Perficient Inc (PRFT) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2005 Perficient earnings conference call. My name is Samuel, and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr. Jack McDonald, Chairman and CEO of Perficient. Please proceed, sir.

This is Jack McDonald. With me on the telephone this afternoon are Jeff Davis, our President and Chief Operating Officer and Mike Hill, our Chief Financial Officer. We'll have 10 to 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 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.

Q3 was a great quarter for Perficient. We posted all time records for revenues, cash flows, net income and earnings per share. We pushed through our $100 million revenue run rate goal, completed the acquisition in Dallas of Vivare, a transaction which expanded our presence in the Southwest and also brought significant additional solutions capabilities to the Company.

Growth and demand in the market for us continues to accelerate. And we are now realizing, as you look at Q3 results annualized, organic growth of nearly 30% - 30% organic growth. Just looking at some of the accomplishments in the third quarter, total revenue was up 49% year over year; net income up 80%; diluted earnings per share up 60%; EBITDA up 84%.

And we're now realizing an annualized EBITDA run rate of north of 16 million - almost $17 million. And that is without a full quarter's impact from Vivare, which will increase that number further. This was our 10th consecutive quarter of positive and growing earnings per share. Our 11th consecutive quarter of positive and growing EBITDA.

And again, as I mentioned, organic growth of 30%, which is extraordinary. We're going to be talking in a moment about the outlook into Q4, but we're looking at a very strong Q4 and a great close to what has been a phenomenal year.

We're building an information technology consulting leader, and Perficient is becoming a growing force in our industry. We added several significant new clients in the quarter. Jeff Davis is going to address that a little bit later on. And we continue to reap the benefits and synergies of scale in meaningful ways - larger projects, a better time - an easier time recruiting, better mind share from our partners, a healthier M&A pipeline and an increased ability to get high quality M&A deals done. And also these milestones that we hit on scale, I think, are important in terms of our recognition in the investment community.

In addition to the Vivare acquisition, which added roughly 10 million in annual revenues, we continue to pursue a robust M&A pipeline. The companies that we're in just active discussion with represent about 250 million in annual revenues. Our goal is to get one more deal done by the end of this year. It may go slightly into the first quarter, but that is the goal - to get one more deal done.

And then next year, in 2006, we'll look at an additional three to four deals to add somewhere between 40 and 50 million in revenues. So, current course and speed on that score in terms of augmenting our strong organic growth with M&A.

We're in a good position in terms of financing the cash portion of those acquisitions with available debt and cash totaling about $20 million right now. And frankly, the ability to increase the size of our debt lines as we need them. We will be beginning those discussions with our bankers in the not too distant future.

So, again, overall a very strong quarter. Our business is growing across the board and truly firing on all cylinders. I'm going to turn the call over now to Mike Hill, who will 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 run through the Q3 numbers first and then follow that up with a summary of year to date metrics.

First of all, for the quarter ended September 30, 2005, we recognized total revenue - including reimbursed expenses - of $26.1 million, a 49% increase over the third quarter of '04. Our Q3 2005 services revenue, including reimbursed expenses, was 24.2 million compared to 14.1 million for the same period in 2004 and 20.3 million in the second quarter of '05. This represents services revenue growth of 71% over Q3 '04 and 19% sequentially.

Q3 '05, revenue from the sale of third party software was 1.9 million compared to 3.4 million for the same quarter in '04 and 1.4 million in the second quarter of '05. Also, for this third quarter, we recognized $42,000 from the sale of internally developed software. This is a first for us.

Net income was 2.1 million or $0.08 diluted earnings per share for the quarter compared to net income of 1.1 million or $0.05 diluted earnings per share in the third quarter of '04 and 1.6 million or $0.07 diluted earnings per share for the second quarter of '05.

Cash earnings per share, a non-GAAP measure defined as GAAP earnings per share, but excluding amortization of intangible assets and stock compensation was $0.09 in the quarter compared to $0.06 in the third quarter of '04 and $0.07 in the second quarter of '05.

