Perficient Inc (PRFT) 2008 Q2 法說會逐字稿

Good day ladies and gentleman and welcome to the Second Quarter 2008 Perficient Earnings Conference Call. At this time, all participants are in a listen only mode. We will be facilitating a question and answer session toward the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder this conference call is being recorded for replay purposes.

I would now turn the call over to Mr. Jack McDonald, Chairman and Chief Executive Officer. Please proceed.

Hi. This is Jack McDonald. Good morning. With me on the phone today are Jeff Davis, our President and COO and Paul Martin, our CFO. I want to thank everybody for their time today. As is the usual process we'll have about 10 or 15 minutes of prepared comments after which we'll open it up for questions. So, with that, Paul, if you could go ahead and 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 including 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, is posted on our website at www.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. Jack?

Perficient really logged a very solid Q2 particularly when you look at it in the context of the macro economic environment. It's obvious there's a slowdown out there, recession or whatever you want to call it. But notwithstanding that, we delivered in line revenues and earnings and very strong cash flow. Part of that is our diversity across industries, technology platforms, and geographies and solutions areas helps us to mitigate risk and I think has us well positioned growing forward.

We continue to diversify client base and if you look at it, I think, in the quarter a single largest client was less than 5% of revenues. So, with scale through time the business has become more diversified on every front and that should put us really in an excellent position to re accelerate growth once the general economy recovers. But even in this period of a little bit of a slowdown we're still logging some very solid numbers.

If you look at revenues and cash earnings per share we were in line with expectations. Cash flows for the quarter were north of $40 million excluding stock comp if you look at it on an annualized basis. Our balance sheet has never been stronger. $54 million in net current assets including as of today about $18 million in cash at the end of the second quarter, about $20 million in cash today. So, that equates to nearly $2.00 a share in net current asset. You add that to our debt facility, the new debt facility which we put in place which is a $50 million facility when Accordion they expanded up to $75 million and really zero debt across the board here puts us in a very strong position to execute on either M&A or to buy back shares when the time is right. And I stress when.

It's critical here for us to be patient just like we were the last time we went into an economic downturn. Again, we don't see this one being anywhere as near as bad as the one that occurred after the dot com crash. But Perficient has proven that we are able to drive in difficult economic environments. This team has been running the business since we had very few people. I joined Perficient when we were eight folks. Jeff joined shortly thereafter. So, we know how to grow a business. We know how to manage a business through tough times and really come out in a stronger position on the other end of that and there's no reason for us to believe that this time will be any different. So, we are going to focus on customers and focus on cash flow and focus on building our balance sheet. And we will look for smart opportunities that we can exploit. That may include buying back shares and probably will include that in the third quarter and it may include executing on the rifle shot basis on M&A as we go forward here.

So, with that I'm going to let Paul Martin walk through the details on the quarter and then Jeff Davis will have some additional commentary. Paul?

Thanks, Jack. Total revenues for the second quarter of 2008 were $59.1 million, a 12% increase over the year ago quarter. Services revenue, excluding reimbursable expenses were $53.6 million with organic growth of approximately minus 3% on a trailing four quarters average annualized basis including businesses owned at least two quarters. The sequential revenue growth in the second quarter compared to the first quarter was 4%.

Gross margins for services excluding stock compensation and reimbursed expenses for the second quarter were 38%, which is down from 39.5% in the second quarter of 2007. The decline in gross margins is primarily the result of higher non reimbursable project related costs associated with businesses acquired in the second half of 2008 and a generally tougher economic environment.

SG&A expenses were $11.6 million in the second quarter including $1.6 million of non cash stock compensation expense. Excluding non cash stock compensation SG&A expense was $10 million compared to $8.9 million in the comparable 2007 quarter. SG&A excluding stock compensation as a percentage of revenue was flat at 16.9% compared to 2007.

EBITDA increased to $8.6 million compared to $8.2 million over the second quarter of 2007 with the current year absorbing $800,000 more of non cash stock compensation expense compared to the second quarter of 2007. EBITDA excluding stock compensation was $10.8 million, up 11.7% over the comparable prior year quarter. EBITDA margins excluding stock compensation were essentially flat at 18.3%.

