Perficient Inc (PRFT) 2007 Q2 法說會逐字稿

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

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

(OPERATOR INSTRUCTIONS)

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

Good morning. With me on the phone today are Jeff Davis our President and Chief Operating Officer and Paul Martin our CFO. I'd like to thank you all for your time.

We'll have, as is our typical practice, 10 to 15 minutes of prepared comments, after which we'll open the call up for questions. Paul Martin is now going to read the Safe Harbor statement.

Thanks, Jack, and good morning everyone. Some of the things we will discuss in today's call concerning future Company performance will be forward-looking statements within the meaning of the securities laws.

Actual results may materially differ from those discussed in these forward-looking statements, and we encourage you to refer to the additional information contained in our SEC filings concerning factors that could cause those results to be different than contemplated in today's discussion.

So the second quarter was another great quarter for Perficient, very strong operating metrics which led to record profitability. Really we fired on all cylinders, we posted record revenues, record non-GAAP cash EPS, record GAAP EPS and record cash flow or EBITDA.

We're talking about 40% year-over-year growth in services and total revenues, and we're continuing to see strength across the business as we win larger and more strategic engagements, and Jeff is going to speak a little bit more to that later.

He'll also talk about our operating metrics which remain strong. Services gross margins excluding stock comp were north of 39%, so tremendous progress that we've made there over the past 12 to 18 months. And those gross margins achieved an 83% utilization rate, which is well within our comfort zone and what we've, I believe, proven to be sustainable rate.

The benefits of scale that we've talked about have really begun to emerge during the quarter and contributed to the strong cash earnings per share number we reported and also to our strong EBITDA.

But really we expect profitability to be scaling even faster than overall revenues, so Perficient is really both a top-line and a bottom-line growth story.

This was our 17th consecutive quarter of revenue growth and our 21st consecutive quarter of positive EBITDA. And we continue to demonstrate discipline with the business, delivering consistent, profitable and proven results.

The cash generation capacity of the business, again reflected in those EBITDA numbers, if you back out stock comp, we're talking about a little over $9.6 million in EBITDA in the quarter, so annualizing that we are approaching close to $40 million in annualized EBITDA production. So, some significant cash generation capabilities.

As a result of that, we fully repaid our term debt and working capital line during the quarter, so came out of Q2 at June 30th with zero debt and roughly $500,000 of cash.

So our balance sheet, really stronger than ever, annualized revenue run rate nearly $225 million with an M&A pipeline that's stronger than it's ever been and, frankly, a financial and an operational ability to execute and integrate these deal that's stronger than it's ever been.

And currently then we have a full approximately $50 million of capacity available under our credit facilities, so we are ready to strike and fund accretive deals as they present themselves. And as we've talked about, we our aggressively in the market and growing the business.

You know there are no guarantees here, the goal I would like to see, at that $225 million run rate today, I would like us to see Perficient coming out of this year at a run rate north of $250 million.

That will be dependent on additional M&A and of course there are no guarantees there, but that is the goal and it could be higher than that depending on whether we're able to achieve one additional or two additional acquisitions this year, and we would like to achieve two.

Again I'll stress no guarantees there, but that's the goal to be looking at a north of $250 million run rate coming out of this year.

So we continue on with our plan to more than double the size of this business by 2010. That plan to grow Perficient into a $500 million revenue run rate firm.

We think we've got a unique opportunity at the best position, most profitable and fastest growing U.S.-based tech management consultancy, and we plan to continue consolidating this market.

And I will say we're very excited about the fact that really the earnings growth potential for Perficient is just getting started.

We did $0.50 in cash EPS last year, the prospect is out there to do mid-$0.70s cash EPS this year and this business could do, again no guarantees, could do $0.90 to $1 next year.

And then if you look at the business further out, with acquisitions, if we're able to continue the pace of acquisitions that we've done historically, and again there are no guarantees around that, but at $40 million to $50 million a year of acquisitions we could be growing earnings annually at 30% to 40% a year at Perficient over the next few years.

And you look at that against potential earnings of up to $1.00 next year and at a percentage that equals our growth rate, and I think you see some potentially significant appreciation potential in the stock.

