Perficient Inc (PRFT) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome the First Quarter 2006 Proficient Earnings Conference Call. My name is Chanique 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 Chief Executive Officer. Please proceed sir.

Thank you. This is Jack McDonald, Perficient's CEO. With me on the phone today are Jeff Davis, our President and Chief Operating Officer, and Mike Hill, our Chief Financial Officer. I'd like to ask Mike to read a Safe Harbor statement at this time.

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

We'll follow our standard format today, a review of our business and financial performance in the quarter. Then we'll discuss our outlook for revenue in Q2. Finally, we'll open it up for questions.

Q1 was a great quarter for Perficient and got the year off to a very strong start. We posted record revenues and cash EPS numbers and realized our 12th consecutive quarter of growth and positive earnings and our 16th consecutive quarter of positive EBITDA. We're talking about 50% total growth in revenues and 22% organic only revenue growth with 43% growth in cash earnings. I'd like to note that our GAAP EPS is up nicely even after accounting for the new stock option expense regulations and for Sarb-Ox costs and I think that's a testament to the profit generating capacity of this business.

Jeff's going to comment more on this later but the market is showing continuing signs of strength. We really saw some very bullish signs in the first quarter as we're winning larger and more strategic engagements for our clients. In addition, bill rates were up about 11% in the quarter on an annualized basis. And after backing out stock compensation, gross margins on services improved from 35% in Q4 to 35.6% in Q1. So, as we've discussed, we are looking at some improvement in gross margin over the course of the year, the next four to six quarters, and that process is already underway.

Finally, operating leverage continues to improve. SG&A as a percentage of revenues has declined even further. Q1 SG&A was approximately 19% of revenue versus 20% in Q4. Again, that is net of stock compensation. We enter Q2 at an annualized revenue run rate approaching $130 million and our forward guidance for the second quarter, which reflects services growth of between 50 and 58% is stronger than its ever been in our history. And while it was technically a few days after the quarter, I do want to mention our acquisition of Bay Street Solutions. Bay Street's focus on CRM, customer relationship management fits well with Proficient's overall customer intimacy offerings, and that should mean strong cross selling opportunities within our customer base.

It was a $8.6 million firm with some growth. Hopefully we'll be closer to $10 in '06. As previously announced, the transaction will be accretive to earnings this year. It's a great team founded by seven members of Accenture's Seavold practice back in 1999, led by Tim Robinson, a great team there. And again, we pursued a disciplined structure for the acquisition using more than 50% restricted stock at five-year non-compete. So we're continuing with our standard format of finding great businesses that we can achieve immediate synergies from that are immediately accretive and structuring them in a disciplined way.

In terms of future M&A opportunities we have strong cash flows. We've got good access to credit under our credit lines and those things leave us positioned to continue to aggressively seek out additional M&A opportunities this year to compliment our strong organic growth. Our deal pipeline remains strong -- again, in active discussion with firms that in total have about $250 in revenues. Our gross pipeline of firms is north of $1 billion. So I'm hopeful that we'll get two, maybe three, additional deals done this year. I mean, clearly there are no guarantees as we always say. And we are disciplined buyers and will only pursue accretive deals. But we are out there every day looking for opportunities and things look good. We are very bullish in general on the current market environment.

As we've discussed before Perficient's addressing a $10 billion plus market opportunity and continue to gain strength. We believe there are a number of factors pointing to significant growth ahead. You've got cash on corporate balance sheets at an all time high. Confidence is up in executive suites. Globalization and the Internet are reshaping industries, increasing competitive pressures and driving the need for our clients to innovate through the use of information technology. We've got a backlog of strategic deals out there. I mean, you had basically a five-year virtual spending freeze and now we've got a substantial upgrade cycle and pent-up demand.

