Perficient Inc (PRFT) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Fourth Quarter 2005 Perficient Earnings Conference Call. My name is Colby and I will be your coordinator for today.

At this time, all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of this conference.

[OPERATOR INSTRUCTIONS]

As a reminder this conference is being recorded for replay purposes.

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.

Good afternoon. This is Jack McDonald. With me on the phone today is Mike Hill our CFO, Jeff Davis our President and Chief Operating Officer who normally joins us is on vacation today so he'll not be joining us.

I'd like to thank you all for your time this afternoon. Let's start off with a brief Safe Harbor statement, Mike.

Thanks Jack and good afternoon. Some of the things we will discuss on today's call concerning future company performance will be forward-looking statements within the meaning of the securities laws. Actual results may materially differ from those discussed in these forward-looking statements and we encourage you to refer to the additional information contained in our SEC filings concerning factors that could cause those results to be different than contemplated in today's discussion.

We'll follow our standard format for today our review Perficient's business and financial performance in the fourth quarter and then we'll look at the full year. We'll discuss our outlook for Q1 and finally open it up for questions.

Q4 was a great quarter for Perficient. We posted record revenues and record cash and GAAP, EPS. It was a tremendous close to a year that saw Perficient expand its presence, significantly increase billable headcount and scale the company's revenues from 57 million in 2004 to near 100 million in 2005 and of course we've got a current revenue run rate that's well above 100 million.

The business generated meaningful cash in the fourth quarter which allowed us to pay down 6.3 million of bank debt during the quarter. That means we've got 21 million of borrowing capacity under our existing 28 million bank facility and we can use that capacity for additional acquisitions. So that's a significant war chest for M&A and more on M&A later but we are aggressively pursuing a number of acquisitions as we speak and our pipeline of deals is stronger than it's ever been.

Taking a look at a few of the accomplishments in the fourth quarter.

Total revenue including reimbursed expenses was up 36.4% year-over-year with strong organic growth running in the overall year in the 15 to 20% range as we've talked about.

Total services revenue in Q4 was up about 74%. Diluted cash earnings per share were $0.09 so running at a $0.36 run rate there and up 50% year-over-year.

EBITDA was up 56% so we're now realizing an EBITDA run rate north of $16 million. It was our eleventh consecutive quarter of positive EPS, our eleventh consecutive quarter of positive and growing net income. Our fifteenth consecutive quarter of positive EBITDA. So the business is doing quite well.

Regarding the fourth quarter, I would note that our gross margins came in a little low at 35%. That's versus 38.4% in Q4 of 2004 and roughly 37% which is where we've been running in a typical quarter. Most of that year-over-year decline was due to two factors. We had one less billing day in the fourth quarter of '05 than we had in the fourth quarter of '04, plus a change in vacation policy where we moved the drop dead date on vacation forfeiture up from March 31 to December 31st that in connection with a very busy year resulted in about 6,400 extra hours of vacation being taken in Q4 of '05 versus the prior year. So if you normalize for those factors gross margins would come back up to about 37% which is where they've been running as I mentioned a moment ago and where they should bounce back to in Q1.

Moreover, in a strengthening market as we've discussed before we think there's an opportunity organically to materially increase our gross margins over the next five to six quarters through a combination of rates increases and further integration of deals that we've previously done. Beyond that, there are a number of deals in our current M&A pipeline that are high gross margins, in other words 40% plus gross margins and that will help even further in terms of improving gross margins.

For the full year total revenues were up about 65%. Total services revenues just backing out the software resale were up 92%.

Cash and earnings per share on a fully diluted basis up 57%. GAAP earnings per share up 47%. EBITDA up 87%. Net income up 83%. So some tremendous growth in 2005.

We're building an IT consulting leader. We're becoming a growing force. We are beginning now to expand off our strong central U.S. base and are looking nationally both in terms of our acquisitions and our organic growth in terms of Greenfield office opportunities and we're having a very positive experience in the market winning a number of larger deals winning against bigger players.