Gross margin from services was 38.4% for the quarter compared to 38.6% in the third quarter of '04 and 36.9% in the second quarter of '05. Note that excluding subcontractors, gross margin from services was 42.1% for the quarter compared to 37.7% in Q2.

Gross margin for software revenue was 21.6% in Q3 compared to 14.1% for the third quarter of '04 and 14% in the second quarter of '05. SG&A expense, excluding noncash stock compensation, was $5 million in the quarter, which is an increase in absolute dollars from the third quarter of '04 and second quarter of '05. However, SG&A expense, excluding noncash stock compensation, as a percentage of services revenue was 21.7% for the quarter compared to 25.2% in Q3 of '04 and 21% in the second quarter of '05.

EBITDA - a non-GAAP measure - was 4.2 million for the quarter compared to 2.3 million in the third quarter of '04 and 3.2 million for the second quarter of '05. Note that we had strong cash flows from operations during Q3 of about 2.5 million.

Now for the year to date numbers. For the nine months ended September 30, 2005, we recognized total revenue, including reimbursed expenses, of 67.5 million - an 81% increase over the nine months ended September 30, '04.

The year to date September 30, '05 services revenue, including reimbursed expenses, was 62.8 million compared to 31.4 million for the same period in '04. This represents services revenue growth of 100% over year to date last year.

For the current year to date revenue from sale of third party software was 4.7 million compared to 5.8 million for the same period in '04. Year to date net income was 5.2 million or $0.21 diluted earnings per share compared to net income of 2.6 million or $0.13 diluted earnings per share for year to date '04.

Cash earnings per share - a non-GAAP measure - defined as GAAP earnings per share, but excluding amortization of intangible assets and stock compensation, was $0.24 for the year to date period compared to $0.14 for the nine months ended September 30, '04.

Year to date gross margin for services was 37.4% compared to 39.6% for the year to date and prior year. Year to date gross margins for software revenue was 17.7% compared to 15.5% for the year to date September 30, '04.

SG&A expense, excluding noncash stock compensation, was 12.7 million for year to date September 30, '05, which is an increase in absolute dollars from year to date '04. However, SG&A expense, excluding stock compensation, as a percentage of services revenue only was 21.2% for year to date - for this year to date period - compared to 25.4% for year to date in prior year.

Year to date EBITDA - a non-GAAP measure - was 10.4 million as of September 30th, compared to 5.1 million for the same period last year. And during Q3 2005, our utilization rate, based on a 2000 hour year, was 88%, excluding subcontractors, and our end of period billable headcount was 491, including 122 subs.

Our quarter end cash balance increased to 3.3 million at September 30th, 2005 from 2 million at June 30th, 2005. During Q2, net working capital increased to 17.9 million as of September 30th.

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

Thanks, Mike. You know, as previously discussed, we really had another strong quarter in the third quarter and I've got just a few additional noteworthy items that I'd like to discuss for a couple of minutes.

First, we really had strong sales in the third quarter, which I think continues to validate our strategy of focusing on the application integration in Middleware space. Really, continue to see strong demand there.

Some of the spending trends that we're seeing include continued strong investment in e-business infrastructure. Companies that still have a lot of pent-up demand holding back on making those investments over the last several years. Really stepping up spending recently over the past, say, 12 to 18 months.

Interest really peaking, by the way and early adopters beginning to spend some money on service oriented architecture platforms, such as IBM's Diamond framework. This is something that represents a messaging framework for business integration within a lot of our clients. And really see that as a future opportunity for us.

Also seeing clients continue to leverage technology to improve customer intimacy and, obviously, operational flexibility and efficiency. Another noteworthy item, perhaps the most noteworthy item, is the Vivare acquisition. Another significant event, obviously, in the third quarter. With Vivare, we added several Fortune 1,000 clients, over 60 strong consultants and a solid presence in Dallas and the Dallas market. We also expanded our business intelligence capabilities and enhanced our relationship with Essential, which is a business intelligence platform vendor that was acquired earlier this year by IBM.

