Perficient Inc (PRFT) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Perficient earnings call. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Chairman and CEO Jack McDonald. Please proceed, sir.

This is Jack McDonald. With me on the phone today is 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 the call up for questions.

Paul, would you read the Safe Harbor statement?

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 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.

In addition, our earnings press release includes a reconciliation of certain non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with generally accepted accounting principles, or GAAP.

This is posted on our website at ww.perficient.com under news and events. We have also posted a reconciliation of certain non-GAAP goals to the most directly comparable financial measures, prepared in accordance with GAAP on our website at www.perficient.com under investor relations.

So the headline for Q3 is we posted record revenues, record cash flow, or EBITDA, and record non-GAAP and GAP EPS. We exceeded the analyst consensus estimate. We beat on cash EPS, and we also have issued strong Q4 revenue guidance.

This was our 18th consecutive quarter of revenue growth and our 22nd consecutive quarter of positive EBITDA. On revenues, we came in within our guidance range, albeit at the low end of that range, posting roughly 20% year-over-year growth in total revenues. Our non-GAAP, or cash EPS, again, exceeded analyst consensus estimate and we set another record. We achieved $0.21 on a rounded basis, so currently at an annualized run rate of about $0.83 to $0.84 on cash EPS.

Now, that's 40% growth, 40% growth in cash EPS, or non-GAAP EPS, in the quarter over the same period last year. So that's clearly demonstrating the operating and earnings leverage that we've been talking about. On EBITDA, if you look at it ex-stock comp, which is the preferred measure for looking at it for us, again, another record, $10.7 million on quarterly EBITDA on stock comp, so a roughly $43 million annualized EBITDA run rate.

And it was that strong cash flow generation which allowed us to fully fund the cash portion of the BoldTech acquisition which we did this quarter, which is our largest acquisition to date in terms of purchase price and still exit the quarter with no debt. And I'd note as well that EBITDA margins ex stock comp were at 20.1%. That's an all-time record. It's up from 18.5% in the second quarter, which is the previous record, and again, is consistent with what we've been talking about in terms of expanding margins as we generate SG&A leverage, particularly G&A leverage, with further scale.

Now, Jeff's going to talk more about this later, but the operating metrics remain strong. Services gross margins, excluding stock comp and reimbursed expenses, were over 39%. And that's consistent with the comparable 2006 period, and that's at an 82% utilization rate, which is well within our comfort zone and what we believe to be sustainable. So even in a quarter where growth was not what we wanted it to be, we did, I think, a very good job of managing the headcount, managing utilization, managing labor costs and still achieving really close to record gross margins.

On organic growths specifically, as we've talked about, we did have a tapering in the middle of the year, really sort of, and what looks at this point to be an April to August phenomenon. And really that was due principally to three factors.

One was some slackening in demand. The second was the loss of a $4 million backlog project, because the client with whom that work was proceeding was acquired, ironically by another client, and so there is a good possibility that work could come back. We'll see on that. So some slackening on demand. A $4 million backlog project that fell out, really principally impacting Q3, and a tough comparison to a very robust 2006.

In any event, business has strengthened from a revenue-per-day standpoint and from a variety of other perspectives. Business strengthened throughout the third quarter, and we see that strengthening continuing into Q4. And it's that strengthening and organic growth which enables us to issue the strong revenue guidance for the fourth quarter that we put out today, which was in line with the analysts' consensus estimate and which shows year-over-year services revenue growth of 30% to 37%.

So on a total basis, 30% to 37% revenue growth implicit in that Q4 guidance. Now, we're going to talk more about guidance later, but from a strictly organic growth perspective, after bottoming out at around 4% organic growth in Q3, our organic growth should increase to the 5% to 10% range in Q4, again, and those would be the bookends based on the current Q4 revenue guidance shows us moving into that 5% to 10% organic growth range for Q4.

And again, our target for next year, that goal for next year, remains that 10% to 15% range. So our hope is to reaccelerate as we move into next year. No guarantees, but that's the target.

Now, as I say, we have continued to see earnings momentum. We are still very comfortable with the $0.76 non-GAAP goal for this year, the cash EPS goal, which was up from $0.51 last year. And again, still targeting the same goal of $0.90 to $1 in cash EPS for next year. And we continue to believe beyond that with -- provided we can grow organically at around a 10% range, and with additional acquisitions, along the lines of what we've done historically that beyond 2008 we can continue to grow earnings at approximately 30% a year over the next several years. No guarantees, of course, but that's our goal. So very much intact in terms of earnings for this year, our outlook for 2008 and our long-term outlook for growth in earnings.

Other exciting news in the quarter on the acquisition front, we acquired BoldTech. This is a $20 million plus business, which strengthened our presence in Denver and the Rocky Mountain market, but also brings China, and Jeff is going to talk more about this later, but this further diversifies our delivery capability. It means now that over 25% of our delivery headcount is either offshore or foreign national H-1Bs. And we have opportunities now, particularly with that China facility, to scale that over time. This will help us manage labor costs, boost margins and ultimately enhance competitiveness and growth.

Continuing on the M&A front, our pipeline, our M&A pipeline, is stronger than it's ever been. We currently have $50 million of capacity available under our credit facilities. As I say, we came out of the quarter with no debt, even after paying the cash portion of the BoldTech acquisition. So we have $50 million of borrowing capacity to fund additional accretive deals this year and as we move into next, and we are aggressively in the market looking at deals.

