Perficient Inc (PRFT) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 Perficient Earnings Conference Call. My name is Mishayla 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 end of this conference. (Operator instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Chairman and CEO, Jack McDonald. Please proceed.

This is Jack McDonald. Good morning. With me on the telephone today are Jeff Davis, our President and COO and soon to be our CEO, and Paul Martin, our CFO. So, I want to again thank everybody for your time. We'll have, as is the usual, ten to 15 minutes of prepared comments, after which we will open the call up for questions.

Paul, could you please read the Safe Harbor statement?

Sure. Good morning, everyone. Some of the things we will discuss in today's call concerning future Company performance will be forward-looking statements within the meaning of the securities laws. Actual results may materially differ from those discussed in these forward-looking statements, and we encourage you to refer to the additional information contained in our SEC filings concerning factors that could cause those results to be different than 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 updated 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 delivered a solid Q2 in what was admittedly a challenging market. Our revenues came in at the higher end of our guidance range as did cash earnings per share and were in accordance with the analyst consensus estimate. So, we're pleased about that. We continue to generate good cash flow and build our balance sheet and of course continue to repurchase shares. More on that in just a minute.

Jeff is also going to talk about this in his comments, but we do believe we're starting to see some signs out there of a potential rebound in the business. July was our strongest sales month in the entire year of 2009 and significantly stronger. We saw closed deals in July, 30% higher than any other month this year. Again, we're not talking realized revenue, we're talking sales which begins to hit revenue over the next few months. So, 30% in July than we saw in the next best month in 2009. Obviously that's a trend we need to see continue but if it does we think we're very, very positioned for a snap back in both the top and bottom line as we head into 2010.

Our balance sheet has continued to strengthen each quarter. Operating cash flow is increased and from a cash on hand standpoint, we've never been in a better financial position. The Company has no debt, more than $31 million in cash on hand at the end of Q2 and again that's after repurchasing $4 million of stock during the second quarter and of course purchasing a total of $18 million of stock under the $30 million stock repurchase plan that we announced, the initial phase of last year. So, $31 million in cash plus our $50 million credit facility. We've got zero drawn on that facility today. It puts us in a very strong position to execute as we need to to grow the business.

The cost adjustments, we have taken action there as we've moved through the year. We took additional steps in the second quarter to structure operations to meet the current environment including transitioning some of the business units and eliminating a few positions, condensing four regions nationally into three. So, we are, as always, looking at ways to trim costs in the business. We're also reducing some lease hold expenses in certain markets.

I would say to you, though, we do have a core SG&A infrastructure in place as Jeff and I have talked about on some previous calls. There are certain areas like vertical markets and other areas where we are making investments. We are holding on to that core infrastructure because we believe when sales come back up and we think we're starting to see the beginning of that here in July, we're going to have some significant operating leverage and we want to be in a position to execute well against that.

So, we continue to be confident in our capacity to manage through any kind of an economic situation. We do have a flexible cost structure and low CapEx requirements and again our position with good operating leverage as we start to see an uptick. We are again beginning to look more closely at acquisitions and we are rebuilding that pipeline of deals with a focus on early 2010. Again, we'll see what happens. We're going to play it by ear as we go through here but our target would be to really start looking at executing acquisitions again early next year if we continue to see signs of recovery in the market and our currency is in a position to fund accretive deals.

So, with that I'm going to turn it over to Paul Martin who will give us some additional detail on the Q2 results. Paul?

Thanks, Jack. Total revenue for the second quarter of 2009 was $44.9 million, a 24% decrease over the year-ago quarter. Services revenue excluding reimbursed expenses were $40.8 million with organic growth of negative 26.5% on a trailing four quarter average annualized basis. The sequential revenue growth in the second quarter of 2009 compared to the first quarter of 2009, was minus 9.4%. Gross margin for services excluding stock compensation and reimbursed expenses for the second quarter was 30% which is down from 38% in the second quarter of 2008. The decline in gross margins is primarily a result of lower utilizations resulting from softness in service demand and a slight decline in average bill rates. Management has and will continue to manage our labor costs to match expected demand.

