Perficient Inc (PRFT) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the First Quarter 2007 Perficient Earnings Conference Call. My name is Jeremy, and I'll be your coordinator for today.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host, Mr. Jack McDonald, Chairman and CEO. You may proceed, sir.

Good morning. This is Jack McDonald Perficient's CEO. With me on the phone this morning is Jeff Davis, our President and Chief Executive Officer; and Paul Martin, our CFO. I'd like to thank you for your time this morning.

As is the usual format, we'll have about ten to 15 minutes of prepared comments, after which we will open up the call for questions. I'd now like to ask Paul to read the Safe Harbor Statement. Paul?

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 meanings 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.

So, the first quarter was another phenomenal quarter for Perficient. We're looking at 69% year-over-year growth in services revenue and, as we noted, record profitability. We've expanded our geographic footprint by acquiring E-Tech Solutions, an east coast based, Philadelphia based firm, and we are moving into the second quarter here at an annualized run rate approaching $210 million.

Our acquisition pipeline has never been stronger, and we are going to continue to aggressively execute against that pipeline through the course of this year. And as we'll talk more about later and have begun this discussion a year or so ago, we are really beginning to see the benefits now of operating leverage and scale as it's going to improve our bottom line.

And we should positively begin to see that impact right here in the second quarter. So again, we're talking about record revenues, record EPS and cash EPS and EBITDA. I would note a slight change in just some terminology in our press release. Where we used to say cash EPS, we are now calling that non-GAAP EPS, same metric, just a different name, in order to more fully reflect what the regulatory authorities would like to see in terms of how that is described.

Jeff is going to speak more to this later, but our operating metrics really continue to improve. Services gross margins, excluding stock comp, were north of 38% and improved three full margin points, 300 basis points over the comparable 2006 period. And we did that at an 82% utilization rate, which is well within our comfort zone that we've talked about of 82% to 84% and what we believe and have proven, I think, to be a sustainable rate.

And we also realized strong operating margins. And again, we are at a point in this business where you're going to start to see those margins improve. So, we were talking about roughly 17% EBITDA margins pre stock comp.

And I think, right here in the second quarter, you're going to see we have an opportunity to increase those to somewhere between 18% and 20%. And where it falls on that spectrum will depend on the percentage of revenues comprised by software versus services. But, we are really, I think, positioned for some significant potential improvement in margins and profitability right here in Q2.

We continued in the first quarter to demonstrate the cash creation potential of the business, generating more than $8.3 million in EBITDA. And so, annualizing that, that's close to $33 million. And again, as I mentioned a moment ago, I think we'll see a material pick-up in that level of annualized EBITDA production here in the second quarter.

And, the balance sheet is looking good. At the end of the quarter, we had just $2.9 million of term debt outstanding. And that was primarily related to the recently completed acquisition of E-Tech that I referred to earlier. And we have since fully repaid that line of credit. And so, there's still a little bit of term out there, but -- and about $1 million of cash. So, I think Paul, at this point, net is how much?

At this point, it's about a little under $1 million.

A little under $1 million, so just demonstrating that -- the cash generation potential of the business and have a $50 million credit facility basically completely untapped at this point.

Again, annualized run rate north of $200 million, approaching $210 million, M&A pipeline stronger than it's ever been, have that capacity under the line. So, we are continuing now to execute on our plan to grow Perficient into a $500 million revenue run rate business by the end of 2010. Continue to believe we have a unique opportunity as the best positioned, most profitable and fastest growing US-based technology management consultancy, and we continue to consolidate this market and build the premier brand in our space in the US.

So, at this point, I'm going to turn the call over to Paul Martin to discuss the Q1 results in greater detail. Paul?

Thanks again, Jack. Total revenues for the first quarter of 2007 were $50 million, a 69% increase over the year-ago quarter. Services revenues, excluding reimbursed expenses were $43.1 million with strong organic growth of over 20% on a trailing four-quarter annualized basis including businesses owned at least two quarters.

This represents 69% growth in services revenue, excluding reimbursed expenses. And it is 70% if you include reimbursed expenses. Gross margins for services, excluding stock comp for the first quarter was 38.6%, which is up from 35.6% for the first quarter of 2006, a 300 basis point improvement.