With BoldTech and our accelerated organic growth, it puts our run rate going into Q4 and exiting the year at about $250 million annualized. That was the target we had hoped to hit. We would still like to get at least one more acquisition done by year end/January to boost that run rate even further, and we are actively in the market right now executing on our M&A pipeline.

So, again, revenues came in within our original guidance range, albeit at the low end. We beat on cash EPS. We've issued strong Q4 revenue guidance and we'll exit the year at or about $250 million in annualized revenues, which was our goal. Organic growth is accelerating from that Q3 dip. We see it moving to 5% to 10% in the fourth quarter based on the guidance we've put out, and we continue to target a 10% to 15% organic growth rate, again, no guarantees, but that's what we target going into 2008. That, plus, we're aggressively in the market for acquisitions.

So, with that, I'm now going to turn the call over to Paul Martin do discuss the Q3 results in greater detail. Paul?

Thanks, Jack. Total revenue for the third quarter of 2007 was $53.1 million, which is a 20% increase over the year-ago quarter. Services revenue, excluding reimbursable expenses, were $48.4 million, with organic growth of approximately 4% on a trailing four quarters average annualized basis, including businesses owned at least two quarters.

Gross margin for services, excluding stock comp and reimbursement expenses for the third quarter was 39.2%, which is essentially flat with the third quarter of 2006 and the second quarter of 2007. SG&A expense was $9.8 million in the third quarter, which included $1.1 million of non-cash stock compensation expense. Excluding non-cash stock compensation, SG&A was $8.7 million, which represents 16.4% of revenues, compared to SG&A of $9 million, or 20.4%, of revenues in the comparable 2006 quarter. This decrease in SG&A excluding stock comp as a percentage of revenues is driven by lower bonuses tied to increasingly challenging goals in 2007 and lower costs as a percentage of revenue across many of our SG&A, and particular G&A categories as the Company leverages its infrastructure to deliver economies of scale.

EBITDA was up 46% over the year-ago quarter to $9.2 million, which includes absorbing $0.7 million more of non-cash stock-compensation expense in the third quarter of 2007, compared to the third quarter of 2006.

EBITDA, excluding stock compensation, was $10.7 million, up 51% over the comparable prior-year quarter. EBITDA margins, excluding stock-compensation expense, improved over four full margin points over the comparable prior period to 20.1%, a Perficient record. The third quarter annualized EBITDA run rate, excluding stock compensation, is approaching $43 million. This is our 22nd consecutive quarter of positive EBITDA.

Net income was up 60% over the year-ago quarter to $4.5 million, which includes absorbing $0.7 million more of non-cash stock compensation expense in the third quarter of 2007 compared to the third quarter of 2006. This is our 17th consecutive quarter of positive net income.

Diluted GAAP earnings per share was up 50% over the year-ago quarter to $0.15. Non-GAAP earnings per share was up 40% over the year-ago quarter to $0.21. Non-GAAP EPS is defined as GAAP earnings per share, plus non-cash amortization expense and non-cash stock compensation net of the related taxes, divided by the average fully diluted shares outstanding.

As previously mentioned, during the third quarter of 2007, our utilization rate was 85%, including subcontractors, and 82%, excluding subcontractors. Our average billable headcount for the third quarter was 973, which includes 151 subcontractors, excluding BoldTech.

We ended the third quarter with 1,002 billable consultants, including 191 active subcontractors. In addition to the billable headcount, we currently have 149 SG&A personnel, which results in a total colleague headcount as of 1,151 as of September 30th, 2007.

From a year-to-date perspective, year-to-date revenues for the nine months ended September 30th, 2007, are $155.7 million, a 40% increase over the prior year. Year-to-date services revenue for the nine months ended September 30, 2007, were $137.6 million, compared to $98.6 million for 2006, an increase of 40%, as well.

Year-to-date 2007 gross margin for services, excluding reimbursed expenses and stock comp was 39.1%, an increase of 60 basis points over the 2006 period. SG&A expenses were $30.1 million for the nine months ended September 30, 2006, excluding $3.4 million of non-cash stock compensation expense. Excluding the non-cash stock compensation expense, SG&A expense was $26.7 million, which represents 17.1% of revenues, a 260 basis-point decrease from the comparable prior-year period, again, primarily the result of lower bonus tied to our increasingly challenging goals and lower cost as a percentage of revenue across many G&A categories as the Company leverages its infrastructure.

EBITDA for the nine months ended September 30, 2007, increased 63% over 2006 to $24.2 million, which includes $4.5 million of non-cash stock compensation expense in 2007. Without the effect of stock compensation, EBITDA increased 67%. For the nine months ended September 30, 2007, net income was $11.7 million, fully diluted earnings per share increased 56% over 2006 to $0.39. Non-GAAP diluted earnings per share was $0.56. Again, non-GAAP measure is defined as GAAP earnings, minus amortization, stock comp and the tax effects. We continue to generate strong operating cash flow that we use to fund both internal growth and growth from acquisitions.

As Jack mentioned, the Company has fully repaid all outstanding debt balances as of September 30, 2007. This includes funding the cash portion of the BoldTech acquisition completed late in the third quarter. The Company has full access to its $50 million unused credit facility as of September 30, 2007, and a modest amount of cash on hand.

The Company has generated $10.2 million of cash flow from operating activities in 2007, more than double the comparable prior-year period. Our days sales outstanding on accounts receivable was 76 days normalized for acquisitions at the end of the third quarter, up slightly from the 74 days at the end of the third quarter. Our goal is to maintain DSOs between 70 and 75 days over time. We will intensify our efforts in the fourth quarter to bring this metric back into our stated range.