SG&A expense was $10.1 million for the second quarter compared to $11.6 million in the comparable prior year quarter. Excluding non-cash stock compensation, SG&A was $8.4 million compared to $10 million in the comparable 2008 quarter. SG&A excluding stock compensation as a percentage of revenue was 19% in the second quarter of 2009 compared to 17% in the second quarter of 2008.

EBITDAS, defined as earnings before interest, taxes, depreciation, amortization, and stock compensation for the second quarter of 2009 was $4 million or 9% of revenues compared to $10.8 million or 18% of revenues in the second quarter of 2008. We reported a moderate net loss of $196,000 compared to net income of $4 million for the second quarter of 2008. Diluted GAAP earnings per share was a loss of $0.01 compared to earnings of $0.13 for the second quarter of 2008. Non-GAAP earnings per share was down 60% at $0.08 for the second quarter of 2009 compared to $0.20 in the year-ago quarter.

Our tax rate for the three months ended June 30, 2009 was 186% compared to 41.3% for the comparable prior year quarter primarily due to the magnified effect of certain state taxes which are generally based on gross receipts instead of income, permanent items such as meals and entertainment and non-deductible executive compensation relative to a smaller income base. Our average billable headcount for the second quarter was 998 including 892 billable consultants and 106 subcontractors.

In addition to the billable headcount at June 30, 2009, we had an average of 164 full-time equivalent SG&A personnel which results in a total average colleague headcount of 1,162 at June 30, 2009. We have reduced our average billable U.S. headcount from 1,035 in Q4 2009 to 866 in Q2 2009, a reduction of 16%. We will continue to adjust our cost structure primarily headcount based on changes in customer demand. As part of our ongoing cost reduction initiatives in the recent revenue contraction, we are planning to vacate several office space leases in the third quarter. This will result in a one-time third quarter charge and a decrease in future lease expense.

Turning now to the six month results, year to date revenues for the six months ended June 30, 2009 were $96.2 million, a 17% decrease over the comparable period last year. Year to date services revenue excluding reimbursed expenses were $85.7 million for the six months ended June 30, 2009, a decrease of 19% over the comparable prior year period.

Gross margin for services excluding stock compensation and reimbursable expenses for the six months ended June 30, 2009 was 30.2% which is down from 36.4% in the prior year period. Again, the decline in gross margins is primarily a result of lower utilization resulting from softness in services demand.

SG&A expense was $20.7 million for the six months ended June 30, 2009 compared to $22.3 million in the comparable prior year period. Excluding non-cash stock compensation, SG&A expense was $17.2 million compared to $19.1 million in the comparable prior year period. SG&A excluding stock compensation as a percentage of revenue was 18% for the six months ended June 30, 2009 compared to 16% in the comparable prior year period.

EBITDAS for the six months ended June 30, 2009 was $9.3 million or 10% of revenues compared to $19.9 million or 17% of revenues for the comparable prior year period. Net income was $700,000 for the six months ended June 30, 2009 compared to $7.1 million in the prior year period. Diluted GAAP earnings per share decreased to $0.02 a share from $0.23 a share in 2008. Non-GAAP earnings per share for the six months was down 51% over the year-ago period to $0.18.

Our tax rate for the six months ended June 30, 2009 was 58.8% compared to 41.1% for the comparable prior year period, again primarily due to the magnified effect of certain state taxes which are generally based on gross receipts instead of income, permanent items such as meals and entertainment, and non-deductible executive compensation relative to a smaller income base.

During the second quarter we spend $4.2 million on and repurchased 639,000 shares. As of June 30, 2009 we have spent $16.2 million on repurchasing 3.1 million shares since the plan's inception last year and we're up to $18 million in total spending through the current date. We continue to believe our shares are undervalued and that repurchases will drive future accretion and shareholder value.

As Jack mentioned, we also continue to generate strong operating cash flow. Our operating cash flow for the six months ended June 30, 2009 increased 46% over the comparable prior year period even with lower EBITDAS. We ended the quarter with no debt and $31.3 million in cash on hand, an increase of $6.4 million during the quarter, and $8.4 million since December 31, 2008.