We've introduce the Vivare team to our existing vendor partners in the area and expect strong synergy from those relationships also within the Dallas market. We really didn't have much going there. We were doing some service there from other markets, but obviously, having a presence there is very meaningful.

Additionally, the Dallas team is already engaged with other business units throughout Perficient and pursuing opportunities around business intelligence and other skills that they brought to the table, as well as already engaged in project delivery.

Also, as previously mentioned, we continue to have really strong organic growth in the third quarter. We added 30 additional employees compared to, I think it was about 12, last quarter. We've got eight full-time recruiters on staff now, which is up from five as of the second quarter. Also, as Mike mentioned, our overall rates were up in the third quarter and I expect that trend to continue as we improve our position in the market and sell more solutions oriented engagements.

You know, this assumes, of course, that the market continues to cooperate. And as I've already alluded to, we're not seeing any indication of a slowdown or to the contrary for our business. Business continues to look strong and our pipeline is very full.

Looking ahead, we have another strong forecast, I think, for the fourth quarter. Jack alluded to that already and provided some more details on it. We've already surpassed our third quarter software sales with nearly $2 million of software in the backlog. And expect an opportunity to sell quite a lot more.

Fourth quarter's an interesting time of the year for software sales. A lot of the deals don't materialize - we don't have a lot of visibility until probably about mid-November. There's usually a big spend in the latter part of Q4 and we've already got a great start. So, we're excited about that.

With that, I'll turn the call back over to Jack.

As Jeff alluded to, we're in a very strong position regarding Q4. And you know, Q4 you tend to lose a couple, maybe three, billable days due to the holidays and vacation around the holidays. But notwithstanding that, we're in a position to report record guidance for the fourth quarter.

So, we expect our total Q4 revenue to be in the range of $26.8 to $28.2 million. And that's comprised of 24.6 to 25.8 of services revenue - 24.6 to 25.8 of services revenue. And then 2.2 to 2.4 million in revenue from the sales of software. So, that forecast range of services revenue represents services revenue growth of between 73% to 81% year over year. So, over the fourth quarter of 2004. So, we're still looking at, really, some very, very significant growth.

Now, regarding our guidance, it's important to note a couple of things. First of all, we have always used a conservative guidance methodology, and particularly as it relates to software sales. And as Jeff mentioned a minute ago, of that 2.2 to 2.4 million in software sales that we're guiding to, $2 million of that is already sold.

And I'd mention as an aside that it's on the books with about 30% gross margin, which is much higher than our historical software gross margins have run - about twice the normal level. So, that's good news from a cash flow and earnings perspective for the fourth quarter.

So, really, we feel very good about the potential for Q4 software sales. And for perspective, you'll remember - looking back to last year to Q4 - our initial guidance was 13 million to 13.6 million. Ultimately, we reported close to $21 million. Now, a large part of that delta was increased software sales.

And while I don't expect a kick of 7 million above guidance for the fourth quarter, it is possible - one never knows - that that 2 million of guidance software could come in at twice that number. Of course, there are no guarantees and again, we have a conservative guidance methodology, which is why we're guiding 2.2 to 2.4 million of software sales.

But again, given the fact that 2 million of that is already in the bag and given what our pipeline looks like, there is the potential for a significant upside surprise there. But of course, we'll only know that when we know it when those deals come in. And so that's the status on that.

But in general, really very well poised for Q4 for a great end to a great year. So, we're as optimistic as we've ever been about the potential. For Perficient, market demand is increasing, organic growth is building, our M&A pipeline remains strong. We're extremely optimistic about the remainder of the year and the opportunity to continue to grow this business significantly in 2006.

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

Thank you.

(OPERATOR INSTRUCTIONS.)

And our first question comes from Peter Heckmann with Stifel, Nicolaus. Please proceed, sir.

Good afternoon, guys. Nice quarter.

Thank you.

As regards some of the newer specialty sub-niches in addition to WebSphere, can you comment a little bit more specifically on some of the things you've seen within Tibco, Documentum, dotnet over the last couple of quarters?

