Perficient Inc (PRFT) 2006 Q4 法說會逐字稿

Thank you for your patience, ladies and gentlemen, and welcome to the Fourth Quarter 2006 Perficient Earnings Conference Call. My name is Candace, and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode. We will conduct a question and answer session toward the end of this conference.

[OPERATOR INSTRUCTIONS]

As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to turn the presentation over to your host for today's conference, Chairman and Chief Executive Officer Mr. Jack McDonald. Please proceed, sir.

This is Jack McDonald. With me on the phone today are Jeff Davis, our President and COO, and Paul Martin, our CFO.

I'd like to thank you for your time this morning. We'll have about 10 to 15 minutes of prepared comments, after which we'll open up the call for questions. Paul, could you now read the Safe Harbor Statement?

Sure. Thanks, Jack, and good morning.

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 law. 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.

The fourth quarter was an extraordinary close to really an exceptional year for Perficient. We posted record revenues, record cash EPS, GAAP EPS and EBITDA. We're talking about 65% year-over-year growth in services, with 68% total revenue growth. And if you look at it for 2006 as a whole, we posted 23% organic services revenue growth, so really the fastest growing IT consultancy in the U.S. We continue to see strength across the entire business, as we're winning larger and more strategic engagements, and we currently see no market or industry obstacles that would prevent us from building on this great success well into 2007.

We had strong cash collections during the quarter, which helped us pay down the entire balance on our line of credit facility. So at year-end we had just $1.3 million of debt under the term part of the facility. So the line of credit paid down completely and $1.3 million only under the term and about $4.5 million in cash on the balance sheet as of December 31, 2006. So the balance sheet is stronger than it has been at any point recently.

Jeff is going to speak more to this later, but our operating metrics has continued to improve. Services gross margins, excluding stock comp, north of 37% in the fourth quarter and improved 200 basis points over the fourth quarter of 2005, and that's at an 81% utilization rate, which is actually towards the low end of our 82% to 84% sort of sustainable rate. We realized our 15th consecutive quarter of revenue growth and our 19th consecutive quarter of positive EBITDA. So Perficient continues to show a dependable track record of both growth and profitability.

In 2006 we essentially doubled the size of the business. So we coupled our strong organic growth with active M&A -- an active M&A program. We acquired three businesses. Those transactions helped us expand into new markets. They added new solutions to our portfolio. They helped to build our client roster, and they brought substantial sales and consulting talent into the firm.

During the year, we also made some significant growth infrastructure investments, including strengthening our executive team. We used our growing financial strength to secure a larger credit facility, so more dry powder. We've got that $52 million facility and again, as I mentioned, only $1.3 million drawn on that, and really just positioned the firm for growth and for attacking our longer term targets.

In 2006 we continued to demonstrate the cash creation potential of this business. We generated more than $24 million in EBITDA. That's excluding stock comp. And if you annualized the Q4 numbers on a run rate basis, we're generating more than $29 million, and we expect some significant growth in that metric now in 2007.

So on a revenue basis we enter 2007 at an annualized run rate that is just under $200 million. We've got a solid acquisition pipeline. In fact, I'm sure most of you have seen that we announced another acquisition this morning, the acquisition of E-Tech Solutions. That provides us a base in the mid-Atlantic, adds about $10 million of revenue run rate and some additional Microsoft expertise. They're a Microsoft Gold partner. Paid about $12 million, which is just about smack-dab in the middle from an EBITDA perspective, our EBITDA target multiple range. So a great deal, accretive, solid IRR on it and makes a lot of sense strategically.

Even after that deal, we've got nearly $43 million of capacity under our credit facility, so we've got the firepower we need to continue to do acquisitions. So hitting that $200 million mark is another significant milestone in our plan to grow Perficient to a $500 million business, as we've talked about, $500 million revenue run rate by the end of 2010. We feel we've got a unique opportunity as the best positioned, most profitable and fastest-growing U.S.-based tech consultancy, as a survivor of the internet, crash to pick up the pieces and consolidate this market and build the premier tech management consultancy in the United States.

