Perficient Inc (PRFT) 2009 Q4 法說會逐字稿

Great day, ladies and gentlemen, and welcome to the fourth quarter 2009 Perficient earnings conference call. My name is Katina and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this presentation. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Jeff Davis, Chief Executive Officer and President. Please proceed.

Thank you. This is Jeff Davis. Good morning, everyone. Glad to be with you here this morning on the call. With me is Paul Martin, our CFO. I want to thank you all for your time this morning. And as typical, we've got about 10 to 15 minutes of prepared comments; after which, we'll open the call up for questions. I'll ask Paul to read the Safe Harbor statement now.

Thanks, Jeff, and good morning to 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 included 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. This is posted on our website at www.perficient.com under News and Events. We have also posted a reconciliation of certain non-GAAP goals to the most directly comparable financial measures prepared in accordance with GAAP on our website at www.perficient.com under Investor Relations.

I'll now turn it back to Jeff. Jeff?

Thanks, Paul. Well, again, thanks, everyone, for joining us this morning. Perficient closed a strong -- or closed 2009, rather, on a strong note. The fourth quarter saw us return to sequential revenue growth for the first time since 2008 and has really laid a foundation for a solid start in 2010. Revenues and earnings came in above our guidance as well as analyst consensus estimate. And while we continue to generate solid cash flow, build our balance sheet, and repurchase shares, it's really the top and bottom line growth that I think is most notable here.

In spite of the seasonality typically associated with the fourth quarter, and as a reminder, we're typically down 3% to 4% sequentially in the fourth quarter, due to the seasonality from holidays, et cetera, we actually experienced a 5.2% sequential increase or growth organically over the third quarter. So again, a solid quarter, a solid end to 2009.

On each of our last two quarterly calls, we indicated a growing optimism that, in fact, mid-2009 was the revenue bottom for Perficient. I think our Q4 results and the current quarter guidance for Q1 give me the confidence to emphatically state that revenue did, in fact, trough in the middle of last year. Both sales and revenue are now resuming a growth pattern that we like to see.

Our balance sheet remains strong. The Company has no debt and more than $28 million in cash at the end of the year. That's $5 million more than a year ago after repurchasing about $18.5 million of stock during the year. Of course, that strong cash flow generation plus our $50 million credit facility puts us in a strong position to continue to execute in the best long-term interest of the business. $12.5 million of purchasing power remains authorized under our existing repurchase plan, though I expect you'll see us allocate more cash this year toward accretive acquisitions, as I mentioned in the past.

Speaking of that, and we discussed this in the last couple of calls, our goal is to complete an acquisition or two in the first half of this year and possibly another before year's end. We're in active discussions right now with dozens of firms and advanced discussions with a handful. And as before, obviously, these deals will be highly disciplined and only execute acquisitions that are immediately accretive to our bottom line.

With regards to the bottom line, our 2010 cash earnings per share guidance reflects the operating leverage that we've discussed in the past, and the fact that we're at an inflection point around that in the business. While the high end of our 2010 revenue guidance range reflects a 10% year-over-year increase in revenues, reaching the high end of our cash earnings per share guidance range will reflect an increase of 67% over 2009.

Even achieving only the midpoint or even the low end of our 2007 revenue guidance would still result in substantially increased earnings in 2010. And again, that's due to the leverage that we've discussed on the past calls. We've got solid leverage around SG&A, as well as some room to run on the direct cost side through increased margins from ABR as well as utilization. And of course, accretive M&A will only help drive those earnings higher.

I'll turn the call over to Paul now, our CFO, to discuss the financial details, and then I'll follow up with a few more comments before we open the call up for Q&A. Paul?

Thanks, Jeff. Total revenues for the fourth quarter of 2009 were $47.4 million, a 16% decrease over the year-ago quarter. Services revenue for the fourth quarter of 2009, including -- excluding reimbursable expenses, were $41.3 million with sequential revenue growth, as Jeff mentioned, of 5.2% compared to negative 3.6% in the third quarter of 2009.

Gross margins for services for the fourth quarter 2009, excluding stock compensation and reimbursable expenses, was 30.6%, which is down from 32.6% in the fourth quarter of 2008. However, it is worth noting that the fourth quarter gross margins of 30.6% showed improvement from the 28.3% in the preceding quarter.

SG&A expense was $9.6 million in the fourth quarter of 2009 compared to $11.9 million in the comparable prior-year quarter. Excluding non-cash stock compensation, SG&A expense was $7.8 million compared to $10.2 million in the comparable 2008 quarter. SG&A, excluding stock compensation as a percentage of revenue, was 16.4% in the fourth quarter of 2009 compared to 18% in the fourth quarter of 2008. The decline is primarily driven by higher bad debt expense in the fourth quarter of 2008.