In terms of recruiting our total headcount including subcontractors is approximately 575 up from 571 at the beginning of Q4. So not a big change but Q4 is never a big hiring quarter.

In Q1 we've added 31 net new hires just to date in Q1 and expect over 100 net new hires this year so as we've moved past 50 and now past 100 million we are becoming a much more attractive employer. Big enough to be stable. Small enough to offer entrepreneurial career upside and so our recruiting outlook is quite positive.

I want to talk a little bit more about our M&A pipeline. We continue to pursue aggressively accretive acquisition opportunities. We did two deals in 2005 as you know. We did not execute on a late year deal. As I've said before and would say now we don't intend to do deals for deals sake. We're disciplined buyers and we're going to remain so but not to worry. Our pipeline of deals is stronger than it's ever been and we are actively in the market as we speak executing on deals and we're a stronger buyer than we've ever been in terms of our size, our reputation in the market, our acquisition share currency and our access to capital. So our target is still to close three to four deals this year provided we can strike the right deals, but again always making sure that we continue to exercise discipline.

As I mentioned earlier, cash flows in Q4 were strong. Helped us pay down the credit line so we now have 21 million under the existing debt line to fund the cash portion of new acquisitions and a 50/50 cash stock structure which is obviously what we do. That equals $42 million of buying power and of course that's just under the existing debt line that we put in place over a year ago. Our EBITDA has grown significantly since we put that line in place and we now have theoretical borrowing capacity that's far in excess of the size of that line. So great access to capital and a strong M&A war chest which we intend to begin putting to use aggressively this year.

So again overall another great quarter and a tremendous year. We continue to see strengthening market demand in our business is executing well and capitalizing on it.

So with that, I'll turn the call over to Mike.

Thanks Jack. I'm going to run through some financial metrics. First, I'll run through Q4 and then I'll switch over and do the whole year for 2005.

For the quarter ended December 31, 2005 we recognized total revenue including reimbursed expenses of $25.9 million a 36% increase over the fourth quarter of 2004.

For Q4 services revenue including reimbursed expenses was $24.8 million compared to $14.2 million for the same period in 2004 and $24.2 million in the third quarter of 2005. This represents services revenue growth of 74% over Q4 2004 and 2.5% sequentially.

In Q4 revenue from the sale of third party software was $4.7 million compared to $7.4 million for the same period in 2004 and $1.9 million in the third quarter of 2005. This Q4 2005 software revenue included approximately $239,000 of revenue from sales internally developed software.

Net income for Q4 was $2 million or $0.09 diluted cash earnings per share. Cash earnings per share is a non-GAAP measure defined as GAAP earnings per share but excluding amortization of intangible assets and stock compensation. This is compared to net income of $1.3 million or $0.06 diluted cash earnings per share in the fourth quarter of 2004 and $2.1 million or $0.09 diluted cash earnings per share for the third quarter of 2005. Diluted GAAP earnings per share for the quarter was $0.08 compared to $0.06 in the fourth quarter of 2004 and $0.08 in the third quarter of 2005.

Gross margin for services was 35.0% for the quarter compared to 38.4% in the fourth quarter of 2004 and 38.4% in the third quarter of 2005. As Jack mentioned, we are running year-to-date through September 30, 2005 at roughly 37%. Note that excluding subcontractors gross margins for services was 36.3% for the quarter compared to 42.1% for Q3.

Gross margin for software revenue was 17.7% compared to 12.7% in the fourth quarter of 2004 and 21.6% in the third quarter of 2005.

SG&A expense excluding non-cash stock compensation was $4.9 million in the quarter which is an increase in absolute dollars from the fourth quarter of 2004 and a decrease from the third quarter of 2005. SG&A expense excluding non-cash stock compensation as a percentage of services revenue including reimbursed expenses was 19.8% in the quarter compared to 24.4% in Q4 2004 and 20.8% in the third quarter of '05.

EBITDA a non-GAAP measure was $4.1 million for the quarter compared to $2.7 million in the fourth quarter of 2004 and $4.2 million in the third quarter of 2005.