So we think it's a very, very exciting time for the business and again are very pleased with the strong quarterly results as we continue on our growth path.

So with that I'm going to turn the call over to Paul Martin to discuss in further detail the Q2 financial results. Paul?

Thanks, Jeff. Total revenue for the second quarter of 2007 was $52.6 million, a 40% increase over the year ago quarter.

Services revenue excluding reimbursable expenses were $46 million with strong organic growth of over 10% on a trailing four quarter average annualized basis, including businesses owned at least two quarters.

We believe that organic revenue growth in the 10% to 15% range is achievable, although it could go higher over time. We expect earnings per share growth to continue to grow faster than our organic growth rate.

Gross margins for services excluding stock comp and reimbursable expenses for the second quarter was 39.5%, which is essentially flat with the second quarter of 2006 and up from 38.6% in the first quarter.

SG&A expenses of $9.9 million in the second quarter included $1 million of non-cash stock compensation expense.

Including non-cash stock compensation SG&A was $8.9 million, which represents 16.9% of revenues compared to SG&A expense of $7.7 million or 20.6% in the comparable 2006 quarter.

Lower bonus costs associated with the 2007 bonus plan, which is based on significant growth levels, was a primary, driver of the SG&A decrease. If the Company's profitability objectives are not achieved, this amount could be reduced in future quarters.

EBITDA was up 67% over the year ago quarter to $8.2 million, which includes absorbing $700,000 more of non-cash stock compensation expense in the second quarter of 2007 compared to the second quarter of 2006.

EBITDA excluding stock compensation was $9.7 million, up 70% over the comparable prior year quarter. EBITDA margins excluding stock compensation improved over three full margin points over the comparable prior year period to 18.4%.

As Jack mentioned, the second quarter annualized EBITDA run rate excluding stock compensation is approaching $40 million. This is our 21st consecutive quarter of positive EBITDA.

Net income was up 78% over the year ago quarter to $4 million, which includes resolving $700,000 more of non-cash stock compensation expense in the second quarter of 2007 compared to the second quarter of 2006. This is our 16th consecutive quarter of positive net income.

Diluted GAAP earnings per share was up 63% over the year ago quarter to $0.13. Non-GAAP earnings per share was up 58% over the year ago quarter to $0.19.

Non-GAAP EPS is defined as GAAP earnings per share plus non-cash amortization expense and non-cash stock compensation expense, net of the related taxes divided by average fully diluted outstanding shares.

As previously mentioned, during the second quarter of 2007 our utilization was 86% including subcontractors and 83% excluding subcontractors.

Our average global headcount for the second quarter was 925, which includes 161 subcontractors. We ended the second quarter with 987 billable consultants, including 201 subcontractors.

In addition to the billable headcount, we currently have 135 SG&A personnel, which results in a total colleague headcount of 1,122 as of June 30, 2007.

On a year-to-date basis, revenues were $102.6 million, a 53% increase over the prior year. Year-to-date services revenue for the six months were $89.3 million compared to $58.3 million in 2006, an increase of 53%.

Year-to-date 2007 gross margin for services, excluding reimbursed expenses and stock comp, was 39.1%, an increase of 120 basis points over 2006.

SG&A expenses were $20.2 million for the six months ended June 30, 2006 including $2.3 million of non-cash stock compensation expense.

Excluding non-cash stock compensation expense SG&A was $17.9 million, which represents 17.5% of services revenue, 170 basis point improvement from the comparable prior year period, primarily as a result of the lower bonus accrual I talked about that effected the quarter, which is tied to our increasingly challenging targets.

EBITDA for the six months ended June 30, 2007 increased 75% over 2006 to $15 million, which includes $3 million of non-cash stock compensation expense in 2007. Without the effect of stock compensation expense EBITDA increased 79%.

For the six months ended June 30, 2007 net income was $7.5 million and fully diluted earnings per share increased 63.5% over 2006 to $0.24 a share.

Non-GAAP diluted earnings per share was $0.35, an increase of 60% compared to $0.22 in the comparable prior year period.

We continue to generate very strong operating cash flow that we are using to fund both internal growth and potential growth from acquisitions.