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

Thanks, Paul. Well, as previously discussed, I think we had another successful third quarter and there are a few noteworthy items that I'd like to address and reiterate in some cases. I think most importantly is that the key operating metrics remained strong and really did help us realized increased profitability again this quarter. And gross margins remained strong at over 39% net of stock comp and EBITDA margin excluding stock comp was 20.1. I think those things bore repeating. Utilization, excluding subcontractors, was 82%, which was in that range that we've talked about before as being a range that we feel is sustainable. We're shooting for that 80% to 85% range.

Average bill rate at 115 was the highest it's been this year. SG&A expense, Paul mentioned, continued to decline as a percentage of revenues, down to 16.4% net of stock comp. Now, some of that's tied to a lower bonus, as a result of the lower organic growth, but there's a significant component as well that's a result of scale. These factors combine to allow us to really post the highest earnings per share figures in the Company's history. I think that's something again worth reiterating.

One of the quarter's more important developments, as Jack mentioned earlier, was the acquisition of BoldTech Systems, and that transaction was important for a number of reasons. First of all, it was our largest acquisition to date from both a revenue standpoint, as well as headcount. I think that's validation that as we continue to scale, we're able to consider and close larger deals. Also, acquiring BoldTech of course helps us further expand our footprint in the Western U.S. and really deepened our expertise in the public sector markets, a presence that they've got strong abilities in.

The most unique and very exciting element, I think, of the BoldTech acquisition, as Jack mentioned, is our global development center that we acquired in China. This is a CMMI level-four certified center where we currently have about 90 employees, and we expect to increase that number substantially over the next several months as we begin cross-selling that capability into our markets.

In fact, we're already pursuing a number of opportunities in our existing accounts, leveraging that offshore capability in China. I also want to talk a little bit more about the organic growth. Jack addressed this already. I'm going to reiterate a couple of points that he made. But while the organic growth number for the quarter is not what we were shooting for, I think it's important to note that we did experience that substantial pickup at the end of the quarter that jack was referring to, that revenue per billable day in September was about an 8% or 9% increase over what we had seen since about the May timeframe.

So we're seeing a pickup that in fact carried over into Q4. So it's repeated in October and in fact in November. Now, December is a pretty seriously affected month due to the seasonality, but we're seeing that carry forward and we're seeing some strength in the market that we're encouraged by. All these things lead us to believe that that 10% to 15% organic growth target is in fact achievable and sustainable. I don't think that we're of a size yet where we can't maintain that kind of growth in a reasonably healthy market.

A couple of things specific to the quarter, as Jack mentioned earlier, 2006 was a very strong year for us, and that made it for a tough comp this year, and in particular in the third quarter. Jack also mentioned that one of the larger accounts that we have and about $4 million worth of projects were canceled as a result of an acquisition of that account. And the good news, as Jack mentioned, is it was acquired by another relationship, another account of ours, another client, and we're optimistic that we'll be back in there.

But that really did affect pretty dramatically the July-August numbers and, again, I think that explains the uptick that we saw in September that I believe we actually would have seen earlier. And, in fact, the 4% organic growth that we're posting now on a trailing four-quarter basis I believe would have been six to seven had it not been for the loss of this account. And I think we're going to get back to that rate and perhaps better coming out of the fourth quarter.

So as a result, as I mentioned, July and August were a little slower. We saw a pickup in September, a serious pickup in September that's carrying into the fourth quarter, and we're optimistic about the overall year being in that say 5% to 10% range, hopefully the higher end of that for the year.

From our perspective, the general market remains solid in the third quarter. Again, if it wasn't for that cancellation I think we would have posted a solid quarter. We continue to run multi-phase, multimillion dollar engagements, bold life cycle solutions, strategy through full technology deployment.

Now related to the economy, because we expect Fortune 1000 sort of enterprise-level accounts to weather any potential softness perhaps better than SMB customers might, w will be more rigorously pursuing enterprise accounts in 2008 and moving forward until we get through some of these uncertain economic times, if you will. And we continue to build our presence in these large accounts. We've got the scale, the breadth and depth to do so. And we continue to expand that component of our portfolio every day and again there'll be real concerted and focused effort on doing that on a go-forward basis.

So, finally, I think from our perspective we see the market again generally strong. Our business-development team is busier than ever, responding to proposals, pursuing opportunities, et cetera. I expect that over the long term we will continue to grow organically at a faster pace than most of our competitors and the industry in general.

Now, keeping that in perspective, there's a couple more points I'd like to make before I close, and that we of course will continue to augment organic growth through smart M&A as we move toward the goal of more than doubling the business by the end of 2010 to $500 million. I think we're currently on pace to do that, and I'm optimistic we're going to stay on pace to do that.

We expect the profitability of the business will continue to scale faster than the overall revenue, as it has, which again we expect to grow faster than industry averages. Over 40% year-over-year cash EPS growth for the quarter I think is validation of that. With that, I'll turn the call back to Jack.

So, again, in terms of Q4 outlook, we expect fourth quarter services and software revenue, including reimbursed expenses, to be in the range of $56.3 million to $62.1 million. And that's comprised of $54.3 million to $57.1 million of revenue from services, including reimbursed expenses and between $2 million and $5 million of revenue from software. That guidance range of services revenue, including reimbursed expenses, would represent services revenue growth of 30% to 36% over the fourth quarter of 2006.