So with that I'm going to turn the call back over to Paul Martin, our CFO, and he can walk through the financial results in greater detail. Paul?

Thanks, Jack.

Total revenue for the fourth quarter of 2006 was $49.5 million, a 68% increase over the year-ago quarter. Services revenues were $39.1 million, with strong organic growth of over 23% on a trailing four quarter average annualized basis. Gross margin for services, excluding stock comp, for the fourth quarter was 37.1%, which is up from 35% for the fourth quarter 2005, even with 2006 including a larger accrual for variable compensation based on strong operating performance.

SG&A expense was $8.9 million in the fourth quarter, including $628,000 of non-cash stock compensation expense. Excluding the non-cash stock compensation, SG&A expense was $8.2 million, which represents 16.6% of revenues, which is essentially flat with 2005.

EBITDA was up 60% over the year-ago quarter to $6.6 million, which includes absorbing $905,000 of non-cash stock compensation expense in the fourth quarter of 2006. EBITDA excluding stock comp was $7.5 million, up 78% over the comparable prior year quarter. EBITDA margins, excluding stock compensation expense, improved 90 basis points over the comparable prior-year periods of 15.1%. The fourth quarter annualized EBITDA run rate was $29 million, excluding stock comp. This is our 19th consecutive quarter of positive EBITDA.

Net income was up 39% over the year-ago quarter to $2.8 million, which includes absorbing $669,000 of after-tax non-cash stock compensation expense. This is our 14th consecutive quarter of positive net income. Diluted GAAP earnings per share was up 25% over the year-ago quarter to $0.10 a share, even with the $0.02 per share after-tax impact from stock compensation expense in the quarter.

Cash earnings per share were up 67% over the year-ago period to $0.15 per share. Cash earnings per share 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 related taxes divided by average fully diluted shares outstanding for the period.

As previously mentioned, during the fourth quarter of 2006 our utilization was 81% including subcontractors and 85% excluding subcontractors. For the full year, total revenues were $160.9 million, a 66% increase over the prior year. For 2006, services revenues were $137.7 million compared to $83.7 million for 2005, an increase of 65%. 2006 gross margin for services, excluding stock comp, was 38.1%, which is up from 36.7% for 2005.

SG&A expenses were $32.3 million for the year ended December 31, 2006, including $2.1 million of non-cash stock compensation expense. Excluding non-cash stock compensation, SG&A was $30.1 million, which represents 18.7% of services revenue. This is slightly up from 18.2% last year primarily due to higher variable compensation.

EBITDA increased 48% over 2005 to $21.5 million, which includes $3.1 million of non-cash stock compensation expense. Without the effect of stock compensation, EBITDA increased 67%. 2006 net income was $9.6 million, or $0.52 diluted cash earnings per share, again this is a non-GAAP measure, which is an increase of 33% compared to income of $7.2 million, or $0.33 diluted cash earnings per share for 2005. Diluted GAAP earnings per share was up 25% over 2005 to $0.35 a share with $0.08 after-tax impact from stock compensation in 2006.

Average billable headcount for the fourth quarter of 2006 was 835, including 181 subcontractors. We ended the fourth quarter with 853 billable consultants, including 198 subcontractors. In addition to the billable headcount, we currently have 119 SG&A personnel, which brings our total colleague headcount to over 972 as of December 31, 2006. Headcount prior to the acquisition announced this morning currently is slightly over 1,000.

Our cash balance was $4.5 million at December 31, 2006. Outstanding debt as of December 31, 2006, has decreased to $1.3 million, all of which is on our term line. No amounts were outstanding on our working capital facility. Lower long-term debt is primarily the result of operating cash flows and cash generated from option exercises exceeding borrowings for acquisitions during the year.

Our days sales outstanding on accounts receivable was 70 days normalized for acquisitions at the end of the fourth quarter, down from 74 days at the end of the third quarter. Our goal is to maintain DSOs between 70 and 75 days.