EBITDAS, which is defined as earnings before interest, taxes, depreciation, amortization and stock compensation, for the fourth quarter of 2009 was $5.2 million or 11% of revenues, compared to $6.9 million or 12.2% of revenues in the fourth quarter of 2008. EBITDAS margins improved sequentially from 8.1% in the third quarter of 2009 to 11% in the fourth quarter of 2009.

We reported net income of $629,000 for the fourth quarter 2009 compared to $759,000 for the fourth quarter 2008. The fourth quarter of 2008 includes a one-time impairment charge of $1.6 million, or $0.03 a share. Diluted GAAP earnings per share was $0.02 for the fourth quarter 2009 compared to an earnings of $0.03 for the fourth quarter of 2008. Non-GAAP earnings per share was down 23% to $0.10 for the fourth quarter of 2009 compared to $0.13 per share in the year-ago quarter, and increased sequentially when compared to the $0.08 per share earned in the third quarter of 2009.

Our effective tax rate for the three months ended December 31, 2009 was 59.4% compared to 53.1% for the comparable prior-year period. The 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 nondeductible executive compensation relative to a smaller income base.

Our average billable headcount for the fourth quarter of 2009 was 1,027, which included 866 billable consultants and 161 subcontractors. We have reduced average billable headcount by approximately 12% from the fourth quarter of 2008. Total SG&A headcount for the fourth quarter of 2009 was reduced by 13 full-time employees or 8% compared to the fourth quarter of 2008. We will continue to adjust our cost structure based on changes in our customer demand.

Now let me turn to the full year results. Year-to-date revenues for the year ended December 31, 2009 were $188.2 million, a 19% decrease over last year. Year-to-date services revenue for the year ended December 31, 2009, excluding reimbursable expenses, were $166.4 million, a decrease of 20% over the comparable prior-year period. Organic growth was negative 16.4% on a trailing four quarters average annualized basis.

Gross margin for services for the year ended December 31, 2009, excluding stock compensation and reimbursable expenses, was 29.9%, which is down from 35.6% in the comparable prior-year period. The decline in gross margins is primarily the result of lower utilization resulting from softness in services demand.

SG&A expense was $40 million for the year ended December 31, 2009 compared to $47.2 million a year ago. Excluding non-cash stock compensation, SG&A expense was $32.9 million compared to $40.8 million in 2009. SG&A, excluding stock compensation as a percentage of revenues, was 17.5% for 2009 compared to 17.6% in 2008.

EBITDAS for the year ended December 31, 2009 was $18.1 million or 9.6% of revenues compared to $35.2 million or 15.2% of revenues in 2008. Net income was $1.5 million for the year ended December 31, 2009 compared to $10 million in 2008. Diluted GAAP earnings per share decreased to $0.05 from $0.33 in 2008. Non-GAAP earnings per share for the year ended December 31, 2009 were $0.36, down 45% from $0.66 earned a year ago.

Our effective tax rate for the year ended December 31, 2009 was 51.4% compared to 42.2% for the comparable prior-year period. During the fourth quarter, we spent $5.6 million and repurchased 666,000 shares; and as of December 31, 2009, we have spent $27.5 million on repurchasing 4.5 million shares since the plan's inception in 2008. We continue to believe that our share repurchases will drive future accretion and shareholder value.

We also continue to generate strong operating cash flow. We had operating cash flow for the year ended December 31, 2009 of $22.6 million compared to $25.1 million in 2008. We ended the year with no debt and $28 million in cash compared to $23 million at December 31, 2008.

Our days sales outstanding on Accounts Receivable was 73 days at the end of the fourth quarter of 2009 compared to 71 days at the end of the fourth quarter of 2008, and 75 days at the end of the third quarter. Our goal is to maintain DSOs in the 70 to 75 day range over time.

With that, I'll turn it over to Jeff for some additional commentary. Jeff?

Thanks, Paul. As I mentioned earlier, I do believe our Q4 performance clearly validated the markets improving and specifically for us. Utilization ticked higher in the United States and we saw substantial rebound at utilization at our GDC facility. I continue to expect the utilization could run as high as the mid-'80s in 2010. I've talked about that before and that's our comfort zone, is that sort of 82% to 84% range. We think that's sustainable on a long-term basis.

Billing rates were also up sequentially, and I expect that will continue as well, as we begin to get some pricing power back and we continue to see a healthier environment in demand creation.

