Perficient Inc (PRFT) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2006 Perficient earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of today's presentation. (OPERATOR INSTRUCTIONS).

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

This is Jack McDonald. With me on the phone today are Mike Hill, our CFO, and Jeff Davis, our President and COO. I would like to thank you for your time. As is typically the case, we'll have about 10 or 15 minutes of prepared comments, after which we will open the call up for questions.

Mike, would you read the Safe Harbor statement?

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.

Q2 was an extraordinary quarter for Perficient. We posted record revenues, cash EPS and GAAP EPS, as well as record EBITDA. We're talking about 73% year-over-year growth in revenues, total -- on an organic basis alone, 28% organic services growth. Now, that's based on the trailing four quarters annualization that we do to factor in seasonality. If you look at just Q2 alone, we had 12% sequential growth Q1 to Q2, 12.2%. That annualizes out to 48% organic, if you looked at just the spot number for the Q2 quarter.

So really incredible growth, top-line and organic. Jeff Davis is going to comment on this further later, but the market is showing continuing signs of strength. We continue to win larger and more strategic engagements, and we see our high growth continuing into Q3.

Our operating metrics were strong across the board. If you look at services gross margin, it increased sequentially and year over year, and now approaches 40% net of stock comp expense. Average bill rate increased again, and has grown on a 10% annualized basis. Utilization excluding subs in the quarter was nearly 87%, and our recruiting engine continues to perform. Jeff is going to talk about this further later, but we added 75 net new billable resources through the end of Q2, and have a very strong recruiting pipeline as we move into the second half of the year.

We realized in Q2 our 13th consecutive quarter of growth and our 17th consecutive quarter of positive EBITDA. Regarding EBITDA, the business continues to generate substantial cash flow. If you give full effect to our recent acquisitions, including EGG, the most recently announced acquisition, we are now generating more than $27 million per year in EBITDA. That's on a pro forma basis. That's factoring out stock comp, but north of $27 million a year and growing.

We lined up a $52 million acquisition financing facility, low-cost senior debt facility, in the second quarter, which will enable us to complete additional accretive acquisitions and do so with a capital mix that enhances return on equity. So we have a sizable war chest, and we are actively out in the market looking at additional deals. Of course, we have closed two accretive acquisitions in Q2 and a third one just in the first month here of Q3.

So we have been talking for some time about our strong pipeline on the M&A side and the fact that we're executing on it. I think those acquisitions demonstrate that, but we have got additional deals in the pipe, and our net pipeline continues to run north of $250 million, gross pipeline north of $1 billion. So there are significant additional accretive acquisition opportunities out there. As I say, we are intending to execute aggressively against that pipeline.

We've continued to build out our growth infrastructure. You may have noticed recently we announced an accomplished new CFO, Paul Martin, who has joined the team. Mike Hill -- who has done a superb job for us as CFO over the past two years and who will continue to serve in a CFO post until August 20th, I believe -- is going to be staying on as Vice President of Strategic Finance with a focus on M&A, increasing our bandwidth in that area.

We enter Q3 at an annualized revenue run rate north of $170 million, and our forward guidance, which reflects Q3 services revenue growth of between 67% and 75%, is stronger than it has ever been. There were a number of other positive developments during the quarter, many of which were mentioned in the press release, but I want to call attention to the fact that Perficient was selected for inclusion on the NASDAQ Global Select Market, which is the highest tier of NASDAQ listing. Very few firms of our size were selected for inclusion. In fact, less than one in three included firms at a market cap below $500 million. So it's a nice external validation of our performance, as well as our prospects moving forward.

As I mentioned, we see strong growth continuing into Q3, with record forward guidance and great market fundamentals. We have a real shot, subject to completing one or two additional accretive acquisitions, of achieving our stretch goal of a revenue run rate by the end of this year of close to $200 million. Again, there are no guarantees in life, but we are aggressively pursuing that stretch goal. $200 million by year end would be just another milestone in our plan to grow a $500 million business by 2010. I believe we have a unique opportunity as the best-positioned, most profitable and fastest-growing US-based e-business consultancy, as a survivor of the Internet crash in the nuclear winter, to continue to pick up the pieces and consolidate this market and build the premier e-business consultancy in the United States.

