that an average headcount for the first quarter of 376. How many subs did that include? I missed that number.

It's 72 subs.

Your next question comes from the line of George Milhalos of Gilford Securities. Please proceed.

Can you give us some clarity, perhaps a vertical breakdown and any trends you're seeing, perhaps in a particular vertical?

Sure. Looking at first quarter revenue, financial services, banking, insurance as a group was roughly a third, I think 26% of revenue; manufacturing 9%; business services and healthcare both came in at around 7%; energy and utilities about 5%. And after that about 35% was a mix. And I'm going to ask Jeff Davis to comment on the trends that we're seeing in terms of that mix going forward.

I think that really continues, Jack, and we continue to see real strength in the financial services sector. It's just a natural fit for the kinds of solutions that we develop, integration, client facing portals, better customer service. So I think that's going to continue, especially if you consider the provider -- or the payer side rather of the insurance industry. I think we'll see energy increase for us as a result of the ZettaWorks acquisition. Energy would never have been at the high level that it was (inaudible) quoted before and I think we'll continue to see improvement there. That's another industry that continues to try to drive greater efficiency in their business and integrating applications is a big part of that.

That would be my comment there. I think the trends -- that mix continues, maybe a little more of an uptick in energy.

Okay. And you guys mentioned you've been successful in upping the hourly rate from ZettaWorks business. What is that blended rate for the quarter?

It was 111 an hour.

111 an hour?

Company-wide and that's down about $1 from Q4. And again, that's because even with the uptick we experienced, Zetta had about $106 an hour average rate, so the math on that is -- takes us down to $1. I'd note there that all of these acquisitions, we structure these deals so they're accretive even at these lower rates and lower gross margins. And as we bring those rates and gross margins up, that's icing on the cake. And in addition, I'd say that when I look at the deals we've got in our acquisition pipeline right now, a few of them have higher rates, in the 120s, so although we found some really good firms that again we're pricing locally and pricing out of fear with lower bill rates, we're also looking at a number of firms now that have bill rates in 120, $125 an hour range. So it's not a given that all future acquisitions will follow that same path.

Okay. And just looking at the business standalone right now, I would imagine you'd expect somewhat of a modest billing increase quarter over quarter?

Yes, the -- if you look at it absent acquisitions, there has been an increase in rate fairly steadily and it's not surprising in an 84% utilization environment that we'd be seeing some firming up of rates. So yes, I agree with that.

Okay. And just two more questions. What percentage of your business came from IBM this quarter from the subcontracting arrangement?

From the subcontracting arrangement in total, about 13% of revenue. Now that's down from 35% of revenue a year. So even though the business has grown on an absolute basis, on a percentage basis it's a much smaller piece of what we do. And I would say in addition to that that about a third of that 13 million is work that we sourced and put on IBM paper for one reason or another and so when you look at the actual true subcontracting piece, it's even lower than 13%, closer to 7 or 8%. And I'd make a further point that the retainer agreement is less than 2% of revenues. So not really material from an economic standpoint to our business at this point.

Okay. And just one final question. What is the size of that Macedonian operation and are you looking to scale it?

Yes. It's a small operation today, about a dozen, dozen and a half people and doing two things. One, the development of the IP implementation tools that Jeff talked about earlier and a significant amount of time being spent right now porting that Tibco based tool over to WBI, which is IBM's enterprise application integration platform, and also providing project support on a couple of Tibco engagements here in the U.S. I would very much like to grow it. I think we will grow it over the next year. I think there's a great opportunity there. We've got a good relationship with the university in Bitola (ph) and they graduate some very talented English-speaking engineers. You don't have nearly the attrition risk that you've got in India and you don't have much of a time zone difference either. So I think we've got a good situation up and running there and I see us growing it.

Your next question comes from the line of Steve Neary (ph) of Gilford Securities. Please proceed.

Gentlemen, can you explain why you went about bringing out the March 7th offering the way you did and what did you learn from that?

The -- I'm sorry, when you say the March 7th offering you mean the -- ?

