Perficient Inc (PRFT) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the fourth quarter and full-year 2007 Perficient earnings conference call. My name is Stacy and I will be your moderator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of the conference. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded for replay purposes. I would now like the turn the presentation over to your host for today, Mr. Jack McDonald, Chairman and CEO. Please proceed, sir.

Thank you. With me on the phone today are Jeff Davis, our President and COO and Paul Martin our CFO. I would like to thank everyone for their time this morning. As is typical, we will have about 15 minutes of prepared comments, after which we will open the call for questions. Paul, can you read the Safe Harbor Statement please.

Sure, 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. 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 principals, or GAAP. This is posted on our website at www.perficient.com under News and Events. We have also posted reconciliation of certain non-GAAP goals to the most directly comparable financial measures prepared in accordance GAAP at our website at www.perficient.com under Investor Relations. Jack?

Thanks. So I want to cover a few things up front on today's call.

Obviously, we are going to review our Q4 and full-year 2000 results. And as you saw from this morning's press release, had we had a great fourth quarter, we had record revenues, record cash flow, record earnings and a great 2007. So more on Q4 and the full-year 2007 results in just a few minutes. But second, I want to discuss what we are seeing right now in the first quarter.

I mean, it should be no surprise to anyone who's listening this morning that there has been a slow down in U.S. economic growth. And there's obviously some concern among investors about the economy and its impact on our business. I would say in a sense, it seems like there's an assumption that the world is coming to an end for our business, which is clearly not the case.

The headline for us is, in terms of the first quarter, is that January was soft, and that softness is reflected in the Q1 revenue guidance in today's earnings release which shows services revenues in the first quarter, at least based on our current revenue guidance, will be up 17% to 23% on a year-over-year basis. So up 17% to 23% on a year-over-year basis, but down a touch sequentially from about $57.5 million to about $56.5 million in the fourth quarter 2007 first quarter. So a touchdown sequentially, even after adding in our latest acquisition. So that shows a few points of negative growth on the organic side, and is obviously weaker than we would like to see, but that said, since January, we have seen steady strengthening in our business as measured by revenue per day, sales close, sales activity, pipeline and other key metrics. So -- and this is a very key point, after a dip in January, revenue per day is now back up to Q4 levels. So, if revenues per day continue with the levels that we are currently achieving, no improvement, but just where we are currently achieving, we could see a very healthy snap back in the business, both in revenue growth and earnings in the second quarter. As always, no guarantees, but that is -- those are the facts as we are seeing them right now.

At the same time, as a result of the softer January and given the economic environment, we have boosted sales activity. We have right sized our consulting head count which we always do. We never carry a bench of any material size, we are always right sizing to market demand. And we have trimmed non-essential costs in order to boost our revenue, optimize our utilization and gross margin levels, and ultimately enhance cash flow and profitability. And Jeff Davis is going to speak more about these efforts a little bit later in the call. So again, although there are no guarantees, the sales and revenue trends we are currently seeing and the actions that we have already taken on the cost side give us optimism as we look forward to the second quarter and the rest of 2008.

Now, notwithstanding the positive trends we are seeing on a month-by-month basis, we are going to reduce our earnings targets for 2008 and we are doing for this two reasons, one is the impact of that soft January on the Q1 results, and the second is any potential impact of the economic slow down on the year as a whole. So really, just want to reset expectations to a conservative level here. In terms of actual numbers that means the following: we had previously discussed a goal of $0.90 to a dollar and the fact we were seeing about 10% down side risk to that from the recession and -- or any economic slow down. So we had previously discussed that. And that means roughly $0.80 to $0.90. However, in order to be extra conservative, we are going to set a cash EPS target range of $0.75 to $0.80 -- $0.75 to $0.80 for the year. Now, as we will discuss more in a few minutes, and as I have already alluded to, if the current trends that we are seeing in the business such as current revenue per day continue, we may well beat that range, but that said, given the current economic environment, we think it makes sense to be conservative. So resetting that range, that goal to $0.75 to $0.80 for the year, which we think is conservative, again as always, no guarantees, we will continue to monitor that and update you as we have any kind of material updates consistent with our disclosure policy.

Last thing I wanted to cover here before getting into the numbers are acquisitions. We continue to have a strong M&A pipeline and we continue to have a healthy cash flow, and currently have, after paying down the last acquisition -- after paying down that acquisition, we have $8 million in cash and zero borrowed under our $50 million credit facility. So, balance sheet is stronger than it has ever been. And this is a great time for a strong company like ours and with a solid business and with access to capital to take advantage of market weakness. And we have a proven track record of doing that if you look at what we did going into the downturn post Y2K and the dot com crash, which by the way, was a hell of a lot more severe than anything we are seeing now. But as always, we are going to be smart and we are going be patient and we are going to wait to execute deals at our price. And this is particularly true with our stock price at these levels. That may mean no deals for a quarter or two, we'll see. But as always, we are only going to do deals that are immediately accretive from a cash EPS standpoint, and also, deals that is hit our IRR targets. I would also note at these levels, at some point, it may make more sense to consider buying in our own shares instead of doing acquisitions. We have discussed this many times before. We have always compared where we can buy cash flow cheaper, in the private market, essentially through acquisitions, or by repurchasing our own stock. And historically it has always been cheaper in the private market, but currently that's not the case. I would note that, even if you assume just $0.80 cash EPS for 2008, this company is currently trading at about a five times EBITDA multiple, excluding stock comp. Now that's what we pay, or even less than what we have been paying, for small $10 million to $15 million private companies with no scale, no infrastructure, little geographic vendor vertical or customer diversification. So, I personally doubt this inversion will last very long, but if it does you may see us take advantage on it.