I'm now going to turn the call over to Mike Hill to discuss in detail the financial results for the quarter.

Thanks, Jack. Our total revenue for Q2 was $37.5 million, a 73% increase over the year-ago quarter. Services revenue including reimbursed expenses was $34.9 million, with strong organic services growth of over 28% on a trailing four quarters average annualized basis. Gross margin for services during Q2 was 38.9%, up from 34.7% in Q1. This increase was a result of strong utilization of 90% in the quarter, up from 86% in Q1. That's 90% including subcontractors, 87% excluding subcontractors. The margin improvement is also due to increased average billing rates to $116 an hour, up from $113 an hour in Q1. This gross margin on services included $242,000 of non-cash stock compensation expense, without which services gross margins would have been 39.6%.

SG&A expense was $8.2 million in Q2, including $504,000 of non-cash stock compensation. Excluding this non-cash stock compensation, SG&A expense was $7.7 million, which represents 22.1% of services revenue, including reimbursed expenses. This is a slightly higher percentage compared to 20.1% in Q1 of 2006, as a result of higher bonuses and sales commissions from our strong financial performance against bonus commission plan targets.

However, EBITDA as a percentage of services revenue, including reimbursed expenses but excluding software and excluding stock compensation, increased to 15.0% for Q2, up from 14.8% in Q1, so EBITDA margins still improving. EBITDA was up 55% over the year-ago quarter to $4.9 million, which includes absorbing $745,000 of total non-cash stock compensation in Q2. Excluding the stock compensation, EBITDA was up 75% over the year-ago quarter to $5.7 million.

We're now realizing an annualized EBITDA run rate of greater than $22.7 million, excluding stock compensation expense and before factoring in a full quarter's impact from both the Insolexen acquisition and the Digital Consulting EGG acquisition. As Jack mentioned earlier, giving full effect to those deals on a projected EBITDA basis, we're realizing an annualized EBITDA run rate north of $27 million. This is our 17th consecutive quarter of positive EBITDA.

Net income was up 39% over the year-ago quarter to $2.3 million, which includes absorbing $559,000 of net after-tax non-cash stock compensation. This is our 13th consecutive quarter of positive net income.

Diluted GAAP earnings per share was up 14% over the year-ago quarter to $0.08 per share, given the $0.02 per share after-tax impact of stock compensation expense in the quarter. Diluted cash earnings per share was up 71% over the year-ago quarter to $0.12 per share. I should clarify that cash EPS is a non-GAAP measure, which we define as GAAP earnings per share plus non-cash amortization expense and non-cash stock compensation net of taxes, divided by average fully-diluted shares outstanding in the period.

As previously mentioned, during Q2 2006, our utilization rate, based on a [2008]-hour year, was 90% including subcontractors and 87% excluding subcontractors. Our average billable headcount for Q2 was 622, including 143 subcontractors. We ended Q2 with 695 billable consultants, including 151 subcontractors. Now, after the end of Q2, with the 98 billable consultants joining Perficient in July from the Digital Consulting EGG acquisition and organic growth since the end of Q2, our billable consultant headcount has risen to over 800. In addition to billable headcount, we currently have 112 SG&A personnel, which brings our total colleague headcount after the Digital Consulting EGG acquisition to over 925.

Our quarter-end cash balance decreased to $1.6 million at June 30, 2006 from $2.3 million at March 31st. As a result of the two acquisitions during the quarter, we drew down a net of $5 million on our AR line of credit and paid our approximately $7.4 million of cash consideration for these acquisitions. During Q2, our net cash flow from operations was approximately $1 million, and would have been a little higher had we not seen a slight uptick in days sales outstanding at the end of the quarter. Normalized free cash flow after debt payments and CapEx investments is still running at better than $2 million per quarter.

Our days sales outstanding on accounts receivable was 72 days at the end of Q2, slightly up from 69 days at the end of Q1. Our goal is to maintain DSOs as close to 70 days as possible, so we are still close to that 70-day count.