The Company has fully repaid all outstanding debt as of June 30, 2007 and this includes funding the cash portion of the Tier 1 acquisition that we completed late in the quarter. And the Company has full access to its $50 million unused credit facility as of June 30, 2007.

One housekeeping matter I'd like to discuss, the Company with its current and predecessor auditors, and currently evaluating the classification in its cash flow statement of certain previously reported transaction costs associated with acquisitions.

If we decide to reclassify such expenses, this would result in an increase in cash flow from operating activities and an increase in cash flow used in investing activities for the periods from 2000 to March 31, 2007.

There would be no revision to the total change in cash and cash equivalents in the effect periods.

Look, the total impact of this would be an increase in operating cash flows of $3 million or $4 million in 2006 and $1 million to $1.5 million in 2005.

If this evaluation indicates that a restatement is required, it will not affect previously reported cash or GAAP earnings or EBITDA, or any other items in the Company's income statement, balance sheets or statements of stockholders' equity.

To accommodate this process, the Company will file a Form 12B25 and request a five-day extension of time to file our second quarter 10-Q, which we intend to file by the extended due date of August 14, 2007.

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

Thanks, Paul. Well as previously discussed, we did have a strong second quarter. I think most importantly, as both Jack and Paul mentioned, is that our key operating metrics remained strong and helped us realized increased profitability.

You know gross and operating margins remain very strong, utilization moved up to 83%, our average bill rate at $114 an hour remained constant with the $3 increase we realized in the first quarter.

As we discussed last quarter, SG&A expense continues to decline as a percentage of revenue. And I've said this before and I think it's worth repeating, we now have in place the back-office systems, processes and people to support our growth plan.

With many of those costs being fixed, the result is that we're seeing positive impact to the bottom line. With continued scale, I expect that improvement to also continue.

On the recruiting front, we continue to hire aggressively in the second quarter. Excluding the Tier 1 acquisition, we hired 43 net new consultants.

Regarding Tier 1, this is an acquisition that was very strategic for Perficient. Not only does it have strong financial impact, it also further solidifies us as an important partner to Oracle.

We now have more than 100 consultants dedicated to Siebel technologies. Now that's not too far behind the U.S. components of some larger firms like Accenture.

As I alluded, the financial performance of Tier 1 is very strong, very high gross margins, strong utilization and attractive bill rates at better than $160 an hour.

Lastly, since we retained the senior management team we've enhanced Perficient's scalability by adding strong experienced managers. And these folks have big consulting backgrounds, Big Five or the Big 10 as I like to refer them, including CSE and some of the firms like that.

Now on the sales front, we actually had our best quarter yet for book sales with key follow-on wins at a number of existing clients. A few of those you'll see mentioned in the press release.

Of course we continue to open up new client accounts as well such as Borders, Ercot and Catalina Marketing.

With our growth we're broadening and deepening our solution offerings, adding business development executives and solution directors. In other words, increasing Perficient's feet on the Street, and that's yielding more and larger opportunities.

As a testament to that, 80% of our sales in the quarter came from deals that averaged more than $400,000. Now that's up from $250,000 from the first quarter of this year.

So from our perspective, the market remained very strong in Q2. We continued to close multi-phase multi million dollar engagements that are full lifecycle solutions, beginning with strategy and running through full technology deployment. In fact, we closed what we expect to be the largest engagement we've ever done.

This is a SOA-based development project we anticipate will be a multi-year relationship that could approach $20 million in services by completion. Now we've done some eight-figure deals before over time, but this promises to be the largest so far. The point being clients are recognizing us as being able to deliver larger and larger strategic engagements.

So to wrap up, I'd like to comment briefly on Q3 and the remainder of the year. The market remains strong.

Our business development team is busier than ever in proposal cycles. I expect Perficient to continue to grow at a faster pace than most of our competitors in the industry at large.

And a couple of other key points, as Jack mentioned earlier, we will of course continue to augment our organic growth with smart M&A as we move towards our goal of doubling the size of this business to $500 million by the end of 2010.

Now right now we're right at $225 million run rate and, with our current M&A pipeline, I'm optimistic we'll meet or exceed our stated goal of exiting 2007 on a $250 million run rate.