So, again, we're well positioned moving forward, we've scaled this business over the last eight years from a startup to a $250 million run rate. We're the logical consolidator of a large, growing and fragmented market and we're beginning to enjoy the benefits of scale and winning bigger projects, realizing better operating leverage and profitability and becoming stronger M&A buyers. Our competitive position has really never been better and our operating team is deeper and broader than it's ever been.

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

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of John Maietta with Needham & Company.

Please proceed.

Thanks very much. Jeff, I was wondering if you could comment on -- you said you saw a reacceleration in the business as we moved into September. Could you comment on across different industry verticals maybe where you're seeing a reacceleration, and to what level?

Yes, I think the levels' going to be kind of hard to assess. Again, for us, we saw a pickup of about literally 8% on the revenue per billable day month over month moving into September from August, which has been kind of largely flat. I think we'd have seen that pick up a little sooner had it not been for that cancellation we referred to a couple of times.

In terms of industry, I think it's pretty well across the board. Of course, we're enjoying -- we've got a nice presence in the South, as you know, based out of Houston. We've got Dallas and some markets down there where we're seeing certainly some opportunity around the energy sector. But I think across the board we're seeing still general health, not a major slowdown from what we can see.

I don't think the market's quite as hot for us as it was a year ago, but the difference is subtle enough that I think it's actually hard really to put a figure on. Very, very business, lots of proposals out there. I think the sales cycle's a little shorter, also, than it was maybe at the beginning of the year. And so I think the softness that we saw was probably more at the end of the year -- I mean, at the beginning of the year.

In hindsight, honestly, it wasn't so dramatic that it was really noticeable to us, as you know. And I think it lagged in its revelation in the numbers, and really that I believe was kind of an April, May through August sort of phenomenon that we seem to be coming out of now. And if it's sustainable or not, I don't have a crystal ball, but it feels pretty good. And we're hearing that also in the industry, talking to some of our peers in some other companies and of course on the M&A path we talked to a lot of smaller companies, and they're seeing similar things. So I think there are signs, reason to be optimistic.

Okay, and then just to be clear, that $4 million deal that got pushed or canceled, that's not included in the Q4 guidance?

That's correct.

Okay, and then just last question I had was I was wondering if you could just provide a little commentary around the undergraduate hire program and how that's ramping.

Yes, we have slowed down a little bit on that, given, again, the uncertainty that we were experiencing in the quarter, although we have actually ramped up our recruiting capability and changed our org structure and infrastructure around that, have dedicated corporate director-level manager running the recruiting and in fact we're renewing the campus-recruiting program this year. So I'm still optimistic that we could be recruiting as many as 50 folks off campus over the next 12 months, perhaps more. If we see a pickup, we get back to the 15% to 20% rate, I'm hoping that we can expand that.

So it's still definitely a strategic element of our hiring. We did slow it down and focus more on experienced hires over the last say, four or five months. But we'll be back on campuses for the spring season. In fact, we're ramping up for that now.

Great. Thanks very much.

Sure.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of Brian Kinstlinger of Sidoti and Company. Please proceed.

Hi, good morning. The first question I had was really to the SG&A. It's come down two straight quarters. Excuse me. You mentioned bonuses coming down, but you added Tier1 in this quarter, too. It's an $11 million business, if my memory serves me. So can you give us the pluses from Tier1 and maybe just tractions from bonus accruals compared to the June quarter, because it's amazing that you'd be able to drop that when adding Tier1, I think.

Yes, from the total SG&A perspective, the decline as a percentage of revenue, about two-thirds of the decline in the quarter is associated with year-over-year change in the bonus accrual, and the remainder is due to, as I talked about, the leveraging of the infrastructure.

Right, but the SG&A, did you not add SG&A from Tier1 in the acquisition? From a dollar perspective, not percentage, it's actually down $100,000.

The modest amount that we've added as a result of the Tier1 acquisition, but there's slightly less bonus in the third quarter relative to the second quarter. The numbers I was referencing were the year-over-year comparisons.

Right, the dollars increased from Tier1 are more than offset by the dollar reduction in the bonus relative to Q2.

Okay, can you give us a sense of what Tier1's SG&A, do you even have those numbers where that is?

Yes, it's quite modest. I don't have an exact number in front of me, but typical with our acquisition strategy is that substantially all the back office function is consolidated, and so there's a fairly modest amount of SG&A that comes with each deal.

I think, Brian, you can assume that it's going to be consistent on a percentage basis with the Company, now certainly from a sales perspective, the G&A being slightly lower, so the combined SG&A amount as a percentage of that $11 million is probably going to be a percent or so below the total Company, as a reasonable estimate.

All right. If I look at the tax rate, it shouldn't be much of a surprise because the same thing happened exactly last year, but every quarter it seems to come down in the first three quarters. The first quarter it's the highest. It comes down and it comes down again in the third quarter. What's the phenomenon that drives that?

So the tax rate is really a function of obviously the statutory rate and there's also the impact of there are some non-deductible stock comp, as well as when people exercise options and sell there's what's called a non-qualifying disposition that the Company gets the benefit of, though. So with a relatively high amount of activity in option exercises in the third quarter, that's essentially what helped drive the rate down sequentially. And we're looking at a comparable rate to the third quarter as we look out to Q4.

From Q3, or the average.

Comparable to Q3.

Thank you. And if I take a look at bill rates, my guess is, it sounds like you've added some acquisitions that had higher bill rates. Give us a sense for when you look to '08, you've broken this out very well before, how much you think of your revenue growth is going to come from bill rate increases. Is it going to be a little bit less than years past?