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

Thanks, Mike. Well, as we have already discussed, we had a very strong quarter in the second quarter. There's a few other areas that I would like to cover briefly, and then I will turn the call back.

The strong results we enjoyed in Q2 were really across the board. The demand was not confined to any particular region, solution area or partner technology. We're really seeing a rising tide lifting all the boats, as it were. We really see no signs of that stopping, with strong demand across all industry segments that we are working with and technologies, in our partner technologies -- very strong demand in the middleware space, which is really our sweet spot, in addition to the customer intimacy work that we do around CRM.

During the second quarter, we closed a number of multi-phase, multi-million-dollar, full lifecycle engagements that have contributed to the largest backlog in our history. A few of these deals could prove to be the largest individual deals in the Company's history as well. The key takeaway, I think, to this message is that demand remains strong, the strongest we have seen, actually. We see no sign of that changing for us.

I also want to discuss recruiting for a moment and our capacity to staff that demand I was just talking about. We're got a team in place now of 12 recruiters that we estimate is capable of recruiting 400 consultants per year. That's enough to support better than 30% organic growth. We designed the team and the processes such that we can scale it quickly and effectively as we need to.

Actually, I think the results really speak for themselves. Through the end of the second quarter, as we mentioned earlier, we added 75 net new consultants. That's on pace with the 30% annualized growth that we talked about earlier. I expect this level of recruiting performance to only improve as the Company grows and our brand awareness increases from a recruiting and marketing standpoint.

In conjunction with the increased demand, our bill rates are also increasing, as Mike mentioned earlier. In the second quarter, our net bill rates increased $3 over Q1. So we were at $110 in the fourth quarter of 2005, $113 in the first quarter of this year, and now we're at $116 for this quarter. That's a better than 10% increase, annualized. We expect to continue to be able to move these rates higher going forward, due to our strong demand that we're seeing and the additional pricing power that our increasing breadth and depth affords.

The acquisitions we have made in the past four months are already paying substantial dividends. We have leveraged the CRM resources from the Bay Street acquisition into engagements at existing legacy clients, broadening the scope of our relationship with those firms. Insolexen has helped us become a dominant leader in the business integration market, particularly around the IBM stack.

Our most recent acquisition, the Energy, Government and General Business Division of DCSS, has provided us with an entry into the Southeast, we think in a very attractive market. We've got plenty of opportunity for client growth there. We will be leveraging our partner relationships that are also strong in those regions to really accelerate that.

Lastly, I wanted to review some of the trends that we're seeing in the market, which include continued investment and application in messaging infrastructure -- as I mentioned, our sweet spot -- including rapidly increasing demand for service-oriented architecture foundations, enterprise service bus foundations, continued strong demand for customer and portal solutions, enterprise content management solutions for both internal and external use and, of course, CRM solutions. As we mentioned earlier, we're seeing a great deal of larger, more complex mission-critical solutions. As I also mentioned, these result in a number of multi-phase, multi-million-dollar engagements that we have kicked off here in the first half of the year. I see this as a continuing time for us that should be very exciting -- strong demand, no reason to believe that that's going to end anytime soon.

In summary, I think that in 2006, we should realize the largest organic growth that the Company has seen in about six years. Excluding acquisitions through the second quarter, we've added 75 net new consultants and have a goal to bring that number to at least 125 by the end of the year. As I also said, (technical difficulty) additional recruiting capacity and also plan to do significant campus recruiting, and actually bringing in a lot of campus hires beginning in the second half of this year is something else we're very excited about.

Finally, while it didn't fall in Q2, and Jack mentioned earlier but I know it's of interest for everyone, I wanted to mention my thoughts on the hiring of Paul Martin as our CFO. Very excited, obviously, about adding Paul to the team. I feel like he's a real coup for the Company. It was a competitive situation. Paul had other opportunities, but he chose Perficient, because I think he sees an opportunity here, the same opportunity that we all see here. We're excited to get him. He is a guy that has got big company experience, multi-billion-dollar firm experience, but has also worked well in smaller, entrepreneurial firms like us. We're excited about him, and think he will be a great addition to the team.