We expect the profitability of the business to continue to expand even faster than the overall revenue growth and our EBITDA margins are at all-time highs. We expect to see further improvement of those margins as we continue to scale, as we mentioned earlier.

You know ultimately its cash flow that creates opportunity and profit that drives shareholder value. We get that and on those marks, Perficient has never been in a better position than it is right now.

With that I'll turn the call back over to Jack for more specifics on the Q3 outlook.

In terms of the Q3 outlook we expect third quarter services and software revenue, including reimbursed expenses, to be in the range of $51.8 million to $56 million.

That'll be comprised of $51.3 million to $53.9 million of revenue from services including reimbursed expenses and $500,000 to $2.1 million of revenue from the sale of software.

The guidance range of services including reimbursed expenses represents services revenue growth of 20% to 26% over the third quarter of 2006.

And I'd note with respect to software guidance, as we've continually done, we've attempted to refine our methodology to more accurately reflect the revenue we anticipate to report for the full quarter.

So again, very strong guidance for Q3 and we are optimistic as we've ever been as we move forward for Perficient. In seven, eight years here we've scaled the business from a start up now to $225 million revenue run rate.

We are really emerging, have emerged as the logical consolidator of a fragmented market and we're addressing a $20-plus billion market opportunity.

We are just beginning to enjoy the benefits of scale by winning bigger projects, realizing better operating leverage and profitability, we're seeing those benefits in terms of our recruiting and we are a stronger buyer from an M&A perspective than we've ever been. Frankly, I don't think our competitive position has ever been stronger.

We're more solutions oriented, we have a more diversified client base and revenue stream, our operating team led by Jeff is deeper and broader than it's ever been and all of that is manifesting itself in better win rates, both against the big guys and against the boutiques with which we compete.

So with that I would like to now open the call up for questions.

(OPERATOR INSTRUCTIONS) Our first question will come from the line of Peter Heckmann of A.G. Edwards. Please proceed, sir.

Good morning, guys. Hey I wanted to follow up on that organic growth number in the quarter.

You know the last six to eight quarters here we've been reporting organic growth in the 18% to 23% range and, if I heard you correctly, you said about 10% for this quarter. Was there an unusually difficult comparison in the second quarter?

And based on the way I understand you calculate it on a trailing four quarters basis, it would imply that organic growth in this second quarter was close to zero. Is that right?

Well, in terms of organic growth, yes we're still talking about double-digit organic growth here. Part of it does, you're right, relate to the methodology, we had a very strong Q2 in 2006 and the sequential growth was I think 11% Q1 to Q2 2006.

And I would say, Pete, that, and you know this, we have been consistent all along in saying that during those quarters, when we saw that 18-plus percent or 23% organic growth, that that's not sustainable, that from a modeling perspective 15% was a more realistic number to use as an average through time. And as you know, we've been consistent in saying that all the way along.

So, part of it is methodology driven because of the inclusion after two quarters of acquired businesses.

I'd note that if you were to look at organic growth in the first quarter of this year versus fourth quarter of last year and strip out completely acquisitions, in other words not include them after two quarters, you'd still see organic growth in the 17% range.

But that's a slightly different methodology than we've used, so I just offer that by way of sort of comparison or color. Again, we're comfortable with the numbers that are out there in terms of full year revenues, and obviously you can see we guided in line for this quarter.

And finally I would say that the real opportunity -- and we do see 10% to 15% organic growth going forward, as Paul mentioned earlier, we also think there is an opportunity to get back above that.

We're just looking at some tough comparisons in terms of last year, but I think you'll see that growth rate begin to accelerate.

And of course the real emphasis is on earnings growth where we think, again with M&A, we can achieve 30% to 40% rates of earnings growth over the next few years.

Okay. And so contemplated within your third quarter guidance would be roughly 10% to 15% organic growth. Is that what I'm hearing what you're saying?

Yes. Well I'm not sure what the exact percentage is contemplated, but you can see what the numbers are there in terms of they're in line with what the analyst consensus is.

And again, I'm comfortable not only with respect to those third quarter numbers which are strong, but also with where we're coming out for the year.

Okay. And then just one follow up, based on where we are mid year, 43 net new hires in the quarter, I think there was around 28 net new hires in the first quarter, how are you tracking with full year goals?