Net income remained flat at $4 million for the second quarter of 2008 and 2007. This is our 20th consecutive quarter of positive net income. Diluted GAAP earnings per share remain the same at $0.13 a share. Non GAAP earnings per share was up 5% over the year ago quarter to $0.20 a share. 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.

For the full year, revenues were $116.4 million, a 13% increase over the comparable period last year. Year to date services revenues were $105.7 million for the six months ended June 30, 2008, an increase of 18% over the comparable prior year period. Services gross margin excluding reimbursed expenses and stock compensation was 36.4% in the six months ended June 30, 2008 compared to 39.1% in the prior year. The lower margins are primarily the result of lower utilization rates in the first quarter that we discussed on the last call, higher non reimbursable project related costs primarily associated with businesses acquired in the second half of 2008, and a generally tougher economic environment.

SG&A expense was $22.3 million for the six months ended June 30, 2008 including $3.2 million of non cash stock compensation expense. Excluding non cash stock compensation SG&A expenses were $19.1 million compared to $18 million in the comparable prior year period. SG&A excluding stock compensation as a percentage of revenue decreased to 16.4% compared to 17.5% in the comparable 2007 period. This decrease is primarily associated with the reduction in bonus related costs.

Net income was $7.1 million in the six months ended June 30, 2008 with fully diluted earnings per share of $0.23, down $0.01 from the prior year. Non GAAP earnings per share in the first six months was up 6% over the year ago quarter to $0.37. Our average billable headcount for the second quarter of 2008 was 1,150, including 1,007 billable consultants and 143 subcontractors. In addition to the billable headcount we currently have 173 SG&A personnel which results in a total colleague headcount of 1,323 as of June 30, 2008.

During the quarter we completed a new $50 million credit facility with an accordion feature that allows us to increase the facility to $75 million. The combination of this facility and cash on hand has the company well positioned to execute against our plans for acquisition and other necessary investments in delivering organic growth. We continue to generate strong operating cash flow that we're using to fund both internal growth and growth from acquisitions. Our operating cash flow has improved substantially over the comparable prior year period which resulted in ending the quarter with $18.3 million in cash and zero debt.

Our Day Sales Outstanding on accounts receivable was 75 days at the end of the quarter compared to 73 days at the end of the year. Our goal is to maintain DSOs between 70 and 75 days over time. We will continue our efforts in 2008 to maintain this metric within our stated goal.

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

Thanks, Paul. Well, as Jack mentioned earlier we do feel pretty good about the quarter's results particularly in light of the overall sort of economic condition that we're working in. And while several industries are struggling, our diversification continues to serve us well. In a couple of our key verticals, healthcare and energy remains strong and we believe poised for years of growth. We also see opportunity in Telecom, which I'll talk about in a couple minutes.

As we anticipated on the Q1 call we were able to substantially improve utilization in the quarter. At 84% excluding subcontractors, we're right in the range that I consider ideal and sustainable and I'm optimistic in fact that we will sustain levels in excess of 80% through the remainder of the year. We didn't experience any meaningful deterioration in bill rates during the quarter and I'm confident that we'll be able to maintain or modestly improve those rates throughout the rest of 2008.

In addition to the diversity we have across industries, geographies and solution areas I think it's important to note that while we continue to deepen all of our vendor relationships we are also broadening the revenue base from a platform perspective. Our largest platform partner accounted for less than one quarter of revenues during the second quarter as compared to 41% last year. So, while our work around all platforms continues to grow in absolute dollars we've taken steps to broaden our capabilities. Oracle related work, for example, over the last year has grown from 8% to 18% of revenues. It's healthy that Perficient now has the competency around most of the leading technology platforms and is no longer disproportionately dependent on any one single vendor's products.

Our clients demand an agnostic partner who can work on their behalf to implement the most effective and relevant technologies, whatever they may be. I think over the course of the last few years that's what we've been able to assemble here at Perficient and build. We continue to pursue and win larger deals. During the second quarter, we sold 23 deals with expected services billings of over $500,000 each. That compares to 21 deals of that size in the first quarter and just eight in the fourth quarter. So, again we're feeling pretty good about the business despite the broader economic concerns. As we talked about before, though, budgets and projects are still there, but we're seeing them extended a bit. So, the sales cycle is extended. Decision making processes are slower than they've been in the past.