So, just to be clear, we have made no decisions on a buyback, but it is one option that we are going to consider when we decide how and where to invest our operating cash flow. I think also it is important to remember that Perficient is a company that knows how to thrive in a variety of economic environments including tough ones. We have got a strong core franchise, 600 plus blue chip client base. And this is a stable business with good visibility. This is not an end of quarter Hail Mary pass software license business. We have, as I just noted delivered record Q4 results, and you can just see press releases in the last 30 days named the top U.S. partner by both IBM and EMC, top software partners, software solutions partners in the U.S.. We still have got healthy cash flow, we have zero debt, balance sheets stronger than it's ever been, $8 million in cash and $50 million of borrowing capacity under our earnings lines. We have got a highly flexible business model. We've built this model with low fixed costs, 50% subcontractors which are an automatic shock absorber whenever you have a downturn. We have got the offshore labor now which is less effective -- less expensive and will help us grow our margins.

We have got a low base, high incentive comp structure which aligns our interest with shareholders and again, is another shock absorber if you ever have slow downs in the business. We are still addressing a $20 billion-plus market and serving a niche that is large and growing and in the early stages of a long-term secular growth opportunity, but that is underserved. Because so many would-be competitors went out of business during the crash. So very healthy business, a strong cash flow, strong balance sheet, large market opportunity and a very attractive competitive environment.

And then finally, I would stress that this is not a fly by night management team. We didn't arrive here six months or 12 months ago. I have been with Perficient nearly a decade, joined the company back in '99 when we had eight employees and Jeff Davis has been here for almost as long. And really, as a team we have built this business, literally from a start up with eight people and no revenues to 1,400 people and $250 million revenue run rate today. I would note we did that on a -- on a the total invested equity on a net basis of less than $10 million. So, this was not a fat venture or private equity funded firm. We built this as a boot-strapped entrepreneurial business, that's in our culture, that's in our DNA. That's the kind of attitude and ability that is going to see us through any kind of slow down and again, we are seeing a dip here. We are not seeing anything like what you saw a few years ago.

So with that, I am going to turn to a -- just a quick summary of Q4 and 2007 before I turn the call over to Paul for a little bit more detail and then to Jeff. So, if you look at Q4, it was a strong close to a very solid year, a year that saw us complete four acquisitions and expand in India and China. We are talking about services revenues for both Q4 and for 2007 which were up close to 40%. GAAP and cash EPS both up approximately 50%. Again, both for the quarter and the year. Net income up more than 60% for the quarter and 70% for the year. We have had record quarterly and annual cash flows, again for the fourth quarter, about a $45 million annualized run rate ex-stock compensation, so substantial cash flows. And again, if you look at $45 million annualized run rate against $240 million, $230 million, $240 million market cap you can see that very low multiple we are trading at, given our market opportunity and potential growth. And again, if you look at the year, we had substantial improvements on gross margin, both for the quarter and for the year. On a non-GAAP EPS, a cash EPS basis, we exceeded analysts estimates in the fourth quarter, so -- beat estimates by a penny, set another record, achieved $0.22 rounded for the quarter and $0.78 rounded for the year. It was the 19th consecutive quarter of revenue growth. 23rd consecutive quarter of positive EBITDA.

As I mentioned earlier, that strong cash flow generation allowed us to fully fund any year-end expenses, fully fund the cash portion of the ePair's acquisition that we did in the fourth quarter and still exit the quarter we are no debt and $8 million in cash. So at this point I am going to turn the call over to Paul Martin, our CFO to walk through those results in more detail. Paul?

Thanks, Jack. Total revenue for the fourth quarter of 2007 was $62.4 million, a 26% increase over the year ago quarter. Services revenue, excluding reimbursed expenses were $53.8 million with organic growth of approximately 10% on a trailing four quarters average annualized basis including businesses owned at least two quarters. Gross margin for services excluding stock comp and reimbursed expenses for the fourth quarter was 39.2%, which is up from 37.1% in the fourth quarter of 2006. SG&A expense was $11.9 million in the fourth quarter, including $1.3 million of non-cash stock compensation expense. Excluding non-cash stock compensation, SG&A expense was $10.6 million, which represents 17% of revenues compared to SG&A expense of $8.2 million, or 16.6% of revenues in the comparable 2006-quarter.

The increase in SG&A excluding stock comp as a percentage of revenues is driven primarily by higher bad debt costs associated with an isolated issue related to an IT procurement manager we were required to use by several global 2000 accounts. EBITDA increased 44% over the year ago quarter to $9.5 million which includes absorbing $0.8 million more of non-cash stock compensation expense in fourth quarter of 2007 compared to the fourth quarter of 2006. EBITDA, excluding stock compensation, was $11.2 million, up 49% over the comparable prior year quarter. EBITDA margins, excluding stock compensation, improved 2.8 margin points over the comparable prior year period to 17.9%. The fourth quarter annualized EBITDA run rate, excluding stock compensation, is approximately $45 million. This is our 23rd consecutive quarter of positive EBITDA.