Sure. Jeff, do you want to take that one?

Sure. You know, phenomenal experience with Tibco. And you know, Tibco continues to evolve their product. As I mentioned earlier in the call, I think services oriented architecture is sort of the next wave of application integration. And we see Tibco and IBM really vying for top position. And fortunately, we have relationships with both. So, we're excited about that.

From a business intelligence standpoint, I think I mentioned earlier too, that Essential is coming on strong. And we're enjoying a nice relationship there. And experiencing a pretty good - pretty good demand on the business intelligence side.

I'd add to that, too, we've got - I think - a fairly unique skill and differentiator for us around usability and user-centered design that we perform both as a - (inaudible) - service and it's a part of our methodology. And really seeing strong demand there as well. And it's a great entree into a lot of clients. We might start there with a smaller sized opportunity - a recent example, a large cable company, was we started there with about a $75,000 opportunity helping them redesign sort of the front-end of some applications they were using in the call center. Expanded now a $1-plus million opportunity in redesigning a lot of the applications that they're using.

So, we've got a good diversity and really orienting more towards solutions sales and not focusing as much strictly on technology, but really wrapping it all together and being a one stop shop for our clients.

Okay, great. And then can you comment a little bit on the outlook for software margins? Seeing that number look better here in the third quarter and you made some encouraging comments for the fourth quarter. Is there a mix shift going on there? Is there a change in the compensation agreements for resellers? Or is it just - it just happens to be a specific mix related to these two periods?

Yes, you know, it's actually - IBM particularly, who we resell mostly, but we do have relationships with other vendors. Sometimes we just get influence fees. Sometimes we do some resell, but you know, far and away, IBM is the largest component for us.

IBM put some programs in place this year that really favored the VAR's - the Value Added Resellers. And you know, over the pure resellers. And we're really -- have hit our stride in taking advantage of that. They've got a valued added partner program that allows for more margin if you are delivering the services - a substantial amount of services around the software sale.

And we've really, you know, sort of figured out how to really leverage that to our advantage in the latter part of the year. So, I think you're seeing that. I think we'll see even stronger margins on the software in the fourth quarter. And then going into next year, again, led by IBM and I think other vendors are going to follow suit. IBM's really got a more sophisticated margin opportunity model that really drives into the detail of what the value add that the partners bring to the table. And I think we've got an even bigger opportunity next year.

So, fortunately, rather than going in the other direction, it seems to be going really more in our favor where the margins are going to come back around again and be solid margins. I think upwards of a 30% margin opportunity going into next year.

That's great. And then, Mike, can you talk about in terms of Vivare in the composition of the receivables for the quarter. Did Vivare bring over a chunk of receivables with that acquisition?

They did. They brought over about 1.8 million of purchased AR. And we really only acquired the AR that was less than 60 days old.

Okay.

You know, and of course, any of that that's not eventually collected will be an adjustment to purchase accounting anyway. So, it won't impact our, you know.

Okay. Thanks a lot. I'll let someone else get in the queue.

Thanks, Pete.

And your next question comes from George Mihalos,, IT service analyst with Gilford Securities. Please proceed, sir.

Good afternoon, guys. Congratulations on a nice quarter.

Thank you.

Congratulations on a nice quarter. Can you give us a sense of what your organic hiring plans will be like looking out into fourth quarter and into '06?

Yes, we're looking at forecasted organic growth into next year consistent with what we've been talking about historically, which is in that 20% - 15% to 20% range. And so, we would see organic growth, basically, tracking that. Maybe slightly lower than that because we'll make up some of that organic growth through increases in bill rates.

So, if you start with roughly 500 billable heads and you're increasing that by 20%, it's approximately 100 and then back off that number a little bit, because of the contribution of increased bill rates.

And that what be an average number for the year. So, you'd be looking at a 2006 end of year number probably in the neighborhood of 620 billable. And an average for the year around 580 to 585.

Okay, thank you. And can you give us a sense of the vertical breakdown in the quarter?

