Perficient Inc (PRFT) 2008 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth quarter 2008 Perficient earnings conference call. My name is Erica and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Jack McDonald, Chairman and CEO. Please proceed, sir.

Good morning, this is Jack McDonald. With me on the phone today we've got Jeff Davis, our President and COO and also Paul Martin, our CFO. I want to thank everybody for their time. We are going to have about ten or 15 minutes of prepared comments and after that we will open the call up for questions. Paul, could you now read the Safe Harbor statement?

Sure, 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 Web site 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 Web site at www.perficient.com under Investor Relations. Jack?

So Perficient had a very solid Q4 particularly when you consider the environment that we are operating in. The revenue for the quarter was down about 9% on a year over year basis. Of course if you look at full year revenues for 2008 as a whole we were up about 6%, again despite the broader challenges. We had a little bit of help there obviously from acquisition.

Revenues for the quarter, again Q4 came in above our estimates and also came in above analyst consensus estimates. And we continue to generate healthy cash flow and we are building our balance sheet. Jeff is going to talk about this a little more later but I think it's important to note that, yes, we are in an environment where customers are taking a little bit more time. We talked about this on a number of calls over the past nine to 12 months, a little bit slower sales cycle than we saw and there's a little bit more caution out there. But we are doing a very good job of maintaining our relationships and we are winning new orders. And, again, Jeff is going to talk about this a little bit more in a moment. But there are exciting new projects that are starting on a regular basis and that gives us hope for the future.

If you look at the number of clients served during the fourth quarter it was just one fewer client during the fourth quarter of 2008 than during 2007. And, again, I think this speaks well to our ability to maintain client relationships and also our ability to rebound when the market ultimately does. And in terms of what we are seeing out there on the demand environment unlike what we saw earlier in the decade when the tech bubble burst, we are not seeing wholesale project cancellations, we are not seeing sales pipeline or backlog that's evaporating. Those are the kind of thing we saw post the tech bubble burst. We are not seeing that today.

The balance sheet continues to strengthen as it has over the past year or so, quarter by quarter. We really have never been in a stronger position from a balance sheet perspective. Currently about $56 million in net current assets including $23 million in cash at the end of the quarter and that's after repurchasing $9.2 million of stock. So $23 million in cash at year end, 2008, after repurchasing $9.2 million in stock during the year. Current cash on the balance sheet if you look at where we are today is still $23 million. And that's after an additional $2 million stock buy back and paying year end bonuses to non-executives -- to billable bonuses to consultants. So you are looking at a cash balance that is up $15 million since the end of Q3 even with the buy back and even with those other payouts.

Now that's partly the result of financing fewer receivables, right, given the lower rate of revenues that we are at but we have also improved our DSO performance. Paul is going to mention this more in a moment but taking that DSO number down to the low 70s around 71 at the end of the year. So doing a very good job of managing customer receivables and we've always of course had a very good record in that regard given our blue chip customer base.

We continue to have access to a large credit facility. $50 million credit facility with an accordion feature that can expand it up to $75 million and we have got zero debt drawn under that facility. So that puts us in a very strong position to execute for the business whether we are looking at stock buy back or acquisitions. And again of course we have got cash, operating cash flow out of which we can finance a stock buy back.

We do obviously believe in this environment that the stock remains undervalued. I mean, we talked about this $35 million roughly of EBITDA last year. If we were to hit the top end of our range for this year, the $200 million run rate for 2009 we would be looking at roughly $25 million in EBITDA. So you ex out cash, the stock is trading for about, I don't know, 3.5 times EBITDA. We continue to believe that it's significantly undervalued and that our best rates of return are going to be achieved through share repurchases. So we are going to continue to do that. We announced the additional $10 million buy back a short while ago and we are executing on it.

And speaking of the balance sheet we took a $1.6 million impairment charge in the fourth quarter. Based on a detailed analysis of our goodwill and intangibles. We mention this on the third quarter call and in other public statements we've made and appearances at conferences. I want to try to take whatever goodwill we can off the balance sheet.

We constantly scrub the receivables and look to take whatever settlement amounts or reserves that we can. It makes total sense to do that in this environment; frankly I was hoping to be able to write off more goodwill and intangibles. We looked through it and that's all we could sort of agree to with the accountants in terms of an impairment charge going through with the proper methodology. So, we talked about that in the past. All a function of continuing to strengthen and scrub the balance sheet. Particularly important I think in this kind of an environment.

