Perficient Inc (PRFT) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Third Quarter 2009 Perficient Earnings Conference Call. My name is Marisol and I will be your operator 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 the conference at which time you may press star one for questions. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Jeff Davis, CEO and President. Please proceed, sir.

Thank you. This is Jeff Davis, Perficient's CEO and President. With me on the phone this morning is Paul Martin, our CFO. I'd like to thank you all for your time this morning and we've got about 10 to 15 minutes of prepared comments, after which we'll open the call up for questions.

Paul, will you please read the Safe Harbor statement?

Sure. Thanks Jeff and good morning, everyone. Some of the things we will discuss in today's call concerning future Company performance will be forward-looking statements within the meaning of the securities laws. Actual results may materially differ from those discussed in these forward-looking statements, and we encourage you to refer to the additional information contained in our SEC filings concerning factors that could cause those results to be different than contemplated in today's discussion.

In addition, our earnings press release 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 again www.perficient.com under Investor Relations. Jeff-?

Thanks, Paul. Again, thanks everyone for joining; we're glad to be with you today. I think Perficient delivered a solid Q3. Revenues and earnings came in above the consensus estimate and our strong sales performance in the quarter has really laid a nice foundation for sequential growth in the fourth quarter. That's something we haven't been able to say now since the second quarter of 2008.

And we continue to generate solid cash flow, build out balance sheet and repurchase shares. We're increasingly confident that Q3 was in fact the bottom for us, and that we're now in the midst of a recovery.

On last quarter's call, we referenced that Q3 sales started off well with July having been the strongest sales month of the year so far in 2009. And I'm pleased to report that September actually exceeded those July figures. Beginning to deliver on those associated projects is already helping our Q4 which is typically slower due to seasonality. In fact, we're typically down sequentially off the third quarter about 3% to5% in the fourth quarter.

We [still continued to see] continued momentum on the sales front, obviously, but our Q3 performance was definitely a positive sign; and as a further indicator, the recent 3.5% GDP number also provides us some confidence that we stabilized.

I mentioned before that I thought when GDP began to consistently turn positive, even if it's only modest, that we'd be well-positioned to resume our growth and I think that's in fact the case.

Our balance sheet remains strong. The Company has no debt and with $28 million in cash at the end the quarter, and that's after purchasing nearly $6 million of stock during the quarter. So far in 2009, we've invested $12.7 million in our share repurchase program and have still been able to build our cash balance by $5.6 million.

That strong cash flow generation, plus our $50 million credit facility, fortunately puts us in a strong position to execute in the best long-term interest of the business.

Our repurchase program remains in place and we announced this morning in the release that the Board of Directors has authorized an additional $10 million for the buyback, bringing our total authorization for that to date to $40 million.

Also, if you didn't see the press release this morning, Kathy Henely has been promoted from Vice President Corporate Operations to Chief Operating Officer. For those of you who know her, you'll understand that this is largely a business-as-usual move. She and I have both been involved very heavily in the operations of the business for many years. She's a 10-year Perficient veteran and an excellent leader. I'm pleased to make this announcement this morning. Congratulations to Kathy.

We continue to monitor the cost side of the business as well and have consistently demonstrated that we'll adjust as the market dictates to ensure profitability. The adjustments we made in 2009 have us now positioned I think with excellent operating leverage, both on the delivery side and with SG&A as we move forward into more of a growth period.

As we discussed on the last call, we're more aggressively examining M&A candidates again and we've got a few candidates in the hopper now that we're looking at but it's still early into those stages. However, it's still our goal to close a transaction in the early part of 2010; of course, that's assuming that the economy doesn't head backwards again and that we continue to see stability in our sector and in our business.

Now for now, we'll continue to focus on customers and cash flow, continue to build the balance sheet, and buy back shares when it makes sense for our Company and our shareholders. And of course our long-term focus remains to build Perficient toward that $500 million revenue run rate that you've heard me speak of often.

I'll turn the call back to Paul now for a detailed discussion of our financial results. Paul-?

Thanks, Jeff. Total revenues for the third quarter of 2009 were $44.5 million, a 24% decrease over the year-ago quarter. Services revenue, excluding reimbursed expenses, were $39.3 million with organic growth of negative 27.8% on a trailing four-quarter average annualized basis.