Sure, Mike, do you want to walk through that one?

Sure. Basically, for Q3 it was 21% financial services insurance and banking, those three categories combined for 21% of our revenue. Healthcare accounted for 15%, telecom was 12%. Computer software was 11%; and then energy/utilities 7%, manufacturing was 6% and then just business services in general 4% and the remainder is just a number of other kind of specific verticals that all aggregate to the remaining 24%.

Okay, thank you. And last question, what are you internally targeting with respect to your DSO's going forward?

Yes, DSO's, we've shown progress from last quarter - improved that somewhat. And we want - our goal is to get it down to less than 80 days. So, right now we're a little above that, but we're improving on it every quarter and trying to get it down there.

Okay, thank you.

Yes, we've picked up about three days this quarter. And I have been looking closely at this issue and putting the right incentives in place. And I'm confident that, you know, within a few quarters we should be able to crack 80.

Okay.

And your next question comes from Colin Gillis, IT service analyst with Adams, Harkness. Please proceed, sir.

Good afternoon, everybody.

Hey, Colin.

I was wondering if you could talk a little bit about, you know, deal size and average deal size? And are you seeing that number, you know, creep up? And is it getting close to the million dollar mark now?

Well, I think it depends on how you define deal for these purposes. Typically, you're seeing a lot more serial procurement on the part of enterprise customers where what you used to be called a deal is now broken down into sort of three sub-deals.

So, as we define a project - and usually, you'll see two or three of these being strung together in the course of a year - as we define a project, we're seeing an average deal size of around 300,000, which is double what it was a year ago.

And again, you often see two to three of those strung together over the course of a year. And so, you come back up to that $900,000 to $1 million mark that you're talking about. But what you are seeing on the part of enterprise customers is the desire to procure at a more serial fashion, to see iterative return on investment.

And you know, frankly, that's a procurement practice that we encourage. Because it keeps these deals below the RFP radar screens. And of course, we've built a business that can profitably execute on projects of that size. So, the good news is, we are seeing an increase basically double where we were a year ago.

Okay, great, fantastic. Then along the lines of, you know, of the Q4. Does the fact that the holidays land, you know, on weekends, is that a help to the quarter?

It is a help to the quarter in the sense that on a purely workday to workday basis, you're only looking at being down one day in Q4 relative to Q3. And you will have years where you're down as many as two or three days, so that is helpful.

But you've still, of course, got the vacation happening around that. And that's why we make an estimate of a couple or three days. You know, at a roughly at 450 a day - 450,000 a day workday in revenue, it's a meaningful number. Notwithstanding that, though, we are growing rapidly and our revenue per day is increasing. So, we are able to overcome that shortage of days and still expect a very strong close to the year. And of course, some positive seasonality on the software side. And it should all set us up for, you know, a great entry into 2006.

Okay, great. Understood. And then just on the salary expense side, is a 3% to 4% annual lift still the right way to keep thinking of that number?

Yes, although, Colin, now we've gone to instead of putting out annual raises at the end of the calendar year all at once and you see that step up, what we've gone to is laying out the raises on an anniversary basis based on hire dates. So, that's already - that kind of trend and increase in salary expense is already built into kind of our growth cost as you see the trends quarter to quarter.

Okay, fantastic. Congrats on a great quarter.

Thank you.

And your next question comes from Tim Brown, IT service analyst with Roth Capital. Please proceed, sir.

Hi, it's actually Jeff on the line.

Hey, Jeff.

How are you?

Good, how are you?

Good, good, thanks. I was wondering if Mike could walk us through the 30% organic growth number, maybe specifically, what's the contribution from the three acquisitions in the quarter and do you straight out exclude that in your calculations?

Right, so - the best way to look at this is sequentially. And basically, what we've got are Zeta Works, iPath and Vivare that are excluded from the Q3 revenues in order to compare apples to apples.

And what we've got - and this is an unofficial number - but roughly about 8.8 million of revenue from those three acquisitions being contributed here in Q3. Take from the services standpoint - take that off of our total services revenue of 23.2 million. And so, then you compare the net 14.3 to the second quarter of '05 of 13.3, which is going to yield a 7.4% organic growth rate. So -

That's sequential and then annualize that number to 30.