Our day sales outstanding on accounts receivable was 72 days at the end of the second quarter compared to 75 days at the end of the comparable period last year. As we've always stated, our goal is to maintain our DSOs between 70 and 75 days over time.

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

Thanks, Paul.

As Jack mentioned earlier, Q2 was challenging but it was something we had anticipated and planned for. The utilization was flat with Q1 and again slightly below our target range of 80% plus at 78% including subcontractors. But I think given the top line challenges in the quarter, that's a relatively healthy number and indicative of the adjustments we made. As demand stabilizes and begins to grow, I'm confident we'll have little problem in ramping the utilization back up. In fact, we've demonstrated this in the past. We can run utilization in the 83% to 85% range which would translate to a top line increase of about 9% and that would largely drop to the bottom line due to that leverage that Jack mentioned earlier. Excuse me.

From a sales standpoint, we closed ten deals north of $500,000 in the quarter, compared to 11 in the first quarter and a few multi-million dollar deals at existing and new clients this quarter. Our revenue in sales remain well diversified across technology platforms, solution areas, industries and geographies, and obviously that benefits us in any economy but particularly important in a weaker climate.

During the quarter, our top five customers combined to represent about 23% of revenues in our largest industry, energy, which is still a very strong sector for us and an expanding sector for. It accounted for about 17% of revenues in total.

On the last call we mentioned that we believe this market environment represented an opportunity for growth this year at our China facility and we're seeing a lot of traction there right now. While our total revenues were down for the Company in the quarter on a sequential basis, our global development center revenue contribution increased in the quarter by 15% of a relative basis. So, that's the amount of contribution from off-shore went up by 15% relative to the rest of the Company.

Again, this isn't a situation where it's impacting our existing revenues. This capability is helping us compete for and win deals we wouldn't otherwise win. So, we're not cannibalizing here in the business. And the gross margins are very, very strong out of the facility, about 60% - even over 60% in most cases. In fact, we have now 17 clients that we're serving out of the GDP. I think we were at about 12 in the last quarter. That's strong evidence of our broadening traction there.

I also mentioned in the last call that we had introduced some support and maintenance offerings that were getting some traction and that's going pretty well. We've also made investments in developing application testing services. We're beginning to see some very solid traction in that area as well, even as a stand alone service in addition to the complementary service to our development efforts.

Also on the last call, I referenced some cautious optimism for the third quarter and the second half of this year. While it's still pretty early, I do think we may have seen a bottoming process completing in Q2 and carrying into Q3. The supporting evidence of that is the fact that, as Jack mentioned, July was our strongest sales month year to date for the year. The quarterly revenue sequential decline obviously has slowed. It's not -- while we're still guiding down, that guidance has improved over the last three quarters.

Revenue per billable day, and I think this is the most important fact here, revenue per billable day for all three most in the third quarter is projected to be flat with June. So, if in fact that sustains, we may be seeing a bottom right here. June, July, August, September. And in fact, I actually think we've got some upside in the back half of the quarter or the back third of the quarter, at least.

This month of September forecast is the strongest third month forecast we've had in a given quarter in the last four or five quarters. I think those are all good signs. Knock on wood. No guarantees. But we are encouraged at least by those things. Again, we'll have to see how August and September play out. But our pipeline continues to grow. Anecdotally, the client feedback supports the thesis that we're starting to see some incremental increase in client confidence here in the second half of the year. Again, it's early in the second half but we're beginning to see some things loosen up, unlocking some dollars and moving forward on some planned projects.

I also think last week's GDP number is a healthy sign. As I've mention previously, I believe that when GDP can flip positive, Perficient will be in a great position to capitalize and resume on our path of sustained top line and bottom line growth. As you may recall, we talked about this before, coming out of the last downturn, we really emerged at an accelerated pace even within our industry and I expect that the same thing is likely to happen again.

Of course our long-term goal of reaching $500 million in revenue remains intact. When the market normalizes, we're going to look to supplement our work to drive organic growth with accretive acquisitions as Jack mentioned. I mentioned this on the last call as well and Jack touched on it earlier. We're targeting early 2010 and I'm intent on getting out of the market and really getting serious about acquisitions again later this year with an intent of closing something the first half of 2010. Obviously, as Jack mentioned, that's very dependent upon the overall environment, macroeconomic environment as well as our own business stability and the stability in our sector.