Note that we had strong cash flows from operations during Q4 of approximately $6.9 million.

Now for 2005. For the year ended December 31, 2005, we recognized total revenue including reimbursed expenses of $97 million a 65% increased over prior year.

For 2005 services revenue including reimbursed expenses was $87.6 million compared to $45.7 million for 2004. This represents services revenue growth of 92% over the prior year. For 2005 revenue from the sale of third party software was $9.4 million compared to $13.2 million for 2004. This 2005 software revenue included $281,000 of revenue from the sale of internally developed software.

2005 net income was $7.2 million or $0.33 diluted cash earnings per share again a non-GAAP measure compared to net income of $3.9 million or $0.21 diluted cash earnings per share for 2004. Diluted GAAP earnings per share was $0.28 for 2005 compared to $0.19 for 2004.

2005 gross margin for services was 36.7% compared to 39.2% in 2004. 2005 gross margins for software was 17.7% compared to 13.9% in 2004.

SG&A expense excluding non-cash stock compensation was $17.7 million for 2005 which is an increase in absolute dollars from 2004. However, SG&A expense excluding non-cash stock compensation as a percentage of revenue including reimbursed expenses was 20.1% for 2005 compared to 24.2% for 2004.

EBITDA a non-GAAP measure was $14.5 million for 2005 compared to $7.8 million last year.

During Q4 2005 our utilization rate based on a 2,000 hour year was 78% excluding subcontractors. That's due to the seasonality of holidays and vacations taken as Jack mentioned earlier and our average billable headcount was 502 for Q4 including 138 for the contractors.

Our quarter ended cash balance increased to $5.1 million at December 31, 2005 from $3.3 million at September 30, 2005. And as of December 31, 2005, net working capital was $17.1 million.

I'll now turn the call back over to Jack.

There are a few other noteworthy items from Q4 that I'd like to address. We realized strong sales in the quarter that are materializing in a very strong revenue guidance for this quarter. The mid-point of our services guidance range for Q1 is 5.7% higher than our Q4 services revenue so 5.7% sequential growth. That's the strongest forward guidance in terms of sequential growth that we've ever had and we continue to see accelerated demand.

Obviously, when you move from Q4 to Q1 you're going to have a reduction in the amount of year-end software sales but the key driver in our business is services revenue and that is very strong sequential growth on the services revenue side and again, we've seen 11 straight quarters of accelerating demand and we are continuing to see that.

Cash on corporate balance sheets is at an all time high. Key factors are driving increased demand for our e-business integration solutions, increased globalization, increased competitiveness in the market, a maturation of the e-business technologies and an increase in the ROIs that our clients can drive with them. So we are seeing a very - we're very bullish on the outlook for demand for this coming year.

Also in the fourth quarter we closed a number of multi-phased multi-million dollar engagements that begin with strategy and run through full technology deployment. In a majority of these opportunities we competed head to head against large management consulting firms like Accenture and BearingPoint and IBM Global services.

In fact, last year, we had 10 major projects in which we competed with the big guys and we won all 10 and we can't guarantee we're going to repeat that win rate forever but Perficient has really been knocking the cover off the ball in terms of how we're differentiated and how effectively we are competing in the market.

Some of the specific trends that we're seeing in terms of demand include a continued strong investment in e-business infrastructure including a number of migrations from the legacy application servers to market denominators such as IBM WebSphere.

Substantial investment in SOA or Service Oriented Architectures as a messaging framework for business integration. We are assisting a lot of clients in establishing an ESB or Enterprise Service Bus as standard framework and are beginning to move into development with a number of clients. These are largely Fortune 1000 customers. As you folks that have followed the company know, Perficient has been an early subscriber to SOA and ESB co-authoring the IBM Redbook on web services as it used to be called. This SOA ESB area over three and a half, four years ago and we are really beginning to see that technology now come to fruition and drive additional demand.