Now Q1 is not fully baked yet on an annualized basis although of course whenever this fourth quarter call always happens a little bit later because of the year end audit. So we have a little bit more visibility than would you in a typical quarter. But on an annualized basis we are trending near the high-end of our full year guidance. So again we talked about $180 million to $200 million you can see from the press release that we are talking about roughly $50 million first quarter, which is really well above materially above analysts' estimates. And I think a great sign given the current market environment. Obviously we are going to see how the rest of the year place out as it plays out. And there is still a lot of uncertainty in this environment so we don't want to get ahead of ourselves on that, but we are happy with what we've seen thus far in the first quarter.

Jeff is going to speak more on this one later also, but we made some tough decisions internally to ensure that we are going to be able to continue to deliver cash flow and profitability. And we've shown this time and time again that we've proven that this is a management team that, this is a Company that is an entrepreneurial Company that has kept its fixed costs low and has a willingness and ability to address our variable costs to make sure we maintain the kind of cash flow margins and profitability we need not only to survive this environment but to position the Company to prosper at the market recovery. So we continue to feel very good about our ability to handle whatever challenges this economy might present.

Again, we are going to focus as we have on customers and cash flow, on building our balance sheet and exploiting opportunities we see in the market whether that's well priced acquisitions as the market as we move through the cycle a little bit, I think it's still a little early for that right now but we will begin to peek back out into the market. We are already peeking back out but you might see us start to move on that toward the end of this year if we see some stability in the marketplace; we will see where that goes; no guarantees on that right now. But right now we see a tremendous opportunity in terms of buying back our stock, it makes sense for our company and our shareholders and we again intend to continue aggressively executing on that.

So I am now going to turn the call over to Paul Martin, and he is going to discuss in detail the financial results for the quarter and the year. Paul?

Thanks, Jack. Total revenues for the fourth quarter of 2008 were $56.8 million, a 9% decrease over the year ago quarter. Services revenue including reimbursable expenses were $49.2 million with organic growth of minus 12% on a trailing four quarter average annualized basis including businesses owned at least two quarters. The sequential revenue growth in the fourth quarter compared to the third quarter was minus 6.4%.

Gross margins for services excluding stock compensation and reimbursed expenses for the fourth quarter was 32.6% which is down from 39.2% in the fourth quarter of 2007. The decline in gross margins is primarily a result of lower utilization resulting from softness in services demand. We are actively adjusting our labor cost to match expected demand in the first quarter and beyond. SG&A expense was $11.8 million for the fourth quarter including $1.6 million of non-cash stock compensation expense. Excluding non-cash stock compensation SG&A was $10.2 million compared to $10.6 million in the comparable 2007 quarter. SG&A excluding stock compensation as a percentage of revenue was 18% in the fourth quarter of 2008 compared to 17% in the fourth quarter of 2007.

EBITDAS defined as earnings before interest, taxes, depreciation and stock compensation for the fourth quarter of 2008 was $6.9 million or 12.2% of revenues compared to $11.2 million or 17.9% of revenues for the fourth quarter of 2007. The company recorded a $1.6 million or $0.03 per GAAP EPS only impact charge related to the value of intangible customer relationship assets as a result of its impairment analysis. This analysis indicated the recorded goodwill was not impaired at this time. Net income decreased to $759,000 compared to $4.5 million from the fourth quarter 2007. This is our 22nd consecutive quarter of positive net income. Diluted GAAP earnings per share decreased to $0.03 compared to $0.15 from the fourth quarter of 2007.

Non-GAAP earnings per share was down 41% from the year ago quarter to $0.13 for the fourth quarter of 2008 compared to $0.22 per share in the year ago quarter. Again, non-GAAP EPS is defined as GAAP earnings per share plus non-cash impairment charge, amortization expense and non-cash stock compensation net of the related taxes divided by average fully diluted shares outstanding for the period. Now turning to the full year results.

Year to date revenues for the year ended December 31, 2008, were $231.5 million, a 6% increase over last year. Year to date services revenues were $207.5 million for the year ended December 31, 2008, an increase of 8% over last year. Services gross margin excluding reimbursed expenses and stock compensation was 35.6% for the year ended December 31, 2008, compared to 39.1% in the prior year. The lower margin is primarily a result of lower utilization associated with the slow down in services demand.

SG&A expense was $47.2 million for the year ended December 31, 2008, including $6.4 million of non-cash stock compensation expense. Excluding the non-cash stock compensation SG&A expense was $40.8 million compared to $37.3 million in the comparable prior year period. SG&A excluding stock compensation as a percentage of revenues increased to 17.6% from 17.1% in the comparable 2007 period. Net income was $10 million for the year ended December 31, 2008, with fully diluted earnings per share of $0.33, down $0.21 from the prior year. Excluding the impairment to intangible assets previously described and a $900,000 write off of deferred offering costs reported in the third quarter, net income was $0.39, down $0.15 from the prior year.