All in all, I remain more optimistic than ever about our future and I'm pleased to report these findings. Jack, back to you.

Great. In terms of outlook for the quarter, Q3 and the rest of the year, first we are reiterating our full year revenue guidance of $180 million to $200 million. We're adjusting our cash earnings per share guidance for the full year to $0.30 to $0.40. And that was really already reflected in the analyst consensus number which has been in the mid $0.30. So, no huge news there from a market standpoint.

In terms of the third quarter, we're looking at revenue in the range of $42 million to $45 million and comprised of $40 million to $42.3 million of services and $1.9 million to $2.4 million of sales from software. So, again, those are the numbers and as Jeff has pointed out and I referenced earlier, we think we're seeing a bottom in process here. We're optimistic for the second half of the year and those July sales numbers were very strong.

I also want to talk about the CEO transition. This is really not new news. We had disclosed some time back in March that our succession plan had Jeff moving up to the well deserved appointment to CEO and we are setting the date on that now as September 1 of this year. I'm going to remain as Chairman and just very, very happy to announce Jeff's appointment. He and I have worked together as partners to build this business for basically eight years now and Jeff has been running the business day to day for several years as President and CEO. As I said in the press release and mean it, the guy knows the business inside and out. I know the investors and folks who have gotten to know him and hear him on these calls and meet with him in person and see him at the conferences know that and he is just going to be a terrific leader for this business. He's done an exceptional job and we could not have gotten where we are today and have the growth that we've had without Jeff. He has my full confidence. He was the full trust of our colleagues and our clients and our board and I know he's going to be just an exceptional CEO/ and lead Perficient into an era of continued strong growth. So, Jeff, congratulations. And any -- would you like to say a couple words on that?

Sure. Thanks, Jack. Thanks also for the very kind words. I really appreciate it. I'm obviously really proud of what we've accomplished together, what Perficient's become and obviously I'm looking forward too to your continued leadership as Chairman on the board and what is a new chapter, I guess, really for each of us in the Company. I'm of course excited about the challenge and welcome it.

As I've already mentioned, I'm as optimistic as ever about Perficient. I fully believe Perficient's best days for our colleagues, clients, and shareholders truly remain ahead. So, I'm looking forward to our next chapter and again thank you very much.

Alright. With that, let's open it up for questions.

(Operator Instructions) Your first question comes from the line of Jon Maietta with Needham and Company. Please, proceed.

Thanks very much. Jeff, congratulations.

Thanks, Jon.

Jeff, you had talked about potentially bottoming here in that activity has picked up somewhat in the month of July and as we move through the summer. Has that pickup been pretty broad based or is it more concentrated in healthcare, energy, any particular vertical or type of work?

No. It's pretty broad based. I think we're consistent. The break down across sectors is consistent. Where there's some difference is sort of geography. We're actually up, flat or up in this forecast in 80% of our business units. It's really only four that are in a down cycle. It's interesting. Those four went into this down cycle later. So, I think they're just cycling through at a little later stage. The rest of the business is really -- like I said, about 80% of the business is actually - seems to be on the mend and like I said, forecasting flat or up for the quarter.

Got it. Okay. And then follow-up question to that. Paul made a remark and, Paul, I'm not sure if you meant down year over year or down sequentially but on the bill rates. The bill rates, are they pretty much stable or - ?

Yes. The bill rates are down about $3.00 from the first or second quarter. Jeff can give a little more color on it but we're seeing some modest pricing pressure. Jeff, do you want to add something on that?

Yes. I think that's exactly right. We talked about pricing pressure for some time now and I think modest is the right word but it's there. I think I mentioned that on the last call. I think we're seeing the effect of that now on the revenue side. So, when we report bill rates, of course, it's based on booked revenue, not sales. So, where we hit some pricing pressure for awhile, we're starting to see that revealed more on the revenue side.

It's not dramatic but I will tell you the mantra that I repeat to our GMs and our sales folks is we don't want to lose any deals based on price in this climate. We're getting very competitive on pricing where we need to. We're also still enjoying good rates in a lot of areas of the business. As you know, we've got a lot of niche skills, very, very deep skills that just aren't duplicated in other firms. So, we've still got some good pricing power. There's an impact there.