You've got mature technologies in the e-business area now that deliver meaningful ROI for these clients. So you've got five or six factors there that I think are very bullish. Moreover, action in the IT services space and around software is increasingly focused around key core platforms, including IBM, where Perficient is incredibly strong; but obviously now we're also opening up Oracle and growing our strength in Microsoft and ultimately looking to other vendors like SAP over the next 12 to 18 months. So a very, I think, positive opportunity. And again, as we've discussed, the market downturn earlier this decade knocked out literally nine out of 10 of our public competitors, leaving Perficient as one of the last firms standing in this space, really one of just five domestic public IT consultancies between $100 million and $1 billion. It's really an incredible opportunity and we're out there everyday capitalizing on it.

So with that, I'm going to turn the call over now to Mike Hill who will focus on our financial results for the first quarter.

Thanks Jack. As Jack alluded to the fact that this is the first quarter where we were required expense stock options under GAAP. In t total, the pre-tax impact of stock options expensing, actually stock and stock option expensing in Q1 was $724,000. This is -- and the net after tax impact was $582,000. I'll note the impact of the stock expensing rules in each of the key metrics that I've discussed in a moment.

As we've discussed before, we continue to believe that cash EPS is the best indicator of the operating performance of our business as it does not fluctuate based on these accounting variables.

Our total revenue for Q1 was $29.6 million, a 50% increase over the year ago quarter.

Services revenue, including reimbursed expenses, was $27 million with strong organic services revenue growth of over 22% on a trailing four quarters basis.

Gross margin for services during Q1 was 34.7%, down from 35.0% in Q4. This decrease was a result of $232,000 of non-cash stock compensation expense included in our cost of revenue for the first time, without which services gross margins would have been 35.6%. Additionally, services margins were negatively impacted in Q1 as a result of higher payroll taxes with the beginning of the new calendar year. This is to say that as the salary ceilings are reached for FICA, FUTA and PSUDA payroll taxes on a per employee basis the payroll tax will decrease through the remainder of the calendar year.

SG&A expense was $5.6 million in Q1, including $492,000 of non-cash stock compensation. Excluding the stock compensation SG&A expense was $5.1 million, which represents 19.1% of services revenue, including reimbursed expenses. This shows continued improvement from 19.8% in Q4 2005 and 20.1% in Q1 of 2005.

EBITDA was up 22% over the year ago quarter to $3.6 million, which includes absorbing $724,000 of non-cash stock compensation expense. We're now realizing an annualized EBITDA run rate of greater than $14.5 million. However, after adding back the new stock compensation of $724,000, the annualized EBITDA run rate is greater than $17 million. This is our 16th consecutive quarter of positive EBITDA.

Net income was up 15% over the year ago quarter to $1.7 million, which includes absorbing the $582,000 of after tax stock compensation. This is our 12th consecutive quarter of positive net income. Diluted cash earnings per share was up 43% over the year ago quarter to $0.10. I should clarify that cash EPS is a non-GAAP measure, which we defined as GAAP earnings per share plus the after tax impact of intangibles amortization stock compensation.

Diluted GAAP earnings per share was up 17% over the year ago quarter to $0.07 per share even with a $0.02 per share impact from stock compensation in the quarter. This is our 12th consecutive quarter of positive EPS.

During Q1 our average billing rate increased to $113 per hour or up from $110 per hour in Q4.

Also in Q1 our utilization rate based on the 2000 hour-year was 81% excluding subcontractors and 86% including subcontractors.

Our average billable head count for Q1 was 507, which included 133 subcontractors. We ended Q1 with 521 billable consultants, including 136 subcontractors. With the 41 billable consultants joining Perficient in April from Bay Street, our billable consultant head count has risen to approximately 560, or a little bit more. In addition to billable head count, we have 86 SG&A personnel, which brings our total colleague head count after the Bay Street acquisition to almost 650.

Our quarter end cash balance decreased to $2.3 million at March 31st from $5.1 million at December 31, '05 as a result of paying down our accounts receivable line of credit by $3 million during the quarter and paying out approximately $3 million of annual bonuses to all employees per our company wide bonus program. As a result of paying out these accrued bonuses during Q1, our net cash flow from operations was a negative $700,000. If not for paying out these annual bonuses during Q1, our operating cash flows would be over $2 million and our normalized free cash flow after debt payments and capital investments is still running at better than $2 million per quarter.