Net income for the quarter increased 63% over the year ago quarter to $4.5 million which includes absorbing $0.8 million more of non-cash stock compensation expense in the fourth quarter of 2007 compared to the fourth quarter of 2006. Diluted GAAP earnings per share was up 50% over the year ago quarter to $0.15. Non-GAAP earnings per share was up 47% over the year ago quarter to $0.22. Non-GAAP EPS is defined as GAAP earnings per share plus non-cash amortization expense and non-cash stock compensation net of related taxes divided by average fully diluted shares outstanding for the period.

Our average billable head count, excluding ePair's which was acquired in late November for the fourth quarter of 2007 was 1,176 including 158 subcontractors. We ended the fourth quarter with approximately 1,260 billable consultants, including 50 billable consultants acquired as a result of ePair's acquisition in November, and 185 active subcontractors. In addition to the billable head count, we currently have 167 SG&A personnel which results in total colleague head count of 1,427 as of December 31, 2007. Turning to the full-year results, revenue for the full year ended December 31, 2007 was $218.1 million, a 36% increase over the prior year. Services revenue for the year ended December 31, 2007 were $191.4 million compared to $137.7 million for 2006, an increase of 39%. 2007 gross margin for services, excluding reimbursed expenses in stock compensation was 39.1%, an increase of 100 basis -- 100 basis points over 2006. SG&A expenses were $42 million for the year ended December 31, 2007, including $4.7 million of non-cash stock compensation expense. Excluding the non-cash stock compensation expense, SG&A expense was $37.3 million, which represents 17.1% of revenues, 160 basis point decrease from the comparable prior year period, primarily the result of lower bonus tied to the increasingly challenging goals in 2007 and lower cost as a percentage of revenue across other SG&A categories as the company leverages its infrastructure to deliver economies of scale. This was partially offset by a 30 basis point increase in bad debts, primarily associated with the fourth quarter bad debt charge previously described. EBITDA for the year ended December 31, 2007 increased 57% over 2006 to $33.7 million which includes $6.1 million of non-cash stock compensation expense in 2007. Without the effect of stock compensation, EBITDA increased 62%.

For the year ended December 31, 2007, net income was $16.2 million, fully diluted earnings per share increased 54% over 2006 to $0.54 a share. Non-GAAP diluted earnings per share was $0.78. A non-GAAP measure defined as GAAP earnings per share, but excluding amortization of intangible assets and stock compensation and the related tax effects at an increased 50% compared to $0.52 in the comparable prior year period. As Jack mentioned, we continued to generate strong operating cash flow that we are using to fund both internal growth and growth from acquisitions. The company has full access to its $50 million unused credit facility as of December 31, 2007 and our cash balance as of December 31 was $8.1 million. The company generated $23 million of cash flow from operating activities in 2007, which is a 76% increase over 2006.

Our day sales -- day sales outstanding on accounts receivable were 73 days in the fourth quarter compared to 76 days at the end of the third quarter. As we have discussed many times, our goal is to maintain DSOs between 70 and 75 days over time. We will continue our efforts in 2007 to maintain this metric within our stated range. With that, I will now turn the call over to Jeff Davis for a little more commentary behind these metrics. Jeff?

Thanks, Paul. I've just got a few comments to make before I -- I've got a couple of brief comments to make really about the fourth quarter. I'm going to focus most of my attention, as Jack did, really on what we are seeing right now and the remainer of the first quarter and beyond.

So, as previously has been discussed already, we've had a strong fourth quarter, we are pleased with the results for the fourth quarter. We continue to close multiphase, multimillion dollar engagements. In fact, 30% of our new sales averaged about $1.2 million in individual deal size, which is up from $950,000 in the third quarter. That's a record high for Perficient. So with that, I am going to move on really to what we are seeing right now, and as I mentioned, the balance of the first quarter and beyond.

So, we are still closing a number of multimillion dollar deals and have an active healthy pipeline so far in the year. We have had some large projects wrap up in the December/January time frame, which is really through normal completion, no big surprises there, but they were large. We are back -- backfilling those fairly well, but not as rapidly as we would like. The deals are there, but sales cycles do appear to be little extended over the year ago quarter. However, year-to-date we have closed more than $36 million in new deals, which is at a pace ahead of revenue, meaning that we are selling a higher dollar volume in new projects per day than we are billing per day on existing projects, implying, obviously, an upwardly sloping revenue line in growth. So, we are hoping that trend continues, but time will tell.

We anticipate right now that it will as Jack mentioned earlier. Year-to-date we have added 30 new clients with initial contracts that total more than $3 million in contract value and represent a potential total value of more than $15 million over the next 12 to 24 months, and again, that implies we are landing new client relationships at a fast pace, and really a faster pace than we normally do. So that's another reason to be encouraged.

Current Q1 services backlog is at 92%. This is signed committed contracts, 92% of the fourth quarter total services revenue, and total Q1 forecast right now is at 97% of the fourth quarter total services revenue. I think there's some potential upside to that, possibly to get even beyond those numbers. In terms of momentum, January is always seasonally slow month. And as we have commented several times, and Jack pointed out, was really softer than usual this year, so we are really working from a lower base than we would like for the first quarter. Again, it is typically down from flat, or down with December, which is always a down month, and we usually see a little -- a little faster pace of pick up for January than we saw this year. However, we did begin to see that pick up in February and actually on into March, and as I mentioned before, if these trends continue, we are relatively encouraged beyond the first quarter. We're looking at about a 5% to 6% in total pick in February/March over the January month. So again, I think a solid -- good sign there.