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

Thanks, Paul.

Well, as we've already discussed, I think we had another strong quarter in the fourth quarter. We're obviously happy about that. There's just a few other noteworthy items that I'd like to address.

As Jack mentioned earlier, 2006 was a very important year for Perficient in many ways. And as he noted, our year-over-year services gross margin for the fourth quarter were up 2 percentage points to over 37%, excluding stock comp. So for a quarter that's a seasonally slower quarter, we're really pleased with that, and I think it reflects the improvement we made over the year in our rates and gross margins.

Another area that we haven't talked about much where we made a lot of progress last year was building headcount and laying the foundation for future growth, operating performance and profitability. As most of you know, that's sort of a dreaded term around those kinds of investments is stair-step function. And one thing I think is worth noting is we went through one of those steps last year and I think still produced very, very good results in spite of that.

Our headcount continues to grow rapidly. During 2006 we added a net 380 billable consultants to Perficient. Organically we added a net of nearly 200 consultants. So organic growth accounts for over half of our 2006 increase in consulting headcount. I expect that pace to continue, and actually I really anticipate that it'll quicken in 2007. The market is looking strong out of the gate for us this year.

So in terms of the investments we made last year, where I think we're really approaching an inflection point that we'll see some return on this year for the business in terms of really increasing the efficiency of our operating leverage. 2006, as I mentioned, we spent considerable time, energy and money in making key infrastructure investments to accommodate the growth that we anticipate. So we've now got back office systems processes people in place capable of supporting a much larger consulting organization than we are today. And really we did that with a goal in mind of taking the company to the $500 million mark.

So moving forward in terms of hiring, we expect to increase the consultant to support staff cost ratio. Put simply, we'll be lowering our SG&A costs on a relative basis, resulting in increased net margins. And again, we expect to see an effect of that beginning this year with some material impact.

So as I mentioned, the market remains strong. We continue to close more multiphase, multimillion-dollar engagements each quarter that are full lifecycle solutions, meaning they begin with strategy and run through full technology deployment. Much of the time we're competing directly with large management consulting firms like the Accentures and BearingPoints of the world, and the vast majority of the time we're winning those deals, another example of how we're benefiting from our increased scale and capability.

Clients are seeking our breadth and depth and recognizing our ability to deliver solutions across a wide range of disciplines. It provides them with a comfort level that encourages them to engage us for larger and more strategic projects, as I mentioned. And I can tell you it's exciting and enjoyable to go up against some of those big guys and win, as I said, the vast majority of the time.

Cross-selling is working very well for us also. As we've mentioned, a part of our M&A strategy obviously is bringing complementary skill sets into the portfolio, with our business units really teeming across geographies and functional disciplines to build a client base to deliver more value to our clients. And as I mentioned before, that enables us to do more of those full lifecycle deployments. Many of the engagements that we do involve a multitude of technologies or disciplines, such as portal business integration, content management, usability and user experience disciplines, and we're able to bring all those together now under one roof and deliver large engagements for those clients.

I can think of several projects today where multiple Perficient business units are engaged, and we're delivering significant work that would not have been possible for Perficient to pursue or win just a couple of years ago. So I expect this trend to continue. In fact, I think it'll accelerate as we grow.

Some of the specific trends we're seeing in the market include continued investment on e-business infrastructure, including a number of migrations from legacy application servers to market dominators, such as IBM Websphere. Again, I think there's a ton of applications out there, custom-built applications out there that will be seeking that migration path, and that continues to be a good source of leads and income for us.

Also, substantial investment in service-oriented architectures as the messaging framework for business integration, a key factor in increasing the efficiency both within IT and on the business side for our customers. We're assisting many clients in establishing enterprise service bus standards and are beginning now to move into the development phase with a number of clients. These are typically large Fortune 1000 customers.