We're also continuing to work with a number of clients leveraging technology to improve customer intimacy and operational flexibility and efficiency. One of the multi-million dollar wins as I mentioned earlier is completely focused on customer acquisition e-commerce customer service and customer retention.

We've seen also see this shift that we've talked about before it really began 10, 11 quarters ago from IT led cost rationalization projects to line of business led strategic engagements which again is a very bullish sign combined with increasing deal size. Very, very bullish sign we think for the market.

As discussed, we continued our strong organic growth in the fourth quarter obviously offset somewhat by seasonality around the holidays. I mentioned earlier that Q1 is shaping up very nicely. We've added 30 new employees net this quarter. So what we see is a business that's growing 15 to 20% on an organic basis with the top line with 25 to 30% earnings growth and a growth rate with M&A that's been well north of 50%. So major growth.

We also see a margin expansion opportunity both around gross margins in a environment where we think we're going to see some improvement in rates and also an EBITDA margin improvement opportunity even independent of the gross margin improvement through better leverage of SG&A.

Mike pointed out that from 2004 to 2005, the percentage of our revenues comprised by SG&A declined from 24% to 20%, a very obvious indication of the kind of G&A leverage we're seeing and we believe there is significantly more forward operating leverage as we scale the business to 150 million and beyond.

So well positioned. High growth on an organic basis. Even higher earnings growth. A large M&A pipeline and an opportunity for margin expansion and all of those factors that was very bullish as we enter 2006.

Again, we talked about the expectation for Q1. The total revenue including reimbursed expenses in the range of 26.5 to 27.9 million which includes 25.5 to 26.8 million in services revenue including reimbursed expenses and approximately 1 to 1.1 million in revenue from sales of software.

The Q1 revenue forecast range of services revenue would represent services growth of approximately 39 to 46% over the first quarter of 2005 and as I mentioned earlier on a sequential basis the highest guidance we've ever given from a sequential growth standpoint.

So we're as optimistic as we've ever been about the potential for Perficient and with that I'd like to open the call up for questions.

[OPERATOR INSTRUCTIONS]

We will pause for a moment to structure the list. Your first question comes from the line of Peter Heckmann with A.G. Edwards. Please proceed.

Good afternoon Jack and Mike. Wanted to follow-up on trends in bill rate some of the acquisitions that were made in '04 and '05. Have you seen the ability to move up average bill rates as you have integrated those acquisitions and been able to cross-sell or oversell into some new areas that you have whether it's going back and getting repeat sales of additional modules or focusing more on business intelligence? But do you see the trend in bill rates moving up especially in the acquired businesses? The ones that came on in '04 were somewhat lower?

Yes we do. We see an increase in bill rates in the acquired businesses. Now, if you look at average bill rate in Q4 it was actually down a little bit. Around $110 an hour. The reasons for that we won a number of larger engagements towards the end of Q3 and the beginning of Q4 that we executed on and some of them carry lower bill rates but these are 3, 4, $5 million deals the three in particular that I'm thinking of that were locked in for a year's worth of work so there's a lot of margin associated with those deals and they provide a base line of utilization.

So net, net a large benefit from deals of that size. We do though expect to see as I was referring to a moment ago, an upward trend in the bill rates. That's what's going to drive the organic improvement in gross margins because in the 82 to 84% utilization environment which is where we've been running for 10 or so quarters you're not going to see - you're going to see that gross margin improvement come obviously in increased rates. This is really the year for us to focus on that. So we're optimistic on that front.

We do see bill rates trending upward and particularly where acquisitions are concerned the cross-sell and the integration has been going extremely well. We feel that we are at a point of having all acquisitions done last year fully integrated and as you know we've been in the market and are looking forward to executing on some additional deals this year.

Great and then as a follow-up. We had talked a little bit in previous calls about the potential for some margin expansion within the software reselling line. Do you see some changes in the VAR treatment? What do you think the outlook looks like for '06? Should we expect a substantial change or something more gradual?