As I mentioned to you, there's no guarantees, but if that continues, we should see a solid sequential up tick in revenue, and probably even more meaningful increase in profitability from Q1 to Q2. So as we progress through to 2008, January could prove to be just an anomaly, but in light of the macro economic picture, as Jack mentioned, we are modeling a more conservative approach and taking a more conservative view of the outlook. Either way, as Jack also mentioned, we will continue to manage the in business as we have, and react quickly to right size and make sure supply and demand are in sync. Our fiscal discipline, focus on bottom line as what is always health proficient post metrics that among best in its class, and we see no change to that. We are taking several steps right now, in fact, including continuing to maintain what we began six months ago, focusing specifically on large enterprise, sort of global 2000 accounts, firms we believe have less sensitive to the U.S. specific economic concerns and offer better promise for us in terms of growth for the year.

Also, we are managing head count to insure that utilization remains near or within our targeted goals, and we're doing that through allowing actually, natural attrition to sort of overtake hiring. So we are stepping down our head count slightly, but we're doing that primarily through allowing attrition to overtake the hiring for the time being. We anticipate that will flip back again here in the second quarter, assuming that the trends hold. We are also stepping up marketing campaigns and increasing our inside sales support of those campaigns and others, actually by leveraging our recruiting team. These are folks that are accustomed to doing cold calls and sales at some level, and we feel like they are going to do a good job for us from an inside sales standpoint, so we're leveraging in to follow in behind those campaigns and help generate new leads.

So to summarize, while we are seeing some flatness and softness early in the year, it is really nothing catastrophic as Jack mentioned, and based on the recent trends we are seeing, I am still optimistic that we'll enjoy decent growth this year. In fact, our MBO targets are still set at better than 10% organic growth for the year, which would actually top last year. Whether we achieve that or not remains to be seen, but that's what we are shooting for. With that, I will turn it back to Jack.

Thanks. So, just looking at the outlook now for Q1, again, we have talked about it, but just to go through the actual numbers one more time. The following statements are based on current expectations, these statements are forward-looking, and actual results, obviously, may differ materially. We expect first quarter 2008 services and software revenue, including reimbursed expenses, to be in the range of $54.8 million to $58.9 million, so roughly $55 million to $59 million, comprised of approximately $54 million to $56.5 million of revenues from services included reimbursed expenses, and then $1 million to $2.5 million of revenue from the sale of software. And that guidance range of services revenue would represent services revenue growth, including reimbursed expenses, of between 17% and 23% on a quarter-over-quarter basis, in other words, over the first quarter of 2007. So with that, I would like to now open the call up for questions.

(OPERATOR INSTRUCTIONS). Please be patient while we assemble the list. Your first question comes from the line of Colin Gillis. Please proceed.

Morning.

Good morning.

Hey, can you just talk a little bit about the utilization that you saw in the January -- in the month of January, and are you already starting to scale back the use of some of subcontractors, sort of putting some of the shock adsorbers in place?

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

Sure. From a employee-only perspective on utilization for January, it was really in the, I am going to say the around 70% mark, maybe in the high 60s. We ended the year, the fourth quarter, I think Paul mentioned, at about 158 subcontractors on average. So we talk about having active subcontractors and sometimes it can be a little confusing. We said we ended the year with 158 active subcontractors. Those are are subcontractors that we have sort of on our books that we can use, or choose to use or not. Many of those are part time. So the average number for the fourth quarter was 158. The average number that we are looking at right now coming out of February is about 120 to 125.

So to answer your question, yes, we have scaled back the use of subcontractors in addition to this other measures that I mentioned earlier. So, about 70% roughly in January we are seeing that up tick and expect that the utilization will be back into the low 80s for employees only in March.

Got it. And you made some comment about the size of the projects that you are seeing in the marketplace. Are they getting broken up into smaller pieces?

We are not really seeing that, to be honest with you. We have seen interestingly, at least initially so far this year, that the opposite is true. And that might just be that, that, an anomaly based on some large deals closing that we have been working on for a while coming into the year, but right now we are not seeing the the smaller deals pick up. We are actually seeing some larger deals close.

Is there any color you can give us to the impact from a slower economy in the March quarter versus having major contracts that are winding down?

Yes, it is hard to separate the two, honestly. If we had -- I do think that we would likely have been able to replace that revenue. Large contracts always end. We did happen to have two coincide here at the end of the fourth quarter coming into the first quarter and another major one slow down. The reason for those had nothing to do with the economy. I do think our ability to replace that revenue is likely due to the economy, although it is virtually impossible, I think, to draw a solid black line there, but I think as we said before, we don't have sort of a magic shield that protects us from the overall slow down. So I am going to attribute some of that, although as we said, there's no cliff here that we see and there's no catastrophe. And in fact right now, we seem to be replacing that at pretty descent pace and seeing a pick up at the moment.

Great. Thank you.

Sure.

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

Hi, good morning. Just a couple of questions. I was wondering first if you can give us a little bit of color on maybe the areas of practices and the verticals where you are seeing strength and weakness.