One of the things we discussed on the last call was our plan to begin making incremental investments into some key industry specific practices. We spoke about our formation of a business unit to specifically target opportunities in the healthcare industry and healthcare is already our leading vertical as we mentioned on the last call and it accounted for 20% of revenues in the second quarter. Very diverse within that industry, but 20% of the total.

Our healthcare team made solid progress in Q2 hiring additional subject matter experts and delivery personnel and working to establish internal goals over the short and long term. I expect that we'll begin seeing meaningful results of these initial efforts by the end of the year as the team continues to grow.

As I alluded earlier another industry we're poised to make additional investment in is Telecom. We've already begun to establish a team focused on that vertical. During the second quarter it was our third largest vertical at 12% of revenues and we see considerable opportunity over the course of the next several years in that space. In the intense competition for customers in that industry and the bundling of services Internet, phone, television rolled into one, not to mention the dynamic wireless side of that business is something we can really capitalize on.

We've served three of the five top cable firms in the country over the last couple of years and have served more than 30 clients in the telecom industry as a whole. That business is all about finding customers, serving them more efficiently than your competitors and retaining them by delivering better experiences. Those are areas where we have significant solutions expertise. So, we're hiring senior leaders in that space with industry experience; salespeople with relationships, Big 5 delivery leaders and consultants, et cetera. Again, I expect we're going to see meaningful return on these investments going into next year.

So, in summary I think the key takeaway is that Perficient is an extremely well positioned business and that will remain the case regardless of external circumstances. That strength allows us to continue to plan for the long term and the best interest of the business. With that, I'll turn it back over to Jack.

Thanks, Jeff. I want to talk a little bit about guidance for Q3 and then a few other comments and we'll open it up for questions. In terms of the outlook as the press release indicated we currently expect third quarter revenue this includes services and software revenue and reimbursed expenses, of course, as well to be in the range of approximately $56 million to $61 million. That will be comprised of roughly $55 million to $58 million of revenue from services including reimbursed expenses and $1.2 million to $2.5 million of revenue from sales of software. That guidance range of services revenue including reimbursed expenses represents services revenue growth of between 7% and 13% on the quarter over quarter basis; in other words over the third quarter of 2007. Now, looked at sequentially that's basically a flat Q2 to Q3 sequential number, but again in this kind of an environment with the top end on our revenue range of about $61 million. So, in this kind of an environment I think it's a pretty good outlook.

We're still generating a ton of cash and I would note that it's a conservative we think a reasonable guidance range. The backlog, for example, is meaningfully higher today than it was 90 days ago when you look at how that guidance is put together. So, I think that if you look at the business as Jeff talked about, more diversity, bigger deals, steady bill rates, well positioned in key growth industries with a real world vertical strategy that I think is going to put us really in a great spot in terms of accelerating growth once the economy begins to recover a little bit here. I think Perficient is very well positioned. And during any kind of a slow down here, again, still generating strong cash flow, focused on customers, building that balance sheet and as we did last time looking for good opportunities to deploy capital whether that's M&A or buy backs.

On the buyback front before we get to the Q&A I just want to address that for a minute. We announced a buyback back in March. The stock was at around $7.50 a share, give or take. Stock is obviously up significantly since then. We have been unable to buy during the last quarter due to blackouts around earnings and around M&A, but we do fully intend to execute against that in the third quarter. We have a $10 million authorization. We have room to buy it. We're not going to chase the stock, but we are going to look for good opportunities to buy when the price is right.

So, that concludes the formal part of our call this morning. With that, I'd like to open it up for questions.

(OPERATOR INSTRUCTIONS). You're first question will be from the line of Colin Gillis of Canaccord Adams. Please proceed.

Good morning, everyone.

Good morning.

Can you give us some color about what you're seeing in terms of the project's size themselves? Larger deals are still getting broken free. Are you seeing fewer of the smaller one off type projects?