And we are also happy to report that we continue to perform well on our day sales outstanding on our accounts receivable, which remained at 69 days, which was consistent with Q4.

I'll now turn the call over to Jeff Davis for a little more commentary behind these metrics.

Thanks Mike. Well, as previously discussed, we had a great quarter in the first quarter. There is a few more notable items that I'd like to mention. The first quarter was another great quarter for services sales yielding second quarter guidance for services revenue of nearly a 6% increase over Q1. That's a big milestone for us and it represents our largest guidance growth percentage and forward revenue guidance ever.

We continue to see very strong demand going forward. As an example, in this quarter, Q2, we've already closed a number of multi-phase multi-million dollar full life cycle engagements with total sales of new services business in April alone of more than $15 million. Now that revenue will be spread over several months going forward but it represents roughly 45 days of services business closed in a single month.

Of course the biggest news from April was the completed acquisition of Bay Street Solutions. Bay Street is an excellent addition of Perficient and represents a spearhead for us to deliver package enabled CRM solutions. A significant portion, better than 25%, of the work Perficient does for our clients today is driven by a customer intimacy initiative. So the complimentary nature of the two businesses is very strong.

Likewise, CRM solution deployment typically involves a great deal of application and data integration, which is a key area of strength for Perficient. For all these reasons we anticipate strong cross-selling synergies into our respective customer bases between the two businesses.

As I mentioned, we're continuing to see strong demand in the market and some of the specific trends that we're seeing include continued investment on application and messaging infrastructure, including high demand for services oriented architecture foundations, customer and partner portal solutions, enterprise content management solutions for both internal use and extended use to customers; and, of course, customer relationship management solutions.

But I think the most significant trend we're seeing is that customers are substantially increasing their appetite for larger, more complex mission critical solutions. They're moving past the proof of concept at foundation stages and making significant investments in IT solutions that enhance their businesses by streamlining processes, automating work flow, reducing paperwork and providing differentiating offices - offerings and services for their customers. We see this as a very exciting time for Perficient and we're also excited about the outlook for the remainder of the year.

This looks to be our strongest year for organic growth for more than six years. In response, we're significantly increasing our recruiting efforts in capacity. We added 18 net new employees, billable employees, in the first quarter and are currently shooting for a total of 75 or more by the end of the year. As I said, we have added additional recruiting capacity and also plan to do significant campus recruiting this year as well and bringing some new blood into the organization. We're excited about that capability, that possibility.

Lastly, along with the increased demand we're seeing an up trend in bill rates. I think Mike mentioned this earlier. In Q1 our net rates increased about 3% over Q4 and we expect to see this trend to continue going forward. The markets are very strong. We're very optimistic and look forward to our Q2 results. With that, I'll turn it back to Jack.

Thanks. Yes, so we saw a sequential bill rate increase of about 3%, which annualizes to about 11 or 12% total bill rate increase. In terms of our outlook for the second quarter, we noted this in the press release, Jeff just mentioned it, single best growth in terms of forward guidance that we've had in our history. So we expect total revenue in the range of $31 million and $32.8 million and that would be comprised of $30.4 to $32 million of services revenue, including reimbursed expenses and between $600,000 and $800,000 in revenue from sales of software. And as I noted earlier, that forecast represents services revenue growth of approximately 50 to 58% on a quarter-over-quarter year-over-year basis.

So in summary we are extremely well positioned moving forward. Perficient today is the fastest growing public e-business consultancy in the U.S. with best debreeds operating and cash flow margins, 525 blue chip clients and 85% repeat business rate. We survived the tech crash, scaled this business from start-up to $130 million run rate and we're chasing a $10 billion plus market opportunity and have what we believe to be a credible plan to hit $500 million in revenues within 4.5 years. So growing our top line 20% plus organically, 50% plus with acquisitions. In Q1 growing our cash earnings bottom line by 43% and now on a $0.40 or better cash EPS annualized run rate and growing. And our growth has been dependable, 12 consecutive quarters of positive of positive EPS, 16 consecutive quarters of EBITDA, so a very bright outlook for the business. So with that I'd like to open up the call up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Pete Heckmann with AG Edwards. Please proceed.