That's really all I had. So Jack, I'll turn it back to you.

Thanks. We expect Q3 services and software revenue, including reimbursed expenses, to be in the range of $41 million to $43.1 million. That is comprised of $40.4 million to $42.4 million of revenue from services, including reimbursed expenses, and then $600,000 to $700,000 in software revenue. So that guidance range of services revenue would represent services revenue growth, as I mentioned earlier, of 67% to 75% over the third quarter of 2005. So, as I mentioned, we see our rapid growth continuing into Q3.

Now, that Q3 guidance range does not include a full quarter of revenues from the $17 million division of Digital Consulting, the EGG acquisition that we closed on July 21st. So on a pro forma basis, if your gave effect to that acquisition, our Q3 guidance range in total would be roughly $42 million to $44 million.

So, again, we're as optimistic as we have ever been about the potential for Perficient. We're extremely well-positioned moving forward. We have scaled this business from a startup to a better than $170 million run rate in just six years. We're the fastest-growing, most profitable public domestic IT firm in the US. We are realizing strong organic growth, chasing a multi-billion-dollar market opportunity and, as we have talked about, have a credible plan to build the business to $500 million in revenues by the end of 2010.

With that, I would like open the call up for questions.

(OPERATOR INSTRUCTIONS). Pete Heckmann, A.G. Edwards.

Great quarter. When you look at the recruiting, 75 net new billable, can you talk about the markets that you're adding them in, whether they are localized consultants or on a national basis? Then, what type of -- a little bit more on the training facility, I believe, in Chicago, whether you're going to be taking some of the new recruits through that facility to bring them up to speed?

It's really across the board. We're hiring, really, into all the technology we cover in really all the markets, both locally and into those national practices. So, if you kind of apply that 25% or so increase that we're looking to make, it really is pretty much across the board for everything we cover.

In terms of training, we're actually in a facility here in St. Louis now with the operating headquarters, where we have got a training facility, a 50-station training facility, available for our use in this shared facility, where we're actually going to be on-boarding consultants. This will be something that is new for us in this formal way. We obviously always on-board folks, but we're going to be taking people through more formal on-boarding boot camps beginning in the fall. We will also be using the facility you referred to in Chicago to do more technical training, more focused technical training in conjunction with some of the partnerships that we have.

With the most recent acquisition in August, talk about some of the new geographic markets that brings. I think there was a real fledgling operation, perhaps Atlanta or New Orleans. Talk about any of your thoughts in terms of maybe Greenfielding new offices.

Well, we did pick up, with the EGG acquisition, local presence in Houston. Now, we've got a significant Houston office pre-EGG. But most of the work from our Houston office was outbound. Right? That's where our TIBCO practice and our Documentum practices -- so our enterprise content management and enterprise application integration practices -- are headquartered. But most of that work was really done on an outbound basis. So, EGG added a much more significant local practice in Houston, much of it -- a good chunk of it, anyway -- energy focused; and obviously, the work in Louisiana also principally energy-related.

In addition to that, though, there is the office in Atlanta. That is a market that we have wanted to crack for some time. This toehold there will give us an opportunity now to really grow a more substantial practice there. Just looking at a few million dollars in revenue today, but we see an opportunity to grow that substantially, hopefully build a $10 million office there within a couple of years.

In terms of other Greenfielding, we always look at that, and there may be opportunities to do it. Right now, we are focused on growing the markets that we are already in geographically and, of course, growing our national practices. Roughly half our revenue is natural practice revenue, where we serve our local offices and also serve service business nationally. We're basically running as fast as we can to recruit and train and deliver the work we have got now across the board.

Tim Brown, Roth Capital.

I was just hoping that you could maybe help us look at an SG&A run rate going forward, particularly the last couple of acquisitions.

Sure. In terms of percentage of revenue, it's running roughly 19% to 20%. Now, it was a little bit higher than that in Q2, since we had such dramatic outperformance. You had somewhat higher sales commissions and a little bit more in the way of bonus accrual. But typically, it's been running in the 19% to 20% range, and our goal is to reduce that further. It has been trending down with further growth in the business.