Okay, got you. And then, Mike, how should we think about bonus accruals for Q4? Obviously, you've had a good year and you're going to have some bonus accruals coming in. What do you think the delta will be for SG&A from Q3 to Q4?

Yes, we're going to - you know, we've been accruing the bonuses, as you know, quarter to quarter. You know, Q3, obviously, was a very good quarter. So, naturally, we've got bonus accruals built in to both the cost of revenue and SG&A lines accordingly. And then going into Q4, you know, the components of our bonus plan are driven by both revenue and EBITDA, but mostly the EBITDA number. And it'll be dictated by the results, but you know, based on the guidance that we're seeing here with our EBITDA percentage, you know, hopefully remaining consistent with what it has been over the last several quarters, then we'll be able to see the same kind of consistent accrual, if you will, from a bonus standpoint.

Okay, so you accrue for that period during the period -

Absolutely.

- every quarter.

Right, right.

Okay. And then I apologize if you've answered these already, but I just want to make sure that I've got them. The total billable consultants at the end of the quarter - total headcount - at the end of the quarter? And average billing rate for the quarter?

Right, so going backwards. The average billing rate was $113.00 an hour, up from Q2, which was $111.00 an hour. The ending headcount - billable headcount was 491. And total professionals, including sales and G&A was 571 at the end of Q3.

Okay, and then what about utilization rates?

Utilization - Q3 was excellent on utilization. We achieved 88% utilization in Q3, excluding subcontractors. With subcontractors, which as you know and as you would expect, are 100% billable. That brings the average up to 91% utilized with - but the metric we track is excluding subs, 88% compared to Q2 of 86%.

Okay, and then on the balance sheet I had a question. Other current liabilities jumped almost 3 million in the quarter. What is that associated with?

We had some due to's and due from's related to the Vivare acquisition. So, you'll note there that the other current assets of 1.4 million on the balance sheet, most of that is related to a receivable from revenues and other costs due from Vivare offset by a corresponding payable down in the payables accrued expenses to Vivare.

So, we setup a transition services agreement for one month with them. And we just need to settle that out here.

Okay. And then final question is on the sale cycle. A lot of IT services companies seem to be stressing the notion that the sale cycle is lengthening for them. Are you seeing the same for Perficient? And if not, why do you think that is?

Well, I don't think we're seeing any significant lengthening of the sales cycle over the past few quarters. I mean, we're basically seeing continued strengthening of demand. And I think that the sectors of the market that we're positioned in continue to grow quite well, and that's important.

So, the entire e-business integration space, enterprise application integration and portal and business intelligence and business process monitoring and business activity monitoring software and also what we're doing around document management, these are all areas that are experiencing pretty good clip rates of growth, first.

Secondly, we have pursued a very focused strategy geographically. And that's really resonating for us in the market. And have spent a lot of time building repeat relationships with our customers, as we've discussed before. If you look at the past five years, Perficient's rate of repeat business has been north of 85%. We're seeing spending coming back and, frankly, seeing a higher percentage of noncompetitive bids because we're building those positive relationships.

You know, you look at the landscape out there now in the sub billion dollar category for publicly traded domestic IT consultancies, you know, you've got Keane and Cyber (ph) in the above $500 million category. And those are not guys we see very often in the market. And then you've sort of got Answerthink, Perficient and Sapient.

So, it is not a - there is not a huge market out there in terms of competition. Nine out of 10 of our competitors have been knocked out. I think we're positioned in the right part of the market. We're seeing our customer base budgets begin to increase. That spending is accelerating and it's all accruing to our benefit and yielding the growth we're seeing.

Great. That's great detail. Thanks, Jack.

Thank you.

(OPERATOR INSTRUCTIONS.)

And our next questions comes from Jacques Soenens with Great Gable Partners. Please proceed.