Nice uptick from the first quarter to the second quarter in net new hires, but would you expect to hire let's say net new of 100 in the second half? Or does that number seem too high?

You know I think that's probably a little high, Pete. You know we don't set a goal for hiring without adjusting it relative to where we are with the business.

And one of the things we have done this year and will continue to do is shift to a little bit lower subcontractor count, more employees.

You know that improves our margins plus obviously retention and a lot of factors that is a benefit to having folks as employees versus using subs. So you might see numbers that sort of exceed the organic growth, but they're offsetting subcontractors.

So yes I think we're probably in line with what we expect to do. Beyond sort of the year I think we talked about 150 to 200 in total, I think we'll be close to the lower end of that.

And you know I'm still real optimistic about the second half of the year and it could be exceeding that, both from an organic demand standpoint as well as, like I said, replacing some subs with employees.

Okay great. And the last question and I'll get back in the queue, as regards the M&A pipeline, do you feel like there are as many opportunities out there as there have been in the past?

Have seller expectations changed at all? And as you get the bigger base of revenue and kind of move up to that next tier, maybe $15 million to $20 million to $25 million in revenue, are there different valuation expectations?

I would say our M&A pipeline, and I think I mentioned this in the introduction, is stronger than it's ever been. Perficient is better positioned, as a buyer, in terms of our scale.

In terms of the power of our currency, in terms of our presence in the marketplace, in terms of our financial capacity on the cash side of those acquisitions, in terms of being able now to point a perspective seller's attention towards the 14 other deals that we've done.

The accretive deals that we've done and the benefits that those sellers have experienced in becoming part of Perficient, both in terms of their operations and in terms of financial return and appreciation of their stock.

So really we've never been in a stronger position, our M&A pipeline has never been more robust. And yet the valuations that we're seeing in the market are in line with what we talked about, Pete, when we started this process seven years go where we said five to seven times EBITDA. And I don't think we've ever done a deal at the top end of that range.

The acquisitions that we're seeing today are in the 5.5 to 6.5 times range and that's even for acquisitions, like Jeff referred to, on Tier 1, where you were looking at $160 an hour bill rates and gross margins in the mid 40s and deals that are strategic to our growth plans, in that case around Oracle.

So very strong deals, very robust pipeline, reasonable valuation, only doing deals if they're immediately accretive from a cash EPS standpoint and if they're hitting 20% IRR hurdle rates based on conservative inputs, and adding value to the business. So, robust pipeline, better ability than ever to execute on those deals.

And we feel confident, you know there are not guarantees with M&A, have to say that every time, but we feel confident that you're going to see some meaningful activity here in the second half of the year and we're out there executing.

Awesome, awesome. Great. And just one more for Jeff, the average bill rate, I missed it, in the quarter?

$114, same as Q1, which is good. When we acquired E-Tech the bill rates there were lower than our average and those are improving. It's a great firm and the margins were still solid, but they were in fact lower bill rates.

So in light of that, the fact that we were able to maintain the increased bill rates, the $114 that we had in Q1, we're pretty happy with.

Great. Thanks, Jeff.

Sure.

Our next question will be from the line of John Maietta of Needham & Company. Please proceed, sir.

Hey thanks very much. The first question I had, Jack, just a point of clarification that $0.90 to $1.00 range for next year, to get to the high end of the range does that assume additional M&A activity? Or are we talking the business as it stands today?

I think at the very high end of the range you'd be talking some additional modest M&A activity.

You know I think without additional M&A activity, and again there are no guarantees on any of this, but I think we can be in the middle of that range without any additional M&A activity, provided growth continues with where it's been.

Got it, okay. And then, Jeff, I was wondering if you could comment on sort of the level of cross-sale activity that you've seen between some of the recent acquisitions and the installed base and what that opportunity looks like going forward?

Yes it's been great. A great example very recently, what we're seeing is that the legacy folks that have been here for a while, whether they've been here for a very long time or from an acquisition in the last couple years, are really getting in tune with that.

So almost immediately when we do another acquisition, they know how to reach out, engage those folks, get those folks educated on how to engage in cross selling.