The sequential revenue growth in the third quarter of 2009 was minus 3.6% compared to sequential revenue growth of minus 9.4% in the second quarter of 2009.

Gross margins for services, excluding stock compensation and reimbursable expenses for the third quarter, were 28.3%, which is down from 37.1% in the third quarter of 2008. The decline in gross margins is primarily the result of lower utilization resulting from softness in services demand and a decline in average bill rates. Management has and will continue to manage labor costs to match expected demand.

SG&A expense was $9.8 million in the third quarter, compared to $13 million in the comparable prior-year quarter. Excluding non-cash stock compensation, SG&A expense was $7.9 million compared to $11.5 million in the comparable 2008 quarter.

SG&A excluding stock compensation as a percentage of revenue was 17.9% in the third quarter, down from 19.6% in the third quarter of 2008. This decline is primarily driven by higher bad debt expense in the third quarter of 2008.

EBITDAS, defined as earnings before interest, taxes, depreciation, amortization and stock compensation; for the third quarter of 2009 was $3.6 million or 8.1% of revenues, compared to $8.4 million or 14.4% of revenues for the third quarter of 2008.

We reported net income of $115,000 compared to net income of $2.2 million for the third quarter of 2008.

Diluted GAAP earnings per share was approximately zero compared to $0.07 a share in the third quarter of 2008.

Non-GAAP earnings per share was down 50% to $0.08 for the third quarter of 2009 compared to $0.16 per share in the year-ago quarter. Non-GAAP earnings per share is defined as GAAP earnings per share, plus amortization expense and non-cash stock compensation, net of related taxes; divided by average fully diluted shares outstanding for the relative period.

Our tax rate for the three months ended September 30, 2009 was an effective benefit rate of 140%, compared to an effective rate of 40.8% for the comparable prior-year period. The current quarter benefit included a true up of our provision to our federal, state and foreign tax returns following the third quarter of 2009, as well as the effect of the Company's full-year projected 2009 tax liability on the current quarter.

Our average billable headcount for the third quarter of 2009 was 1,007, including 870 billable consultants and 137 subcontractors. We have reduced average billable headcount by about 13% from the third quarter of 2008.

Total SG&A headcount was reduced by 13.5 fulltime equivalents or 8% compared to Q3 2008. Again, we will continue to adjust our cost structure, primarily headcount, based on changes in customer demand.

Turning to the full year results, revenues for the nine months ended September 30, 2009 were $140.7 million, a 20% decrease over the comparable period last year.

Services revenue, excluding reimbursed expenses, were $125.1 million for the nine months ended September 30, 2009; a decrease of 21% over the comparable prior-year period.

Gross margins for services, excluding stock compensation and reimbursed expenses for the nine months ended September 30, 2009 was 29.6%, which is down from 36.6% in the prior-year period. The decline in gross margins, similar to the quarter, is primarily the result of lower utilization resulting from softness in services demand.

SG&A expense was $30.4 million for the nine months September 30, 2009, compared to $35.4 million in the comparable prior-year period. Excluding non-cash stock compensation expense, SG&A was $25.1 million, compared to $30.6 million in the comparable prior-year period.

SG&A excluding stock compensation expense as a percentage of revenues, was 17.8% for the nine months ended September 30, 2009; compared to 17.5% in the comparable prior-year period.

EBITDAS for the nine months ended September 30, 2009 was $12.9 million or 9.2% of revenues, compared to $28.3 million or 16.2% of revenues for the comparable prior-year period.

Net income was $800,000 for the nine months ended September 30, 2009, compared to $9.2 million in the prior-year period.

Diluted GAAP earnings per share decreased to $0.03 a share from $0.30 a share for the nine months ended September 30, 2008.

Non-GAAP earnings per share for the nine months ended September 30, 2009 was down 50% over the year-ago period to $0.26. Again non-GAAP EPS is defined as GAAP earnings per share plus non-cash amortization expense and non-cash stock compensation expense, net of related taxes; divided by average fully diluted shares outstanding.

Our tax rate for the nine months ended September 30, 2009 was 43% compared to 41% for the comparable prior-year period. The slight increase in the effective rate is due primarily 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 third quarter, we spent $5.8 million on repurchasing 760,000 shares and as of September 30, 2009, in aggregate we have spent $21.9 million on repurchasing 3.9 million shares since the plan's inception last year.