As Jack mentioned, effective with this quarter, we will reference non-GAAP earnings per share, which we formerly referred to as cash earnings per share. We believe this and continue to believe this measure is useful to investors and allows them to evaluate Perficient's performance using the same methodology and information used by Perficient's management to measure this performance.

SG&A expenses were $10.3 million in the first quarter, including $1.2 million of non-cash stock compensation expense. Excluding non-cash stock compensation, SG&A expenses were $9.1 million, which represents 18.2% of revenues, which is higher than Q1 2006, which was 17.3%. We have $1.3 million of estimated bonus costs driving the increase. If the company's annual profitability estimates are not achieved, this amount could be reduced in future quarters.

EBITDA was up 84% over the year-ago quarter to $6.8 million, which includes absorbing $1.6 million of non-cash stock compensation expense in the first quarter of 2007. EBITDA, excluding stock compensation, was $8.4 million, up 89% over the comparable prior-year quarter.

EBITDA margins, excluding stock compensation, improved almost two full margin points over the comparable prior-year period to 16.6%. The first quarter annualized EBITDA run rate was $27 million. This is our nineteenth consecutive quarter of positive EBITDA. Net income was up 88% over the year-ago quarter to $3.2 million, which includes absorbing $1.6 million of non-cash stock compensation expense. This is our fifteenth consecutive quarter of positive net income.

Diluted GAAP earnings per share was up 57% over the year-ago quarter to $0.11, even with the $0.03 after-tax impact from stock compensation expense in the quarter. Non-GAAP earnings per share was up 60% over the year-ago quarter to $0.16. As previously mentioned, during the first quarter of 2007, our utilization rate was 85%, including subcontractors and 82%, excluding subcontractors.

Our average billable headcount for the first quarter of 2007 was 862 including 160 subcontractors. We ended the first quarter with 934 billable consultants, including 190 subcontractors. In addition to the billable headcount, we currently have 126 SG&A personnel, which brings our total colleague headcount to over 1,060 as of March 31, 2007.

As Jack mentioned, our cash balance was $1 million at March 31, 2007. There was $1.9 million outstanding on the accounts receivable line of credit and $1 million outstanding on the term line. The line of credit has been fully repaid since the end of the quarter. Our days sales outstanding on accounts receivable was 70 days normalized for acquisitions at the end of the first quarter, which is flat with the fourth quarter of 2006. Our consistent goal is to maintain DSOs between 70 and 75 days.

I'll now turn the call over the Jack Davis for a little commentary on -- Jack -- Jeff Davis, I'm sorry, for a little commentary behind these metrics.

Thanks, Paul. Well, as previously discussed, the first quarter was another strong quarter for us. I've got just a few other noteworthy items I'd like to address. Most importantly, and Jack and Paul touched briefly on this earlier, is that our key operating metrics are up year-over-year. Gross and operating margins improved significantly. Gross margins, as Jack mentioned, for services were up 300 basis points.

And consultant utilization is also up. As I mentioned on the last call, many of these improvements are largely due to the fact that we are beginning to enjoy some serious benefits from our increasing scale. We now have in place the back-office systems, processes and people to serve a substantially larger consulting organization. And as we're able to leverage those efficiencies, I anticipate we'll continue to see these improvements, not only in the existing quarter, but going forward.

Recruiting results in Q1 also are further evidence of our ability to scale. In Q1, excluding acquisitions, we hired 80 new billable consultants. We continue to win substantial follow-on opportunities with many of our clients, including -- or several of those are referenced in the press release.

As importantly if not more so, we continue to establish new client relationships. In the first quarter for example, we began working for companies like ING Direct, Penske and Nissan. As we grow, so does the velocity at which we're able to add new accounts while we continue to broaden and deepen existing relationships.

Also, the integration work around our first quarter acquisition that Jack mentioned, E-Tech Solutions, in terms of systems and processes is complete. The more important integration, the assimilation of this colleagues as the firm continues, but the nuts and bolts integration-related tasks are finished.

Our integration team is doing a tremendous job and improves with each acquisition, enabling us to increase both the pace and scale of the acquisitions. We're now to the point where all this occurs with minimal, if any, disruption to the business.