I would just really repeat the same thing I said about this I think on the last call which is that - folks have talked about the rejiggering of programs to begin to approach 25 plus percent margin. That is not what we're budgeting. We're budgeting software margins in the 15 to 20% range. We came in in the mid-point of that range in Q4 at around 17% and I would not raise the margin projections for software above that.

Okay, great. I appreciate it. I'll let someone else ask questions.

Thank you.

Your next question comes from the line of Jeff Martin with Roth Capital Partners. Please proceed.

Thanks. Good afternoon.

Good afternoon.

Jack, you mentioned the opportunity to expand nationally. Can you give us first an update on your potential penetration into the mid-Atlantic market and then also expand on what other geographies you might be looking at right now?

Sure. We have built a very strong base in the Central U.S., an 11 office network. We've indicated before that we are looking in the mid-Atlantic and the southeast. We have also begun to look more nationally particularly where it relates to domain expertise or national practice acquisitions. If you look at our acquisition track record historically, take last year as an example. We did two acquisitions. Vivare in Dallas and iPath, which was in Houston. The Vivare deal represented a footprint in the Dallas market principally a local business with most of the consultants servicing work in the local Dallas metroplex.

In the case of iPath that was 100% travel national practice around enterprise content management principally Documentum and I think as you will see as we go forward that kind of a balance in our acquisitions. Some will be local to build footprint and some will be national practices. They're both beneficial to our business because having that local customer touch we think is an important differentiator in winning business but the opportunity to add national practices that are 100% travel with solutions that we can sell into our 425 customer global 2000 client base is a really large opportunity and it helps us drive leverage and really increase return from these acquisitions. Plus as we've talked about prior increase the penetration of our accounts.

So that's something again I think you will see that balance. So in terms of geographic we're still looking in mid-Atlantic and southeast but where it comes to some of the national practices we're going to look in the west as well.

In terms of progress in the southeast and mid-Atlantic states there are a number of deals that are on the horizon. I don't expect our next deal though will happen there. I expect it will probably happen - it will be more of a national practice acquisition but as always with acquisitions it's subject to the deal actually happening and so we'll just have to wait to see how those actually play out, but in general we're seeing a good opportunity. We're glad we expanded to more of a national footprint. It's significantly increased our pipeline of deals which is frankly larger than it's ever been and we're optimistic.

Great and could you - Jack also comment on what you're seeing in terms of trends on the implementation of what's been the TIBCO product? I think there have been comments out in the past quarter that TIBCO is gaining some market share and that the potential upside there is fairly substantial?

Our TIBCO business has been very, very busy for the last eight or nine quarters, even during those quarters where TIBCO's growth in license revenue was less than what the market was expecting and of course you can never know exactly why that's happening, although our guess is that some shelf ware was being burnt off and it would appear to us that most of that has probably happened at this point and so it wouldn't be surprising to see increased growth in license revenue from TIBCO going forward. It's still a very powerful platform in the market. Great penetration particularly in financial services. Obviously, IBM our most significant partner has strengths across the waterfront and introduced in 2005 their new diamond server which was their business process server really their next generation up in the EAI and business process management and business activity monitoring space and Perficient actually landed the first diamond deal in the U.S. for a major fractional jet aircraft company and so we're very optimistic on the future of the whole idea and platform.

In addition to that, IBM's made a number of smart acquisitions whether it was essential around enterprise data integration or even a smaller deal that offers some interesting upside TREGO around product information management in addition to their enterprise content management acquisition of ATHRIX and I would expect - guess that that acquisition activity will continue further broadening their product line and all of that really (indiscernible) to Perficient's benefit given the strength of our partnership with IBM.

A couple of housekeeping items. Did you give an actual bill rate for the quarter?

110.

Okay. And the billable consultant accounts for the quarter was 502 is that right?

Right.

575 total headcount?

Actually average for the quarter is a little bit higher 580.

Okay and that's all I have. Thanks guys.

Thank you.

Your next question comes from the line of Colin Gillis with Canaccord. Please proceed.

Jack.

Hey Colin.