Yes, I think I'm still optimistic that if we're at 115 now we can still get to 120 if you look at it purely on an organic basis. I think it's something that we can manage to. I think we'll start to see more pressure then.

So I'm not crisp enough in front of me to give you a percentage of our organic growth from bill rate increase, a percent or two I would hope is still achievable, going into next year. And it's something we manage through our incentive compensation plans, both for management as well as our sales folks.

So we have a deal review board structure that oversees that. So I believe there's still some room there. I do think we will begin to see some pressure, but I don't think we're there yet. So, again, I think from 115 to 10 we've still got some runway.

When you look at your -- you mentioned looking at some larger enterprises, given the spending environment. How does pricing change going from the SMBs to the enterprises, if at all.

I think there is less pressure, price. I do think enterprise is less sensitive on a rate basis for the most part. It really depends on the nature of work and how you're selling it, although I think selling solutions as a value proposition versus off of a rate card is something that's more readily done in the enterprise space. It's a little more sophisticated buyer, if you will.

So I think it might give you a little more room there, although most of the SMB that we work with is at the higher end of SMB and tend to be fairly sophisticated buyers, too. I think at the end of the day you probably won't see a huge difference.

Two more questions and I'll get back in the queue. The first is related to -- can you give us a sense of attrition in the quarter versus hires, net hires actually net of attrition, ex acquisitions, of course.

Yes, attrition, voluntary attrition, annualized, continues to run about what we have run all year long, around 18% in the quarter. Our goal is in that 15% to 20% range. Always like to see it a little closer to 15%, and I think Q4 is traditionally a lower voluntary attrition quarter. So I expect that we'll end the year somewhere below that 18% annualized. But that's what it was for the quarter.

Net new hires was actually down a little. We actually netted down probably about 10 folks as a result of that slower organic growth that we talked about. However, also as a result of that uptick that we saw at the end of the quarter, we've already got about 60 committed new hires, 38 of which started in October, the rest starting in November and expect to add to that through this quarter.

Again, there would be some attrition against that. We netted up in October I believe about 18 full-time employees. And we're adding some subcontractors, as well. So down a little for the quarter, Q3, but already starting to grow again and build again in the fourth quarter.

That's really helpful. Last question I have is if you can just give us what CapEx was for the quarter.

Yes, I just have CapEx here. It's 1.3 million for the year. I don't have the quarter number in front of me, and we're expecting it to be a little under two for the full year.

Great. I'll come back into it. Thank you.

Your next question comes from the line of Tim Brown with Roth Capital.

Please proceed.

Yes, good morning, guys.

Good morning.

Just wanted to delve into the organic growth just a little bit more. Maybe you could give us your outlook from the industry. We've heard from a couple of the larger players that they see 2008 IT spending slowing. And what kind of overall industry growth rate are you guys seeing for 2008?

It's funny. I'll comment on that and allow anybody else to jump in, but I wish it were that easy. I mean, I wish I could say it's definitely going to be this. But we look at Forrester, we look at a number of sources. Forrester is saying that it grew 5% in 2007. That sounds a little robust to me. And they're saying 8% for 2008. Gartner on the other hand is saying CIOs should prepare two budgets, all based on the economic conditions, that one budget is yes, 8% growth sounds about right or 5% to 10% growth in spending sounds about right, and the other one actually is a reduction.

So I wish I knew the crisp answer to that. I'd say right now we're seeing things pick up again. I think there was some uncertainty more in the beginning or middle of the year that it seems to have actually improved. I don't think the economy's performed as badly as some people purported that it would more in the beginning of the year.

I do think it's tied to that, though. And if we experience some serious issues with the economy, next year I think we'll see a lesser amount of spending and probably not experience the 8% that Forrester's predicting, possibly even contraction. So we're basically planning to do what we've done this year and sort of roll with the punches, if you will. We maintained 82% utilization through some slower times and we'll do the same thing next year, although we'll be hoping for a strong economy and robust growth in the industry.

Yes, I would say a couple of things on that. One, if you really try to plan your business based on what those analysts say, you're going to wind up in a heap of trouble. I remember when we first got into this eight or nine years ago those guys were talking about projections through the moon for the dot-coms and everybody who followed that siren song wound up going out of business, nine out of 10 of them. So I don't know how much weight I'd really put in their projections.

I think what we can offer in terms of perspective on the market is what we're seeing in our business. And I think that what Jeff and I said earlier is absolutely right, which is that we saw a slowdown. It looks like the worst of it was in the April to August period, and if you look at this business on a revenue-per-day basis, July was better than June and August was better than July and September was better than August and October was better than September, and that improvement is continuing as we move into the fourth quarter. So from a revenue per day standpoint, from a backlog standpoint, from a pipeline standpoint, from a new-sales activity standpoint, from an anecdotal standpoint, in terms of what we're hearing from our salespeople and hearing from clients and hearing from other people in the industries, both peers, companies of around our size and also from the smaller companies that we're looking at acquiring, we're feeling like we're going to see an increase in organic growth. And obviously we're on the line on that in terms of our revenue guidance.

You saw organic growth bottom out at around 4% in the third quarter. The guidance that we put out shows it going to 5% to 10% in Q4, excuse me, and it's still our target to move to 10% to 15% as we go into next year.

Okay, do you think that you see enough acceleration in your business to get that into the double digits by, say, Q1 of next year?

That's a question. I don't know the answer to that yet. I think we'll know more obviously as the quarter progresses. But I will say we feel -- when we were looking at those September and October numbers that that was a key sort of metric for us in terms of whether we saw that uptick or whether we saw that uptick that began in September --whether we saw that sustain into October. And thus far the numbers are looking good on that front.