I would say that if you look at what we're seeing generally in terms of the market environment it's really less a reduction of existing work. You are seeing some slower decision making cycles, and that's what's causing it to basically be more flattish here as opposed to growing. But as Jeff indicated you still see some hot areas out there, healthcare, energy, and telecom are the ones, obviously, that he mentioned. And also demand trends are going to be prone to a little bit of volatility in this kind of environment and if macro conditions were to worsen, obviously, it would reflect that. If they improve, well, same thing. They should reflect it.

I look at the business as Jeff indicated with the 23 deals above $500,000 in the second quarter up from 21 or so in the first quarter, up from eight in the fourth quarter. So, you're seeing larger deals. You're continuing to see strong repeat revenue. You're seeing improving utilization here, so the business is being managed tightly and efficiently. And you're not seeing any deterioration in bill rates.

And again, remember we've got this capacity now in China that's now gone Level 5 certified as well as the European capacity. So, this is an environment where we should be able to deploy our offshore resources to good effect.

What are your customers telling you in terms of their budgets for the full year? Are they just holding on to them tighter or are they getting cut?

No, I think and I'll let Jeff give you his take on this, but again, it's I'd say holding on a little bit tighter. As I was just saying it's more a slower decision making cycle, as opposed to a real reduction of existing work. That's why you're seeing a flattening as opposed to a decline in revenues at least in terms of what we're seeing right now. That's also why you're not seeing the kind of sequential growth that we would like to have. Jeff, you want to give your take on that?

Yeah, I think you hit the nail on the head really. We're not seeing projects that are underway being canceled. We actually had more of that last year. Of course, that was M&A driven. We're not seeing that. We are seeing just as Jack said and I mentioned earlier the decision cycles being dragged out of it. We've seen some budgets, I think reduced, some plans that some of our clients had to put in place that they actually backed away from and put on hold. But for the most part, not canceled outright. It's just more a matter of timing.

I think the economy's going to drive a lot of that and I actually think that the economy does in fact stabilize or begin to improve and if you can give us some insight there, Colin, I'd love to hear it. I actually think some of the stuff will be unleashed. So, I think this is temporary, obviously, and once there are signs of stability or improvement I actually think we'll see a lot of opportunity.

One last one for Jack. Is there a price level which you're ideally buying back stock or a cap price at which you would no longer be interested?

We have gotten an authorization from the Board up to a certain price level, which we've not disclosed, but I see clearly where we are now. And frankly, even a good chunk higher than that. It's accretive and that's ultimately what we look at. We're not going to do a buyback to chase the stock price or try to impact the stock price. It's about is this a good use of capital? Is it more accretive to buy back stock given the risk calculus? Is it more accretive to buy back stock then it is to do M&A? It clearly is here, and even at a decent premium from where we are here.

Thank you.

Thanks.

Your next question will be from the line of Peter Jacobson of Brean Murray. Please proceed.

Thanks. Good morning. Can you tell me what the financial services was as a percentage of total revenue?

That ran at about, I think, 9% in the second quarter. That's down Paul, help me here.

From a year ago, it was 18%. So, that has trended down, but we've seen as we talked about strength in healthcare, telecom, and energy have kind of picked up that slack.

Energy, was that the second largest? What share was that?

The largest is healthcare at 20%; energy was about 13% and telecom about 12%. Those are the top three.

Okay. In terms of the delayed decisions do you experience healthcare as being relatively recession resistant where you don't see the slowdowns as much? And also are the slowdowns more heavily concentrated in financial services or are they spread across your various sectors?

I think the answer in healthcare I would say yes. My opinion and what we've seen is that it's much more insulated from the general economy. And certainly, a lot of the work that we're doing is legislated. That's a very dynamic fluid environment as you know. The legislation changed. Each state legislates their own. We work with a lot of companies that do a lot of state level, Medicare, Medicaid administration, things like that. So, fortunately, we're still seeing a lot of opportunity there and see really far less signs of a slowdown. I won't say there's no indication, but it's a very different environment than the broader market.

Financial services is certainly an area of slowdown. Retail, I think, a bit. We do a little bit of work in retail and you're seeing some impact there. But I think the other industries as we mentioned before we're seeing extensions, but just not a dramatic difference. Clearly, if there were no difference at all I think we'd be still on our 10% to 15% organic growth rate, if not better. So, it's broader than just one or two segments, but clearly financial services and things related to the whole housing meltdown as I mentioned retail to some degree, are impacted from what we can see.