Sure. It is not really -- if you look alt our business it is a very diversified business, I think tech has been running -- if you look over the last few quarters, it may be 15% of revenues, financial services and health care running at about 12%, energy just shy of 10% and then it really sort of drops off after that -- after that. And there hasn't been a pronounced enough sort of slow down to say gee, we are getting hit in just one area or another. We've had a little slowness, I would say geographically in the center of the country but as Jeff indicated, some of this just comes from some large projects where we had roll offs. We are back filling well. And frankly, in a stronger economic environment we probably would have back filled quicker than has been the case, but we have seen now, if you look at the revenues that we are just currently experiencing, revenue per day in March is up substantially from where January was.

So if these current trends continue, I think you are going to see a very healthy snap back in the business in the second quarter from the revenue and an earnings perspective. But that said, given the current economic environment, we just what to be conservative in terms of outlook.

And Jack, in terms of the practice areas, are you seeing any weakness in any of those?

Not really. I mean there's not enough of a -- there's no sort of specific area where there was any kind of substantial weakness that warrants discussion. I think just a little bit of dampening of demand combined with us back filling some -- some normal project completions, and that is really, more of what it was about and the results again, the bounce back that we have seen since January would really seem to bear that out.

Okay. And then, you mentioned you had closed $36 million of new deals year-to-date. Do you have the comparison, maybe how much did you close in Q4? What is a typical quarter? Just look for some context there.

Yes. Let's see, Paul do you have the, the Q4 total close numbers? It is going to be skewed slightly, Tim, due to the acquisitions in the Q1 numbers that I'm talking about. I look more at the sort of granular analysis inside that to try to pick up the trends because that includes the acquisitions we did in the fourth quarter, where the fourth quarter numbers aren't going include those. It is certainly healthy in the fourth quarter. Fourth quarter, by the way, is always a typically slow sales quarter. So, any given quarter of the year is healthier, but this is at a pace that we hadn't seen before in the first quarter, so we are encouraged by it. It is going to be difficult for us to give you sort of an apples to apples comparison to -- to Q4.

Okay.

Paul, do you happen to have the total sales numbers for Q4?

I don't have it really broken out that way unfortunately.

Okay.

Tim, we will follow up with you on that number.

Okay. And then just a last question, when you guys look at pipeline, can you tell us how you look at pipeline and if you can quantify where you see the pipeline now versus, even just three or six months ago?

Yes, the total pipeline right now is as -- again as healthy, healthier probably than we saw it three or six months ago. The total pipeline right now looks very good. It is a matter of the sales cycles and how quickly we can close that work. I think the work is there. It is a matter of how quickly we can close it. Our gross pipeline right now is $110 million worth of deals. And that's the largest it has ever been, even excluding acquisitions, it's larger than it was six months ago. Again, the issue is how quickly do the deals close. I believe they will.

I have talked to a number of CIOs, just talking to people in the industry anecdotally. I can tell you that what I'm hearing is, that there is cautiousness. The budgets are there. They're prepared to spend. Many of them are, we are closing deals, but some are taking more pause to sort of see how things unfold, and whether or not they want to pull some of that budget back. Again, we are not seeing that come through in a very meaningful way other than what I mentioned earlier that sales cycles are somewhat extended over the year ago quarter, by perhaps a week or two on a typical eight week sales cycle.

So, in terms of the pipeline again, gross pipeline right now, $110 million, and certainly as healthy, I would say healthier than six months ago. By the way, in the fourth quarter we closed about $46 million total new business in the fourth quarter.

Okay. That helps.

That does include -- that would include the BoldTech acquisition, but not the ePairs acquisition, which is about -- would be about $1.5 on top of that would be the run rate.

As compared to $37 million really just through first seven weeks -- seven and a half weeks of Q1.

Okay. Thanks for taking my questions.

Thank you.

Your next question comes from the line of Jon Maietta with Needham and Company. Please proceed.

Hey, thanks very much. With the snap back that you have seen in the business today, is it flat -- kind of flat year-over-year growth or are you actually -- are we actually seeing organic growth year-over-year?

If you look at the guidance range for Q1, it would imply neg -- year-over-year growth in services revenue of between 17% and 23%. Organic growth as we calculate it, which is four quarter trailing sequential would be in the negative 4% range, negative 4% to negative 5% range.

Okay. And then, just in terms of price adjustment, I know now is probably not the time to try to raise prices with existing clients, but with new business, do you have more pricing power today versus, six months ago, a year ago?

Oh yes, absolutely. You know, the deals that we are replacing for those deals that I mentioned those project that is have wound down are at higher rates. We are not seeing, again, this is -- we are seeing that we're seeing some softness, there is a change. But it is -- it is relatively subtle. I mean, it is there and we are talking about it, but it is not at a point where, gosh we are dropping prices and things are so competitive for the deals that are out there that there is price pressure. We're not seeing that. And in fact, like I said, the revenue we are replacing right now is at higher prices, higher rates than we had with those that went away.

Got it. Okay. And then, just last question, Paul, with regard to the EPS range, does that imply similar tax rates to '07 or what's kind of inputs or tax rate there?

Yes, it will be -- yes, it is similar rates to what we saw from full-year 2007.

Okay. Okay. Thanks very much.

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

Hi, good morning.

Morning.

The first question I had was a follow up from two question ago, about about the billing, could you give us a sense for what the average bill rate -- funded bill rate was in the fourth quarter, something you guys historically have given?

Yes, Paul.