So I'm not -- again, as Jeff says, absent some kind of massive contraction in the economy, we're not seeing a sub-5% organic growth scenario for next year. My gut is we'll probably -- a pretty good chance of just continuing in the 5% to 10% as the downside case, with the potential of moving it back to 10% to 15%.

And of course that's all well within what we've -- that gets us well within our earnings range of $0.90 to $1 for next year, even absent additional acquisitions, and of course we will be making acquisitions. So I think all in all it's a pretty positive outlook.

Okay, and that's helpful. And just the other area of growth for you has always been acquisitions, and you made your largest acquisition to date. Can we expect acquisitions larger than the $20 million-type acquisition of BoldTech. And also are you going to be looking to acquire more consultancies with offshore expertise?

I would say in terms of the size of the deals, you will see the average deal move up from the $12.5 million to $15 million, where it is today, to probably to a $15 million to $17.5 million, because you're going to see a mix. I mean, we have some deals in the hopper that are as small as $6 million or $7 million and some deals that are as big as $30 million.

So you'll see that average move up a touch, just like it's been moving up over the past few years. And right now the sort of middle-of-the-road game plan is to do another three to four acquisitions next year and add roughly $50 million in revenue. And we may have the opportunity to do more than that. We clearly have the capacity to do more than that, to do $60 million to $70 million in acquired revenue, but we're going to wait and see what's out there. We're not going to rush deals just to get deals done.

In terms of offshore capacity, yes, I think you will see some more there, particularly in the H-1B space. There's more that we want to do. And so I think I would not be surprised to see some additional acquisitions that bring H-1B headcount onboard.

And then the real offshore opportunity for us is to organically grow China, because we have that CMMI level-four certified facility in place there, as Jeff spoke about earlier. And we see opportunities to scale that. Now, we're going to have to see obviously where that goes, right? Obviously we see some potential for it or we wouldn't have done the deal. And we love doing it this way because it's a relatively low-risk scenario, because we basically valued the BoldTech acquisition based on the U.S. operations and picked up the China facility for just a small incremental amount.

So it's a low-risk but potentially high-reward opportunity. We see some great potential for that facility and so there's a great real organic opportunity around scaling offshore headcount. So we'll see where that goes over the next 12 to 24 months.

Okay, and, Jack, just one last question on China. Just on the economics, can you give us what kind of bill rates people there bill out at, and are gross margins there quite a bit higher?

Well, the bill rates are around 30 and, Jeff -- in terms of gross margin?

For China?

Yes.

Yes, in excess of 50%.

Okay, okay, thanks.

Your next question comes from the line of [Dan Mendoza] with Agincourt Capital.

Please proceed.

Hi, most of them had to do with BoldTech. Is that doing a $20 million run rate?

$20 million trailing revenue, slightly higher run rate.

Okay, and what kind of organic growth rate have they been putting up in recent quarters?

I think running -- Jeff, correct me on this -- but running in that 5% to 10% range.

That's right, I think this year and recent quarters. I think they've had a similar growth record to what we've had over the last, say, three years, and then this year a little slower, 5% to 10%.

Okay, and then what percentage of that business runs through China?

Right now on a revenue basis it's I want to say about 15%, 15%, 20% at the high end.

That's right.

So you've got probably roughly half their headcount, a little bit less than half their billable headcount, but about only 15% of revenue. But they've built a great facility there, really just to service their Rocky Mountain business.

And it's like when we look at acquisitions domestically, frankly. When you're a public company and you're managing earnings, it is a much more attractive proposition to buy the platform rather than greenfield it. And then the marginal dollar of growth on that platform is immediately profitable. And really that's the model we've pursued domestically. And to be able to do that offshore makes a ton of sense, particularly where you can do it, as we did here, where you're valuing the acquisition based on the U.S. operations, it's a relatively small incremental cost. So you've got a lot of upside there. You've got the marginal dollar of growth being profitable and very little downside.

And to Jack's point on that, as we looked at their financials and they've scaled this and increased their utilization, their profitability has really been moving in the right direction and as we scaled that further that's just further opportunity for us.

Okay, and if that gets to be a big enough piece of your business, does that make the kind of bill rate comparisons become less relevant going forward? I mean, I guess it's a tiny piece of the business now.

Yes, but it's a good question, and it could, and so one thing we're looking at is just publishing two rates, our onshore rate and our offshore rate, and that's something that we will probably start doing here in the next couple of quarters.

That makes sense. Thanks.

Thank you.

Your next question comes from the line of [Deban Katari] with JMP Securities.

Please proceed.

I had a quick question on organic growth, and it's a topic I think you've already addressed. But as you look out to Q4 and even your next fiscal year, do you think your growth comes primarily from headcount addition or if there's an opportunity for pricing increase, and if you could just generally talk about the pricing environment out there?

Yes, I think that Jeff addressed this a little bit earlier. If you look at our model historically -- now this is just a rough measure, roughly 25% of our growth comes from bill rate increase and 75% from headcount addition, and that's based on the organic side of the business. Obviously you can muddy the water with acquisitions.

And, as Jeff indicated, we're at about 115 now and we see I think a fairly clear path over the next kind of four to six quarters to 120, and then you probably start to plateau a little bit in that range, for a while anyway. But we do see some upside there.

So if you're looking out at 2008, those rough measures should hold about 25, 75.

Okay, great, thank you.