Just as an aside there, one thing that we believe firmly is that the bonus payments that are made, whether they are senior management or mid-management in the Company, aren't paid unless we have hit our earnings goals. So there's really no accrual under those plans until, at a minimum, the consensus estimate is met. That really amounts to a $3 million or $4 million a year insurance policy on hitting earnings, because you've got that buffer in there. But it will result in quarters like this one, where we outperform, and some additional accrual under those plans. But I think it's a very investor-friendly plan, and we designed it specifically that way.

So 19% to 20% going forward, then?

Yes. As we continue to scale the business, I would like to see that come down. The flip side of that is an increase in EBITDA margin, so we will look for that. But you've seen some trending down of it -- again, a little bit of a bump-up just because of the massive outperformance, which has resulted in some additional accruals under the performance-based bonus plan, as well as additional sales commissions.

Looking at the gross margins and the utilization going in the second half, do you think those are sustainable rates? Where do you expect utilization to be?

Well, you saw in the second quarter utilization ex-subcontractors of about 87%. In a typical situation, based on our model, the way we're structured -- we have said this many times before -- we think 82% to 84% is what we would typically see. I think, as you look at the second half of this year, I would not be surprised to see us run somewhere between 84% and 87%. So we will see somewhat higher-than-normal utilization.

The flip side of that coin, on gross margin -- there are factors that are helping on the gross margin side in addition to just the utilization number. We've also seen an increase in bill rate. Of course, that average bill rate number is going to go up and down. It has been trending up, but it is going to be impacted by acquisitions -- some positively, some not. But we're only doing deals that are accretive. We're only doing deals that ultimately help in the actual gross margin number. But some firms are achieving good gross margins at lower bill rates. So that always needs to be kept in mind when you are looking at that.

But I do think we're seeing improvement here in gross margins from the 36% that we were seeing earlier in the year. As we talked about, we want to be getting closer to that 40% number. We were seeing that 39.6% here in the second quarter, ex-stock comp. I think even if you normalized out utilization down a couple of points, you are still going to see something in the 37%, 38% range. So we are clearly demonstrating some significant improvement on that.

George Mihalos, Gilford Securities.

Congratulations on the nice quarter. I was wondering if you could maybe speak to some applications going beyond TIBCO and .NET and WebSphere. Are there any other sort of applications that you're starting to see gaining some strength perhaps, where you would like to add some more expertise?

Sure. Jeff, do you want to comment on that?

Sure. You know, we do a good deal of custom application development. As I think I've mentioned before, I still feel like it's almost Greenfield around customer intimacy, customer self-service applications. Again, these are custom applications. I don't know that we're looking necessarily to get into package deployment outside of the Siebel space that we're already in, perhaps more Oracle down the line. But really, the middleware space that we're in has been very good to us, and as we mentioned earlier, continues to look very strong. So it will be focused around that space and that area.

You might have seen IBM's recent announcement of the acquisition of Webify. That will go under the WebSphere brand, where we've got a close relationship. We'll obviously be looking to leverage that relationship and see how we can help IBM integrate that and introduce it into the WebSphere platform and hopefully play a role there.

Your last acquisition was very much focused on the energy space. Are there any other verticals where you're looking to expand in via acquisition, near-term?

I would say that if you look at our acquisition strategy today, it's really focused in two ways. One is increasing that geographic footprint, adding markets that we are not in today. Of course, it is a much more attractive economic model as a public company to open new markets through acquisition, rather than Greenfielding and having to absorb early losses when you are opening up a new market.

So, you're going to see 50% of our acquisition activity focused on geographic footprint expansion. The other half is focused on adding strength in existing competencies and solution areas, and then adding new solution areas were we see an opportunity to cross-sell to our 600 plus Global 2000 clients.

So you are really -- the two lenses through which we're going at that are geographic and then domain expertise or solution area. There's not really a vertical focus to what we're doing. That's a touch more opportunistic. So, there will be other opportunities to potentially open up some verticals where we are not as strong today, but that would be more of a tangential benefit, frankly, than it would be a core part of the strategy.

On software gross margins, should we be modeling somewhere around this 15% range going forward?