From a market standpoint, we continued to see strong demand in Q1. We closed and started a number of multi-phase, multi-million dollar engagements that are full-lifecycle solutions, meaning that they begin with strategy and run through full technology deployment. This includes wins where we competed directly with large management consulting firms like Accenture, BearingPoint and Deloitte, which is becoming more and more commonplace for us.

Those wins are additional examples of how we're benefiting from our increased scale. Clients are current -- correctly perceiving Perficient as now being capable of handling larger projects. They are seeing our breadth and depth and recognizing our ability to deliver solutions across a wide range of disciplines, providing them with a comfort level that encourages them to engage us for larger, more strategic projects in broader areas of their business functionally.

Our cross-selling strategy continues to work well. Our business units are teaming across geographies in functional disciplines to add new clients and to deliver more services to our existing clients. In Q1, we closed more business where multiple Perficient business units were involved in the pre-sales process and were landing work that we simply would not have been able to land just a couple of years ago. This is a key, pragmatic component to our growth.

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

We're also seeing substantial investment in service-oriented architecture as the messaging framework for business integration. And we're assisting many clients in establishing enterprise service by standards they're beginning to move into development with a number of clients. These are largely Fortune 1000 in a lot of the areas where we compete head to head with those Big Five firms that I mentioned earlier.

Another increase in demand is coming from our resurgence of investment around business intelligence and commerce solutions. And we're moving quickly into that space or enhancing our capabilities, delivering in both of those areas. Finally, we're continuing to see a growing number of clients continue to leverage technology to improve customer intimacy and operational flexibility and efficiency. Those firms are attracted to us for our user-centered design and CRM expertise.

With that, I'll turn the call back to Jack for the Q2 outlook.

Thanks, Jeff. We're looking at a very strong Q2. We expect second quarter 2007 services and software revenue, including reimbursed expenses to be in the range of $48.5 million to $51.2 million. And that's comprised of $47 million to $49.3 million of revenue from services, again including reimbursed expenses and $1.6 million to $1.9 million of revenue from sales of software.

So, that guidance range of services revenue, including reimbursed expenses represents services revenue growth 35% to 41.3%, so very strong growth over the second quarter of 2006. And again, as I mentioned earlier, in addition to that strong revenue growth, we expect to see leverage, operating leverage and scale drive increased profitability in the second quarter. And of course, we are as well, looking at a very strong pipeline of M&A that we'll be executing on.

So again, we're as optimistic as we've ever been about the potential for Perficient. We are extremely well positioned moving forward. We've scaled this business over the past seven years from a start-up to a better than $200 million run rate, and again, are focused on building to a $500 million run rate business by 2010.

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

Certainly, sir.

(OPERATOR INSTRUCTIONS)

And sir, your first question comes from the line of Pete Heckmann with A.G. Edwards. You may proceed.

Good morning, guys.

Good morning.

Hey, could you go over those billable headcount numbers again, Jeff? I think I might have written those down wrong.

Yes. I think -- Paul, correct me if I'm wrong here. But, I think we averaged for Q1, 860?

Yes, 862, correct. And that included 160 subcontractors. And then, we ended the quarter, Pete, with 934, which includes 190 subcontractors.

Okay. Well, help me reconcile then. I have that you ended the year with 853 billable. And then, we added 80 to 90 at -- through E-Tech, and then about 80 through organic hiring. But, from a beginning of quarter to end of quarter, we only increased by 81. Is that an issue of just the subcontractor mix?

Yes. We, by design, reduced the number of subcontractors. We don't typically add a lot of net consultants in the first quarter, sort of by design.

Okay.

So, the net number is probably more like 30. We have some voluntary attrition. I think maybe Paul mentioned that's running about 17% annualized, our goal there being 15% to 20%, and then some involuntary. But, we also shed about 20 subcontractors.

Okay.

Again, by design.

Okay. And then, can you give me the utilization and average bill rates for the period?

Yes. Utilization, Paul mentioned it earlier, was 85 with subs, 82 without subs. And the ABR was $114 an hour, up about $3 from Q4.

Okay, that's good. That's --.