Okay. You talked about the Oracle platform as a share of revenue. Is the largest platform IBM? And if so, what percentage does that contribute?

It is IBM and it's just about 24% of revenue for the second quarter. Again, in absolute dollars it's very similar to what it was a year ago, maybe even grown a little bit. But about 24% of the total revenue for the second quarter.

Okay. And just to clarify, you talked about, I believe, stable bill rates, but I thought in former remarks you had indicated the bill rates did deteriorate in the quarter. Can you clarify that?

We had considered it to be about flat. I think it was down $1 from 118 to 117 for employees. Paul?

Yeah, that's right. For all employees including China, it was down $1 from 108 to 107 and excluding China it went from 118 to 117. So, essentially flat down $1 or so.

At the same time just to provide some more context behind that, on a relative basis, we're doing about the same amount of fixed fee work that we've done now for a number of years, but the fixed fee work in the second quarter is up from the first quarter. The way to calculate bill rates using the fixed fee revenue is we calculate total hours against those projects into the revenue for that project. So, the bill rate will sometime be lower on fixed fee as people are working overtime, et cetera.

Often in a timed material basis we don't necessarily bill for overtime. We kind of punish ourselves, I think, in that regard and that alone can drive a dollar or two variability in that rate. But in terms of client's palette and willingness to pay, we're just not seeing enough of a shrinkage of demand, if you will, or a glut on supply where we're being impacted from a rate standpoint.

Okay. And then finally, you mentioned the 10% to 15% organic growth target. Is there some form of guidance or target for organic growth for 2008 on the table at this point?

I think we believe over the long haul that the business can grow 10% to 15% organically. Obviously, we're in a recessionary environment or a slowdown or whatever you want to call it. So, this is not a year where we're going to be able to achieve that. What did we do $218 million last year and this includes the impact of M&A and the numbers will approach $250 million this year. So, that's obviously not hitting that sort of organic growth target, but that's because we've got a recession going on out there and as Jeff indicated before we view this as temporary.

We are focused on strengthening customer relationships, building cash flow, building that balance sheet and we'll be positioned to re accelerate growth as the economy recovers. Again, I really want to stress here this is not a recently hired management team. We've grown this business from a startup. We grew it through one of the worst meltdowns in tech and tech services in recorded human history post the dot com crash. We know how to grow a business in a difficult environment. We know how to expand customer relationships. We know how to use that kind of an environment to do smart deals which bring us out much stronger on the other side and we will do that again here.

Okay. Thank you very much.

Thank you.

Your next question will be from the line of Brian Kintslinger of Sidoti. Please proceed.

Thank you. The first question I had was regarding the length of deals. You signed 23. Is that average length of the deal longer or shorter than maybe a year ago?

Brian, I think it's actually a little longer given that we're doing larger deals now. They are inherently a little bit longer than a year ago, although I wouldn't say they're materially different. Again, if we look at the overall climate that we're operating in what I would say to you is, gosh, it's not hugely different. Again, if it was perfectly healthy like last year we would probably be growing 10% or 15% as I mentioned before, but the big difference, again, is just extended sales cycles. So, the nature of the deals, the deals themselves, the projects that clients are taking on are very similar to what they were doing last year they're just taking longer to commit to them.

Now, I'm curious. The 23 deal is that more than last year because I'm trying to reconcile delays with your signing more clients in each of the last two quarters? Or is it that those deals that are actually signing are taking longer to start and ramp up?

Paul, do have those metrics? I will say this, maybe, Paul, while you research that. We're a larger company than we were last year. So, we're talking in absolute deal size and number of deals. You would expect that we would be doing more of those than we did a year ago because we have a larger company to feed. There can be some difference just in that.

Paul, do we have the breakdown of number of deals over $500,000 this year compared to last year?

Actually, on the historical when we were smaller we did it on deals over $100,000 and we have probably 50% more deals over $100,000 this year than we did in the comparable quarter last year. Again, as Jeff said a big piece of it is attributed to the acquisitions and the size we are today.