Some of that down tick would also be China ticking up sequentially.

That's exactly right. There's some effect of China. We're still down though. If you round it up - $3.00, like $2.50 even netting China out.

Got it. And then just last question for me, mix is fixed price versus time and materials. Did that change much on a sequential basis?

Paul? I think we're about consistent on a sequential basis. But down considerably to about -- what?

Yes. I'm looking it up here. It's basically flat on a sequential basis, but it is down compared to second quarter of last year.

Got it. Okay. Thanks very much.

Thank you.

Your next question comes from the line of George Price with Stifel Nicolaus. Please, proceed.

Thanks. Good morning, gentlemen. Nice numbers and, Jeff, congratulations.

Thanks, George.

First thing I wanted to ask is services in the quarter was below guidance. Hardware, software came in a little bit ahead. Can you give us some color on what happened to this components in the quarter relative to your original expectations?

Yes. Paul? Help me out there. I don't believe it was below guidance. We were within the guidance range for all numbers.

Yes. That's right. I'm just pulling up the numbers here. Yes. The guidance range on services was $41.8 million to $43.9 million and we were at $43.1 million.

Okay. Sorry. I messed that all up.

That's okay. We were actually -- you know the way we do guidance is we -- our forecast reflects the midpoint. Or the midpoint of guidance reflects our forecast and then we put a buffer on either side of it. So, on services, we actually came in a little over the midpoint.

Okay. Services revenue wasn't $40.8 million?

So, the guidance number is the services including reimbursed expenses.

That's net. Got you.

That's right.

Understood. Alright. Second question then, if with business booked in July being so high, why is the third quarter revenue guidance then basically down quarter over quarter?

There's about a 60 to 90 day lag between sales and delivered revenue. Even that is imperfect because a lot of these deals, particularly these deals north of $500,000 or north of $1 million are six month deals. So, we won't realize -- the benefit of July will be spread over the next six months in reality.

Now, again, the key thing there is can we sustain sales, close deals or book sales month to month that's higher than our current revenue run rate? Then, again we're going to see that translate into growth. And so it's only one month. As we mentioned, we're very cautious to say that we're out of the woods. But I think it's a good sign and better than we've seen so far this year.

Okay. And just your comment on the market recovery in the press release to be incremental rather than immediate can you kind of flesh out exactly what you meant by that and if your expectations of how we're going to come out of us, have they change or if they've changed?

I think the bottom lasts longer than -- when we modeled this year and we provided guidance for the year, we had kind of a U-shape to our model on the revenue. I think we're going to see that but I think two things -- the bottom of that U has shifted right in time. Right?

So, it's really more, I think, what we were hoping was going to be a straddle of second and third quarter is probably hitting a little more in the third quarter than our original model had shown or planned. And it remains to be seen how steep the second leg on that U is going to be. I believe it's there. I'm optimistic, actually, as I said, that barring seasonality -- fourth quarter by the way is always historically down about 4% sequentially off the third quarter just due to seasonality with the holidays, vacations, et cetera.

But barring seasonality, I've got some optimism that we might see some improvement in the fourth quarter. But I think it's shifted a little bit right in time. It might be a little less steep of a second leg than we had originally modeled and that model was done nine months ago. That's what I was referring to.

Got you. And just a couple housekeeping items. Could you give utilization excluding the subs in China and average bill rate?

Paul will find that.

Sure. Yes. So, I'm sorry. Excluding China the bill rate went from down $3.00, as we said, from $1.18 to $1.15. And the rate -- I'm sorry. Did you say including or excluding - ?

Utilization excluding subcontractors in China?

Yes. So, that went from 75% to 76%. So, up a tick.

Okay. And then finally could you give cash from operations and CapEx? Actually you just filed a Q. So, I'll get it from that.

Yes. The Q's on file.

Great. I'll hope off, let somebody else in. Thanks very much.

Thanks, George.

Thanks, George.

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

Great. Good morning, guys. Thanks.

Hi, Brian.