Good afternoon. I just wanted to triple (ph) back to organic growth. This quarter you mentioned 49% year over growth and 30% organic growth. Last quarter, you reported 91% year over year growth and 24% organic growth on your conference call.

But what I'm confused about is when you look to your 10-Q for Q2, you actually report 12% organic growth. I'm just wanting to clarify, what's the different between the organic growth you're suggesting on the conference call, versus what's being said on your 10-Q?

Well, there's a - so, when we talk about this 30%, which is an annualized quarterly number that we just walked through, that's services revenue only. Excluding reimbursed expenses, excluding software. The growth percentages on the 10-Q will be defined in the section, you know, where they're quoted based on whether or not, you know, whether it's total revenue, whether it includes rebilled expenses or not.

So, it should be clear there. So, it's just a distinction in how you define the revenue base that you're quoting there from a percentage growth standpoint.

By way of background, 90% of our revenue is consulting services revenue. That's really the core of our business. That's the higher gross margin revenue running about 38.4% this quarter total. A little over 40% after subs. And that's really the number that we find most investors and analysts want to focus on. So, that's the reason we break that number our. But we do provide alternative disclosure of total revenue growth rates as well.

That's point number one. Point number two on organic growth is, you know, there's always two ways to look at these numbers. You could look year over year and you could look sequentially. The tougher way to go at it from an organic standpoint is to look sequentially and back out your acquisitions.

And so, that's the methodology we use there. What did we grow Q3 over Q2? Backing out acquisitions and then annualize that number. That, to me, is the cleanest way to go at it and that's the number that we quote on these calls.

I understand. What should we expect will be reported in your 10-Q for Q3, then, for total organic growth? Even though I understand your point you just made.

Well, I think in the 10-Q we don't get into quoting organics. We just talk about total growth.

You actually do on page 15 of your 10-Q for the six month year over versus - and then also on a quarter to quarter basis. Just for example, you Q2 for six months, you know, for six months it was 45.2 million divided by your 42.7 million for last year, which would suggest 12% organic growth. This is under the title, pro forma results of operations excluding all the recent acquisitions. I'm just trying to understand the difference between the two.

I think you might be making a distinction between results as reported and pro forma results. But we don't breakout the organic in the Q.

So, what will be your pro forma combined results of operations for the company, excluding Genesis, Ameritage (ph) and all the recent acquisitions?

Are you talking about for Q3?

Q3, yes, please.

Yes, I mean, that will be in the Q when we release it. But I mean, roughly, to do the math, there's basically Vivare is roughly a $10 million company. And as we indicated in the press release, about $730,000 of revenue from Vivare was included in our results for the third quarter. The reason for that was that acquisition closed at the beginning of September. So, you had basically, you know, roughly one month of revenue.

So, if you net that out of 2.5 million, which would be a full quarterly constitution, you come up with a number of roughly 1.7 and you could tack that on and get to, you know, roughly the same place. And that would be the footnote disclosure that will be provided in the Q3 with respect to pro forma revenues for the third quarter as a whole. Roughly those two numbers combined.

That's very interesting. Okay, next question. Can you give us an update on your credit facilities? Your 28.5 million? What's the status of the outstanding - (inaudible) - and so forth?

Yes, we've got about 13.5 million outstanding under that line. Add (ph) to that roughly on the AR portion, which is a long term AR facility, about 3.5 million under the term facility, about 15 million of availability currently.

And as I mentioned earlier in the call, you know, if you look at where we are today relative to where we were when we put that facility in place, our EBITDA run rate has almost doubled. I think we had - I think the trailing quarter prior to putting that facility in place we had an EBITDA run rate of $6 or $7, maybe $8 million. And as we've mentioned here, we've got closer to 17 million now. So, we've got significant additional borrowing capacity given the covenant levels, which are basically, total funded debt to EBITDA of two-and-a-half to one.

So, two part answer. One, we've got 13.5 million drawn. We've got an additional 15 million of borrowing capacity, under that line. That's in addition to the 5 million in cash that we've got, so roughly million of dry powder. And then two, given where we are in terms of run rate and the covenants that are currently in place, we think we can put in place a larger facility than what we currently have. We're already beginning those discussions with our bankers.