Good afternoon gentlemen. Great quarter.

Thank you.

Following up on the comment on recruiting, clearly the demand is leading to the requirement to add organic headcount. Do you feel -- are you able to find the qualified people in your markets and are you seeing any type of wage inflation in those areas or is it pretty much more of the same of what you've seen over the last couple of quarters?

A couple of things. One, I think Perficient has become a more attractive employer as we've scaled. I can tell you looking back three or four years to when we were a $10 or $20 million company, it was very difficult recruiting top notch business or technology consultants out of industry or out of the big five, or top notch sales professionals. And it is much easier today. We've got that sort of tweener status at $130 million, small enough to be entrepreneurial and offer tremendous career upside but big enough to be stable as an employer. And the kind of work we do, the high impact, small project teams, highly iterative work with cutting edge technologies is very attractive.

So in general Perficient has become a more attractive employer. Now, it's never easy to find good people but I would say our inbound flow of quality candidates is larger than it's ever been. Our investment in recruiting infrastructure is larger than it's ever been and we're quite confident that we're going to be able to find the folks we need to fuel our organic growth.

As to wage inflation, really costs have been running within the projections that we had set out prior to the beginning of the year in roughly the 3.5% range blended overall. We haven't seen a dramatic impact in that. One might expect that we'll track in parallel with some of the growth in the market, but right now it looks pretty good.

Great, great. And then as regards you talked a little bit about your strong guidance, a very strong outlook into the second quarter and there were some clients doing some larger multi-phase deals. In terms of the relative customer concentration, which has historically been really quite low, could you talk a little bit about IBM as a percent of revenue and then maybe talk a little bit about the top five clients as a percent of revenue?

Yes, Pete this is Mike. Revenue -- let's see, IBM was 9% in the quarter. The top three customers represent about 15% concentration there. The top five, again including IBM, represented 33%. The top 10 was 46% so, it's kind of spread heavily across the top ten there, and then it's disbursed after that.

So it's a very good, very diversified revenue continues to be the case for us which is good news. No situation of too much concentration.

Yes, well, I thought that would be down significantly. I think I had maybe the top three or closer to 20 to25 run rate last summer, so that would be down from where I had it last so that's very encouraging. And then in terms of acquisitions, Bay Street looked very consistent with some of the other deals that you've done in terms of pricing size. In terms of future acquisitions do you still feel that some of these firms in this target area of $5 to $25 million in revenue, do they still have ultimately limited opportunities for liquidity or basically the question is are you still one of the preferred buyers and are you seeing a big change in the acquisition multiples?

We believe we are really the logical consolidator of firms in this size range and we have not seen a dramatic increase in EBITDA multiples from what we've talked about historically in terms of where we price deals. And so everything is consistent there. It was noted with Bay Street and also other transactions that we're looking at right now we are remaining disciplined buyers not only with respect to price, which is obviously important, but also with respect to structure and using heavy restricted software components for the management team and long-term non-competes. It's really a belt and suspenders approach there to guarantee stickiness of acquired operating management post transactions. So feeling very good on all of those fronts.

All right, I appreciate it. Thanks much.

Thank you.

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

Jeff Martin. Thanks. Good afternoon guys.

Good afternoon.

Could you give us an update on your Mid-Atlantic market strategy? I know that was at one point kind of your second target market from the Midwest and I know acquisitions had led you there but the multiples were -- and fit wasn't there. What's the latest update and do you plan to expand into that region soon?

We do plan to expand into that region. As we talked about, we have achieved north of $100 million revenue run rate in the central U.S. and made the decision earlier this year to begin to expand nationally in terms of our office footprint, right? I mean, as folks know, we have always had a large percentage of our work force, roughly half, that travels nationally. So we've always been providing consulting services with a national footprint but our office network was clustered in the central U.S.