We're continuing to see a growing number of clients leveraging technology to improve customer intimacy and operational flexibility and efficiency that are attracted to us for our user-centered designs, CRM skills. As I mentioned before, our ability to put those foundations in place on the IT side that are flexible and allow for low-cost deployment of custom applications.

Our recruiting engine remains in full force. I mentioned before the increase that we had in 2006, and I expect to add 300 net new consultants this year on an organic basis as well. I'm optimistic that a year from now we'll be reflecting again on 2007, as we have on 2006, as another year of substantial growth for Perficient.

Finally, I'd like to comment on our recent acquisition of E-Tech Solutions. Obviously, we're thrilled to add a very solid group of consultants with a great client list, strong leadership and strong results in that business, in addition to expanding our geographic footprint to the east. And as I mentioned earlier, we're also enhancing our skill base, particularly in the areas of infrastructure deployment, business portal implementation and custom application development, really our bread and butter. So as I said, it's been the most exciting recent development that we've had, and we look forward to another exciting year and quarter in the first quarter.

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

In terms of the outlook for Q1, we expect Q1 services and software revenue, that would include reimbursed expenses, to be in the range of 45.3 to $48.3 million, and that's comprised of 42.7 to $44.9 million of revenue from services, including reimbursed expenses, and 2.6 to $3.4 million of revenue from software sales.

The guidance range of services revenue, again including reimbursed expenses, would represent services revenue growth of approximately 58% to 66% over the first quarter of 2006. So again, we're talking about a continuation of the strong growth that we've been seeing. And that guidance range includes approximately $1.1 million of services revenue from E-Tech. So E-Tech, as we mentioned, just shy of $10 million run rate, roughly $2.5 million a quarter, and so only $1.1 million of that is included in guidance because of the closing date of the acquisition here yesterday. So we're actually on an effective run rate that's even higher than guidance would indicate.

So again, in summary, we're as optimistic as we've ever been about the potential for the company. We are extremely well-positioned moving forward. We have scaled this business in a little over seven years from a startup to a $200 million run rate. We're the fastest growing, most profitable, best positioned domestic IT consultancy. We're realizing strong organic growth, 23% last year, chasing a multibillion-dollar market and have a credible plan to scale this business to $500 million in revenue run rate by the end of 2010.

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

[OPERATOR INSTRUCTIONS]

Our first question will come from the line of Colin Gillis of Canaccord Adams. Please proceed.

Hey, gentlemen, just congratulations on a fantastic 2006.

Thank you.

As we enter into '07 now and you're chasing after these larger multiphase, multimillion-dollar lifecycle engagements, is there any change in your go-to-market strategy, and do you expect to see increased competition head-to-head with the [bulge] players?

In terms of go-to-market strategy, we have employed what I think has been a very effective strategy. We've got a 40-person direct solutions sales force out there. These are folks that are averaging $4 million a year or better in sales production and a significant asset for the company. So we've got that as really our number-one leg on the stool.

Secondly, as you know, Perficient has driven better than 80%, close to 85% repeat business rate over the past five years. So a second major thrust is really further penetration of existing accounts and growing those relationships. We've demonstrated that we are growing long-term dependable repeat relationships with this global 2000 customer base.

And finally, we've got very strong relationships with vendors, folks like IBM and others, with whom we go to market. So it's that direct force, it's that repeat business, and it's the vendor partnerships. And really there's no plan to change that fundamental go-to-market strategy.

In terms of the amount of time we'll see the big guys, it's been about 20% of the time that we'd go up against them versus 80% against smaller boutiques. There's been no dramatic shift in that. One, I guess, could argue that it could get -- you might see a little bit more of that over time. But I want to emphasize we're winning bigger projects, but if you look at sort of the numbers and you look at our average sized deal, there're still a ton of $0.25 million, $0.5 million wins out there, and there's a lot of hay to be made in that end of the market. And so I think we'll continue to see this sort of mix of smaller and larger deals, and that'll position us well for growth and stability of the revenue and earnings growth going forward.