We continue to believe that current and expected repurchases of our shares will drive future accretion and shareholder value.

We also continue to generate strong operating cash flow. Our operating cash flows for the nine months ended September 30, 2009 have increased 41% over the comparable prior-year period, even with lower EBITDAS.

We ended the quarter with no debt and $28.5 million in cash and short-term investments on hand, an increase of $5.6 million since December 31, 2008.

Our days sales outstanding on accounts receivable was 75 days at the end of the quarter of both 2009 and 2008. Our goal, as we've stated many times, is to maintain our DSOs in the 70 to 75 days over time. We will continue to manage in that direction and we certainly will say that the aging of the accounts greater than 60 days has declined and is in the best position it's been in, in some time.

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

Thanks, Paul. As I mentioned earlier, I believe our Q3 performance in terms of revenue, earnings and sales is the first step on the road to resuming growth. Utilization was flat with Q1 and Q2 and again slightly below our target range of 80-plus%. We were at 78% including subcontractors. But I think give the economic challenges we faced this year, that's really a relatively healthy number.

And I think it's also indicative of our commitment to fiscal discipline. As demand stabilizes and begins to increase, I anticipate that we'll be able to pretty quickly move back to the utilization target range. As a matter of fact and I mentioned this on the last call, I expect that it's quite possible if not likely that utilization could run into the mid 80s in the full swing of a recovery.

I don't know if that's sustainable long-term, but I think there could be a pretty prolonged period; again in the midst of the recovery, we could run at that level. Obviously, that would correlate to improved top-line growth but really more substantial bottom-line improvements.

From a sales standpoint, we closed 14 deals north of $500,000 in the quarter, compared to 10 in the second quarter; and several multi-million dollar or million-dollar-plus deals with existing and new clients. From a pure numbers standpoint, we closed 24% more deals in the third quarter than in the second quarter and those improvements were across the board-- more small deals all the way up to more large deals, as I mentioned earlier.

In the press release we highlighted that our Q3 booked sales were 54% higher than in the second quarter. And that improvement is partially a reflection of course of the very challenging second-quarter sales environment that we had, but I think it's worth noting that if you annualize the third quarter numbers for sales, it would be a significant improvement over our current revenue run rate, hence the growth that we're seeing.

And during the quarter our top five customers combined to represent just 22% of revenues in our largest industry, which was telecom this quarter; accounted for 17% of revenues. I think that speaks well to our diversity, both in client size and lack of concentration there, as well as from a vertical standpoint. As a matter of fact, it's worth noting that every quarter this year we've had a different vertical represent our largest industry and I think that speaks to our ability to play horizontally across multiple industries.

With regards to verticals, we continue to have high expectations around healthcare in the next several years, based on a few recent wins as well as the political landscape. As an example, the stimulus add calls for $685 million to be allocated for state and local agencies to plan, design, build and implement health-information exchanges. And we've already won a couple of different opportunities there at the state level.

We also expect to win additional work based on mandated requirements surrounding electronic health records. A meaningful opportunity exists for Perficient to enable health systems to be compliant around patient and consumer exchange of medical information, but also the analytics around the measurements and results and the use of an EHR solution.

So to summarize Q3, evidence that we've seen the bottom continues to build. Q3 sales were much improved. The quarterly revenue sequential decline was the lowest in a year and maybe most importantly, our revenue per billable day has increased for four consecutive months, including October.

In fact, as we look forward to Q4, the Company expects our fourth quarter 2009 services and software revenue, including reimbursed expenses, to be in the range of $43.4 million to $46.7 million, comprised of $41 million to $43.3 million of revenue from services, including reimbursed expenses; and $2.4 million to $3.4 million of revenue from sales of software.

We remain confident, by the way, with our previously stated full year revenue and cash earnings per share guidance. With that, I'll open the call up for questions. Operator-?

(Operator Instructions). And our first question comes from the line of George Price from Stifel Nicolaus. Please proceed.

Thanks very much; good morning, everyone. First question; just if I look at the fourth quarter revenue guidance the $180 million to $200 million looks more like roughly $184 million to $187 million; so sort of in the low to mid area of the $180 million to $200 million range. You reiterated the $0.30 to $0.40. Should we assume that the same thing should be implied for the EPS range more in kind of in the upper 30s kind of EPS is really the implied range?