That is now beginning to change and there are firms that we're looking at in the Mid-Atlantic region, as well as the Southeast and West. So I'd say the area where we've got the least amount of potential in the pipeline presently would be the Northeast. But those other regions are regions that we're actively looking at. It's been this way for a number of years for us in that we'll meet firms and sometimes there's an immediate opportunity to do a transaction that makes sense for everybody involved. And sometimes you get to know a firm and then revisit them six months, 12 months, 18 months later, and of course we spend a lot of time doing that and there's some good benefits to be gotten out of that in terms of tracking the progress of these firms over a period of time. So we have a number of active candidates throughout the country, a $250 million pipeline including in the Mid-Atlantic states and it's still an area of focus for us.

Okay, that's helpful. And Jack, how is the competitive environment on these larger more strategic deals versus kind of your core business historically? And then secondly, should we think of Perficient now as more of a national IT consulting company and does that mean you're going to compete more regularly with the larger players?

Sure. I'm going to ask Jeff Davis to give his perspective on that.

I think we'll always be able to compete with the larger guys and we're doing that now. I mean I think Jack, I think you spoke about this on the last call that, I don't know that it's critical that we expand or gain a larger footprint in order to be able to do that. I think our skills, the depth and breadth, that we have already enable us to do that. Does that answer your question?

Well it does on a broad scale but on some of the larger more strategic deals that you mentioned you're winning in the first quarter are you competing more directly with the larger players than you have in the past?

Oh yes. I'm sorry. I misunderstood then. Yes. Absolutely, Interestingly enough we've -- I mentioned earlier in the call the number of multi phase multi million dollar deals that we won just in April and obviously in Q1 as well. And I would say what we refer to as the big guys, the Deloittes, the DCS's and IGS, et cetera, Accenture. We've competed with them on those larger deals honestly 75 to 80% plus of the time. And, as we mentioned before, our win rate is phenomenally high and I think it's actually still about 100%. So we see them a lot more on those larger scale deals.

One thing I want to be - this is Jack. One thing I want to be careful about is if you look at our business overall it's a mix of smaller projects and some larger base deals, right? So there are the $0.250 million and $0.5 million deals in addition to the multi million dollar multi phase deals. And as we said, historically we see the big guys roughly 20% of the time in the boutique or internal PSOs of competing software companies where it's a vendor aligned solution 80% of the time.

So maybe with the kind of shift we see happening it goes to a 30/70 but the 75 or 80% competing against the big guys, that statement relates to a subset of our business of these larger deals. But Jeff's key point is really the important one, which is that Proficient has shown now time and time again in terms of tremendous 10 out of 10 win rate last year on multi-phase projects; accelerating now in the first quarter is that we've got the depth, we've got the product expertise.

We are experts in the cutting edge technologies like Solo, like Enterprise Service Bus that are driving some of these larger engagements. The largest web sphere, largest [Tidco] delivery forces from any independent consultancy in the country so I think very, very well positioned. Now look, there are deals, there are the $25 million deals, the global deployment to the $50 million to the Department of Homeland Defense where the infrastructure that the big guys provide is invaluable. And obviously there is the IT outsourcing and business process outsourcing, which is really the bulk of the business of most of those big guys. And those are areas where we don't play and where their global infrastructures are critical.

But where we play in these $0.5 million to $3 or $4 million projects around the core technologies where we've got expertise in the integration space we can compete against and beat anyone, and I think our track record is proving that.

Okay. And then my next question was for Mike. How should we think about SG&A for Bay Street and what is that on a quarterly or annualized basis?

Well, I think Bay Street should blend in with the company's Perficient track record. It shouldn't be out of the norm of where we've been before. It shouldn't change the metric, the EBITDA margin, from where it has been. So I would say with the revenues coming on line, using the same kind of percentages as you've traditionally seen with Perficient is the assumption going forward with them.

Okay, easy enough. And then one more and my last for you Mike. You mentioned payroll as an impact to gross margins. Are you able to quantify either on a dollar basis or on a basis point hit on gross margin what that was in Q1?