And one clarifying thing on that Pete is, one of the things that we've done is, we've modified the ABR calculation a little bit to pull out non-reimbursed, our project-related expenses. So, as Jeff mentioned, it was $111 in the fourth quarter, versus we had talked about $109 under the old method. But, it's up $3 under either method.

Okay, okay. All right, that's good. That's helpful. Okay. And then as regards, kind of the way that we're looking at the business in terms of organic hiring for the full year, and I'm sorry, some of these things I guess you've already mentioned and we get distracted a little bit [intra] call, but organic hiring for the full year, what type of numbers would you look at gross and net?

I think the gross hiring would probably be in the 400 range, 400 plus range would be my guesstimate at this point. It's still early. And the big hiring season for us tends to be the second and third quarters.

But, that would be the gross number. And then again, if we stay in a 15% to 20% attrition range assuming perhaps the higher end of that, the net would be 200 to 250, and more if the demand is there, obviously. And I think we're geared up to do more than all that. We'll just be pacing it with the demand.

Okay. And then last -- the last question, I'll let someone else get in the queue that a unusually high level of -- it's not way outside the band, but a high level of software reselling in the first quarter.

Yes.

Did that include any one large deal that may have influenced it?

It actually really didn't. We did have -- there was one good-sized deal in there that made up about 25% of that. And that's typical. It's interesting. It's just -- I think its different behavior. One, I think we're -- as we grow and we increase our sales force we're able to pursue more deals. It's a difficult thing to forecast, which is why we're always sort of conservative on the guidance.

But, the results tend to be typically strong. And I do think we're selling more software. It's an increasing of the business. It's still opportunistic. We're still going after the services, but because we have a larger sales force selling more services, we're also selling more software.

The other thing that's happening is the vendors, IBM in particular, are trying to shift away from -- of the sort of trained buy at the end of the year for the best deal model and are really getting more creative and aggressive in closing deals earlier in the year. I know that they've got a big thrust on actually to -- in fact, they've even broken their compensation plans to be semester-based.

So, there's a decent chance we'll see a lot more software this quarter. Software is one of those things that you just don't have a lot of long-time fence visibility into. But, it's a combination of the fact that we got more feet on the street, and we're opportunistically selling more. And then, the vendors are trying to break away the year-end selling cycle.

All right, that's helpful. Thanks.

Sure.

Your next question's from the line of Jon Mietta with Needham & Company. You may proceed.

Yes, thanks very much. Hey guys, I was wondering if you could talk a little bit about whether or not you've seen leverage in the model yet from the undergraduate hiring program?

Yes. I think the answer is, yes. We've not -- we've probably hired, I want to say, maybe 20 folks in total off campus since we launched that in the latter half of last year. We'll be doing more of that this year as well. And yes, as large as we are, it's -- would be difficult to say directly, one or two of those -- or 100 or 200 of those gross margin basis points were a direct result of that. But, it's certainly helping.

It's something that over time, we want to be able to step up more. And we've got to ramp up our ability to assimilate those folks. But, that's certainly part of our strategic plan.

Got it, okay. And then Paul, on the tax rate, you had a tax rate that was a couple of points higher than what we've seen over the past couple of quarters. How should we think about that going forward?

Yes. I think the one wild card as we've talked about is that with these stock options exercises, we get what's called non-qualifying dispositions, which puts some variability in the rates. But, it -- and we've also crossed over the $20 million pretax income line, which puts us in a 35% federal bracket. So, I would generally use a rate similar to what we saw in Q1.

Okay. Thanks, very much.

Your next question's from the line of Brian Kinstlinger of Sidoti & Company. You may proceed.

Hi. Thanks for taking my questions. The first question I have was, did you give the E-Tech average bill rate when it [expired]?

Typically, we don't disclose that. I -- Jeff, roughly their bill rate was at about $105? Is that right?

Yes. It was in the low hundreds, I -- maybe even a little below that. And I'll -- your -- perhaps your follow-on question is going to be, has that changed? It's early to see that change, but in fact, it has begun to gone up -- go up some. These guys do get some pricing power once they're part of a larger firm and they're not concerned, necessarily, about winning every deal. Obviously, we want a high win rate.