Can you sort of take us through the revenue trends in Tier 1, Boltech and EPR was your last three acquisitions. Are they generally in line with the revenue rate you bought them or have they been deteriorating?

I would say they're in line to growing. Boltech is probably a little flatter, but the Oracle space as we mentioned before has grown from 8% to 18%. Part of that is because of the acquisitions, but that business is an area where we continue to see demand really across all industries. Oracle and Siebel particularly in particular are doing well for us. Tier 1 and EPR being Siebel focused are definitely flat to up and I would say Boltech is more flat, but not deteriorating.

You mentioned prudent investments in G&A and it sounds like that's telecom and some other industries. Can you talk about the magnitude in dollars that's going to take maybe in the back half of the year?

I won't disclose the dollars because I don't have firm numbers. We're certainly making some investments there. If we didn't do that we might be able to squeeze out another couple pennies of EPS this year. However, with Jack's concurrence I firmly believe that it's an investment that's critical for our business. I think we're at a size now we had a lot of questions about verticals in the past and I just don't think at $100 million or $150 million company unless you're going to focus on one or two verticals and do that only it really made sense for us. But now that we're approaching that $250 million level, we've got a wealth of expertise that we can really draw from in a number of industries and that's what we're doing.

There's an investment there and again I can't give you a total exact dollar amounts, but it's not insignificant. At the same time, I'm confident it will pay off. By the way the way we've always built this business and our philosophy around making those kinds of investments is it isn't "build it and they will come". The guys that we're hiring and bringing in the door right now are closing deals now and/or are billing deals now. So, we're not building a team and then we're going to send them out and launch them. As they come in the door they're working.

So, the incremental side of that I think begins and again, as I said before we'll see material incremental revenue I think from those more toward the end of this year, the beginning of next year, but those folks aren't sitting around now. They're delivering on the business today.

Just so I'm clear before I ask my last question. Did you suggest G&A then in total dollar terms will be picking up in the second half of the year compared to where you were in the second quarter?

No, I don't expect that. Not from this. These aren't all G&A rolls. It's a blend of G&A and delivery cost of sales. I expect that it's going to be pretty well in line with our current mix today. Not to mention as I said we build these things incrementally. We're not going to go out and hire 50 people tomorrow. So, I think the materiality of those pulling on G&A or cost of sales isn't going to be that great. I don't think you'll see a significant difference because of that.

Last question I have. You've discussed the economy. How does this change your acquisition strategy? What I mean by that is do you focus more on a national presence firm versus local given the raising price side of what you were able to do in the past might be more difficult or do you need to focus more on offshore? Just give us a sense of what you'll be looking at right now in your pipeline.

I think you do focus more on the national practices than you do on local in this kind of environment. You focus on those areas that are still growing well even in a flatter economy. And you also bring an extra dose of caution to it and you don't rush it. And you make sure that you're getting a multiple that makes sense. You may look at using a little bit more equity, maybe not. It depends a little bit more skin in the game. You dial terms towards lower multiple more skin in the game. And again focus on national, focus on those areas that still look good in a flattish economy.

We've said this before. Our usual target is three to four deals a year. Obviously, we're off that right now. It's going to be more rifle shot and we're not going to rush it. We're going to wait until there are good opportunities. I'm not sure that pricing in the private market has yet adjusted to a level that's attractive given the overall environment that we're in. We've said this multiple times before, as you know. There's a lag between public market evaluation adjustments and private market and there's no reason to get ahead of that. You've got to wait for it to adjust and then you exploit that.

Thank you, guys.

Thank you.

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

Good morning, guys. Jack, you made a comment that the backlog was actually higher today than it was 90 days ago. That the guidance here is basically for a flat quarter in Q3. I guess to me that suggests the activity that you're seeing in the pipeline is starting to weaken. Can you give us a little bit of color there?

I wouldn't say that it's starting to weaken, but at any given point in time when you take a snapshot for purposes of producing a forecast you've got a certain amount of that forecast that's in backlog and a certain amount in pipeline. If you look at the way we manage this business for eight, nine years here it's always stronger when more of your forecast is in backlog than in pipeline. So, that was my point there. It's not an indication that pipeline is weakening.