Jack, if you just happen to know offhand on that 40-person direct sales force, what's the turnover been in 2006?

Our voluntary attrition among our sales force for the past three or so years has been running at 0%, which I think is an interesting statistic. People often talk about attrition statistics on the consultants, but I think that says a lot when you look at an experienced sales force like this that they want to stay with a winner and it says a lot about what the kind of solutions, the strength of the solutions that we're selling in the market.

Got it. And just turn to bill rates for the quarter, was that number given? And can we also talk a little bit about what the E-Tech bill rates might be at and then any efforts in terms of lifting some of the acquisition-driven bill rates like Insolexen?

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

Sure. I think -- let me start with the last question, and I'll find the actual bill rate number. The answer is yes, we expect -- E-Tech's bill rates are in the kind of low 100s, high 90s, as many of our acquisitions typically are. And as we've experienced with other acquisitions, particularly those that are highly solutions oriented, as E-Tech is, we expect that those will come up. We'll enhance the portfolio that they've got available to sell, and we'll give them honestly some pricing power in terms of the scale that we've got.

So I think those will continue to improve and increase, and I'm optimistic that we'll continue to do that this year. Part of our compensation plan, of course, for everybody in terms of the variable compensation bonuses are tied to profitability of the company, obviously. And we can't achieve those goals without increasing and improving gross margins, and obviously that means bill rates.

In addition to the variable comp on the bonus side, we also have our sales plans tied to gross margin, again translating to bill rates. So we made great progress last year. As we acquire companies that have lower bill rates, obviously we have sort of a short-term maybe step backwards. But then we feel -- we go forward again. If you look at the history, I think you'll see that that occurs. But we made overall, when you take all that into account, good progress last year.

Our bill rates for the fourth quarter, Paul, I believe were just over 109 in total.

That's correct.

With the entire business. Then if you take out the two acquisitions, I think it gets it to, like, 113 compared to 116 in the third quarter. And then if you look at our offshore, this is I think a good sign or a good thing, we more than doubled the number of hours using our offshore facility in the fourth quarter. Clearly those are low bill rates that pull that number down a lot. By and large, I would view it as flat for those reasons.

And also the fourth quarter is a quarter where we're doing some smaller engagements, getting some filler work in there to make sure that we produce a solid quarter in a seasonally down quarter. But I think, again, we'll be right back on that same track and actually improving them again this year, Colin, if that answers your question.

Okay, great. Nice quarter. Thank you.

Thank you.

Our next question will come from the line of Pete Heckmann of AG Edwards. Please proceed.

Good morning, guys. In terms of the -- could you repeat the average consultants in the quarter and then talk about how many consultants we're adding with E-Tech?

Sure. Paul, do you want to go through that?

Sure. We're adding, I believe, around 90 consultants with E-Tech, and let me pause as I'm trying to find the consultants here. Yes, we had 835 was the average number of billable consultants in the fourth quarter, which includes 181 contractors, and we ended the fourth quarter with 853 billable consultants.

Okay. Is there any -- were there any other components of services revenue in the quarter? Just based on some of those metrics that you provided, my calculation of services revenue is falling short of the reported level. Are there some increasing streams of hosting or other revenue that are included in services?

There is -- there are. I don't think they're that material, though.

Okay.

But there are, though, in fact, some software maintenance and services payments that we receive from vendors when we help out with pre-sales on software deals.

Okay.

But I want to say that was maybe 150, under 200 in the quarter.

Okay. Okay, I'll review it, maybe talk offline if I still come up with those numbers. How about the SG&A figure? We saw a larger sequential drop than we've seen in prior years for the fourth quarter. Was there some reversals of some accruals or any other unusual factors that may have contributed to the drop, to the decline?

Probably the biggest factor affecting that is we record and reflect the bonuses, in essence, in the period in which -- in which the earnings occur. So there is less bonus in the fourth quarter because of that factor. That's probably the biggest single factor. I wouldn't say there was really any kind of what I would call reversals in there. But that would be the biggest driver.