Non-GAAP earnings per share was $0.66 for the year ended December 31, 2008, compared to $0.78 in the year ago period. During the year we spent $9.2 million on repurchasing 1.848 million shares. As Jack mentioned we continue to believe our shares are undervalued and that repurchases will drive further accretion and shareholder value.

Our average billable headcount for the fourth quarter of 2008 was 1,168 including 1,027 billable consultants and 141 subcontractors. At December 31, 2008, we also had 171 average SG&A personnel which resulted in an average total colleague headcount of 1,339 as of December 31, 2008. As demand began to slow the Company reduced US headcount 2% during the fourth quarter. We have reduced our US headcount an additional 5% since the end of the year as we continued to adjust our cost structure based on changes in our customers' demand.

We continue to generate strong operating cash flow. Our operating cash flow year to date has increased 16% over the comparable prior year period. And as Jack mentioned we ended the year with no debt and $23 million in cash on hand. Our DSOs and accounts receivable has decreased to 71 days at the end of the fourth quarter. As we've previously stated our goal is to maintain DSOs between 70 and 75 days and particularly in this environment this is an area of keen focus.

With that I will now turn the call over to Jeff Davis for a little more commentary behind the metrics. Jeff?

Thanks, Paul. Well, as Jeff mentioned earlier in spite of the tough economy I think Perficient did deliver solid results in the fourth quarter. We continue to manage the business profitably and realized higher than expected software sales and margins. Utilization was just under our target of 80% despite being impacted by holidays and vacations as the quarter progressed. As you might expect in this environment we are seeing some pricing pressure in the market, but it isn't dramatic and really didn't have an impact on the business in the fourth quarter.

Excluding our staffing and offshore businesses rates it actually ticked up from 114% to 116%. If you include those groups, rates dropped from 106% to 104%, but that decrease is actually due to an uptick of 15,000 hours of work delivered from offshore facilities. That's about a 70% increase in offshore hours over Q3. I actually view that as a positive and I will come back to that in a minute.

So clearly we are in a softer environment but we are continuing to win new business and new clients. In fact our client count remained flat year over year for the fourth quarter which is another positive sign as Jack mentioned. So we are effectively managing client turnover and adding new clients, but they are spending a little less. Something else to take note of is that while average deal size during the quarter decreased about 2% from Q3, our deal count actually grew and we saw doubling of sold engagements in the 250K to 500K range. So again we are winning those new deals.

We took steps in the fourth quarter and this year to ensure Perficient continues to produce solid profits and strong cash flow. And Jack alluded to this earlier as well. This included action designed to deliver utilization in the 80% range and to keep G&A in line. I do however plan to continue to increase our investments in sales and marketing as well as industry verticals in 2009. I really believe that we can use this downturn to secure new relationships, grow share and strengthen our position for when the economy recovers.

There's also good news in the fact that companies remain under significant pressure to continue to implement the types of solutions we deliver. But also to find a way to do it cheaper and more efficiently. That's why another area where we are placing a lot of emphasis is in our offshore capability. We feel that the market environment represents an excellent opportunity for growth in our global development facility in China. And this optimize is actually validated by our success to date. If you look at what we've done since acquiring that facility we've actually grown it from about 80 consultants to more than 140 and have tripled the number clients we are serving there from three to nine concurrently.

In addition we actually added to the skill set there. What was originally primarily Java development now includes TIBCO and Siebel capabilities. So we've done that through training. We sent teams over there to train those folks and we brought some of them over here by the way to train in the US. Our [GVC] offerings are actually structured to be incremental. What I mean by that is that it helps us win deals we wouldn't have other wise pursued versus cannibalizing our existing onshore business. In fact I feel so strongly about the opportunities for offshore that in additional to their standard sales quotas, each Perficient salesperson now has a quota tied to leveraging offshore resources. And I'm personally involved in regular offshore pipeline collaboration sessions.

I think another fact that really bodes well for the future is that we continue to see our transfer revenue increase. Transfer revenue is revenue generated when consultants from one business unit are leveraged by another. And that's not a published metric but it's something we track internally and I think provides a good barometer of cross-selling success. That's something we've always talked about that cross-selling and leveraging our entire portfolio across geographies and the client base would be key to success. And we are seeing that collaboration continue to increase.

Clients are realizing that we can help them in many areas and we are able bring our best people to the job regardless of whether they are local, traveling from somewhere else, working remotely our working in our offshore development centers. And this flexible delivery model is a strong value proposition for our clients and an important capability for Perficient. So even though the market has slowed we continue to explore opportunities to become a stronger and better positioned firm.

And lastly I just want to mention as I did on our last call, if you take a look at our track record and know that the discipline and focus that took us from start up to our leadership position today remain in place. And as I've said before, I'm confident that when the economy recovers we are very well-positioned to resume our path of strong growth.