But, there is some deals you shouldn't take if you can't make the margins attractive enough. So, one of the things we do immediately in these acquisitions and for all of our business units each year, and we establish gross margin goals. And compensation is tied to that in many ways. Our own bonuses, obviously, are tied to the profitability that's driven by gross margin.

But, the business developers, our sales folks' compensation, commissions are driven also by achieving those gross margin targets. So, those targets were set at a higher bar to try to drive those rates up to sort of more of our standard and beyond. And of course, we're pushing for -- $125 is our ultimate goal here. And I think we're already beginning to see some improvement from them. But, I think Jack's correct that it's in the kind of low 100s.

And when you said you revised last year's bill rate to $111 for the fourth quarter, which is up $2, is that about what the difference is for each of the other quarters in '06, about $2 to $3?

Yes.

Just like for like, thank you. And could you give us a sense of what cash flow from operations was in the fourth quarter? I know it's typically seasonably weak, but if you can gives us a sense for that, that would be great.

Yes, sure. Yes so, cash flow from operations, and we'll be filing our Q later today, was actually a use of cash of $1.7 million. It's about $1 million larger use of cash than 2006. That's principally driven by the fact that the bonus payouts, which were accrued in 2006, were paid out in 2007 and utilized a little bit more cash.

But, as Jack and I both mentioned, we've had strong cash flows and have been able to continue to pay down the debt and generate cash.

Okay. And when you take a look at the organic growth, you said about 20%. Is that -- I think you mentioned it, but is that supposing you took out all the acquisitions of revenue right now that were not in the business a year ago? Or, is that including what that company would have produced in revenue as a private company versus as with you as well right now?

It's -- so, what we do on that as I mentioned is that we take -- it's an average of the last four quarters, and we only include businesses that we've owned two quarters in that calculation. So, the first two quarters that we own them, we don't them in the calculation, because we haven't kind of gone through our integration process. Then, we include them from that point forward.

So, why two quarters? And why not four quarters for year-over-year purposes that revenues are not there at all?

So, we -- no, we normalize all that so that we have four quarters on an apples-and-apples basis for all businesses that we've owned at least two quarters.

Okay. So, of the 20% plus of revenue, would you -- how much would you say came from the companies you acquired that you've been growing, or can you say, versus the core business that you already had?

It's difficult to get into that. And we've gone through a variety of investigation in terms of how best to articulate organic growth. And using a sequential average, a four-quarter, trailing, sequential average and not including these guys for two quarters we found to be the best way to do it. And we're not really -- we don't really break out how much of that growth came from acquired businesses.

Okay. If I look at SG&A as a percentage of sales, I know you expected next quarter to improve, but what happened in the first quarter that increased SG&A as a percentage of sales by about two points?

Basically, a large bonus accrual due to profitability.

Okay.

We set those -- as you know, we only pay bonuses at Perficient after the EPS target is met. So, the philosophy is, pay shareholders first before any bonus payments get made within the company. And because Q1 is a typically seasonally weaker quarter, the bonus target is set lower. It's an annual plan, but it's accrued on a quarterly basis. And in this case, we just had significant profitability.

And so, the bonus accrual kicked in above what was originally anticipated, which is why that SG&A number came in higher. But, as I indicated earlier, you're going to see that SG&A as a percentage of revenues decline in Q2. And you'll see an increase in EBITDA margins and profitability.

Okay, two more questions. The first, TPI, a market research company, held a conference call saying the real large deals are declining significantly year-over-year. So, I'm wondering if, at all, you're seeing some of the big companies, big domestic integrators come down a little bit lower into the project size -- or the deal sizes and seeing more competition from them than traditionally, I think the third that you say you see them? Does that make sense? Like the Accentures of the world?

Yes. We haven't seen a slowdown in demand. We've seen 15, 16 consecutive quarters of increased demand. In some cases, obviously, we've seen our deal size increase. And as a result of that, we tend to see a little bit more Big Five competition, as Jeff mentioned earlier. But, our win rates have been sterling, and we have a very strong value proposition against those larger players.

Yes. I don't know that we've seen the big guys coming down market. We're meeting them more, I think, because we're moving up market. But, I understand exactly what you're saying. I have to say that we're not seeing that, at least not yet.

Okay. Last question is revenue by vertical, financial services, healthcare and such. Can you provide that?