Yeah, I think the implied range to your point, would be more in the midpoint; more around the middle--right-- if it correlates to revenue. Now there's potentially some upside in revenue probably from software. Q4 is always a big software quarter for us. And we actually think we might have upside on the services piece as well. But when we put ranges out, our intention is always to try to hit the midpoint with some surety and obviously shoot for the higher end.

Got you. And just to follow up on your point; the software component of the guide, relative to I think prior fourth quarter, did seem a little lower. I guess-- what are you seeing out there in terms of client indications for potential flush at the end of the year?

Yes, if you look at our historical guidance relative to our actuals, it's going to tend to look conservative in the fourth quarter; and the reason for that is software deals materialize and close literally in the last few weeks of the quarter. So we don't have good visibility into that. I think actually this guidance is probably relatively strong to some prior fourth quarters, even though as I said, I do expect there will be some upside. We're seeing good signs from clients on spend, both on services and software. And certainly, as I said, I think we'll see some deals materializing, particular around some budgets that need to get used probably in the late November-December timeframe.

So again, I think there's upside to that. We just don't have that visibility right now.

Sure. How much do you think July and September is kind of catch up from under-spending earlier in the year versus new incremental spending? I guess the surge that we're seeing and we're seeing it with other companies too; coming into the third quarter and then the fourth quarter. How much of that can we think of as maybe continuing into next year versus it just happens that people under-spent earlier in the year?

That's a $50,000 question. I wish I had a crisp answer on it. We have some optimism that it's more than that, though. But you're exactly right. I think we won't know until early next year, how much that momentum carries forward. I do believe that this is just a small piece; maybe not quite the tip of the iceberg; but a small kind of scratch on the surface on the pent-up demand that is out there. So I think you're right. I think we enjoyed some of that being released in the second half of the year where there was some hold back. In the first half, I'm optimistic that that cycle won't repeat in 2010, based on what we're seeing right now-- even sales in October.

And also, this is really across the board and across all of our business units and products. But we're also seeing some pockets of improvement where our clients are taking bigger steps forward and buying some larger new license projects and larger projects. Our average project size of those projects or sales above $500,000 was about $1.4 million; that compares to about $900,000 in the second quarter. And again, that momentum is carrying forward in Q4. It's too early to tell how it ends up. But we're hearing both from our clients anecdotally and some other outside analysts such as Gartner, is that the appetite to spend is going to carry forward into 2010; how much remains to be seen. It could be that even more of that pent-up demand gets released and 2010 could be a good year.

But at a minimum, we're optimistic that we're going to see continued improvement.

And I'm sorry. Jeff, you started to say something about sales in October. If you had some comments in the call, then I apologize; I missed it. But what did you see in October relative to September?

Yes, we won't provide the specifics on that, but again, it's more good pipeline. When we close all those deals in July and September, one of the things that happens of course is you pull your pipeline down-- right-- the gross pipeline number comes down as you sell out. We were able to quickly replace that pipeline, rebuild the pipeline back to near its highest level of the year. And it had good sales results in October.

I guess let me ask one more question. Margins; I guess given the changes in the cost structure that you made this year, can you give us a sense maybe of what revenue level you need to be back at, at this point to achieve something at or close to a low double-digit 10% GAAP EBIT margin. I know you guys historically in the up cycle have been materially above that; but a GAAP operating margin.

I think with any given quarter, a 5% sequential increase over the prior quarter could get us there. So it's fairly modest, I think. And we've got a lot of leverage right now, but our infrastructure is solid. We won't have to add back to that for quite some time. So something as low as possibly even 4% or 5%. We won't have to hire or add a lot of additional cost to deliver that. So it should drop straight to the bottom line.

Yeah, and one thing that I would add on that George, is from an infrastructure standpoint and a back-office standpoint as we've made the necessary reductions here as the business has gone down, we feel like we're not going to have to add that back. And so therefore, the operating leverage will be there-- as the revenues pick up, a lot of that will drop right through to that EBITDA line.

Okay, last thing; Paul, just do you have utilization excluding subcontractors and also maybe some of the bill rate metrics that you typically give? Thanks.

Yes, so the utilization for the third quarter, excluding subcontractors was 74% compared to 76% in the second quarter-- excuse me-- and bear with me on the rates here. Yes, so the rates-- the all-in rate was $99 which is down from about $104 in Q2.