With that I will turn the call back over to Jack. Jack? Is Jack on? Hello?

Hello?

Jack?

Yes. Sorry, we had a little phone trouble there, folks, and let me just cover where we are for the first quarter guidance. As I mentioned earlier we are seeing some pretty good signs out there right now. And, of course, all these statements are based on current expectations and could change and this is an environment with a little bit of flux in it. Although I would say with respect to first quarter, obviously given the fact that this is already March you have a little more visibility into that than you typically would.

If you saw the guidance from the release, the expectation is first quarter 2009 total revenue services, software and hardware including reimbursed expenses will be about $49 million to $52 million, $48.7 million to $51.6 million. And that's going to be comprised of roughly $46.9 million to $48.8 million of revenues from services including reimbursed expenses and about $1.8 million to $2.8 million of revenue from sales of software.

So a very good performance in this environment. You are looking at a decrease in services revenues obviously on a year over year basis of roughly 12% to 16%. But we are trending on that $200 million run rate, which is at the top of our range and I think a real positive given the current environment.

So with that, operator, let's go ahead and open the call up for questions.

(Operator Instructions) And our fist question comes from the line of Brian Kinstlinger with Sidoti & Company. Please proceed.

Hi, good morning, first question I had from the cost cutting that you've done in the fourth quarter and the first quarter, at what point based on your revenue expectations do you expect the utilization to return to sort of what you guys have experienced in the past?

If you look at where we are, Brian, we are targeting for the year 35% or better gross margins on services ex stock comp. Now that is lower than the 38%, 39% that we were targeting in a healthier demand environment. We may do better than 35% but you are going to have a somewhat uneven demand environment and in terms of where we are setting expectations and targets that's where we are at.

That was where you were in the fourth quarter. Is that because demand is coming down a little bit more so you are just sort of bringing down people in step with that and not additionally? Is that right? Is that how I should look is that? Or is that also a little bit of pricing?

No. We could talk about -- Jeff is going to talk about pricing a little bit and may have referenced it, I got dropped there for a minute. But the pricing environment has been fine, of course you've had some spottier demand, but yes of course; as we mentioned we took headcount down in response to a lower demand environment. We are talking about revenues in the $50 million range in the fourth quarter versus a higher revenue run rate in the first quarter versus a higher revenue rate in Q4. So we made those adjustments consistent with the way we've always operated the business. Keep the fixed cost low, adjust your variable costs quickly if you see a demand, a change in market demand levels. And let's get back to the business of being profitable and ultimately grow when this economy recovers.

Jeff, could you, I didn't get to write them down fast enough; could you go over some of those pricing rates that you had mentioned?

Yes, actually in the fourth quarter we actually saw them increase if you exclude the offshore. And I think it's going to become more and more of a factor as we move on and continue to grow the offshore component. But it was actually 116% versus 114% in the third quarter. 106 -- or 104% versus 106% when you bring offshore back into it. But again the function there was that we actually increased our offshore work by 70% in the fourth quarter. So it's going to become more interesting or complicated to track that.

Net/net in the fourth quarter we really didn't have a pricing issue. We had I think good rates for the market or for any market really in the fourth quarter. I do think when I alluded to some pricing pressure I think we are seeing more of that now. And I think it would be some impact to that to be honest with you. I don't think it will be massive, I think it's 1% or 2%. And I actually think it will be somewhat offset by the fact that we are expanding the offshore capability and the margins are a little better there. So from a margin perspective while the overall rates may go down I'm hopeful that we can keep the margin a little more intact.

Utilization is a trickier, tougher thing to manage in contraction than it is in growth. It's naturally high in growth, it's easy. But, yes, we are targeting 80%, 80% plus for the year still and we are taking the actions to try to maintain that throughout the year. Like I said there's a little bit of a lag there so sometimes you are sort of chasing the demand or chasing the topline.

What percentage of revenue is offshore right now or percentage of delivery mix, however you want to view it?

Yes. Percentage of delivery offshore is about 20% or about 10% to 20% if you include we've got a number of offshore folks working onshore. So it's 20% if you include them. Now again, those are hours worked, of course, the revenue percentage is much lower, about a fourth of that because of the rate differential.

And when I cover the -- I cover a lot of the offshore guidance, and their biggest concern right now is their clients are coming back for rate decreases. So is that where you expect more of the pricing pressure to come from?

I think it's going to be more onshore. We've got I think very attractive offshore. And keep in mind that we don't sell -- we don't lead with offshore as offshore. We have got I think what is a somewhat unique model. It's something everybody is trying to do, but I think actually we are a little ahead of the game there particularly in the mid market where we have got this onshore capability and a long history and track record there of a high customer touch approach onshore. And we are blending into that offshore. So we are not selling offshore as a stand alone, we are selling a blended team and competing in that way.