The first question I had, just a follow-up to George's last question, what was the actual average blended bill rate with China? Did you say that? You just said the one ex-China, I think.

Yes. So, I did -- I'm sorry. Your question is the all-in rate is including China, it went from $108 to $105. The rate excluding China went from $118 to $115.

Then, Paul, you had mentioned a onetime charge in the second quarter. How big is that? And is that included in the cash earnings guidance or is that not a cash charge?

Yes. So, we certainly accounted for that in the cash earnings guidance. We're still in the midst of the real estate portfolio review but we expect it to be -- rough estimate is $0.01 to $0.02.

Okay. Now I'm curious, without a change to the revenue guidance for you guys, what was the factor that drove you to reduce your cash EPS? Is it lower bill rates? Is it lower utilization than you might have expected? Just give us a sense for what changed cash EPS?

Yes. It's primarily a function of the fact that we're trending a little toward the lower end of that range. You know, with the $20 million range that we had out there, had we been at the higher end of it, I think we would've exceeded the $55 million at the high end of the original cash earnings range. It looks like we're coming now in more the $180 million to the $190 million. So the $45 million to $55 million was built around the midpoint of $190 million and it looks like the services component of that is going to come in a little below that midpoint.

At the - I'm curious, as you've obviously reduced headcount, did a lot of that happen towards the end of the quarter, at the beginning, and what's your sense for the second half of the year. You'd mentioned 83% to 85% utilization that you're comfortable with. Is that something you're expecting to happen in the second half of the year? Or is that just a lever that you have that you're trying to tell us you can pull if you need to?

Yes. I think it's going to be -- that's not a lever we would pull. We need -- what I mentioned was we need stabilized demand and growth to get to -- certainly to get to an 85% level. The reductions occur really on an ongoing basis. We're constantly evaluating what our need are, primarily on skills but also in geography and making adjustments. We've actually done a fair amount of hiring in some business units and others, unfortunately, we've had to let some folks go. But it's an ongoing process. We'll continue to do that in the third quarter as we need to. It's my hope that now that we're stabilizing, we'll be doing a lot less of that and begin to do more hiring.

The 83% to 85%, again, is in a healthy climate, in a growth climate. That could be as early as the fourth quarter. It could be the first quarter. No, guarantees, but just based on the trend that we're seeing, I think our expectations at the beginning of the year are actually panning out to be more or less right. I think the severity of the dip was a little more than our midpoint but still within our expectation. And as I said before, a little shifted further in time. So, a little more prolonged than we had originally had hoped for but I do think there's going to be a recovery here. Obviously there will be. It's a matter of when. I think it could be in the next two to three quarters. Then I think you'll start to see utilization very happy back into the low to mid 80%.

Great. And then you talked about a lot of your business units are up, 80% of them you said were down. Can you give us a sense of what's down? And also give us a sense -- I think you mentioned energy. What's up? Maybe some of the drivers behind some of the key points of both?

I'm not going to give specifics on that, but I will tell you that one of them is specific to one particular vendor area that we work with and they happened to be kind of big ticket items. In our -- a lot of Fortune 1000 clients that are just holding off on those investments. Again, that's part of the pent up demand we've talked a lot about. That's very real. That vendor sees it, we see it as well. And then the others are geographic. More probably in the South than the rest. Again, the South has fared very well through this downturn for us. I think it's cyclically sort of their turn to take a little bit of a hit, to put it sort of crudely. But by and large, they're actually -- that's not even across the board there. That's just in a couple of specific business units, couple of specific cities.

Did you mention what revenue by vendor was for the quarter that you've mentioned?

Paul? You want to break that out?

I would do it by percentage.

Yes. We'll do it by percentage. Yes. For the second quarter, IBM was 23%, Oracle 19%, TIBCO 16%, and Microsoft 12% are the top four.

And in terms of pricing, we just talked about that a second ago, it's sort of a backwards view. I guess I'm curious when you look to the second half of the year, do you assume that prices will be a little bit lower either on a blended rate or for China? And when you break them out versus domestic? Is that what you're hearing in your discussions in your early sales in July? Or is it more stabilized do you think?