Yes. And, Pete, we've talked about this obviously many times. You've got FICA burn-off and you also cap out on the bonus plan, particularly in a year like this where we just knocked the cover off the ball. And so as we've mentioned many times, that's the kind of thing that gives you a little bit of extra help on the bottom line in Q4, which is great because it's otherwise a seasonally weak quarter.

Okay. All right, that's helpful. And then last question and I'll let someone else step in. In terms of customer concentration, with the size of the company it seems to be expanding at a greater rate than the average deal size. Does that mean the customer concentration is going lower? Could you give some rough metrics or maybe what percentage of revenue the top five and top ten clients were in the fourth quarter?

Sure. Paul, you want to walk through that?

Sure. So IBM was about 10% in the quarter. And the top three were about 17%, and the top ten were about 40%. So, to your point, as we continue to scale, we're seeing some -- it's spreading out more and were seeing a little bit less concentration.

Great. That's very helpful. I appreciate it.

Our next question will come from the line of Jeff Martin of Roth Capital Partners. Please proceed.

Thanks. Good morning.

Good morning.

Jeff, you mentioned that you plan to ramp up about 300 additional consultants in the year. Should we think about that being spread fairly evenly throughout the year, or are you going to hire more aggressively in the first half? Any thoughts there?

Yes, I think it's spread fairly evenly, I would say over -- probably a little front-end loaded, to your point, beginning probably at the middle of the first quarter and going really through the third quarter. In the fourth quarter we'll slow down on hiring a little bit because again that's a slower part of the year. So most of that'll be spread over the first three quarters is the way I would look at it with, of course, some hiring in the fourth quarter.

Refresh my memory here. Your training capacity is well above that 300, correct?

Our recruiting capacity is, yes.

Recruiting capacity.

Now, that's 300 net. So we will have some attrition, both involuntary and voluntary, that we'll be hiring against. So the actual number of hires I'm sure will exceed 400.

Okay. How's the availability of talent out there these days?

You know, it's pretty good. I think we've got a good story to tell, and while I think the market's heated up some, I'll tell you I don't think it's -- I don't think it's materially changed. Good resources have always been hard to find and so that hasn't changed much. But for the typical hire, we're able to find folks, we're able to get them onboard. And when we get them to the table, we're seeing them choose us over the competition in most cases. Again, I think we've got a good story to tell. We've got a good compensation package. We do fun work here for the folks that we're trying to attract. So I still feel pretty good about it. I'm always concerned about the market heating up, but I'd say we're not seeing any impact from that as yet.

Another thing that I think we mentioned on the last call we're actually doing a fair number of -- a fair amount of campus recruiting this year. And that's not going to be a huge number out of that, say, 300 net, but we do expect to hire probably about 50 folks or so by the year end off campus as well. That's another program that we're excited about. We've actually already done our first round, and we started a new onboarding program here where we're bringing everybody through a St. Louis training program, and we started that in January as well. So that's another source that we didn't really have before, really weren't tapping into in a meaningful way, that we're going to leverage this year.

What is the combined voluntary and involuntary attrition rate for the year?

You know, I think it's probably in the 25% plus range. The involuntary is just below 19% and add to that -- it's probably between 25% and 30% when you add back the folks that we had to let go.

Okay. And then, Paul, tax rate ticked up a bit in Q4. What should we expect in '07, kind of still in that 40.5% range?

Yes, I think in the 40.5% range. It could be a little lower. There's a couple of variables with ISOs and some nondeductible compensation in the fourth quarter that made it a little bit higher in Q4, but I think somewhere around the 40% to 40.5% range makes sense for 2007.

Okay. And then, Jack, with your $200 million revenue run rate, should we expect you to continue to look for the same size of acquisitions, or are you now big enough where you may pursue something larger? What's the general strategy thought process?

I would say that given our increased size we can look at somewhat larger deals. So where we've historically been in a sort of 10 to $25 million range, I would say that the range now probably runs 10 to $35 million, maybe even as much as $40 million.