Sure. Let me pull that up here. Yes so, it's -- by vertical, the largest is financial services. Insurance is about 19%; healthcare around 17%; computer software, computer services, 15%; telecom, about 9%; energy and utilities, 7%; and everything else is under 5%.

Great, thank you guys.

(OPERATOR INSTRUCTIONS)

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

Hey, Jack.

Hey, Colin.

I'm just wondering if you could talk a little bit about your interest in adding the same type of labor that you acquired with Intel Xeon?

Well, we've got a very good mix, we think, right now of talent in terms of high-end, US-based resources. With Intel Xeon, we've acquired a number of folks that are here under H-1B visa status that have great IVM, WebSphere and [Tipco] skills. And of course, we've got our offshore facility in Eastern Europe added into that mix. So, I think you'll probably see, really, a continuation of that same mix going forward.

The only, I think, change -- you'll begin to see to that over time was one that Jeff referred to earlier. Which is, you'll start to see a little more campus recruiting as we've grown and as the mix of our business has gone more and more towards solutions work, creating an opportunity to get leverage on some of those more junior resources. Jeff, anything you'd want to add to that?

No. I think that's exactly right. The only thing I would add is that, literally, at least a third if not half of the new hires that we're hiring today tend to be foreign nationals, H-1B nationals. And that's simply because there's -- that's not by design. We're not profiling, obviously. It's because those are the folks that are there that meet our requirements. And we try to hire the best people for the job. You need all levels of skill. You need some people that have ten years of experience. You need some people that have two years of experience.

And the influx of foreign nationals at the lower level there, the folks that maybe have a couple of years of experience is such that that's the market. So, I would say somewhere between a third and a half, we're actually going out and recruiting and actually doing some sponsorships.

Got it. And then just Jeff, along those longs, the Class of 2007, is that the 20 people that you're referring to that you've got offers out to? Or, is that just some -- from previous hires?

No. That was from last year, summer hires, summer graduates and fall graduates.

We should expect a similar type level for the upcoming class?

That's what we're shooting for.

Okay. Then it's -- Jack, getting back to the acquisition front, could you just talk about, if you can, to whatever detail on the geographic areas of expansion that you're looking for, whether you're more interested in national models or local models and then the areas of expertise that you see available?

Well, it'll continue to be a mix, 50/50, between national and local models. And as far as local is concerned, we are building off of our core central US footprint and moving both east and west. And of course, you saw that with E-Tech in terms of an acquisition on the east coast. And you will see, as we move forward, more of the. We're looking at a number of firms on both coasts at this point.

In terms of the national practices, we want to continue to look at opportunities around Oracle, which we've talked about, continuing opportunities around business intelligence and around our analytics practices and core EAI and middleware. So, it's really a continuation of what we've been up to.

Okay, fantastic. And then just the last piece is the bonus accruals in Q1, is that something that occurred at levels that are higher than historical levels just because of the strength of the business? Can you wrap some color on that?

Yes. I would say that based on seasonality, we typically don't assume a large bonus accrual in Q1, and we had a lot of profitability in Q1. And once we get above that EPS target and pay shareholders, then there is an accrual. So yes, there was more bonus accrual than would typically be the case due to operating leverage in the business and increased profitability. And that's why you saw that uptick in SG&A.

And of course, as we move into the second and third quarters, those EPS targets increase. So as a result of that, you'll see increased reported profitability, should see that, and higher EBITDA margins and a lower percentage of total revenue comprised by SG&A.

And one thing I might add to that, Colin, is if you look at sort of our G&A, salaries, office costs and professional fees are generally our largest SG&A costs. And we are seeing positive leverages those of -- in the first quarter and expect that throughout the year for those decreases of percentage of revenue.

Very good. Is there a more precise, organic, trailing, 12-month that you can give us instead of the above 20%? Or --?

Well, 20% is what we achieved under this method in the first quarter.

20% is the number?

Yes.

Okay. Great. Fantastic. Thank you. Great quarter.

Thank you.

Thank you.

Thanks.

And your next question's from the line of [Curtis Shauger] with [AAD Capital]. You may proceed.