So we don't have to compete offshore for offshore; we are competing on the blended level. There's not a lot of companies out there believe it or not that can affectively do that. They are trying to do it and I'm not saying we are better than all of them but we actually I think do have a leg up against particularly in that market and in the technology space that we cover. I think you know that we've got some pretty unique skills depth in some unique areas that are really better than a lot of the big guys.

And in terms of G&A, was there cost cuts there and if so what can we expect as we are looking forward? Obviously had you some charges in the second half of the year in SG&A but excluding those and when you might have some as Jack alluded to how should we look at sort of where you are there?

I think the best thing I can tell you on that is that we made those investments last year. They are largely in place by the end of the year so you can probably look at the run rate in dollars coming off of Q4. Now we are going to invest some more this year and I expect that to go up a little although there should be some offset there. We have done some reductions in G&A and we will continue to do that as we can. There's some of those pieces you can't live without to offset some of those investments. We will make a little more investment this year.

I don't think it's going to be dramatically impactful to the SG&A dollars. I think you will see that percentage of revenue maybe go up a little bit as the topline has contracted some and hopefully we are flat for the rest of the year. That would be good. And really even better to be up. If you contracts some you will see that percentage increase. I think the run rate coming off of Q4 is close to where we are going to be. And I think Q1 in particular which I can't predict the details of exactly but when you see the Q1 results I think you will see a run rate that's probably going to be sustainable through the year on dollars and make even tick down.

Because we are doing some trimming like I said in some other areas and we are reinvesting some of that and some of it may even make its way to the bottom line. We may actually manage to reduce costs in other areas of G&A even though we are increasing in other areas more. We may increase, may decrease more than we are increasing is what I'm trying to say.

Last question on taxes. Did you mention, Paul, what occurred, it looks like about a 50% effective tax rate or something like that. I think it's --

Yes, so that's essentially related to as the income number drops to a fairly low number there's a number of fixed costs and some of the on the elements related to state taxes, et cetera, associated with the impairment drove that to a higher level. It should not be at that level in the first quarter, it ought to return to more 41%, 42% kind of more normal levels.

My question is, wouldn't the impairment, isn't that, is that not, if it's not deductible, wouldn't the -- I see, I'm sorry. Okay that's good, thank you.

Our next question comes from the line of Richard Baldry with Canaccord. Please proceed, sir.

Thanks. Can you talk about sort of end market or verticals which you saw surprising strength given that you came in a sort of and are guiding to be at the higher end of your expectation prior and then maybe some that weren't as strong? And then also curious about whether the environment overall in terms of the larger deals do you think you will be more competitive given the turmoil in some of the largest providers in the space whether it's missing billions of dollars or facing bankruptcy issues (inaudible) to clearly create execution problems for them? Thanks.

On the industry verticals, yes, I think we are seeing some strength particularly in Q1 in healthcare. It actually -- we had a large project wrap up in healthcare in Q4 so as a percentage of revenues it was about 14% down a little bit from the third quarter. Energy and utilities, 15% and telecom, 15%. So those are some of the key areas. And I think in general in these large markets and particularly in the ones where we made the investments in the industry verticals we see those as areas of strength.

Jeff, you want to take the questions related to our competitors' turmoil?

Yes, just a follow on a little bit on the verticals, too. I mean we are seeing some pretty good strength in energy and healthcare and I think that's going to continue. I think the healthcare is a little bit murky right now because of all the legislation and how it's going to affect healthcare. But I still feel like ultimately that will be a positive and the plans the administration has for that is going to drive some changes. Electronic health records and things like that are going to be a benefit to us and energy again just continues to be a strong sector as Paul said.

But in terms of competitors, sure that helps. We keep an eye on that and as there's turmoil there I think that's actually some of the reasons we've opened up opportunities for offshore now and grown as much as we have. We recently -- one of things we are doing on offshore too we used to be primarily focused, and remember that we've been doing offshore for five years in the Eastern Europe facility, but it was a little smaller scale. And this larger scale approach to offshore and SMII level five capability et cetera in China is a little newer to the mix over the last say year, year and a quarter. And we've really leveraged that and as I mentioned earlier grown it a lot and I think that's going to be a much more competitive force going forward or capability than we had in the past.

So I think we are going to see some more opportunities coming in there. We already have some. One of the things we are adding to that actually is some recurring revenue opportunities. I think we talked about this before; a lot of our business is really more or less recurring revenue anyway. We have got long-term relationship with clients, 80%, 85% repeat revenue rate with these clients year over year. So we've got clients coming back each year for more services from us. Most of that's project based. So they don't sign up for a year long contract for a chunk of revenue, a chunk of dollars typically. We do get some of that and we are seeing more and more of that in fact as we are doing this blended or flexible delivery model that I referred to earlier.