From a sales standpoint, we closed just six deals north of $500,000 in the quarter as compared to 14 in the third quarter. But the good news is that in January of this year, we had a very, very strong sales month. In fact, we closed more deals north of $500,000 -- or we've closed so far more deals north of $500,000 in Q1 than we did in all of the third quarter -- that 14 in the third quarter. So we're off to a very, very strong start to 2010 from a sales perspective.

And we talked each quarter about the diversity of the business, and that was again the case in Q4. During the quarter, our top five customers combined represent just 22% of revenues. Telecom was again our largest industry at 18% of revenues from a vertical standpoint. Healthcare was a close second at 16% and I think healthcare is going to continue to gain. We're also seeing some gain in financial services; I've talked about this before as well. We end the year at about 10% from financial services after beginning at 8%. I think it was actually lower than that in 2008. So again, we're seeing some pickup there as we expect, and I think that will continue as well.

From a solutions perspective, portals and business integration were our strongest disciplines, followed closely by CRM, Customer Relationship Management.

So really, to summarize, we had a strong Q4 performance and have gotten off to a very strong start in 2010. Q4 was the first quarterly sequential revenue growth in six quarters, despite the seasonality associated with the holidays and vacations. As our guidance indicates, we expect this trend to continue through Q1 of 2010. As I mentioned, Q1 2010 sales are very strong so far, and shaping up to be what I expect will be our strongest quarter in several quarters from a sales perspective, and probably revenue as well.

M&A diligence is underway, as I've mentioned, and our goal remains to get two to three deals done this year, including one in the next few weeks. Our long-term plans to build Perficient into a $500 million firm remain intact. I think that's still a three to four-year runway from here, as long as the economy holds together and we continue to see the improvement that we are right now.

I'm optimistic that we're beginning to return to the pattern of growth that we've displayed in the past. You know, Perficient grew from a small startup to a $200 million market leader. We had 18.5% organic compound annual growth rate from 2004 to 2007. I think we're beginning to head into a period that could see substantial growth rates, maybe not that high, but I think they'll be substantial, as our guidance indicates.

Lastly, I'll comment on Q1 and the remainder of 2010. The Company expects our first quarter 2010 services and software revenue, including reimbursed expenses, to be in the range of $46 million to $49.1 million, comprised of $43.6 million to $46.0 million of revenue from services, including reimbursed expenses, and $2.4 million to $3.1 million of revenue from sales of software. For the full year 2010, both revenue and cash earnings per share guidance, we expect full-year revenues to be in the range of $190 million to $210 million, and full-year cash earnings per share to be between $0.50 and $0.60.

And with that, we'll open the call up for Q&A. Operator?

(Operator Instructions). Brian Kinstlinger, Sidoti & Company.

First, just a couple questions, the first one related to healthcare. I'm wondering about the electronic healthcare records and stimulus, and if that has already caused some acceleration in demand for you guys. And when you look to the next year or two, is this going to be one of the strongest areas for you, healthcare, because of electronic records? Or is there more to it?

Yes, I think the electronic health records and the health information exchange, the data hubs that are mandated, will certainly help us some. And they already have some, we're working with a couple of states right now on strategy phases for implementing that. We expect to get some more business from that. Certainly, anything legislated is some help.

However, I think it's a healthy industry. It remains a healthy industry. There's so much requirement to spend on technology and improve the efficiency within the industry the way that they serve their patients. There's also this concept of consumerism that's really gaining momentum within the healthcare industry as a sort of a self-governance mechanism, where patients actually have more rights and more ability to choose, that are forcing it, getting greater efficiencies and transparency. And all that requires technology.

So I think the combination of those things should represent a healthy business for us that's right in our sweet spot. And certainly the legislation hasn't hurt.

Then could you touch on financial services and what the IT consolidation following the actual industry consolidation means for you? And maybe what are some of the other drivers to what's going on in financial services demand for you guys?

Yes, I think a couple of things. One is just that business healing a bit, that industry healing a bit, and the ability for the industry to begin to take a more strategic long-term view of their business and make some investments and really let some capital expense projects. And that's just thing one. I believe they have -- to the extent that everybody's been clamped up for a couple of years, they have got to have been the worst, just because of the turmoil in the industry. So that's being one.

But certainly, to your point, Brian, again, right in our sweet spot is integration. And you've seen this substantial amount of consolidation that's occurred in that industry. So you're bringing people and processes together and trying to match them or integrate them into a single firm. And that's the business or that's the work that's underway now. In some cases, that's fairly down the path. Some businesses, from what we see, are fairly down the path and some have really begun to -- just begun to scratch the surface there.