I expect that there will continue to be rate pressure for the next couple of quarters until things stabilize. The interesting thing about this business is that as soon as demand picks up, pricing power begins to return. It's not necessarily the flip of a switch, but it's sort of close to that. You know, we're not seeing demand pick up yet. I think we're on the cusp of it. So, until it does, I would expect to continue to see pricing pressure and some modest reduction in rates. That's not a definitive either. As I said, we're still faring pretty well in the rates that we're getting. We've still got some good pricing power in a lot of the offerings that we have. So, I think we're going to see something that might be within 1% or 2% of where we are now and then I think actually pricing power returns again within that two to three quarter timeframe.

Okay. The last question I have, talking about M&A early next year potentially, I guess I'm interested, a lot's changed. So, what would you look for? Are we looking for a little more scale in these acquisitions to get you back up to where you could be? Are you looking for geographies? Are you looking for certain vendor relationships that you may or may not have to build? Give us a sense for what some of the main key areas you would look for?

It's probably less scale. It's more broadening our portfolio, adding new skills, in some cases adding some scale. Some of the skills we already have and we're pretty keen on moving more towards the business end of technology consulting. I want to be really clear. We're a technology consulting firm. We're going to stay that. But I'm talking about things like performance management wrapped around business intelligence and business process management around SOA and EAI platforms. So, that's probably our most keen interest. I'd be more interesting in national firms with national delivery capability than geographic based just because it's got more flexibility and more leverage. That said, if we find the right one, we're still looking to expand our geographic footprint as well.

Okay. Thanks, guys.

Your next question comes from the line of Richard Baldry with Canaccord Adams. Please, proceed.

Thanks. Could you talk a little bit more about the strength in July sales, whether it was kind of a broader number of wins in the quarter or deal sizes maybe were climbing? And then if there's a way to think about maybe other lead times or durations of the deals, how quickly they typically ramp after you sign them to get a feel for when that might have an impact on the P&L? Thanks.

Sure. I think the good news is it was pretty diverse. There was one very large deal in there -- I say very large, large for us, a couple million dollars. But for the most part it was across the board. We signed a lot of deals in July. The nice thing about that is you sort of hit the nail on the head. A lot of these deals start small. It's a phase I or planning phase, an initial stage, and then obviously develop into a more prolonged engagement and a broader engagement. So, I think we'll see the benefits of those July sales and again, those have to sustain. If we go from that to a big contraction again in August, then that might've been just a blip. But if that does sustain, I think we'll begin to see the benefits of those -- I think I mentioned earlier, probably in the next 60 to 90 days.

So, moving into Q4 we've got to sustain that sales rate, but moving into Q4 we could begin to see some growth back in the top line again. Again, that has to sustain. I would be very careful about that. But it is across the board. The interesting thing about it is the durations of those large deals are longer than they were in the second quarter. So, the good news is we're going to have a nice backlog as a result of that moving into the fourth quarter and even into the first quarter of next year that we can build on at a time where I'm anticipating demand is going to be increasing. As I said before, there's no guarantee, but there's a good chance that we could see some nice acceleration for us on the recovery. That's what we've experienced in the past. I think there's reason to believe we may see something similar here. Again, I'll come back to in the next two to three quarters and barring any major let down in the economy.

If we look on the balance sheet, even as you're buying back stock, your cash has really doubled in the last nine months. Sort of wondering, can you talk about maybe the scale of ongoing buybacks that you might see over the next six, 12, 18 months and whether one of the reasons you're allowing the cash to accumulate maybe quicker than I might've thought otherwise is because the acquisition pipeline opening up? You think that there will be more of a cash component to help people who've been stress through this time period that may want more of a cash component as a way to get out of the situation they're in when you acquire them?

We use cash in acquisitions. We do about a 50-50 typical deal cash to stock. We wouldn't change that model because it's very important that these guys are aligned. Those principals that stay on are aligned with our interests which means they're stock holders and that stock, in fact, is locked up over typically a three year period. We wouldn't go out and offer a lot of cash. Those are bad deals. We've seen that in the past and they simply don't work. We've not done that and I don't think we would do that; however, we do use cash for acquisitions and obviously it's nice to self-fund those rather than to have to borrow the money. In terms of the buyback, Paul, you want to cover what our latest authorization is on that and to the extent that you can, kind of where we are on it?