We can repeat what we talked about earlier which is it's a slower economic environment or a recessionary economic environment, whatever you want to call it. So, we're looking at a flattish situation as opposed to growth which is the reality that we're all living in.

Okay.

If I could just add to that, too. You could make an argument that, gosh, then there's upside, but I don't think we're comfortable doing that. I think we've always tried to be conservative so that we can hit expectations, set appropriate expectations and we're doing that here. It is as Jack said a function of those extended sales cycles that has us more conservative on the pipeline side. The pipeline and gross is large. Again, it's just a matter of certainty around the closing of those deals and the timing. Sorry, Jack.

I'm sorry. I think that's absolutely right. It really depends on how you want to look at this. It's clear that we've got some kind of an economic slowdown going on out there. We're not falling out of bed. We're talking about a quarter that's flat, but, hey, net expectations in the second quarter. If you look at the top end of our guidance range it's basically where our consensus is or just shy of it for Q3. Great cash flows, record balance sheet.

This is not, at least for us; this is not a 90 day game. Is not a 180 day game. We're in this for the long haul. We've been in it a long time. We're going to grow a $500 million business here as we've talk about. The Company is pretty well positioned. We will strike and exploit good market opportunities on the acquisition front. And any kind of slowdown you always have the advantage of squeezing out some of the weaker players. You're going to be building up some pent up demand and we'll be off to the races here as things recover.

In the meanwhile you can count on us to be conservative in our outlook and make sure that we're delivering what we say we're going to deliver and to run the business in a prudent manner, build that balance sheet, build those cash flows, but also make the right investments that you need to make to be well positioned for growth going forward.

Okay. I don't know if I missed it, but could you reiterate the $0.75 to $0.80 full year guidance?

We didn't specifically do that, but yes, we've still got the $0.75 to $0.80 cash EPS guidance out there. We're still standing by that for the year.

Okay. And then just lastly just in terms of hiring. Is that something where you're basically going through hiring freeze? Maybe you could just talk about the outlook for the second half and then just maybe touch on attrition as well.

No, there's not a hiring freeze. Obviously, we're hiring on an ongoing basis, but you're balancing that against attrition to keep headcount at the appropriate level for market demand. Jeff mentioned earlier that we brought utilization up significantly in the second quarter and he and the team have done a great job on that. He expects utilization to remain north of 80% for the rest of the year. Obviously, we know how to do that. We're going to balance headcount versus demand. It will mean that we're hiring and you're also trading out people both on a voluntary and an involuntary basis.

Attrition in the second quarter ran a touch above 20% which we try to target 15% to 20% attrition. We had a little bit of attrition earlier in the second quarter frankly because we had some headcount reductions in Q1. You always get a little bit of an echo on that in terms of voluntary attrition, but I would say to you that that peaked out in April and as you look at May and June and July attrition is now running back to its 15% to 20% normal target range that we shoot four.

Again, that's middle of the fairway for where we want to be. Bill rates, utilization, you look at the business across the board it's where it should be with the obviously glaring exception of the growth side of it. And that's being impacted by macro economic environments, but it will come back.

Okay. Thanks for taking my questions.

Thanks.

Your next question is from a line of John Maietta of Needham and Company. Please proceed.

Thanks very much. Jeff, as you build out these industry group in telco, healthcare and wherever you may choose to build out a group in the future could you talk about the hiring practices around that and just recruiting folks? One of the things I consistently hear from public companies and private companies is that it's especially difficult to find good people today. If you can talk about how you're approaching that.

It's funny. I think I'd always tell you it's hard to find good people. We've had good success, though. There are a number of folks I'll tell you where we're getting them from is the big guys. There are a number of folks and we've got good networks in place. We haven't gone after the verticals before, so there are people that we knew of or knew out there and many of us in our past associations and experiences that now we finally have the opportunity to bring over.

I think we offer a refreshing environment and culture, honestly, for a lot of these folks that are in the Big 5 environment and whose challenges are to go sell $15 million outsourcing deals every year. That's not something were uninterested in, but that's not the game here. Again, I think we're a pretty attractive alternative. Right now, we've got more interest and resumes than we have openings for the verticals. And I mean these are long time, industry focused veterans, Accenture type folks or other big consulting folks with some industry background that we're real excited about. So far right now we're not seeing that issue.