Yes. Good morning, everybody. I was just curious, could you -- one, could you talk about your pipeline buying capacity? You've mentioned you've had a very healthy acquisition pipeline, but could you talk about how much buying power you have at this point in time? And two, the composition of any such deals going forward, I know historically, you've tended to have -- seemingly had a mix of cash and debt. Can you just talk about what that might look like going forward?

Sure. In terms of what we're seeing out there, our gross M&A pipeline today, which is really our universe of potential acquisitions, is about $1.4 billion. That's the aggregate revenues of the firms in our M&A universe. Our net pipeline, which is probably the more meaningful metric, is comprised of just those firms that we're in some degree of discussion with today regarding an acquisition. And the aggregate revenues of those firms is about $250 million.

Now, there are no elephants in that pipeline. And the largest firm in there is around $30 million. So, it's a great mix of firms. And it's against a pipeline that we'll been executing. And we've really, as I said earlier, have never had a stronger pipeline of quality deals than we do today.

In terms of our approach to valuation and structure, that hasn't changed really. We've been consistent on that over the past seven years, which is that we pay in a five to six -- five to seven times EBITDA range, typically middle or below, in terms of that range, five to six times, five to seven times EBITDA.

The deals are structured up to 50% cash and at least 50% restricted stock. And that restricted stock is held in escrow for up to three years. And if the owner/entrepreneurs leave before that period of time, they effectively lose the stock. That's a skin-in-the-game structure, which is important, because these are people-based businesses that we're buying.

And that has served us very well in terms of being able to successfully execute 14 consecutive acquisitions in this space. And so, that is the structure and valuation parameters that we'll be sticking with. And of course, we will only do deals if they are immediately accretive from a cash EPS standpoint and if they hit an IRR hurdle rate of about 20%.

I guess maybe to ask the question a different way is, how much buying power do you have -- do you think you have at this point in time --?

Right.

Given the size of the firm and the balance sheet inter-availability to -- availability of debt, because I would assume with the net balance, you don't have quite the cash balance to execute anything. So, you'd need to use debt currently. Also, how much -- and I guess that's -- that it does kind of dovetail into the second question, which I would assume that you'd need to use debt if something were to be done in the near term.

Yes. Sorry, I didn't answer the second part of your question on capacity. We have a $50 million debt facility, about $1 million drawn under that today, so a tremendous amount of borrowing capacity. If you think about it, we're using 50% cash and 50% stock. You're talking about paying, let's call it, five to six times EBITDA.

Most of the firms we acquire are running at roughly 15% to 20% normalized EBITDA margins. So, it's roughly one times revenue if you work that out. And if you were to fully tap out the facility at $50 million and match that with $50 million of equity, you're talking about $100 million of buying power.

Okay.

Now, I would -- but, I would tell you that at a two and a half to one covenant ratio of total debt to EBITDA, if you look at where our run rates are today, we could support a larger than $50 million debt facility. So, you could actually say that rather than a $100 million of total borrowing power, the number is closer to $150 million.

And if you look at our stated and consistent plan on M&A, which is to do three or four acquisitions a year that add roughly $40 million to $60 million of revenue, we have more than enough capacity to fully execute against our M&A plan.

And then, as we do those acquisitions, we're generating sufficient -- significant cash flow, and we are immediately paying down that debt under the line. So, we've got a very good model where we can employ a little bit of leverage, hopefully. We try to do that. And every time we borrow against that line, we're quickly paying it down out of operating cash flow so that we can -- we've got plenty of capacity to do these deals on a basis that's very accretive to equity holders.

Excellent, thank you.

Thank you.

And with no further questions, I'd like to turn it back to management for any closing remarks.

Again, we're as optimistic as we've ever been about the potential for the company, extremely well positioned going forward. We have scaled the business to now north of $200 million, very strong M&A pipeline, beginning to see those benefits of operating leverage, which should manifest themselves and increase profitability right here in the second quarter and going forward. And you'll begin to see us execute aggressively against the M&A pipeline for the remainder of the year.

So with that, I'd like to thank everyone for their time this morning. And we look forward to speaking to you again next quarter. Thank you.

Thank you for your participation in today's conference. Ladies and gentlemen, this does conclude the presentation, and you may now disconnect. Have a wonderful day.