I think, to be conservative, we should be. Obviously, we ran a little bit higher than that in Q2, and in addition to that, there have been some changes made to some of the programs offered by our partners, which promise even greater increases in margin. But in terms of what we're doing internally and would recommend folks for their own account, I would keep the margin assumptions in that 15% range.

Colin Gillis, Canaccord.

I've said great quarter many times, but this was a particularly excellent quarter. What is allowing you to have this growth compared to your peers? Could you just discuss a little bit about how you are competitively aligned in the marketplace, perhaps in terms of costs or employee expertise?

Sure. I think we are, first and foremost, chasing a huge opportunity. This is a $10 billion plus opportunity that we're chasing in the entire middleware and EAI area. You have got a situation where fundamental new technologies are coming online, like service-oriented architectures, or SOA, and ESB, enterprise service bus. Large investments are being made by Global 2000 companies to put this new infrastructure in place, and Perficient has under the hood more expertise in middleware and EAI and SOA, pound for pound, than any firm in the country.

Our reputation has grown. Our scale has enabled us to take on larger deals. We have got, obviously, more geographic reach today. We continue to enjoy increasing market share and mind share from our vendor partners with whom we go to market in some instances.

Of course, you have got the fact that literally 9 out of 10, as we have talked about before, 9 out of 10 our competitors were knocked out during the crash. Between $100 million and $1 billion, there are basically five public IT consulting firms that are US-based firms, including Perficient. We're growing faster and are more profitable on a percentage basis than any of them, and we are really the only one that is firmly focused in the middleware space.

We continue to see very, very positive signs among our customer base, as we have alluded to earlier. Cash on corporate balance sheets is at an all-time high. Confidence is up in executive suites. You have got a backlog of strategic IT projects that hadn't been addressed for five years that are beginning to come off the shelf. You've got, meeting that demand, a set of technologies that have matured now, being offered by the four horsemen, the IBM's and SAP's and Oracle's and Microsoft's as well as some other point best-of-breed vendors. You have got trends like SOA, that are enhancing the efficacy of those applications, driving better ROIs for our customers.

So we are seeing -- we think we're in the early innings of this ballgame, second inning of this ballgame. It's a multi-billion-dollar opportunity, and just you are seeing a tremendous amount of demand out there.

We also like the fact that we really own the sweet spot between the big guys, the Accenture's of the world, and all these mom-and-pop boutiques. You just don't have a lot of tweeners in our size range that can bring the attention to the customer, the local presence and the ability to profitably execute the sub-$3 million deals. We can bring all of that the table like a boutique, and yet we also offer the depth and scope and scale and geographic reach and solutions expertise and vendor endorsements that you see from larger players.

Finally is the referenceability. We have served over 600 clients at 85% repeat business rate over the last five years. We have talked about that a lot.

But I tell you, in the market every day, that makes a huge difference because customers, prospective customers, ask two questions. For whom in my industry have you delivered this solution before? And what's their phone number? Perficient is able to answer those questions and get that solid reference. That really is where the rubber meets the road, in terms of winning a business.

So, I think we're very, very well-positioned. I think we've got some headroom on rates relative to our competition, and we have got a stronger pipeline than we've ever had.

It does seem clear that on a sub-$3 million deal, you deliver better people at a lesser cost. What about for those $10 million plus deals? Can you compete at that level?

No, I think we can. We have seen some opportunities recently. You're starting to see some of these outlier deals that we're winning that are in that kind of size range. I will tell you, just in terms of how the Company is managed, and I will let Jeff give his thought on it as well, is that we really want to break those deals up into smaller, bite-size chunks. We are staying away from any kind of large fixed-price risk around anything like that. We run the Company very conservatively in that regard, and we want to -- for us, it's about building the long-term customer relationship. That doesn't -- not just winning a bid at any price.

We've had situations where we said, look, we're not going to be the low-cost provider on this but we bring expertise to the table. We bring a demonstrated track record and we have been winning deals in that size range with that approach. But again, the way we go at those deals is we break them into pieces. So, that's why we're not out there blaring any trumpets on, hey, we won a deal of this size, because all of the contracts around these deals are terminable and pretty much at will. Frankly, we don't want to take on the risks of huge deals. So, we like doing them on a quarter-by-quarter basis. It makes a ton of sense for us. We're building a huge backlog in any event. We have shown that we can get those kind of deals done.