And what would you attribute that drop to?

So there were a couple factors there; our fixed-fee projects in the quarter had a lower rate that we think will snap back in Q4. We'll continue to see some pressure on our overall rate because of additional use of off-shoring and I think Jeff could probably give a little more color on this, but I think there was some general pricing pressure. Although frankly in September and October, we started to see our AVR trend back up.

Yes, I think it's far less pricing pressure to your point than it was-- a couple of these fixed-fee engagements that didn't produce the realized rates that we typically shoot for. Those, by the way, are behind us. And as Paul mentioned, the rates have already begun to snap back. They did in September to some degree and certainly October they snapped back nicely.

So as of right now, for this quarter, we're sort of running back to the Q2 average-- getting close to that. So I think that Q3-- I think that dip was largely kind of a one-time event. We may not get back to exactly that number but I think we'll be within a dollar or so of it.

Okay, great. I'll let some other folks dial in. Thanks very much.

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

Hi, good morning. Just Paul, you mentioned the $99. Can you do the ex-offshore rate as well versus last quarter?

Yes. So excluding offshore, we've got a number of different ways that we look at this. But the rate excluding offshore was down about $4 to $5.

For some reason I don't have last quarter's, so can you provide this one? Sorry.

Yes, and I apologize, I'm looking at a monthly schedule here, but it looks like-- let me get the right number-- I believe we're at $109 versus $104 but let me-- keep going and I'll confirm that number.

It sounds right; about $10 normally higher. You guys mentioned that each quarter has gotten a little bit better in terms of sales activity I think. Could you maybe somehow quantify September versus October so we can sort of see how that trajectory is moving?

Yes, like I said, we don't do a monthly detail. We closed about roughly $50 million in booked sales in the third quarter. And the reason I won't give you the monthly is it's too choppy. Like I said, we had a solid sales month in October and are seeing good results now and good anecdotal evidence that that's going to continue. But we don't provide the monthly detail.

And then maybe speak to sales cycles; they have been lengthening for awhile. Are they improving? Are they just kind of stable where they've been? Is there still a bit of reluctance?

You know, it's certainly not back to what we'd consider a healthy environment, but I think we have seen some modest improvement in the sales cycle. Companies are a little more willing to pull the trigger than they were six, nine months ago. And again, I think importantly from what we're hearing from, as I mentioned before I referenced Gartner and the like; as well as our own interaction with the executives that we work is that right now they're expecting larger budgets and an ability to let projects from those budgets throughout the year next year-- not a wait-and-see mode like they were in the past two years.

And Brian, back on the rates; just the way we normally reference that is the employees excluding China and that rate went from $115 to $110.

In the last two quarters you mean; $115 last quarter?

$115 in Q2, $110 in Q3.

Right. And back to sort of the sales-- what was going on there; would say that customers are still starting with smaller projects than they have traditionally-- that has been the trend obviously given the recession or are they moving more towards larger projects now?

They're definitely moving towards larger projects now. Whether that sustains or not isn't exactly clear, although we think it's-- there's a good chance it will. So yes, as I mentioned before, we closed 14 deals above $500,000 compared to only 10 in Q2. And that was-- even 14 if you go back three quarters, that's still the largest number that we've had in the past 12 months. So 14 deals and beyond that, again, the average deal size there was $1.4 million and that's also the largest that we've had in the last four quarters.

So definitely it's moving towards the larger projects. And again, I think some of that is probably related to this pent-up demand. The good news is-- I don't think the pent-up demand ends in one quarter.

I know you mentioned that you guys would constantly adjust your headcount as demand required. Did you guys cut more in the third quarter-- what I mean is sorry-- was that 1,007 employees-- is that an average or is that at quarter end?

That's an average.

And where were you at quarter end or where are you right now?

I think--

At quarter end, we were about flat with the end of Q2 and I'd say we're fairly close to that at the current point.

So as of right now, given that you're seeing demand improve a little bit, you're not expecting to cut more?

Not in net-- we always deal with skill mismatch; but I think not in net. We started-- if you looked at our headcount on a graph, you'd see it dip in the early part of Q3 and then we did actually do some incremental hiring near the end of Q3 to meet this demand that I've been talking about in September and forward.