Yes, so the average bill rate, again, we now are excluding China from that, because as we have acquired with BoldTech the China acquisition that's at a significant different rate, but the rate all in is about $114.00 an hour.

And based on, I think it was Jeff's comments, is that flat to increasing right now, based on some of the newer deals coming in, or how do you see that over the course of the year?

I would describe it as flat to increasing. I don't -- right now we are not seeing the kind of pressure that would take to have us go backwards. When ePairs is fully baked in, it will have some impact on the rates which would not have been included in Q4 ,but I think it will be relatively small since it was a smaller acquisition, but the rates were lower than our normal average. Now, we also expect to be driving those up, but for the year I would say flat, and possibly up based on again, replacing the work that was at lower rates with work that's more in line with our average. But I don't expect to see dramatic changes right now in either direction.

And when I look at your updated outlook, what does that imply about GAAP EPS, is that a similar range to '07 -- to what '07 way, the low 50% to 55%, 56% range?

Yes, we actually have put up on the website the -- the slide that reconciles that to GAAP.

2008 guidance too, you mean?

It reconciles the updated guidance to the equal GAAP measure.

And what does that number come out to [inaudible]?

Give me a second, let me --

I think it's about $0.52, $0.54, Brian --

That's right.

-- in that ball mark.

Thank you. In that range, can you give us a sense for what it assumes about bonus accruals, the top and the bottom end, cash EPS or GAAP EPS, just what it assumes if there is, and how it compares percentages from '07?

Well, we don't disclose specific bonus levels, but it does assume a normal bonus accrual. Obviously, that will be dependent on actual revenue achievement. We are talking about an earnings guidance here, not revenue. So.

Right. Right. So it is $0.75 there are bonus accruals or at $0.80, or the whole, just curious.

Well, obviously It depends on -- depends on the revenue that's associated with it, but yes, we are not assuming a stripped out year in terms of bonus. Just like we paid -- I know people raise this question. It sort of a funny thing. I mean, we structure our bonus plan to pay shareholders first. That is a positive. I think a massive positive, and I think it is in contrast to the way some businesses are managed. That has wound up creating questions for some people about, well gee, are there no bonuses being paid here, is that why the earnings are growing? And it's just not the case. We had a full bonus accrual for 2007, for example. So, I think that is proof enough that we are not running it on a stripped out basis. That would be silly.

Great. When I look at acquisitions versus buybacks, given there's some uncertainty, but it sounds like some of the -- some of the metrics you are tracking over, especially February and now into March are tracking pretty well. What stops you from wanting to buyback your stocks since you obviously know your company so much better than anybody than anybody would acquire? What would stop you from using free cash flow for buying back stock?

Well, actually, there's nothing specifically in terms of whether we would do it on a -- as a philosophical matter, right? We would look at where it is cheaper to buy cash flow. As I say today, we are trading at about five times EBITDA stock comp. So, at some point we may well take advantage of that. There are blackouts, we have M&A activity. So it's not as easy as being able to pull the trigger whenever you might like. So, I am not announcing on this call that we are going to be doing that as I said earlier comments, but at these kind of value levels it is something we are going tol give consideration to.

Is there an authorization [inaudible]? And if so how much?

Is there currently an authorization, no, there's not currently an authorization.

Last question I have is CapEx. What was that for -- actually two more questions, what was CapEx for 2000 -- for fourth quarter, sorry?

Let's see. I have got the full year -- the full year number in front of me was about $2 million. So it was around 300 -- $300,000 or $400,000 in Q4.

Final question I have, in your earnings, what does that assume about stock-based compensation in your guidance, sorry.

Yes, again we don't give a lot of those specifics, but I can -- you can see what it ran, let me find that number. In -- it ran.

Yes, I have last year's numbers. Should you -- how about directionally, do you expect it to be flat?

Well, we have always talked about the fact that we are looking to run stock based compensation in the range of 15% to 20% of cash earnings which we think is a very reasonable target, much better than most technology companies and particularly given the fact this is a people centric business. And so, that is where we will continue to manage it to. I think we have been running at, I don't have the exact number in front of me, but we have been running at the lower end of that range, but 15% to 20% is what we have previously announced a number of times, and that's where we will keep it.

All right. Thank you.

Thank you.

Your next question comes from the line of Pete Jacobson of Brean Murray. Please proceed.

Thank you. Question for Jeff, your 5% to 6% pick up that you indicated in February and March, is that on a revenue per day metric?

It is.

Okay. And given the IBM acquisition of Cognos and anticipated Oracle acquisition of BEA, do you see that impacting your business now or in the future?

Yes, I think only positively. We have got strong relationships really with all four of those players and we had a nice relationship with Cognos, very good relationship Cognos prior to the acquisition. Of course, we have a great relationship with IBM, so we were excited to see that happen. Same with BEA and Oracle. We have got a relationship with BEA. We've had a good partnership with them and a great relationship and good partnership with Oracle. So, we've -- we have successfully navigated the Siebel acquisition by Oracle and really built a nice relationship with Oracle. We expect the same thing will happen with BEA, and it's already happened with Cognos.

Thank you.

Sure thing.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Devang Kotharti with GMP Securities. Please proceed.

Hi, Devang Kotharti from GMP Securities. Question, do you have any other big renewals coming up in the next couple of quarters.