One of the offerings that we are putting out there is not only application development, but also support and maintenance in an ongoing or recurring fashion. And we've got a verbal now on a couple of deals. We actually already got some of that in the bag. We've got a verbal on some nice deals with this sort of new positioning that we've got that I think are going to close. So this environment is helping in that. I think to your point there is some disillusionment in some of the big firms out there.

These are large clients that we are doing this with, which is really an interesting phenomenon. I think it speaks well to Perficient's delivery record and what we have done for those clients. These are -- a lot of these are existing clients, there's a trust factor there a loyalty factor built there. And a lot of are very glad that we now have that capability and they are shifting some of the work that they would have maybe outsourced to the pure offshore guys more to us. Now it's not dramatic and we are not going to I think grow that facility to 1,000 people in 2009, but that kind of growth is in fact our goal for that facility over the next two or three years.

Can you talk maybe about whether some of your custom clients would be shy about adding to their permanent headcount obviously right now so whether there could be maybe smaller projects they look to move to an outsourced basis they wouldn't prior that they'd try to focus on in house but really are trying to streamline their costs would give you some extra opportunities you might not otherwise see?

No, absolutely. I think that is, I don't think it's the end game but I think it's a fantastic and it is the fantastic launching point that we are using now. We are able to do these blended team delivery that I talk about or even substantially offshore more in the mid market fashion. The big guys go after teams that are 50, 100, hundreds literally, hundreds, thousands of people. We are not targeting that. We can't compete at that level.

But there are a lot of firms out there that have that US based front end but also this back end that can actually tackle a mid market, sort of medium sized project and help the client save some money. It's not dramatic because they are not huge engagements. It's primarily development that's being off shored. You have a lot of business consulting on the front end of that around requirements gathering, architecture and those sorts of things. They tends to still high touch. But we are able to offshore a big chuck of that and save them some money and I think we are already seeing some traction there and some activity exactly for the reason you described. Because customers are as I mentioned before looking to get stuff done still.

The things we do are business critical. There's not a lot of fluff in our portfolio. These customers still need to do this work. And to the extent that they are delaying some of it now, they are going to come back and spend it later. So, yes, I mean, you hit the nail on the head. That's actually something we see as a big opportunity and we are starting to actually get some traction there as well. We are actually starting to see it happen for real.

Thanks, congrats on a good execution in a tough environment.

Thanks a lot.

Our next question comes from the line of John Maietta with Needham and Company. Please proceed.

Thanks very much. Jeff, I just wanted to piggyback off of those questions about the industry verticals. You made some investments there in healthcare and telecom in '08. Is most of the heavy lifting done there with regard to building up the infrastructure on those practices?

Yes, I think for those two practices it is. Now we already had by the way, it's sort of embedded within our Oracle/Siebel practice team which is gosh a big team now. It's probably, I am going to say 20% of the business. A CPG capability. And CPG is actually still doing pretty well right now. Even during a downturn the customers matter, so Seibel and CRM and attracting and retaining servicing customers is a big deal in a downturn. It's a big deal any time, but even in a downturn customers tend to spend money on that.

So CPG was kind of always there. We do a lot of work focused around public sector. And then also obviously these two verticals we talked about telecom and healthcare, largely built out. We are looking to potentially add some sales capacity; as I mentioned before that was part of the sales capacity that I was referring to and continuing to spend there. I think now more than ever in these times you have to continue to spend, increase the spend in marketing and sales. It's a more competitive environment so you've got to be out there more feet on the Street and more brand awareness and more field events occurring.

So, yes, I think the infrastructure for delivery in those teams is largely in place, I said a small amount of spend maybe around some additional sales. But we have a solid team off and running and some exciting things happening there and we are starting to see some traction with those as well. Though as I said those are an investment for the long-term. I think we will absolutely see results from those this year. But I really expect to see some meaningful impact and really kind of a transformation on our go to market that will occur over the next couple to three years based on those verticals.

Got it. Okay. And then just maybe quickly if you could talk about sort of the linearity in the quarter what the demand looked like in exiting January as compared to February and what you have seen sort of month to date in March?

I described it earlier. We've got, I think just what I said before. Same we are seeing that we saw in the fourth quarter. We are retaining relationships that we have to the extent that they've got work to do and we are adding new ones. The business is out there. The pipeline is down a little, but that gross pipeline is there, it's just deferrals, delays. I think there's a lot of fear out there to be honest with you. I mean people are -- they need to do these things, they want to do them, they're just a little hesitant to pull the trigger. So we are just seeing those continued extended sales cycles.