That said, the design of the market out there is such that you see a lot more interesting stuff sub-$25 million than you do above it. So we just announced a $10 million deal. We're looking at a couple of deals right now that are in the 20 to $25 million range. So I think on an average basis you'll probably see a tick-up from $12.5 million historically maybe to 15, $17 million in terms of the average-sized deal. But you do have the potential for some outliers that are larger than they've been in the past.

And then in terms of valuation expectations, has there been much of a change in the past quarter?

No. We've said from the get-go that we are five to seven times EBITDA buyer. Most of those deals have really happened closer to five times. And depending on the growth rates and margins of a particular deal, they can go up and down. But we're not seeing anything that's dramatic. And of course our multiple has advanced nicely, so we're still in a very, very strong position to be buying deals on an accretive basis that are really hitting our IRR targets.

And I will say to you we've got a stronger M&A pipeline really than we've ever seen before. We are a stronger buyer than we've ever seen before. We continue -- in addition to having that great supply, we continue to not see a lot of competition for the kind of deals that we're doing. If you look, you asked about deal size a moment ago, there are some shops on the block out there that are north of 50 or $75 million. And there you start to see competition. But in the context of these, that's well above what we're looking at. We could grow for many years before we'd be looking at deals that size on a regular basis.

So it's really a great opportunity. We're a stronger buyer than we've ever been, and we've got very strong currency, significant momentum in the market. There's a great supply of deals and not a lot of competition for those deals.

Okay, wonderful. Thanks, guys.

[OPERATOR INSTRUCTIONS] Our next question will come from the line of Jon Maietta, Needham & Co.. Please proceed.

Thanks very much. Jack, I was wondering if you could comment on the profitability, perhaps the operating margins for the E-Tech acquisition?

Yes, it's about a $10 million shop and running on a normalized basis around 20% EBITDA.

Okay. And then on the previous quarterly conference call, Jack, you'd touched on perhaps a 40% services gross margin ex-stock comp for '07. Is that still kind of ballpark for this year?

Yes, we are -- I said that was a target, and we are looking at gross margins ex-stock comp in the high 30s to 40, yes. We're seeing a continued improvement in that ratio of bill rate to labor costs, and we continue to see strong utilization. So, yes, we are still there in terms of seeing improving gross margins in '07.

Okay. And then just the last question I had, I just wonder if you could comment on the early traction and level of cross-selling activity with regard to the EGG acquisition.

Jeff, do you want to comment on that one?

I'm sorry, can you give me the question again?

The cross-selling traction we've had to date on EGG.

It's been solid. One of the things -- and it's probably a little early on that deal, we get really, really good traction starts probably the six to 12 month timeframe, honestly. And we're certainly seeing that from, say, the Bay Street acquisition is a good example, as well as the Insolexen acquisition. But EGG's there as well. One of the things that we garnered or gained through that acquisition was FileNet capability. We're leveraging that already and also leveraging the relationships that they had to get our folks in there. But again, I'd say not a lot on them yet, but it's early. In our experience, to really see a lot of returns there. One of the things we are seeing, though, are some rate improvements and some of their operating metric improvements.

Great. Thanks very much.

Thank you.

We have a follow-up question from the line of Colin Gillis of Canaccord Adams. Please proceed.

Hey, Jack, I just wanted to see what your thoughts were in terms of adding in SAP capabilities?

Yes. We continue to look at SAP. The opportunity there, similar to Oracle, we think ultimately is for us to leverage our core middleware expertise around NetWeaver, and Fusion in the case of Oracle, both of those vendors making a significant push in the middleware space. And we've looked at a number of SAP shops, thus far have not found the right one for us.

One of the reasons is that in that market your solutions-oriented SAP shops tend to be larger, north of $35 million, which is a little big for us right now. And so we've looked at a number of smaller SAP shops, and we found a little bit too much of a staffing component in most of those. So that one we have yet to find sort of the perfect candidate for. But we are -- we continue to remain interested in that and continue to be out there looking at deals.