Well, I can tell you that on a normalized basis we had about $800,000 of additional payroll tax expense in Q1 versus what we had in Q4. So the business has grown. But again kind of scaling up the taxes with the additional costs associated with the additional revenue on an apples to apples basis it was about $800,000 more on the percentages for Q1 metrics and margins and so forth. So now, going forward obviously we paid out the annual bonuses in Q1. That was the company-wide bonus program so it affected and impacted all the employees of the company. So everybody went a long way in kind of reaching those thresholds.

Each one of those payroll tax elements -- FUTA, PSUDA FICA -- have different limits. FICA being the highest limit at $94,000 but the other limits are held down in the first $7,000 of income to as much as the high $20,000s. So a lot of folks have kind of cleared the bar in Q1 on those other taxes and have gone through Q2 will go a long way towards getting to the FICA limit. So you'll see that trending down, that extra $800,000 trending down over the course of the rest of the year.

I think that's an important point when people look at the margins for Q1.

Michael Hill. Right.

Jeff Martin. Okay, thanks guys.

Thank you.

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

Good afternoon gentlemen. Congratulations on a nice quarter.

Thank you George.

Can you provide the usual vertical breakdown in your business?

Yes George, let me take that for you. So for Q1 the breakdown of revenues by industry is going to be as follows. We group financial services, insurance, and banking all together as kind of financial services together combined. That was 18% for the quarter. Healthcare was next at 17%. Telecom was after that at 16%. Computer software at 8%, energy and utilities at 4%, manufacturing at 4%, business services at 2% and then we had a number of growth in just kind of unique industries that compiled the remaining 30 percent.

Okay, understood. And if we can go back to the -- your point on hiring and the 75 people you're looking to add? What's the breakdown between experienced and inexperienced over there?

It's about -- this is Jeff. It's about probably 80% on the experienced side. As I mentioned we're actually going to step up some campus recruiting this year, which we've done a little bit of but had gotten away from over the last few years as things slowed down a bit. But we're going to be stepping that up a bit so we're looking to probably to pick up somewhere in the order of 12 to 15 campus hires. The rest would be experienced.

Okay, thank you. And just lastly, what is the share count we should be using for Q2?

For Q2 I think $27 million on a fully diluted basis is about the right estimate there, George. It's about $24 million with the Bay Street shares out there on kind of outstanding and then another $3 million, or a little bit less on kind of common stock equivalents from options, and warrants and so forth.

Okay, thank you.

Thank you.

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

Good afternoon everybody.

Good afternoon.

First I want to talk a little bit more about the national footprint. If you could give us some color or some verbiage in terms of what that might mean from extra expenses or shift in strategy if that opens up more acquisition opportunities to you, and if that provides you access to a broader potential client base?

Yes, in terms of expenses nothing out of the ordinary there because basically we had planned as part of Project Apollo, which we initiated 18 months ago. We built a very granular infrastructure investment plan to guide our scaling revenues from $50 million at the time that plan was adopted through to $250 million. As a part of that we anticipate, and are now implementing, a regional management structure, which will accommodate that national footprint. And as I mentioned earlier, we've always had national reach in terms of our travel practices.

So this isn't a tremendous change from that perspective and that the growth of that regional management team, and we're talking a couple, three people here, being promoted into those roles -- this is no massive infrastructure kind of investment. We'll accommodate that. And again, as we said before we think we can grow the business, accommodate those infrastructure investments and get better operating leverage going forward so we've built those assumptions into our forward outlook.

As to the second two parts of your question, clearly going to more of a national footprint massively increased our pipeline of acquisition opportunities and so we have definitely seen that. I mean there are still a number of good -- a large number of good, candidates in the central U.S. and we're actively exploring additional acquisitions in the central U.S. But going to a national footprint definitely opened up significantly the opportunities there. And again, you will see us do acquisitions in really two categories. The national practices, which are 100% travel firms and it almost doesn't make a difference where they're based out of because they're folks are on the road all the time. And then you'll see the local IT practices that are based in a given market and serve a local clientele, which are also important. And we think, like we are now, with this sort of 50/50 mix that that's what makes sense going forward, and so you'll see our acquisition strategy track that.