We haven't seen much of clients saying I have no budget this year, let's not talk or I had this project slated and then it got cancelled or we are midstream in a project and it gets cancelled. We haven't seen much of that. The clients are still planning. We have got deals in our pipeline. There's just a lot more hesitancy to go ahead and pull the trigger and get them going.

Okay. Thanks very much.

Thank you.

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

Hi, good morning, guys.

Good morning.

Good morning.

Morning.

Hi, Jeff, just a follow-up question on the offshore. I think you mentioned you were looking to ramp up to about 1,000 people over there over the next couple of years. I'm just curious if there is any chance of revenue cannibalization as your clients demand more of a blended solution?

I think that's going to happen anyway and I think if we don't do it we are going to loss that business. And I think there's good margin in that, though. Keep in mind that topline around projects like that is going to be smaller because of the rates but there's also still good margin there. And the margin in dollars isn't quite as big. I don't think so. Again we don't necessarily go out and lead with that. We use it as a competitive tool right now. And we've always been flexible and responded to what the market is doing.

To the extent that we can do things onshore that we think that yields a better delivery for the customer and they are not insisting on offshore we are going to continue to do that. And we will continue to do that for the foreseeable future. I think, though there will be a greater demand for that and the 1,000 headcount that I was referring to is over a couple three years and obviously dependent on some economic recovery. But during the slow time I think we are going to see more of that demand. That's a pendulum, I am sure you know that swings back and forth pretty dramatically or pretty frequently. Over the past, say, ten years you've seen that a lot, so the future is hard to predict. I think we could get that to 1,000 in the next couple or three years as a part of our plan to continue to grow our business to a substantial level, to get it to $500 million. Obviously that's all dependent upon some economic stability and some recovery.

The good news is and we've seen this before, we've seen this movie before as Jack referred to. The good news is like I said the stuff we are doing is not nice to have projects. These are things that people have to do. They are, they can defer them and delay them but they are going to have to spend that money eventually. And I think we've done a nice job of competing always against the big guys and against the smaller guys, the niche firms as well. And I think that will happen, it's just a matter of when. So I think, I think that's a growth opportunity for us more than a cannibalization honestly of the onshore work. We can do both.

And you are seeing your clients ask for that up front more and more?

We are seeing more interest in that now for sure, yes. Like I said they are trying to save some money right now. And that may change down the road but, hey, off shoring is here, it's been here for awhile, it's here to say. And I think as more firms demonstrate the ability to do it effectively with good equality and get the clients the results they want at a lower cost they are going to pursue it.

And I would just jump in and add one other thing there which is this is a process that we started three years ago. And again the game here is not to [ape] what the big offshore guys are doing, that would not a good strategy. But I think we have as Jeff is talking found a way to feather in offshore into this high customer touch, highly iterative integration focused consulting model. So this is done by design. Now it happens to be working well in this environment and I think it will continue to grow.

And I also just want to punch up what Jeff was saying about margin because this is very high margin work. And it also presents the opportunity for us to begin introducing additional lines of business that involve recurring revenue for example in the maintenance area. We talked about that a little bit in the past and that is something that we will continue to look to pilot here because we are flexible. We do respond to market demand. And we are not going to run out there with a big investment in something until we see demand for it. But there is the potential for some additional lines of business as well. So I actually see this as something that far from being cannibalistic is going to help us sort of expand the waterfront on which we play and ultimately grow the revenue pie.

Okay. And then just looking at the service revenue line, your Q1 guidance really suggests that kind of the rate of decline is slowing down quite a bit. Is that something you think you can actually grow in Q2?

Let me just make a comment on that. I think Q2 is going to tell us a lot and I think it's too early to say where Q2 is going to come in. So I mean obviously we would love to see that stability and be flat in Q2 or potentially be up. But it's just too soon to say at this point. And given the environment we are operating in it would be kind of silly to get ahead of it at this point. So we will see where it comes in. And we are obviously working hard to execute.

And for us as a business if we can come through this year at the top end of that revenue range at that $200 million range, I mean not only will we generate strong cash flow, have the opportunity to continue to buy in our stock and shrink our share base, but we will be very well positioned for any kind of economic recovery in 2010. And you can see a dramatic bounce back in earnings because you've got highly profitable marginal dollars as you get above $200 million in revenues. So we are pushing hard on it. All stops are out and we will see where it comes in.

One final question, Jack, just on the acquisition front, the Company that you previously talked to, I mean I have to think a lot of them are facing quite a difficult financial future. Can you comment on what you are seeing with some of the smaller competitors out there and whether or not you might be able to come in, come in and buy them quite a bit cheaper than they were looking for say six months ago?

Yes, you've really got two kettles of fish out there. You have firms that are struggling that we wouldn't want to buy at any price. And then you have some firms that are in areas that still have strong market demands and are still putting up some decent results. And the issue with that bucket which would be the bucket we would be interested in, is it takes awhile for value expectations to adjust. So what we really did was pull back from that market entirely for a couple of quarters here.