No. I actually did that analysis recently, and it looks like right now -- you never know, you never know what's going to happen. Again, there's no crystal ball but we don't have any natural conclusions that are occurring that we don't believe will be extended or carried over to a subsequent phase to that engagement. So, right now we think some of those big wind downs are behind us. Again,no crystal ball.

Yes, but how -- how about ones you think may be extended and are there just contracts that is are large revenue buckets that are coming up for renewal, even though you believe it will be extended into the next phase, and if you could just quantify --

That's -- we don't get into disclosures of specifics of contracts, but that's, I can tell you that's the nature of this business. That's always the case. We have large contracts concluding weekly. So -- and I mean meaningful contracts. Contract size is about $0.5 million and that's typically a eight phase of a multiphase engagement. And those -- those statements work, we have ending weekly and the relationships that we have, I think -- I think I would point back to the metric of 80% -- 80%, 85% of our revenue is business that we have repeated with customers we served the prior year. So it's our expectation that that's going to continue. As I said, there's no crystal ball, but some clients decide to not to continue on. I think it is possible, but I think it's unlikely. I don't think we are in the economic environment that would drive those decision. All the work that we're doing is strategic enough, and mission critical enough, for these customers -- I don't anticipate that happening. Like I said, these were natural conclusions. We don't have any of those where we actually are completing a multiphase engagement. Those were eight figure relationships that I referred to, where we had worked with those customers for years and we were naturally concluding those engagements. We don't have anything like that pending.

Okay. All right. And then, in terms of your 2008 cash EPS outlook, what kind of revenues is implied by -- by that cash EPS outlook?

It is roughly a continuation of current run rate. So, and that Paul, correct me if I am wrong here, we are talking something in the 240 to 250 range?

That's right. It equates roughly to kind of 5% organic growth at the low end, and 7% to 8% at the high end.

And then, could you talk a little bit about some of the recent acquisitions you have done, BoldTech and well as ePairs, and how those acquisitions are performing relative to your expectations?

Sure. Jeff, do you want to take that?

Sure, yes, absolutely. I will answer the last question first. Very well.

ePairs -- I will start with ePairs which is the most recent acquisition was a largely staffing oriented, H1B oriented shop that was very, very well run and focused on Siebel primarily. There are skills beyond that that we are excited about gaining, some SAP skills, in fact, but the core was around Siebel. And these are folks that came out of the big guys, big four, big five consulting solution centers out of India. So these are experienced folks. We have been able to deploy them immediately into our Siebel engagements and that was really the motivation for doing that deal was to gain these additional skill sets, as well as the leadership team that came along with that, and the recruiting capability that we now have in Chini. So that has gone very, very well. Everybody is fully deployed and that position is performing very well.

We are only, obviously, two and a half, three months into that, but we are very pleased. Same really with BoldTech, which really now is our -- our business hub in Denver. They have got a strong market there, serving into that telecom client base there, as well as health care. Doing very well, business unit is performing very well. Of course we gained the China SCI level 4 certified facility in China that we are excited about, and continue to, obviously, operate as a part of that business unit, but also, beginning to be leveraged by others. So we are very, very pleased with both of those so far. And the, say six months or so since we acquired BoldTech and the three months or so since ePairs.

Jeff, could you talk about any initial feedback you are getting from your clients as you talk to them about the [inaudible] capabilities in China that you now have?

Yes. There's a good deal of interest. It is a little bit of a shift for us in terms of a go to market leader. It is not something that we have done a lot of in the past outside of our Macedonia facility, which actually we have done pretty well with, growing from about half a dozen folks to about 60 over the last two, three years. And it's very -- it is met with great reception. And one reason we wanted to do that, again we regained a great team there, a great field team, a great executive team, but one of the motivaters was to get that China facility and to take it back to market out to our clients, and they've been very interested. One of the things we heard in the past was, we wish you guys did do more offshore or had broader offshore capability. So, we are excited about its potential, it is proposed now, or it is a part of proposals on several other engagements that we are working on, again, in many other business units outside Denver. So, we anticipate that we will get traction with that.

Okay. Great. Thank you.

Your next question comes from the line of Paul Kaump with Northlands Securities. Please proceed.

Good morning, gentlemen. A few quick questions for you. Utilization, you said Jeff, that it was running kind of high 60s, 70% in January. What did that rebound to if February?

I am going to say in the low 70s. We are still closing February. So, I can't give you a specific number. I know we improved it. As I mentioned before, we slowed down on the hiring, we've allowed the attrition to overtake hiring a bit, so we're actually coming down some in head count, as well as reducing subcontractors. So, I am sure that it has moved into the low 70s and again, I expect it actually to be in the high 70s, low 80s, in the March -- in this month.

So for March, high 70s low 80s, you said?

Yes. I think we will go into Q2 at a 80, low 80s level, which is -- our target we talk about is kind of the 80-85 range. Or 82, 84 range. I think we will be back into that in April unless again, this trend turn it is other way on us.

I may have missed it. Paul, did you give the utilization rate for Q4?

It was 81%.

81%, okay, great. And then, where do you expect, given the attrition rate that you are talking about, where would you expect to end average billable head count at Q1?

Through today or through our current date here, we are down about 20. We have slowed hiring down a little bit and let attrition sort of overtake the hiring. So, we are down 20 and would would expect it to be down at least 30 plus by the end of the quarter.