Could you talk a little bit about what verticals you might be targeting for growth and as well as what solutions that you're targeting to see a sort of -- for extra penetration?

Yes. If you look at the revenue in Q4, financial services was about 26% of our biggest vertical. Now that's down a little bit from what it has run historically because we've had so much strength in telecom for example with some large wins, some major wireless companies, and major cable companies. We also saw a good strength again in healthcare which is about 12% and then 9% telecom. Actually seeing an increase over the general trend for some technology customers as well.

So I would say that you'll continue to see financial services be dominant and you'll probably continue to see healthcare be number two. Two areas where we will see growth for sure in 2006 are telecom and also agri business where we've seen some significant project wins, multi-million dollar wins just over the past few months. I would expect energy to come back although I haven't seen as much of an up tick in energy as one might have expected given the general market conditions.

In terms of areas of growth by solution type, e-business infrastructure continues to be our strongest. Business integration which is the wholesale and ESB area I referred to earlier. The business process management work whether it's the IBM diamond product or some of the TIBCO offerings and the general EAI which you'd see across both IBM and TIBCO. We see our – saw dramatic growth there in the fourth quarter and we'd expect to see a continued strong selling - showing I should say there and then of course date warehousing and business intelligence. That's doubled as a percent of revenue in Q4 over Q3 going from 4 to 8% and of course that's an area where we are investing in organic growth. Most of that focused from a vendor standpoint around Cognos today although obviously there are pieces of the IBM and TIBCO platforms that have [BI] functionality and you've got some lines that cross over on the whole EDI space with the IBM essentials products suite.

The Cognos is sort of the pure play which we're most focused on right now and we are looking to grow that dramatically both organically and of course we're also looking at some acquisitions in that space as well.

Okay great and Jack can you just talk about if you see any upsizing in terms of projects in the pipeline or any quantification you can give in terms of multi-million dollar projects that you're looking at?

Yes. We definitely have seen an uptick in project size. You know, it's always interesting when you look at the outliers or the more anecdotal information because what we used to consider - I used to consider elephants in the pipeline that we didn't like to see just in terms of forecasting stable revenues a $2 million deal use to be a huge deal for Perficient and now we are seeing a number of wins at or greater than that size and I think that's a function of where we are in the business cycle, a strengthening market, and as I was indicating earlier a shift from IT led cost rationalization projects to more strategic projects lead by a line of business.

In terms of average deal size though the metrics all in all have stayed pretty much the same and so you'll see that sort of 3 to $500,000 average deal size. If you look at the deals above 100K and of course keeping in mind as we've discussed before that you've got a lot of serial procurement going on among enterprise customers. We built the model to profitably execute on that and we in fact encourage it but you'll see two or three - 3 to $500,000 deals where you used to see one 900 to $1.5 million deal and so there is a considerable amount of that continuing in the market but also against that you're seeing emerge a willingness to sign up for larger deals. So it's a very, very healthy environment.

And then just on the acquisition fronts could you talk about what you're seeing in terms of pricing? Are you seeing more competitors coming in? What you're seeing along the - in terms of the offering from the gross margin side?

We are seeing - it's interesting because the firms we're looking at today we're a better buyer a more powerful buyer than we've ever been, better currency, better access to cash resources and we're looking at higher quality firms.

So that we've done some excellent acquisitions to date but as I mentioned earlier, some of them are lower gross margin. Now if you look at what's in our pipeline going forward we're seeing a lot more in the 40 plus percent gross margin range with bill rates at $140 an hour and higher so we're looking at some very high quality companies.

From a pricing standpoint, EBITDA multiples running anywhere - we've always talked about 5 to 7 as being our range from day one and we're still well within that range. We have been running at the low end of that range and I expect now we'd be anywhere sort of in the middle of that range give or take a little bit. So 6x lets say as opposed to maybe a 5x before - although again, there are deals out there that will happen at 5.2 and 5.5 and it really depends on growth rates and margins and the particular issues or opportunities around a given acquisition. I wouldn't say we are seeing dramatically more competition for 10 or $15 million deals. I think if you begin to look at sort of $25 million deals and above which is really the very much the top end of our range, I think there you're seeing more competition but we're not seeing a lot of it in the 10 to 15 million.