And already from both E-Tech and Tier 1, immediately out of the gate with Tier 1 we had a number of deals being worked jointly, not only with our existing legacy Oracle practice but also with our IBM practice and a couple of other practices.

So that still continues to be a strong part of the story, a great pragmatic part of the business that adds just a ton a value.

So like I said, we really rely on the folks that are here and they do just a fantastic job of reaching out and embracing those newly acquired businesses, educating them on how things work here, how you reach out to other folks, the skill sets of the portfolio that are available to them. And like I said, I'd say it's working better than ever.

Okay. And then, Jeff, any solution practices in particular that really performed exceptionally well in the quarter, BI and analytics, CRM.

[Man] saw integrations really strong, so TIBCO and IBM around integration and the SOA platform is very strong, Siebel very strong, Documentum.

I think it's strong across-the-board, but those two probably stand out, integration related engagements are very strong right now and SOA related engagements are very strong.

And the exciting thing about that is I think we're really just, as I mentioned earlier on the sales, we're really just starting to see a lot of traction there and starting to get engaged in some, what will be over time as I mentioned, some real large development engagements with some pretty big clients around their SOA strategies.

Thanks very much.

Sure.

And our next question will be from the line of Tim Brown of Roth Capital. Please proceed.

Yes good morning, guys. Jeff, I was wondering with the recent acquisition if you could kind of just go over maybe the top three or four areas of expertise, WebSphere, TIBCO and Siebel, and just give me an idea of what percentage of your business those are now?

Yes, let's see. Let me give you specifics on that. Paul, can you help me --?

Sure.

Here it is right here, sorry. Yes as of Q2 the break down is as follows, IBM 41%, we got precise on this, IBM 41%, TIBCO 16%, Microsoft 13%, Oracle 8%, Documentum 8%, and other 14%.

Okay. And how's Q2? I assume Oracle will be growing quite a bit.

And it is. Now remember that Tier 1 was only part of the Company for a week, but Oracle actually did go from 7% to 8% in that mix from Q1 to Q2. And of course with Tier 1 baked in there, you know I expect that's going to be easily double-digit, probably 12% to 14% of the revenue.

Okay got you. And then it sounds like you're seeing pretty strong demand across all those lines, are there any areas of weakness?

You know I don't think so, honestly. There's just a ton of activity, customer application development is still very strong, usability practice strong and I can't say that I'd really isolate any specific areas of weakness, either in technology or really in any sector.

I mean we feel like things are very active and I think just some of the phenomenon that we're seeing, and there's some detractors to it, but overall I think there's great positives in that is that we're doing larger engagements and winning larger engagements, and moving up the food chain.

And course of sales cycles on a $5 million deal, or what will ultimately be a $5 million relationship, is longer than a $250,000 engagement. But the market looks strong. And that's across-the-board, SharePoint, Microsoft, ECM, Documentum, TIBCO. We feel right now that everything remains strong as ever.

Okay. And then can you give us an idea of, in G&A, what percentage of those costs are fixed? Is that half of them?

You know I think it's probably between a third and a half. There is obviously, to your point, there's G&A out in the field and that G&A is likely going to scale pretty close. Of course as those business units grow there's scale in that, but the best scale of course is in the corporate G&A and that's probably a third to a half of the total G&A.

Okay. And then if you might address, I might have missed this earlier, but on the gross margins for the software, it came in a little bit lower than it has in the past, can you just give us your expectations and why that was in this quarter?

Yes I think I talked about this last year, IBM where we do most of our resell, has shifted their program to a services-based fee that they pay that actually gets booked as services. So it was a little light in the quarter, we've got a number of accounts that we maintain the reseller of record with and do a lot of renewals with, and the renewals tend to be a little lower.

You know what you saw in the quarter for software sales was larger than it normally would have been in the quarter, and some of that was due to renewals and the renewals tend to be lower margin. Now those are strategic to us because it continues to solidify us as the reseller of record for those accounts.

You know going forward I think we'll see sort of a repeat of what we saw last year in the second half of the year. The sales will probably be somewhere in our guidance range, I think hopefully the higher end of course, but somewhere in our guidance for this quarter.

And then I think we'll see some big deals and a lot of software sales in the fourth quarter where the margins tend to be the best.