And by the way, that's if you just take the old covenants and apply them forward. The truth is, as your EBITDA run rate increases above certain tick marks, a difference in degree becomes a difference in kind. And you can look to get some slightly more attractive covenant ratios in terms of how much you can borrow off an EBITDA base. So, I think we're in very good shape in that regard. Obviously, in complete compliance with all covenants, et cetera.

Great, I was going to ask the next question, too, but you answered it. It was, in Q2 you are in total compliance with Q3 - (inaudible). And I don't whether you answered this or not, but can you break that between your credit facility for your working capital versus your acquisitions?

Well, yes, as I said, we've got roughly $10 million of that 13.5 million is drawn down on the A/R portion.

Okay.

Yes, so the A/R line of credit is 15 million total. At the end of Q3, we had 10 million drawn on that. We've paid down that a little bit - another million. So, we've got 6 million available in the A/R line and we've got 10 million available in the acquisition term debt.

Great. Okay. And then last question I have is a question on intangibles and goodwill. Can you tell us the logic behind - it seems like if you take your intangibles divided by intangibles plus goodwill, it's about 11.%. What's the logic behind getting to that 11.8%? Do you understand the question?

Can you rephrase that?

Sure. If you divide intangibles divided by your intangibles plus your goodwill on your balance sheet -

Oh, yes.

It equals 11.8%

Oh, okay, well so in purchase accounting, what we do is we go through assign specific fair value to identifiable intangible assets in each one of these deals, which tends to be the value of the customer relationships, the non-compete agreements and the sales backlog that these companies have.

We use an outside valuation expert firm, most recently it's KP&G. And they put together an opinion for us on the value of those three identifiable intangible assets. And we book those and we amortize those identified intangible assets over their estimated, you know, useful life there.

The balance of what we pay less the value of the intangible assets that we purchase and the fixed assets and tangible assets, the net result is goodwill. In other words, you assign value to everything that you can, you know, fair value - and then the balance goes into goodwill. So, that's why it just happens to turn out to be 11%. It's the result of that methodology.

Great. Thanks a lot.

Sure.

(OPERATOR INSTRUCTIONS.)

And our next question comes from Rod Shar (ph) with Menlo (ph) Securities.

Hi, good quarter, Jack. I was wondering if you're seeing competition from the offshore players? And what your offshore strategy is? What are you hearing from your clients?

You know, we're not seeing a lot of competition from the offshore players. The type of work that we do tends to be boots on the ground and a mix of business and technology consulting. You've got small high impact project teams and relatively small project sizes.

That type of work tends not to lend itself very well to offshore. Now, you know, offshore is an inexorable trend in so many sectors of the services market and there are large, low hanging fruit or opportunities around CPO, business process outsourcing and IT outsourcing and commodity apps migration. But those are areas where we don't play.

What we have been doing over the past year and a half or so is trying to find ways to feather in some offshore capacity into a high customer touch, highly iterative, project-based consulting model. Not trying to ape what the offshore guys are doing, but trying to use some offshore resources to fill the more commodity slots on our teams so that we can get full leverage on our high expertise U.S. based resources, but also offer the client a compelling blended average rate.

And we're doing that in two ways. First, we've got our own offshore facility in Bitala, Macedonia, which is small. Maybe just a couple of dozen people today, but which we plan to grow. So, that's one way in which we do that. And we use that facility both for some IT development and for more traditional solution support on a solution center model basis. In addition to that, we've got partnerships with a group of Indian firms where we need to bring people in - parachute folks in on deals. So, that's been our approach, but as a kind of broader statement, in the segment of the market where we play - high customer touch, highly iterative, cutting edge technology - offshore has not really been that much of a presence.

Okay, thank you very much.

Thank you.

Mr. McDonald, it looks like we have no further questions at this time.

Okay, with that, we'll conclude the call. Thank you very much for your time.

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