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Your next question is a follow-up from the line of John Maietta. Please proceed.

Thanks very much. Jack, could you comment on the level of competition you're seeing with regard to the M&A pipeline? Are there more folks looking at the same company, less, or is it kind of about the same?

I'd say about the same. We have not really seen a lot of competition for deals. There's really -- there aren't a lot of strategic buyers that are going after these sub-$25 million acquisitions. There have not been a lot of financial players in this market, really none to speak to my knowledge right now that are active.

And so not a lot of consume there. I would say that just drilling further on that, valuations really have been plateaued, I would say, for probably 12 to 18 months at around the middle of our valuation range, roughly six times EBITDA, give or take. And so that's a positive.

And if anything, I think a little bit of a slowdown in the market is a good thing in terms of putting reality into the minds of folks that have businesses, and probably makes them more apt to look favorably at an acquisition and see the benefits of being part of a larger organization with more established client relationships, stronger partnerships and a bigger sales channel. So all in all I think it's a more positive environment on the M&A front probably than -- marginally more positive than it's been over the past 12 to 18 months.

Got it. Thanks.

Your next question is a follow-up from the line of Brian Kinstlinger. Please proceed.

Yes, hi, just a few more questions. The first one, assuming revenue in the fourth quarter and this is a hypothetical, hits below your expectations, and you have this bonus accrual obviously that goes down, what would we see happen to SG&A? Would we see in that insurance policy you talked about, a bigger dip in the fourth quarter to reverse bonus accruals if that target's not hit? I'm just trying to understand what might happen in the fourth quarter if the last month and a half go all wrong in the economy.

Yes, that's right. You would see reversal in that bonus accrual.

Okay, and further questions. First of all, can you remind me what other product-related expenses are? I don't know why I don't remember, but I clearly don't and it's a small piece of the expense line, but I'm just trying to understand it.

Yes, in certain projects, our expenses are built into the rates. It just depends on the client. That's probably the biggest piece of it.

Okay, and then the other question is, when you say you had a 4% organic growth rate on the trailing four quarters, was there actual organic growth in the third quarter compared to the third quarter last year, if I just looked at that quarter?

You mean on a year-over-year basis?

On a year-over-year basis, not a trailing fourth quarter, just the September quarter alone.

Yes, I think it was actually a little bit higher.

A little over 4%. Close to the same, but I think it's --

I think you're talking 3.8 versus 4.1 or something like that.

So remind me. So June must have been a little bit lower in order for your average to come up to 4%. Is that right?

Well, that's right. I mean, that's what we talk about in terms of a comparison with [steamy] '06, right? I mean, if you looked at Q2 of '06, just for example, I think we had 10% sequential growth. And we said at the time those kind of numbers are not sustainable. So that's part of what you're seeing.

And so you've got the project that we took a hit on, that's being replaced. We're seeing some general uptick in the market and we're moving into a less strenuous comparison and all of those factors are driving an increase in the reported organic growth rate, which, again, after bottoming at sort of 4% should move to 5% to 10% in Q4 and we look to the target is to take it to 10% to 15% next year.

All right, thank you for the clarification.

Sure.

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

Please proceed.

Yes, hey, guys.

Hey, Colin.

Jack, can you talk a little bit about the pricing landscape and also what level of discount do you view Perficient prices and services against the majors, like the Accentures out there?

So the pricing landscape, generally positive, and I think you've seen that over the past couple of years as our gross margins on services over the last 24 months, ex stock comp, have increased from around 35% to 39%, so really in line with what we had anticipated, where you saw sort of a 7% or so increase -- again, this is looking back over the last couple of years, 7% increase annual in bill rate against maybe 4%, 5.5% labor cost increase. So that's a virtuous spread and continues to drive higher gross margins for us.

Part of that is due to the fact that we've got a 30%-plus discount relative to those big guys. That's not the number one basis on which we compete. Price is not the number one basis. It's depth of expertise around these e-business integration solutions, and referenceability and vendor endorsement. But that definitely helps.

Fantastic. And then just looking at lower-cost solutions. You're definitely giving some indications about expanding into China. Are you seeing more demand for low-cost solutions, both the H-1B and the offshore facilities.

It's interesting. I'll give you my two seconds on it and then let Jeff address it. But right now we see an opportunity. And this is what we've been working on for the last few years, right? This is the plan that started three years ago. How do we figure out a way not to ape what the offshore guys are doing, because that would not be a winning business strategy, but to crack the code on feathering into a high-customer touch, highly iterative, project-based integration consulting model, how to feather in some offshore capabilities.

And for us it's been this mix of H-1B, the stuff that we grew organically in Eastern Europe, which is now up to I think 50 people billing and I think 70 total headcount, so about 20 in training there.

And we see an opportunity to increase that in China. Now, if it's done just in support of the existing projects we do today, then I think that 25%'s a good level of headcount. Maybe it grows a little bit. But there may be an opportunity to go after some adjacent areas that we're not attacking today. And I'll let Jeff talk more about that, but that could potentially allow us to more significantly scale the offshore headcount. Jeff?

Yes, I think as we've moved upscale over the last, say, 12 to 24 months, we are seeing more of an opportunity, if not a demand or requirement in some cases for offshore capability. And of course we've had the Macedonia facility. We've scaled it from about eight folks to 50 over the last two or three years to help supply that demand. As I mentioned before, as our strategy shifts to more enterprise accounts and we're competing more and more with the big guys, including the domestic players that have locked in offshore capabilities, it's more of a factor.