Okay that helps. That was all my questions, thanks guys.

Our next question will be from the line of Paul Kaump of Northland Securities. Please proceed, sir.

Good morning, a couple housekeeping items. Did you say 201 subcontractors in the quarter?

Yes 201. At the end of the quarter it was 201 and average it was 161.

Okay perfect. CapEx for the quarter, do you have that?

I don't have it in front of me. It's around $500,000 or maybe actually a little bit less than that.

Okay. Your receivable line shot up quite a bit this quarter on a quarter-over-quarter basis, and I know you guys are operating a bigger footprint out there, but quality of the receivables, is there anything out there that's unusual?

Yes so the DSOs went from 71 to 73 days, we've always talked about a range in the 70 to 75 range. As we go through our ongoing active weekly process of looking at the receivables, including the age receivables, no particular watch outs, but we'll continue to manage it within that range.

Okay. With respect to the large deal that you mentioned, the one that could bring you $20 million revs over time, service revs over time, any of that flow through the second quarter? And then related, what do you expect to see in the second half of the year from that opportunity?

No, that sale was really late in the quarter and I think if there was any revenue recognized in the quarter it was modest.

You know I think we'll get probably, I want to say $2.5 million to $3 million out of that deal over the next six months.

Okay.

This year. And then as I mentioned before, assuming we execute well and no reason to believe we won't, we expect that to be a two to three year relationship running at about that same run rate, you know winding of course in the latter part of that.

Right. I believe you anniversaried the Bay Street Solutions acquisition this quarter, anything going on there that's noteworthy in terms of CRM?

CRM's great, I mean it's a great space and the Bay Street guys have been just a phenomenal addition to the team. You know a super hard working bunch of guys and sharp, another big consulting background there.

And like I say, we can look back at that and certainly hold it up as one of our better acquisitions that, again we're really happy with all of them. But Siebel's a great space right now.

I think as Oracle's kind of come around that clarifying the strategy and Siebel's position in the portfolio, we're seeing a really renewed interest there.

And so hence the Tier 1 acquisition, we're excited about that and excited about the overall Oracle relationship and looking to expand that even beyond Siebel.

You know we do the Siebel CRM. The team also has some great Siebel analytics skills and see a lot of business there as well.

And Tier 1 actually brought some saleable IT package solution, if you will, for State and local where they've actually got a pre-configured product that they take out and sell into cities as a portal to the citizens of the cities, do various things, anything from paying traffic fines to applying for building permits and things like that. It's actually something we're very excited about as well.

Last question, when you take a look at the potential M&A landscape out there, any new solutions or capabilities that you're targeting in particular?

You know I'd say, I'll let Jack come in on this as well, but I'd say we're getting more and more interested.

As I look at our portfolio, and I think we really started at the core of being a hard core technology, a lot of customer development and integration on the whole middleware space.

And then as we branched out more into portal you're getting more into applications and more into the business side, the ECM practice around Documentum and FileNet expanded that as well, there's a lot of work flow there.

Of course SOA now in the next evolution of the integration products embracing more work flow and more dynamic business process, environments.

You know I think the next logical concentric circle for us would be more applications in the portfolio, and ERP is one that's of interest to us.

You know we've got, I think, still a lot of opportunity to expand the core, but as we look at adding additional capabilities, that's one that's of interest to us. Jack, did you have anything to add there?

No I think that sounds right. And you know -- as folks know, the Oracle relationship, as Jeff said, is one that we've said for some time is strategic and really want to build the critical mass there.

Then leverage the opportunity both in the application area and obviously around what they're doing with their Fusion middleware initiative, which obviously is a space where Perficient can bring substantial domain expertise to the table. And there may be opportunity with other vendors like SAP as well, we continue to evaluate that.

And as I say, the M&A opportunity out there, really never more robust for us so watch this space, I think we've got some good stuff coming down the pike.

All right perfect. Thanks, guys.

And Paul, just to specifically answer your question, CapEx was it was about $470,000 in the quarter.

All right, thank you.

(OPERATOR INSTRUCTIONS) Our next question is from the line of Colin Gillis of Canaccord Adams. Please proceed, sir.

Hey, gentlemen.

Hey, Colin.