In terms of client base, again similar answer, we had access to a number of clients obviously on a national basis given our travel practices. Now, when you do the travel practice on a national basis those tend to be more vendor-aligned opportunities. Not exclusively but you tend to at least break in hand-in-hand with a vendor. Obviously, that changes as you open local footprints and you have the opportunity to build a more vendor agnostic long-term partnerships with clients. So again, I think it's a net positive in terms of opening up a broader client base. It's why we believe we have a real opportunity here to scale this business to $500 million in revenue run rate over the next 4.5 years.

Okay, great. And then, along those lines Jack would you say that, you know, you have a preference for 100% travel firms just because of the flexibility in terms of utilization or are there any types of solutions that you're looking to bulk up in the Midwest?

I think as we look at this firm going forward, I would like to see really the chariot being pulled by all the four horsemen out there. Obviously we've got a tremendous practice around IBM and that is a key source of growth for us. We're doing more on Microsoft now on the CRM front opening up Oracle and eventually SAP as well. So I think you'll see that. I think that that's looking at it from a vendor perspective. Looked at more from a functionality perspective, we'll be staying close to our key knitting in terms of middleware and enterprise portal, enterprise content management. Obviously data warehousing, particularly business intelligence is becoming more important so you might see more in that area. And then finally again from a geographic standpoint looking at the tie that way you are seeing now a move to a national footprint so look for us to be opportunistic in picking up firms in other geographies that we think are attractive.

Okay. Could we get a sense as to how the revenues broke down by solutions in the quarter?

Sure. Colin I've got that. So by solution type portals and collaboration represented 29%. Business integration was 15%, that's ESB, EAI business process management. Then custom applications was 15%. Customer self-service was 14% and then the technology platform implementations was 9%. E-business infrastructure was 8% and then data warehousing and BI was 3%. And then E-commerce platforms 2% and I think 5% other.

Colin Gillis. Got it. And then how about by products, IBM is still at running 60% or so of revenue?

I believe that's about right.

Okay, so no real change from like the 60/20/10/10 type model?

For right now, at least through Q1 I think that's remained consistent.

Colin Gillis. Okay, got it. And then just finally, any type of commentary you could give in terms of what you're seeing in the sales cycle itself and just in terms of the size of the contracts that are out there. Do you see yourselves spending more time bidding for sort of the plus size contracts?

Well, I'm going to -- I'll give you my quick take on that and let Jeff give you his. I mean obviously we are seeing some larger wins here, more strategic wins, a significant number of them, which is great news for the business for stability and predictability of revenue and earnings going forward. There has not been, to my experience here, a dramatic lengthening of sales cycles associated with that. You're really looking at a market that's heating up and, again, you look at it and there's just not a lot of -- between $100 million and $1 billion you've got basically five firms out there, two of which are staffing companies that we never compete with. So it's a very interesting opportunity from that perspective. But I'm sure Jeff can give you a better perspective on what we're seeing day-to-day.

No, I think that's right. In general, I think what we're really seeing is larger opportunities, larger engagements with about the same sales cycle. I think we're starting to see a sales cycle come down though some. There's really a lot of spend out there, which obviously is great news for us; and I think we are seeing the sales cycle on average and certainly if you looked at a metric like ratio of deal value to sales cycle in weeks or something I'm sure that that's increasing. So larger deals, same or shorter sales cycle. The market's very healthy for us right now. We look down the road and see it continuing.

Okay, good. And just finally Mike on the stock comp expense of $$724,000 can you just give us a sense as to how that breaks out on the different line items?

You bet Colin. So that $724,000 breaks out to $232,000 hitting cost of revenue and $492,000 hitting SG&A.

And then the net tax impact?

Yes, so net of $142,000 in tax benefit there. So it's $582,000 after tax.

Okay, great. Okay. All right thank you. Great quarter.

Thank you.

[OPERATOR INSTRUCTIONS] There are no additional questions at this time.

Okay, well, this is Jack. Again, thank you very much for your time and we look forward to speaking with you next quarter.

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