And we will start peeking again a little bit and if we can see EBITDA multiples come down to four or five, five and a half times and if we can see some improvement in our stock, back to a more normalized level and I think that's got to be at least $6 or $7 a share. I'm not saying that represents full value because I think that's still only a fraction of it. But you need to see some kind of return to that kind of price point and a reduction in multiples on value of acquired businesses and then you can get back to deals that are accretive.

Our general philosophy and our rules of engagement have not changed. We want deals that are immediately accretive from a cash EPS basis. And that serves key strategic function in terms of either growing our geographies or bringing on board skill sets that we need to sell nationally. And I think as well that what you will see us do if and when we get back into the acquisition business the early deals will probably be national boutiques that have service offerings that we can resell on a countrywide basis through our sales channel.

Okay. Thanks for taking my questions.

(Operator Instructions). Our next question in a follow up question from the line of Brian Kinstlinger with Sidoti. Please proceed.

Can you tell us how much you have left on your share authorization and given what you've bought can you give us a rough assumption on the share count in the first and second quarter?

Sure, so we did -- Paul, you want to walk through that, we did what 9.2 million --.

Yes, $9.2 million, it was about 1.8 million shares in the year ended in December. And we've bought back roughly 400,000 to 500,000 so far in 2009 for roughly another couple million dollars.

I got that. I was just curious if the dollars flow through each quarter so I'm curious where you are roughly in March and June total shares.

So roughly we are at $9.2 million so we've roughly spent $11 million of the $20 million total authorization.

Yes, The additional two, Brian, was the stub amount from the first quarter. We are at $11 million of a total of $20 million. So, $9 million left.

You have $9 million left. And when you report the March quarter how many shares do you think you will -- diluted shares do you estimate you will be reporting?

Yes, somewhere around 29 million.

29 million.

Obviously what we like to happen is get, to see happen over the course of the next year is get that number down to something closer to $25 million. We talked about that in the past. And that remains our goal. And that's going to depend of course on the business and whether we see stability, what kind of cash flow that we are generating as a result of that and what the stock price is.

If we have an environment where this business is stable and the stock stays in the gutter here or goes further down, we will buy more aggressively. And that's the goal to try to shrink that share base. I'm not guaranteeing we are going to get there but that's what I would like to see happen over the year.

Jack, you talked about goodwill about the auditors not and I agree with you of writing that down but the business end isn't getting any weaker than come the second quarter which is a telling time, does that mean we will likely not see goodwill impairment?

That's correct. That's correct. We did, Paul did a pretty thorough scrub on that with our auditors. We've got a regularly scheduled year end process. Paul can talk about it more but we go through and scrub it based on an established methodology with the auditors. And so, and frankly even the write down we did Paul, right, a good chunk of it was not even sort of generalized goodwill, it was actual sort of client.

Right, it was customer relationship intangibles. And, Brian, what we do as I think all companies do is it's based on a future cash flow model. And we certainly use numbers in line with what our guidance is for 2009. And so and I think relatively conservative assumptions for the out years in that model that indicated that we didn't have an impairment. So I think as things continue on and stabilize that shouldn't be an issue. Obviously if the world gets dramatically worse like every other Company we will have to revisit that.

If you wrote down intangibles as opposed to goodwill that suggests that next year we will see a step down in amortization of intangible assets?

That's right. The effect of that is about $100,000 reduction in amortization a quarter.

Okay. And then the last question I have is related to severance. If you cut 5% of the people what kind of severance does that equate to in the first quarter that you will be spending if any?

Yes, I don't know if I can give you an exact dollar amount on that. We do -- severance varies obviously based on tenure and some other factors. It's not significant. It's not massive, I should say. A couple of weeks is a typical severance offering. And so in dollars like I said I couldn't actually tack that down for you. I don't think it's going to have a huge impact.

I will tell you that we started out with some bench in January, so January gross margins weren't great. They've increased as we've gone along an as I said our target for the year utilization is 80% plus. So you can sort of look at it that way. I don't think there's going to be a lot of overhead cost associated with the severance.

In the fourth quarter -- sorry go ahead.

Brian, sort of rough math on that would be a couple hundred thousand dollars of severance. It impacts the quarter, but it's not dramatic.

And you had $100,000 or $200,000 I take it in the fourth quarter given the 2% reduction as well, a small amount?

Yes, it's probably, probably half of that.

So $100,000 to $150,000 is probably a good number.

Thanks, guys.

Thank you.

Thank you.

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

Okay. Thanks very much. We appreciate your time this morning and we look forward to speaking with you again on the first quarter call. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. Everyone have a great day.