Sure. As you can see, we've announced, we have a total of a $30 million buyback. We have bought $16 million through the end of June and we're up to about $18 million today. I think we'll continue to buy on roughly a similar pace to what we did in July. I'd also add on the cash build is that certainly as revenues have contracted here, we've been collecting that larger receivable base and not having to make as much of a reinvestment in new receivables. I think the growth in the cash will probably slow down some here in the second half.

Lastly, in the first quarter you talked about the top five accounts being about 20% of revenues, the top 10% maybe 30%. Can you talk about whether that's still sort of consistent in terms of breadth of the number of companies you're doing business with versus concentration? Thanks.

Yes. Paul, you want to take that?

Hold on a second. Let me pull that up here. Yes. So, that has stayed basically the top accounts have stayed roughly the same. We have -- our top four accounts are about -- top five accounts are about 21%. Our top ten accounts are a little over 30%. So, that's fairly comparable with where we've been the last few quarters.

Thanks.

Thank you.

Your next question comes from the line of Michael Martin with SmallCap Report. Please, proceed.

Good morning. Congratulations again, Jeff.

Thank you.

Just a couple of questions. Can you give us a little more color on what your customers are saying these days?

You know, I think probably not much beyond what I mentioned before. We -- if you go back about two quarters, we talked about maybe in the Q4 call, we talked about a lot of clients talking about, "Gosh, I've got a budget, but I'm not comfortable spending it or I haven't been allowed yet to spend and it will probably be the second half of '09 or maybe even 2010 before I really know." I think the best color I can offer is that the preliminary results from the second half year and I think this is sort of the explanation behind July and, again, we've got to see the sustainability there. And we've heard this from a lot of the clients. A lot of these deals we closed in July we've been talking to clients about for 90 and in some cases even 180 days. So, what we're seeing is that they are beginning, now that they're halfway through their year they can see and have some visibility into the second half of their year that those budgets have largely in some cases, not all, have remained intact and they're now releasing some of those budgets and letting some of these contracts.

Terrific. Is there anything else besides GDP in terms of economic indicators that you would focus on and find a sense where the business is going?

Honestly, it's looking at our peers and what they're saying. I think the bigger guys probably have a little better visibility than us. So, we tend to look at what they're seeing and really just looking at our own business I think is the best. Aside from just general GDP. Of course we track Gartner and Forrester reports and look at how they're interpreting the market, what their predictions as well specific for our industry.

Thanks very much.

Thank you.

(Operator Instructions) We've got a follow-up question from the line of George Price with Stifel Nicolaus. Please, proceed.

Thanks. Just had a couple last ones. Did you -- if you gave it, I apologize. I didn't hear it. China employees?

I think we're 135 billable in China. I'm confident we are, I should say. That's up from 87 roughly a year ago.

That's flat quarter over quarter though, right?

Yes. You know, you tend to hire in classes there. We had a lot of interns that we converted to employees. So, you do a lot of your hiring in the first half of the year.

Okay. And can you go through your vertical mix. I guess just in the higher level key vertical groups?

Sure. So, this quarter, our largest was, as we talked about energy and utilities was about 17%, healthcare, about 15%, telecom, 15%, and financial services about 10% and consumer products, 8%, are the top five.

Okay. And I guess last thing, I just wanted to follow-up on the charge in the third quarter. You said $0.01 to $0.02, rough estimate I understand. Just to kind of get beyond the vagaries of the tax rate and so forth, do you have rough pretax number, Paul?

We really don't give guidance kind at that level of granularity, so we've given the general guidance both for GAAP and --

I think, George, you're asking for the pretax charge dollars?

Oh, pretax for the charge. I'm sorry. Yes. So, it's a broad range but I'm going say, let's say $400,000 to $800,000.

Okay. And again just to be clear, that's -- you will be - anticipate excluding that or not excluding that from your cash EPS?

That would be included.

Included? Okay. Great. Thank you.

Thank you.

There are no more questions in the queue at this time. I will turn the call back over to Mr. Jack McDonald.

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

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