More you're seeing issues around timing when you've got companies that are experiencing substantial growth, but frankly we take an attitude of nurturing these relationships with perspective companies through time and sometimes we meet companies where there's an immediate fit and a deal happens and sometimes we get to know them over six months or a year and both ways can work out very well for us.

So I'm optimistic. I know we've got a very strong pipeline of quality deals and look forward to executing on that. The only caution I would add as we've always said is that we are going to be disciplined buyers and we're not going to chase deals for the sake of getting deals done.

Okay great and Mike, do you have the DSO and the organic numbers for the quarter and year?

Yes. The DSOs went down. At the end of Q3 they were at 85 days but at the end of Q4 they went down all the way to 69 days. So a huge great improvement there in DSOs during Q4 and then what was your other question?

Organic growth for Q4 and for the full year.

Yes. Organic growth for Q4 was kind of flat maybe a percent negative going in from Q3 to Q4 but if we look back and as we kind of talked about we've got an issue here on the organic -- measuring the organic growth. We try to integrate these acquired companies as quickly as possible so a lot of the revenue from the acquired companies gets co-mingled in with the existing company and so what we're going through now and when we start to talk about this is really look at a trailing four quarters sequential growth so therefore an anniversary of the acquisitions a quarter or two after they've been acquired rather than trying to go back and pull them apart a year after the fact. So if we look back and just take a trailing four quarter sequential growth rate from an organic standpoint we're at a strong 15%. We expect that to continue.

Okay. Congratulations on a nice quarter.

Thank you.

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

Hi guys. A couple of questions. First, can you give us what the CFFO number would be without the contribution from stock options and then you mentioned a dramatic improvement in DSOs. Maybe you could talk a little bit about what was behind that?

George first of all the CFFO for Q4 was at 6.9 million but then we had 1.4 million for the tax benefits of the (technical difficulty) so if you take that out you're at 5.5 million to answer your question there which is how we came up with the cash to pay down the debt so significantly during Q4. We paid it down by 6.3 million. For DSOs, the dramatic improvement in DSOs was really because; 1) we really focused the company on that. We focused the general managers. We focused the customer relationship folks. We put incentives into the compensation plans that actually charged back any bad debt or any aging of A/R back to the business units. So based on a number of kind of - operating incentive mechanisms along with just a big focus from top down in the company we were able to really improve that and so that's the result. Now, I would say 69 is very, very good and everybody in the organization should be commended for that. However, going forward we probably more realistically want to target maintaining in the mid 70s so I don't want to set the expectation that we're going to do this well every time.

Okay and can you provide us with a breakdown by vertical. I think it was said financial was somewhere around 26%. Can you breakdown some of the other ones for us?

Right. As we mentioned, financial services including insurance and banking was 26%. Healthcare came in at about 12%. Telecom at 9%. Computer software at 8% and we've got energy and utilities at 5%. Manufacturing at 8% and the rest is just a mix of a bunch of others that are 4% or less.

Okay and just last question. Can you talk a little bit on what your SOX compliance costs were for the year and for the quarter?

Yes. For the year we incurred - it's hard to measure the internal costs. Obviously there's not a lot of actual cash outflow from all internal people time that that efforts and but from an external consulting and audit fee cost standpoint we incurred about well over $800,000 in the year. In '04 that number was about (inaudible).

I'm sorry, how much?

Over $300,000.

$300,000 okay. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

At this time, there are no further questions appearing in queue so I will now turn the call over to management for closing remarks.

Thank you very much for your time this afternoon and as I said we're very optimistic on the outlook for Q1 and we look forward to getting back together with all of you next quarter to discuss those results. Thank you very much.

Thank you for your participation in today's conference. A replay of the conference will be available after approximately one hour by dialing 1-888-286-8010 or 617-801-6888 access code 42954858. Once more, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.