Got it. And just how about a breakdown sort of by application, IBM, Tibco, Microsoft, Oracle?

Sure. Paul, you have that list, don't you?

Yes. So by solution type, is that what you're referencing?

You wanted it by vendor or solution type, Colin?

I guess he may be off the line. I think he was asking by vendor.

Sorry. Yes, IBM, Tibco, Dotnet.

I actually don't have that in front of me. I can provide you some of that information. I have it by the solution type.

Jeff, you probably have a pretty good --

Yes, I think I can give you --

Has it shifted much sort of from that 35% Websphere, 20% Tibco-type model?

I don't think it has, but --

I was going to say no. I think it's -- I think we're still a pretty good -- pretty good reflection of the market. IBM's gotten the lion's share of the app server market and a pretty good share of portal markets. So I think 35%, 40% of the work we do ends up on the platform, even though a lot of what we do isn't necessarily [inaudible], in some cases not even the technical work, but I'd say a lot of the solutions, 40% or so end up on IBM platform, probably 15 to 20% Tibco. We're actually doing some more Web Methods work than we were doing in the past. And then Microsoft and, of course, Documentum, Oracle probably each about -- Microsoft probably about 10% to 15%, and then Oracle and EMC Documentum about 10% --5 to 10% each.

Got it. And just on the E-Tech side, is that -- is that a national model, is that a local model?

It's primarily a regional model, a local model, but they do have some folks that are travel ready and capable and will look to -- will look to leverage their infrastructure to hire more of those people, particularly around the share point deployment capability, which is one of the things that we were excited to do, enhance our capability around with this. But also IBM and some infrastructure deployment capability as well.

Jeff, any particular vertical that you're seeing that's showing strength or weakness?

Gosh, financial services always strong. One of the things I think is surprisingly -- maybe a little bit surprising strength to me is we're seeing a lot more opportunities in retail. And retail being such a thin margin business, never big spenders, from our view, in technology, kind of goes in fits and starts, but never big spenders. We're seeing a lot in that space that we haven't seen in years. So that was kind of surprising. I don't know how long it's going to last.

Financial services healthcare insurance, that whole space just continues to be a big spend and I think always will be. These guys leverage technology. They see it for its capabilities and leverage it to both better serve their customers as well as reduce their costs. And there's just tons and tons of work still to be done even in companies that have very sophisticated IT strategies and capabilities, like I said. In fact, the more sophisticated they are, the more value they see, the more investment they tend to make.

Got it. And then just on the software license sales, in terms of the guidance for the March quarter, that's a healthy number. Anything particular that's driving that or is that just sales that's already been booked to date?

Yes, as you know, we really weight down the pipeline stuff, so a chunk of that -- the biggest chunk of that is, in fact, already in backlog. And we expect to see obviously some more deals close still in the quarter. It's been -- starting off I like to say it looks to me like it's a sign of the year, no crystal ball, but it's certainly encouraging to me. And we're seeing some customers go out and buy new -- those are new licenses, new investments.

One deal that closed very recently, large insurance company making a large investment around IBM's software and starting up a large engagement and a long-term engagement I think around deploying that. And there are two, three, four examples like that in what we've already got in backlog. So it's encouraging. I take it as encouraging sign in terms of what the year holds in store.

And just one last one for Paul. Paul, any color as to when we might see the 10K get filed?

Yes, we're targeting the week of March 5th. So the plan is that we'll file a little bit before it's due and we're substantially done and tying up the final loose ends.

Okay, great. Thank you.

Ladies and gentlemen, this concludes the question and answer portion of today's conference. I will turn it back to the speakers for any closing remarks.

Okay. Thank you again for your time today. And again, we are feeling great about the business, very well-positioned and looking forward to a strong 2007, and we will look forward to talking to you at our next quarterly call. So, thank you.

Thank you for your participation, ladies and gentlemen. Have a great day.