I think it's more of an opportunity. We compete with those guys right now without leveraging a lot of offshore capability in a variety of ways, and I think that really speaks frankly to our depth in the areas that we focus in. We're very focused and, honestly, they don't have that kind of depth so they're a little more reliant on that, and they've got a larger team, so they've got to bring their pricing down somehow, so they're more reliant on the offshore.

But as we engage in larger and larger deals and we've got a number of eight-figure relationships ongoing right now, it does become more of a factor, so I think it's good from a competitive-capability standpoint as we move up the food chain.

And then just going back into history, if we do actually have an environment where budgets are contracting as opposed to expanding, is there that same type of cost rationalization workout that PRFT made its name on in the early days.

Yes, I think there is. We do a lot of -- and, actually, if you look at what a lot of firms have gone through this year, I still think we've fared better than most, and I think that the reason for it is exactly what you said. We've got a lot of the fundamental improvement work that we do around IT infrastructure in particular is beneficial. It has ROI, so there's more of an appetite for that I think even during a slower time than there is perhaps for some other endeavors.

Also, the custom-application development. The work that we do in that space is typically mission-critical applications, a lot of it around customer intimacy. And even in tough times, there aren't too many businesses that won't spend money to improve their relationships with their customers. That whole customer-service area of our business from the CRM applications around Siebel to that custom work we do with portals, as well as the business intelligence and giving people the 360-degree view of the customer is something that still sees demand, I think, even during tougher times.

Are we impervious to the economy or completely operating in a microcosm? Clearly we're not, but I do think we'll fare better than others, still.

And you did build the business in a tough environment, right?

Exactly, and, Colin, I know you know this, but just to make the point, Perficient -- first of all, we see a strengthening environment right now relative to the dip we took in Q3. And obviously the further out you move into the future, the less you know. But we see a strengthening environment right now and the kind of customer set that we serve are those Global 2000 customers for the most part that are the ones that are serving global demand that should continue to grow and have a need for services even if there were a tapering of domestic growth.

But to your point more directly, I mean, we made a lot of hay when times were extremely tough in our industry. And our industry, in IT services, didn't go through a recession in the early 2000s. I mean, the economy had a recession, but tech and tech services had an outright depression, and that was knocking nine out of 10 of our competitors out of business. We went into that depression as a $10 million company, came out of it at $50 million, doubled to $100 million, then $200 million, $250 million.

So we not only know how to survive in a tough environment, but we know how to thrive in a tough environment. This is a company that we started eight years ago, whatever, eight people. We're raised a total of $16 million in our entire history of outside equity. So this is not a fat venture or private equity-funded deal. It's a bootstrapped, entrepreneurial deal. It's the way we run the organization. We keep our costs low. We don't hire to the bench.

Witness the great job Jeff and the team did in managing utilization, even in a slower quarter here in Q3. And there will be opportunities presented, as well, if you have a slowdown on the M&A front, for example, and it's cost management both internally for us, and then obviously cost rationalization projects for our customers.

So we know how to thrive in a tough environment, but, again, I would emphasize that what we're seeing right now, what we saw towards the end of Q3, what we see going into Q4 is a pickup in growth relative to the dip we had in Q3?

Got it. And then just, Jack, along those lines, any thoughts about entering into the SAP market and also is there any need to jigger with the sales force at all?

In terms of the SAP market, we are doing some SAP work that we have either grown organically or picked up as smaller parts of some of the acquisitions that we've done. And so we may look at doing a little bit more there organically. We looked at a lot of SAP shops. Most of them that we were looking at were more staffing oriented and so not as interesting to us.

A tremendous amount of opportunity that we're seeing around Oracle, and particularly Oracle Analytics and the Siebel piece, and I wouldn't be surprised to see more acquisitions in that area. And, again, this ongoing consolidation in the industry, whether it's the work, the tremendous acquisitions that IBM has been making or what Oracle's doing, that's all a real bullish sign for Perficient, because once you're under the tent with these larger players -- and our whole interest, for example, ultimately in the middleware area, you're seeing more of that consolidation take place in that area, and that's just going to help Perficient, that and the whole trend toward [Sowa], which continues to grow in the market. And that's an area where pound for pound we've got more Sowa expertise under the hood than just about anybody else out there. So those are all very long-term, bullish signs for the business.

Great, and then just finally, do we have a breakdown by solutions and by verticals.

Yes.

I'm sorry, did you want industries or platforms?

Platforms, both, yes.

So from a platform perspective, IBM is about 36, TIBCO, 15, Microsoft, 12, Oracle, 14, are the big ones.

What was Oracle?

14.

And Documentum?

About seven. And from an industry perspective, computer software is our largest at 17, healthcare down a little bit but still 12. Energy's picked up at nine and financial services is about 12.

Okay, got it. And this is just for the September quarter, or is that year-to-date?

That's Q3.

Just Q3, correct.

And so, again, extremely diversified by vertical, no direct exposure to any subprime, any mortgage origination or mortgage processing at prime or subprime, and I think less than 1% exposure to any auto or auto supply chain. So very diversified and no direct exposure to any of the trouble areas of the economy.

Finally, just one last one, do we see subcontractor use pick up in October? I mean, we talk about revenue per day accelerating, did that show in increased subcontractor use?

Yes, we added some -- go ahead, Paul.

Yes, we did add some subcontractors along with the headcount Jeff had referenced in October.

Okay, great, thank you.

Thank you.

At this time, there are no further questions in queue.

Okay, thank you very much for your time this morning, and we look forward to getting back together with you after next quarter. Thank you.

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