And how about SG&A personnel? Is the plan to hold tight there as well or will there be changes made?

So in general, I think we've made most of the changes that we think we needed to, based on where the business was from a revenue standpoint, to this point. We also have put some of the people in the back office on shortened work weeks; some of the hourly people. So we have the ability to flex it up at a fairly modest incremental cost.

Okay. And did you guys mention cash flow from operations and CapEx. I missed it if you did. I'm sorry.

I think the cash flow from operating activities-- hold on I'll give you the number-- was $17.8 million, I think it was up about 40% from $12.6 million last year. And CapEx-- I just have the nine month number here, is about $570,000.

Okay. And the last question I had was-- and this is nit-picking so I'm going to apologize beforehand. But you guys have bought back a lot of stock this year and from the first quarter you're share count has only come down about $300,000. Could you speak to that?

There are a number of factors that go into the fully diluted share outstanding count, and one of which is the common stock equivalents on outstanding options and restricted stock, which is based on where the stock is. So as the stock has increased from in the 2s in Q1 to in the 8s today; we've had an increase in what they call the common stock equivalency as a result of that that has offset some of the impact of the restricted stock. So depending upon your view of where the stock is going to go from here, that number could help the share count or hurt the share count; just depending upon where the stock goes.

I understand. And how much-- this is a sort of related question-- how many options do you guys generally give, for example this year, outside of the stock moving-- how many new options have been given out this year? Do you know a rough number?

So all of that is included in the Q. And there were no options given out. Bt there was a restricted stock grant in I think April to non-executives and it looks like there was about 900,000 shares that have been granted year to date.

Great. Thanks very much.

And our next question comes from the line of Jon Maietta from Needham and Company. Please proceed.

Hi, thank very much. Jeff, given your comments around pricing, would you expect to see services gross margins to tick up sequentially in Q4?

Yes. The only factor in Q4 to keep in mind is that we'll have some seasonal impact on utilization in primarily December. But yes, I think the rates will pick up in October and November should produce pretty substantial material improvement in margin over Q3.

Okay. And then I don't know if it's too early to tell, but as you look into next year, at the beginning of the year particularly in Q1, would you expect to see kind of a typical seasonal pattern where the Q1 revenues fall off a little bit sequentially? Or given that we're at such depressed levels this year, do you think it's potentially a scenario where you could grow revenue sequentially into Q1?

I think it's the latter. We're seeing that now with the fourth quarter. I'm pretty optimistic this momentum is going to carry forward and that we'll see some sequential growth. That's certainly what our plan is calling in the first quarter.

Okay. And then Paul, with regard to the tax rate; how should we think about that for (inaudible)?

So on a go-forward basis our full-year basis I think the GAAP rate will probably be 42% or 43% and the cash EPS rate will be 38% or 39%. And there's certainly been some choppiness in the quarter, but the full rate should be in those ranges.

Okay. And then Paul do you have the industry vertical breakdown?

Sure. One second -- I'll pull that out. Yes, so telecom this quarter was our largest at 17%, healthcare 15%, energy and utilities 13%, financial services 10%, and consumer products 8% are the largest categories.

Okay. And then just last question-- Jeff, based on the commentary on this call, it sounds like sort of a broad-based modest uptick in demand. Is that accurate or did you see a couple verticals maybe bounce back a little bit stronger than others?

No, the good news is it's broad-based; it's really across the board; both from a technology standpoint and a vertical sector standpoint. And I would put it a little more than modest; I think again, if you look at a typical fourth quarter for us, we're down 3% to 5%. And the midpoint of our guidance has up 2%, so on a relative basis, keep in mind that's about a 5% or 7% sequential uptick for us sort of normalized for Q4 relative to Q3. And again, we're optimistic that that's going to carry forward.

So from what we've seen over the last several quarters, I would describe it more as a pretty robust snap back, so long as it continues-- we need to see it continue.

Okay. Thanks very much.

And our next question comes from the line of Jeff Martin from Roth Capital Partners. Please proceed.

Thanks. Good morning, guys. Could you give us what the fixed fee percentage of business was in the quarter and what you expect for that going forward?

I'll let Paul find a specific number. I think it's about 11% or 12%. Historically it's right around 15%. Interestingly enough, it's declined during this downturn. So I expect it'll come back but probably not get above that historical 15% run rate. So we're a little below that now, but I think will get back to that as things get normalized again. This does tend to be an arrangement more around large engagements or larger engagements. So as we see more of those coming our way, we'll probably see that number go up.