Jeff, any thoughts on that?

I think you hit it well. The only thing I would add is that the fact of the matter is, as you said, while we chunk these things out into what might be, by the way, $2 million or $3 million phases of an ongoing engagement or an ongoing solution, we have in fact delivered a number of, over the last, say, two years, better than five $10 million plus solutions.

As Jack said, though, we chunk those down. That's our methodology, for all the reasons that Jack described. It's a win-win for us and our clients. It's less risk for everybody. We're delivering value, more iteratively, more quickly. The client is happier with that, and they are realizing ROI faster. That's one of the keys, I think, to our success. So that's the only thing I would really add.

Just finally, regarding Paul Martin, will he be based out of the St. Louis office? Does this allow Mike in the Austin headquarters to tighten his focus on the M&A side?

Yes, on both fronts. The Company, for it's got to be three and a half years now, the operating headquarters of the business has been in St. Louis, were Jeff is based, where our controller has been based, with the finance and accounting staff is based, where our head of sales is based and also the head of our IBM practice and our usability practice. So that has for some time been the operating headquarters of the business. I have been based out of Austin, obviously, since the Company's inception, and Mike has been with me there. So it made total sense to base Paul Martin out of St. Louis. Mike will be focused on strategic finance, including more M&A work, and working tightly with me around that.

I'm very pleased. We have made a number of investments and have been doing so in a way that still enables us to increase our margin. So we're not talking about huge dollars, but people and process investments that are really building the platform we need to scale this business to $500 million. I want to stress we're going to be able to make those investments and still bring very, very tight SG&A management as a percentage of overall revenue, and have an opportunity to enhance EBITDA margins. So big add there, and I think we're very well-positioned in terms of growth infrastructure.

Just qualitatively, you're not seeing any change in the month of July or anything that's indicating any type of material slowdown. Is that correct?

That is correct.

Thank you again. Great quarter.

Kevin Foley, Constitution Research.

Did you say what the average bill rate was for the quarter?

$116.

What is that coming up? That was over what a year ago?

Well, we did $113 in Q1, $110 in Q4.

And then, going backwards in time, Q3 last year was $113, Q2 was $110 and Q1 2005 was $111.

Secondly, on the organic growth rate for services, you had mentioned the sequential organic growth rate. What what it have been on a year-over-year basis? Because the total was 73%, correct?

The total was 73%. 28%.

For services alone.

Yes. Organic alone.

In your guidance, what's the assumed organic growth rate on services?

It's roughly that same number. It's in the mid 20's.

Dom LaCava, Canaccord.

Good quarter. Quick question -- can you break down the revenue or the solutions that you provide in the quarter between IBM, Microsoft, Oracle?

Sure. Jeff or Mike, do you guys want to take that?

Mike, you have got those numbers, right?

I've got not by IBM or -- got the solution types. Business integration solutions represented 32% [port], and that encompasses SOA, ESB, EAI, BPM. The portal work was 26% of revenues. We have got customer self-service represented 11%. Content management solutions was 9%. Customer relationship management was 8%. Business intelligence solutions was 5%. Then platform solutions at 4%. Then there were just a few others, aggregated to about 4% of the remaining.

Let me expand on that. I'm sorry, Mike; I thought we had that. These are estimates, but I think they are pretty close. On IBM platform, probably about 40%; on TIBCO, probably about 20%; Microsoft, around 15%; Oracle around 10%. Then the rest I would describe as miscellaneous.

Is there any way that you see yourself lifting bill rates from the recent acquisitions? I know that typically, you say the core bill rates are somewhere in the $130 plus range. I'm just wondering if you see yourself lifting rates from the acquisitions toward that?