Got it. Okay. And then just the second question I had was around Boltech. Have you been hiring some folks over there? Have you been able to throw more work allocate more work to that organization or just kind of status quo?

In China we've actually grown it quite a lot. That's another thing where absolute dollars don't necessarily tell the whole story. While we've had as Jack mentioned we have leveled some of the staffing here in the US. We've actually expanded China from the time we did the acquisition by about 20% or 25%. So, I think we had around 90 maybe 80 or 90 billable folks there where now we've got about 10. We're doing some training programs over there and training those folks on some of the other technology platforms that we work with that they weren't trained on before.

We're definitely making some investments there, again, incrementally like we do everything as I explained before. But certainly in China we see a lot of current opportunity. We've got more projects in there now then they had when we did the acquisition and we still see, obviously, significant growth opportunities around at offering. Like I said, the absolute dollars don't necessarily always tell that. I expect we'll realize more benefits from that in the margins. And again, I think that will be more towards the end of the year assuming we have some stability here in the economy.

That makes sense. Okay. Thanks very much.

Thank you.

Your next question will be from the line [Wayne Chang] with Canaccord Adams. Please proceed.

Hi, guys. Just some housekeeping questions. Would you mind running through the utilization rate and a couple of the numbers you cited before for billable headcount so I can confirm it?

Paul, you want to walk through that?

The utilization was 86% including some contractors in Q2 up from 80% in the first quarter. And with respect to headcounts let me find those numbers again here we had 1,150 total billable headcount; 1,007 of those internal and 143 subcontractors. And 173 SG&A personnel to come up to a total tally headcount of 1,323.

Great. Thanks a lot, guys.

Paul, you want to give him the utilization ex subs?

Ex subs, it was 84% in Q2 up from 77% in Q1.

84 ex subs which is the number we normally talk about 86 with subs.

Got it.

Your next question is a follow up from Brian Kintslinger of Sidoti. Please proceed.

Thanks. Two question. First of all, how many job openings do you have right now? You mentioned 50 last quarter, so I'm just curious if that's about the same or if it changed at all.

Jeff?

Sorry, I was on mute. We've got, I would say, about the same number. I don't have the absolute number in front of me, Brian. The hiring front hasn't really changed. In fact we may be actually we may have more openings than we had last quarter as we're trying to bring things back in line and we've done that now. So, we probably have more openings literally then we had at this time last quarter.

Final question here. Are you comfortable with utilization? I mean generally temporarily would you think about increasing utilization while demand remains a little bit soft and then hire more just in time?

No, I don't think so, Brian. I think, as I mentioned before they've got 83% to 85%. We're right at 84% for the employee only utilization. It's where we're comfortable and I think that's sustainable. I think that's the right level. I think we could as I kind of alluded before, I think we could really pull back and try to maximize earnings and the result of that might be a couple of extra pennies this year, but honestly I think that's not the long term thing to do.

I think we've got to I will tell you that in terms of hiring and staffing right now we're obviously focused on strategic hiring; those hires around these verticals, more senior level leaders in the organization. We'll keep the organization well rounded, of course. We don't want to get top heavy, but we're taking this opportunity to be more selective and hire probably more key resources versus maybe some folks that are more on the commodity end of scale. But honestly, we're not looking to just squeeze every dime we can out of the Company at the potential detriment of the future. I think we're doing the right things. I think we're balancing that well. That 84% is where I'd like to see it stay. I don't necessarily want to drive it up there more and risk losing the opportunity to bring some key people in.

Thank you.

There are no further questions at this time. I'll turn the call back over to Mr. Jack McDonald for closing remarks.

Okay. Well, thank you everyone for your time this morning and again we think the Company is well positioned in really delivering solid results in this kind of an economic environment, making the right investments for future growth and strengthening that balance sheet and putting us in a position to exploit good opportunities on the buyback or the M&A side as and when they arise. Again, thank you very much for your time and we look forward to getting back together with you next quarter. Thank you.

Thank you for your participation in today's conference. This concludes our presentation and you may now disconnect. Have a great day.