Okay, down 30 plus. And I just forgot, what was the average billable head count at the end of Q4? I'm sorry.

It was -- the average billable head count for the quarter -- yes, it was 1,176 was the average and that excluding ePairs and we added about 50 people with the ePairs transaction.

With valuations falling here considerably, are there any new areas of business that you are not in right now that look interesting from an M&A perspective?

I think that we have a pretty well defined plan in terms of what we want to do on M&A ,and that's really two things, right? One is expand our geographic footprint to cover the rest of the country. At $250 million, we're really -- if you look at the geographic footprint, 17 offices in the U.S. We are really only covering about a third, 35% maybe 40% tops of the country. So, there is a tremendous amount of just geographic expansion, and I think you just basically spread this footprint over the rest of the country, we can grow this to a $500 million plus revenue run rate business and probably beyond that. In terms of -- and those geographic expansion acquisitions will continue to comprise roughly half of our M&A activity. On the domain expertise side you have seen us over the past couple of years look to diversify our vendor partnerships, for example, the Oracle relationship and we continue to see opportunities there. And what's critical in our model is to use acquisitions to acquire critical mass in a given vendor area or domain expertise area and then grow that organically.

We continue to look SAP. As we discussed prior publicly, it is hard to find a good solution shop -- shops in the size range that we are looking for. So you can see more Oracle out there. There are additional Microsoft opportunities that we are looking at. There's more interest in -- in the core, sort of BI that we have been doing. There's -- the useability continues to be very strong for us and we are looking at some shops in the useability area. So that's what you see on sort of the vendor and domain expertise side that will comprise roughly half of what we do. And the other half is -- will continue to be geographic expansion.

That pipeline is as strong as it has ever been. North of $1billion dollars on a gross basis, $0.24 billion on a net basis. Obviously, we are going to be, we are out there, we're talking to folks, but we going to be patient ,particularly with our stock at these levels it doesn't make any sense to rush out there. There is going to be a little bit of a GAAP period before private market values reflect public market values, right? Because their values are not traded up and down on a day-to-day basis as our public company. So we are going look at it. We are out there, we are going to be aggressive, but we're going to be aggressive about buying deals at our price and not going to jump the gun before we should.

Okay. And then, last question. You mentioned the potentially slower business environment here in '08, slow down in M&A. I'm wondering, given those two real substantial factors, does this put you behind the trajectory to get to the $500 million goal by the end of -- or run rate goal by the end of fiscal 2010?

I am not sure it does. It really depends on the level of M&A activity. This could come out being a slow year for M&A, it could come out being a very big year for M&A. It really depends on what happens as we move through the rest of the year. If you saw what happened when we went into the Y -- the dot com and Y2K crash, which again, was much more significant than anything we are seeing here, at least based on current visibility, that was actually one of our most productive periods in terms of growth through M&A. So, I don't think it does, I think based on the run rate we were on, we would have hit our $500 million run rate target, it's always been a run rate target, earlier than the end of 2010. So we were kind of running a little bit ahead of target, at least by my calculations. And so, I don't think this changes that.

And again, the point here is to just, we have always run this business, trying to do the smart things, do the common sense things, not look to do acquisitions to create an attractive press release, right? You do it because it's what makes sense for the business at the time it makes sense for the business. So, really wanted to share with folks that, hey, we are out in the market. We continue to look, but we may wait a quarter or two here, maybe three, I don't know. We will see how it plays out. Just so that folks are aware of that, it takes the pressure off, I don't want to there be an expectation or doing deals that don't make sense. Again, I don't see that impacting the overall strategic trajectory of the business.

Okay, terrific. Thanks, guys.

Your final question comes from the line of Colin Gillis with Canaccord. Please proceed.

Yeah, just a couple of quick follow ups. Could you talk a little bit about total head count turnover? And, was there any the turnover in the sales group?

Yes. The attrition was about 19% in the fourth quarter, and not a lot, I will let Jeff speak to the details, but not a lot of attrition in the sales force.

I think on the sales force point, I think we have got a 50 plus person sales force. We've had virtually -- if you look at this business over the past three years, virtually zero attrition in the sales force. Voluntary attrition.

Right.

Got it. And then just wage inflation, expectations for 2007?

I would say modest, much like the rest of the country, like the rest of the economy will dictate that. I think we are estimating, I think conservatively, about 3% or so in total. Obviously, there will be some performers that will be -- that will top that. But my expectation is it will be modest relative to previous years.

Great. Thank you.

With no further questions in the queue, I would like to turn the call back over to Mr. Jack McDonald, Chairman and CEO for closing are remarks.

Great, well thank you all for your time this morning.

Again, I would just emphasize that business continues to have a very strong core franchise of global 2000 clients. We are a continuing to close multimillion dollar deals, sales pipeline is at an all-time high. This is a management team that has grown this business from an eight person start up to a $250 million company on less than $10 million on net invested equity. This is a business that's got strong entrepreneurship in our culture and in our DNA. And, you see a situation where yes, there's some softness early in the first quarter, which it looks like we are bouncing back from here. Again, no guarantees but it looks like, that based on what we're seeing on current revenue, that bounce back has already occurred.

And against that relatively benign backdrop, you see a decline of 70% or more in the stock price. I will let people draw their own conclusions in terms of what that means for value and opportunity. So again, we appreciate everyone's time this morning and look forward to being back together with you next quarter. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect, and have a good day.