As the business continues to scale, Jack, could you talk about increasing appetite or potential need for offshore labor or lower-cost labor?

Sure I'll give you my views on that and then I'd like Jeff to weigh in on it. As you know, our business is really about small high-impact project teams, it's about integration, it's high customer touch, it's highly iterative, most of the work is done on the client site.

It's a mix of business and technology consulting, a lot of business process work as Jeff was referring to earlier, again highly iterative high customer touch. None of that lends itself particularly well to whole hog offshoring.

Notwithstanding that, we've made an attempt over the past few years to feather in as much offshore as we could, so that we can get full leverage on our high expertise U.S. resources but also where required offer the client the most compelling average rate, and just frankly run the business as efficiently as we can. And we've done that principally in three ways to date.

One we have grown significantly our own employee population of folks that are here in the U.S. under H1B Visas, a substantial number of those now, a big part of that base came from the Insolexen acquisition, a great acquisition for us, great guys and the great focus in the TIBCO and WebSphere area.

And we're looking potentially at some other acquisitions like that in some other domain areas but with an H1B focus. So that's one thing that we've done.

Secondly of course we've got subcontractors, which we've managed to about 15% to 20% of the total consulting pool, and a portion of those are also in that H1B category.

Thirdly, our facility in Eastern Europe which we have under exclusive and which we really picked that up with two or three or four or six heads in it when we made the [Zedaworks] acquisition about two years ago.

That's now I think 60, maybe as high as 65 heads there so we've grown that substantially and there might be further growth potential there.

And we continue to evaluate other opportunities where offshore is concerned, again not changing our fundamental model but looking to find the most efficient way to feather in some offshore into what we're doing.

Jeff, anything you want to add to that?

Yes I think I'd just reiterate what you're saying. Really I agree with completely that our MO has been largely these highly iterative, high touch engagements where we spend a lot of time working with the users on really a lot of architecture.

And the development component of those tends to be half or less, and if you're look at $1 million or a $2 million engagement and the idea of engaging three or four offshore folks, to supplement that there's not a lot of bang for the buck there and I don't know that it really justifies the risk.

That's been my opinion and I think that's been our go-to-market strategy and has worked quite well for us.

However, as Jack mentioned, we have feathered those in where it makes sense, competitively it's made a lot of sense for us. It's a more significant factor in the market now so you have to have that capability.

Macedonia has worked quite well for us, we've had I want to say about eight engagements under our belt, including some [fixed-D] engagements that worked out quite nicely for us where we've leveraged that facility. And our teams, both here and there, have done a great job of delivering successful engagements through that process.

I do think that as we continue to move up scale and get into more of these eight-figure long-term engagements and relationships where we're doing larger scale development, that's going to make even more sense and actually be more of a competitive requirement.

So hence the reason we're scaling the Macedonia facility, as Jack mentioned, we're about 65 or maybe even more folks now for that reason, and running larger engagements through there.

And we'll be looking, as Jack said, at other opportunities to enhance the offshore capability as we continue to move up the food chain, as I alluded to earlier.

And just along those lines, what about comments about building centers of excellence in Canada? Are you able to get enough H1Bs in the United States for your current needs?

Well I think we've got actually a Canadian presence and we're doing some of that, in fact, where we're training those folks around some specific skill sets that are in short supply here in the U.S.

But you know we're not experiencing too much of an issue getting the H1B folks that we need here and balancing that load between the folks that we have on the ground in the U.S. and those that we have in the offshore facility in Macedonia.

And as I said before, we do have the Canadian capability and we're actually doing, on a smaller-scale basis, some exactly of what you're describing.

WebSphere Commerce is one example that comes to mind where we've got an initiative under way right now to build that capability out through some training of some of our Canadian folks and do some solution center work there.

So it's something that we're embracing now, it's not something that we're seeing a tremendous demand for. But in that area specifically, it's something that we think is an opportunity.

Okay great, thank you.

Thank you.

Thanks, Colin.

Gentlemen, there are no further questions. I'll return the floor to management for any closing remarks.

Okay well thank you very much, appreciate your time this morning. Again we're very happy with a very strong quarter and look forward to speaking with you again at the end of the current quarter. So thank you very much and have a good day.

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