Sure. Yes, we talked about the fact that we believe and we are seeing increases in bill rates north of 10%, in the 11% or 12% range. We see that continuing. That's an organic statement. There are going to be acquisitions out there. Some come in with higher bill rates, some come in with lower bill rates. We only do deals if they are accretive, or we only do deals if they are ultimately a net positive to our gross margins. Some acquired firms are delivering higher gross margins at lower bill rates, because they have lower-priced personnel and it's lower labor cost.

So, for example, Insolexen was an acquisition we made that brought a lot of WebSphere and TIBCO talent to the table and a national travel model. More folks there that were H-1B visa folks that would be providing great expertise. There you have a lower bill rate but still a good gross margin sort of mix.

So, you'll see a little bit of both out there. Ultimately, I think that the key metric to track -- at least, what we're looking at -- is gross margin. Bill rate is obviously one component of that. Utilization and labor costs are the other two. So I try not to get overly fixated on bill rates. Again, I think the gross margin metric is more important.

But that said, yes, $110 to $113 to $116, and I would like to see us get that closer to $120 over the next 12 months.

(OPERATOR INSTRUCTIONS). Colin Gillis.

Any comments about SAP, what you're thinking about that platform in terms of adding expertise?

Sure. That is something that we are interested in, particularly in the NetWeaver area, which is an area where we believe we have an opportunity to leverage our middleware and EAI expertise in a positive way. We see sort of similar opportunity with Fusion and Oracle.

As we have talked about, at this stage of our growth, we are most comfortable doing acquisitions in the sort of $10 million to $30 million revenue range. The solutions-oriented SAP shops out there tend to run larger than that, more in the $40 million plus range, at least based on what we have seen, and we have turned over a number of rocks. So I think that's more a next-year opportunity for us, just in terms of getting to a scale that would enable us to comfortably execute and digest an acquisition of that size. But it's definitely still on the horizon.

In terms of the June quarter, IBM WebSphere results are very strong from IBM. Is that any type of a business indicator for Perficient?

Well, I think it is. I think WebSphere is showing some good strength out there. Honestly, we are just seeing demand across the board. Sometimes, you see a direct correlation of license growth to services growth, but other times you've got existing significant enterprise license agreements in place that allow us to go in and help clients basically implement and build custom apps and integrate what they have already paid for on the license side. So you'll see tremendous services growth without necessarily a corresponding increase in the license number.

So, without trying to be ambiguous on this, it's sometimes a good indicator and it's sometimes not. But I do think you're seeing IBM grow stronger. We have said for some time that -- and no great surprise here -- you are seeing more and more strength coalesce around the four horsemen, and we expect that to continue. Obviously, we're very, very well-positioned with IBM. Their acquisitions, as Jeff mentioned earlier, also help expand the suite of solutions that we can deliver. So it's a very virtuous cycle for us.

So basically, sales are always a good thing. Lack of sales doesn't mean that there's not business for you, right? You saw things along those lines with the TIBCO practice, perhaps?

I was just about to say that. Yes, we saw that for well over a year, where we were experiencing tremendous growth in TIBCO services and EAI services generally, at a time when you weren't seeing that corresponding growth in TIBCO reported license revenue. Again, sometimes you have just got a situation where there is software out in the market under these enterprise license agreements that is not being fully utilized, or there is integration work, and the software has basically already been paid. But yet there's a tremendous follow-on services component.

We use a ratio for our own market-sizing purposes of $3 of services to $1 of software sold. A lot of folks, when you're looking at enterprise-class applications of the type that we're working on, use $5 to $7. So that just gives you -- we just try to be conservative in our sizing estimates, but that gives you some idea of the amount of services work that just $1 of license fees can generate, potentially.

That $500 million number that you tossed out there, when was that, again? Was that 2009?

Well, we have talked about it, the $500 million run rate by the end of 2010. Folks can look at it. If you look at our organic growth rate today, even if you shaved 5 points off our organic growth rate today, and we just executed on acquisitions like we're doing today, you would see -- the math alone would drive you to probably getting there earlier than the end of 2010. But in terms of what we're saying for the market, it's $500 million by 2010. We're going to try to get there sooner, if we can.

That will conclude our question-and-answer session. I would like to turn the call over to Mr. Jack McDonald for closing remarks.

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

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