Okay.

So it was a little bit below 10% in the quarter and peaked, as Jeff mentioned, at a little over 15% in the first half of '08 and has been on a decline since the middle of '08.

Okay. And then if you had to rank the factors that impacted the average bill rate; how would you rank them?

Fixed fee was the top. I think fixed fee up probably about 60% of it; and again, that's gone now.

Sounds good. Could you talk a little bit to the acquisitions? What kind of valuation expectations are out there-- if they're in line with your historical purchase prices or if they're better? What's the receptivity of people?

The receptivity is excellent. I think they're going to be slightly better. Our historic range is 5 to 7 times EBITDA and I think we'll see things at the lower end of that range, but probably not much outside it. We're really only looking at businesses that are healthy and we're not looking to do a fix up. So those healthy businesses out there are still looking for a reasonable valuation I would describe it. Again, we're optimistic that we can be at the lower end of that range. But it remains to be seen.

Okay. And then in terms of the type of work; if you just classified them in two categories-- cost-savings initiatives versus growth initiatives-- would you say that the majority of work right now is cost-savings related or are you seeing a shift more into growth initiatives?

I think we're seeing a shift. A lot of projects that we've won recently, especially these larger engagements, are definitely more strategic and more forward-looking; more growth and leveraging proprietary processes, things like that.

Okay. And then the last question; what was the quarter end basic share count?

The quarter end-- the fully diluted share count? Oh, you want basic?

Please.

The basic number I think is about 27 million.

Okay. I suppose I could get it off the Q.

Yes, it's all-- the Q was filed this morning and that number is in there.

I appreciate it. Thanks, guys.

(Operator Instructions). And our next question is a follow up from the line of George Price with Stifel Nicolaus. Please proceed.

Hi, thanks very much. I just wondered-- you mentioned in the press release you think you could see substantial improvement in 2010. Do you care to give kind of any color on that commentary?

Yes, I think I've alluded to it a couple of times. It's if we-- again we're seeing anecdotal evidence. It's too soon to know, to have that visibility, that crisp visibility. But anecdotally, it looks like that this increased demand that we've seen in those sales months in Q3 that will materialize in revenue in Q4 and beyond, looks to be continuing. Our preliminary forecasts, which are very preliminary at this point for Q1, are pointing to a positive as well.

And as I said before, a 10% improvement, 15% improvement in demand for Perficient will have a tremendous impact on the bottom line. I don't think those kinds of numbers from the base that we're operating from are unreasonable at all. Of course there is a dependency there on general health in the economy and the willingness to spend in those executive suites.

And right now, again, it's our sense and some external evidence as I referenced Gartner before; that in fact is going to be the case; which I think will be a nice improvement for Perficient. We tend to do very, very well; even in modest increased-spend environments.

Okay. The timing of budgets and spend and in particular the areas that you guys tend to focus; higher-end software implementation and integration; what are clients saying about their budgeting process? Is it going to be more normalized this year? When are budgets going to be finalized in your view? And any senses-- I guess your preliminary; you said your preliminary 1Q view would be that things are going to continue to ramp in 1Q. So it sounds like the timing of the spend will be a little bit more normalized. But just when do you think they'll finalize the budgets?

I think that's occurring now, as these plans are coming together. And we'll certainly know more in December. We'll know a lot in January. During that holiday season, things tend to slow down to not much activity at all. And then in a healthy year, we see a pretty rapid snap back in sales, in the first part of January. So that's going to be really I think the tell-tale sign as to what 2010 is going to be. But what we're hearing again, anecdotally, is that it's going to be more of a normal cycle where they're going to take the whole year.

One of the things that I think these CIOs right now are frustrated by is that they're behind-- the demands from the business are still there; and yet they're behind on meeting those demands because they were shutdown on budgets on the first half of 2009 and for the better part of 2008 entirely. So there's a lot of frustration there and what we're hearing is that they're going to be allowed to utilize those budgets. They've got more normal budgets and then 2010 will be a more normal year, where they pick off projects at the beginning of the year as well as throughout.