Right, the S3, you filed that. Initially you went to do the 4.25 million shares and then decided to cancel that, obviously because the stock price. So I wanted to, if you could, explain kind of what your strategy was at that point, why did you want to do it that way -- we all understand why you want to cancel it -- and then what did we learn from that?

Well, I think that there was an opportunity to assemble a war chest for acquisitions and do so at an attractive price and increase the institutional ownership of our stock and increase the float. And those are really the reasons behind doing a secondary. And they made sense at the right kind of a price. But obviously if you look at -- this process took a long time. It was really begun back in November and just working through accounting issues and filing issues and these things.

You know a lot transpired between the time we originally filed and the time we began the process and the time we actually filed with the SEC. And obviously the market changed dramatically. And at the kind of numbers that we were looking at, it just didn't make sense. I'm a shareholder, a significant shareholder here, as is Jeff, as is the management team and we obviously appreciate very much the responsibility we have to grow shareholder value. And so we are very much focused on that and you make a determination based on where the price is.

I think what we need to do is execute on our plan. I think we need to find the least expensive, the most cost effective financing that we can to do that and right now that is senior bank debt. We have converted the S3 registration statement to a shelf so that is not a lost expense. That's a shelf that we can use in connection with further M&A needs or finance needs that we might have around M&A. We had wanted to put one of those in place anyway, so that's good. And onward and upward from here.

Thank you. With respect to the pipeline, the M&A pipeline you were talking about, 200 million plus, do you feel that the war chest you're building is 50 million you refer to? Does that cover it?

Yes, I think in terms of wanting to get 50 million of deals done, looking at the fact that we tend to do at most 50% cash and 50% stock, given our operating cash flow and a $25 million debt facility, we will have enough of a war chest to execute on our plan this year.

Now, I'll make this point as well. At Perficient we talk about the benefits of scale and winning larger projects, recruiting people, getting more mind (ph) share from our customers and from our partners like IBM, but we also get some significant financial benefits. At a certain point as a business, a difference in degree is a difference in kind and as we've moved from being a company that in the first quarter of last year, first quarter of 2004 did $1 million of EBITDA, or a $4 million annualized run rate, to a company that did 3 million of EBITDA in Q1 2005, or a $12 million run rate, we entered into a different class as a potential borrower. We are now an EBITDA borrower and we can make -- we can get access to a different kind of financing than we could before.

And I'd say as well, if you look at how we do these deals, we're paying post-synergies, immediate synergies, immediate cost cuts, five times EBITDA, call it six just to be conservative. Half of that's in cash, only half, so basically on a cash basis we're paying three times EBITDA. You can do deals on that basis and finance them with debt ad infinitum and improve your debt coverage statistics as you go because you're adding in additional AR borrowing base and additional EBITDA on top of that.

So we've moved to a different league in terms of our classification as a potential borrower in terms of our credit ability, if you will, and we've got a model that is paying a very low multiple in terms of cash paid for EBITDA. And so I think we've got plenty of runway using the debt facility. And when we max out on that 50 million, we can expand the size of the facility and that was an integral part of the discussions we had with the banks. And I repeat again that we had six or seven institutions that were very interested in providing that. So I think that'll be a good source of capital for us.

Thank you for clarifying. I was also curious, if I understand you correctly you say the 50 million war chest covers the pipeline. So that's to say that you're looking to close that pipeline, consummate all these deals by '05?

Yes. Let me again, just to be totally clear, the pipeline of companies with whom we're in active discussion represents about 200 million in annual revenue. Our aggregate pipeline is even larger, but just the folks that we're talking to. Of that 200 million, we're looking to do 50 million, acquire 50 million in revenue in 2005. And the debt facility that we have provides us enough firepower, together with our operating cash flow, to get that done.

Sirs, you have no further questions at this time.

Okay. Thank you very much for your time this afternoon and we look forward to speaking to you again next quarter.

Ladies and gentlemen, a replay of today's call will be available for seven days after today's conference date. To access this replay, call toll free 1-888-286-8010 and the access code is 98298293. Again, the phone number is 1-888-286-8010 and the access code is 98298293. This concludes today's presentation.

You may now disconnect. Thank you and good day.