Okay; any sense on the M&A environment? You guys have talked a little bit about-- and when I mean M&A I mean beyond-- I think you already commented on looking for targets yourself. But obviously we've had a couple of big deals announced in this space, more on the outsourcing side. But I was curious on your thoughts there and in particular, do you see or kind of feel any of these larger firms that have done some consolidation-- are they starting to show any indications of looking maybe to add more consulted-oriented businesses now that they've kind of stepped up on the outsourcing platform?

Yes, I think that's a natural gap; what they're going to find is to your point-- there's a gap between consulting and outsourcing. It's going to be hard to go sell outsourcing to people who buy hardware. They'll have some success with that, but you need that consulting gap in there that can address the business site as well, in my opinion.

So I think consulting-oriented firms will become a more attractive target, to some degree already are; but I think that's a gap that exists and particularly in the middle-ware space, there's a gap there. Of course, we're focused on operating this business day to day and long term without a lot of thought to that relative to Perficient. But I do think it's likely that that consolidation is going to continue to occur and there's a gap in those businesses that I think strategically they're going to want to fill.

Okay. Lastly, any comments maybe on some of your sales channel partnerships? I mean I know IBM has done some-- it sounds like some consolidating of their services channel partners which as I understood it, it would probably be net beneficial to you guys. But given where the environment is now, maybe what can you tell us about how those partnerships are working out, particularly IBM and Oracle?

Yes. Very well; our IBM relationship is I would say, better than ever. And we've done well with IBM this year. That's one area that has grown for us throughout the year; not just on a relative basis, but on a real-dollar basis. So we've done well there. The partnership is very strong. And you're right. They're actually consolidating out a lot of these sort of non-value-added re-sellers, so that will definitely be a benefit to the value-added re-sellers like ourselves.

And right now I believe that we can claim that we're one of, if not IBM's top partner in that field. So that's excellent.

Oracle also is a very strong relationship. We're a go-to partner for a lot of things with Oracle, including Siebel on Demand now, in addition to the Siebel on Premise. We're very, very strong in CPG. We've had a couple of large wins. Those are some of the things I was just referring to and a couple of these large deals where we're seeing clients coming back and being willing to spend more on the on-premise license arrangement that these larger companies need--SOD or Siebel on Demand is going to be focused more at the mid and down market.

So good relationship there, a go-to partner again for Oracle in that space; we're working to expand that relationship into the technology side. We do have some good capability there now. But we're looking to enhance that both sort of from a greenfield standpoint, but that's also on our acquisition list.

Is there any sense of, given the pressure that we've seen on software sales in general; do you feel any sense of increasing competition from the internal services arms of these companies?

No, certainly not with IBM. We compete-- IBM Software Services group of course is different from GBS. We compete with GBS frequently. We work in partnership with the Software Services group, and as I said, we've actually grown this year there. And IBM's view on that is that they're enablement. They're not there to compete with their partner. So that's an excellent relationship and they have an excellent view of that and I don't think you have any concerns there.

Oracle really the same way; our relationship with all of these partners is more on the software sales side. And even where these software sales folks might have some incentive to sell services, that's a difficult task for them. Their main incentives are around software. The reality is the rate differential just erodes the budget that they're trying to sell software into. So they embrace partners very much in the field and I don't see that changing anytime soon. In fact, if anything, I see them probably getting more partner friendly as they move forward. Leveraging our sales capacity and resources and presales resources saves them a bunch of money. What we've seen all of these guys do is actually cut back in that space and rely more on partners like us.

Interesting, okay great. Thanks very much.

Our next question is follow up from the line of Brian Kinstlinger from Sidoti and Company. Please proceed.

I just wanted to follow up; talking about all your partners, can you sort of split out what percent of revenue they each make up?

Sure. In the quarter, IBM was 27%, up a little bit as Jeff said, the business was strong there; 16% with Oracle; about 15% with Tibco and 14% with Microsoft are the big I guess that's four.

I want to make sure we're clear on that. That's a percent revenue breakdown on services work done on those platforms. That's not business we're getting from them, right?

That's right.

I worded that poorly, sorry. That's what I meant. Thank you. Bye-bye.

And this concludes the question-and-answer session for today's program. I would now like to turn the presentation over to Mr. Jeff Davis for any closing remarks.

Okay, that's it. Thank you all very much for your time today and we look forward to talking to you again in a quarter.

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