But even those that are down the path are really still just addressing the people, the organization, the processes. And what will follow that will be the systems work or the IT work. So I believe that there's going to be kind of a watershed opportunity around financial services to help them redesign their systems, redeploy, reimplement systems and integrate existing systems that they haven't begun to do yet.

Okay. And lastly, on two unrelated questions. First of all, Paul, if you could provide the bill rates. You said they were up. Both metrics from a -- with offshore and without offshore.

And then finally, maybe can you comment on, over the last couple quarters, we've seen subcontractors be the place where you're adding resources as you need them. Just remind us the economics of that and do we expect that to sort of stop, now that demand is increasing and you'll be hiring more? Talk about that, please.

Brian, let me take the bill rate question first. So the AVR for Q4 all-in went from 99 in Q3 up to 102 in Q4. And if you take the rate excluding China, it went from 109 in Q3 to 115 in Q4. So that's a combination of the impact of -- as we've talked about, sort of as demand has increased, that's been able to help us on our pricing, as well as there's always some volatility in the quarter-to-quarter comparisons associated with fixed fee projects, which worked pretty well for us in the fourth quarter.

So, yes, on the headcount side, Brian, you're right. We did increase the subcontractor headcount in the fourth quarter to address some of the additional demand that we had there. Long-term, we intend to shift that to the employee base. Obviously, that's our preference. But until we've got some stability and certainty, which I think we're getting to that point now, you want to make sure that you're not caught in a situation where you're having to do layoffs again.

So with regards to this quarter or 2010 in general, if we are able to hit the higher end of that range, we'll certainly be doing some hiring this year. And in fact, I think we'll be doing some hiring again here at the end of this quarter. And we're hiring now; we're sort of hiring all the time, as we've talked before, from a skill standpoint. And you're always sort of right-sizing or matching the skills to the demand. And, of course, we've got voluntary attrition there as well.

But incremental hiring, I believe, we'll see a pickup here near the end of the quarter. But, as I mentioned before, our first plan there is to get that utilization and we're doing that. You're going to see that, I think, this quarter, well into the 80s. So for the employee base alone, our goal -- again, excluding China -- our goal is about 82% to 84%, call it 83%. And we're going to drive utilization into that range before we do any substantial hiring. But again, I think that will happen pretty quickly.

Sorry, what's the difference in the economics for subcontractors versus your own consultants? Is it significantly a better margin for you to have your own consultants?

Yes, it's a fairly complicated answer because it depends on the utilization, right? You've got employees -- you're covering that bench time; you're paying for that bench time. With subs, you're not. So if we can -- when we're running utilization at that sustainable level of 82% to 84%, yes, the economics are substantially materially better to have employees doing that work.

When we're in a contracting mode, sometimes it can actually be a little closer to an even -- a breakeven between the two by using subs. But again, I'm optimistic we're heading into that growth mode, and we're going to want to rely more on employees and subcontractors going forward.

Thanks, guys.

George Price, Stifel Nicolaus.

Nice job, nice numbers.

Thanks, George.

Just the first thing, I just wanted to make sure I heard you correctly. So while the deal size or that deals in 4Q was a little lighter in quarter-over-quarter; so in January, you've already got more, did I hear, than 3Q, than the 14 in 3Q? Did I hear that right?

That's right. Yes, we're -- so far -- I said January; it's really, I'd say, year-to-date, we've got more of those large deals closed than we had in the entire quarter in the third quarter. I don't want to get into specifics in a current quarter because I don't want to get in the habit of doing that.

But -- and the thing, too, I would caution about the fourth quarter -- fourth quarter is always kind of a low quarter from a sales standpoint. Literally, our customers sort of checkout, go on vacation, around Thanksgiving. And we don't close a lot of business in December; that's typical for the industry.

I think if you look at the entire second half of '09, it's a pretty healthy -- it was pretty healthy sales leading into what we're seeing now in the growth of revenue. A total of $78 million closed there in the second half of the year. And keep in mind that not every single deal runs through our sale system. We've got relationships with a couple of major clients, such as IBM, that we don't run every single deal through our [CIBOL] system.

So, $78 million plus some extensions that don't get reflected there was actually a pretty healthy step forward for the second half of the year. But we're definitely seeing a different trend. I think this is really relevant.

As you all try to look at the information we're providing you and assess where we are, in the first quarter of both '08 and '09, it was dry as dust from a sales standpoint. Customers were not buying much and it was really, really tough to find these deals. Now, I'm not saying it's easy now, but we've definitely seen a shift. Like I said, people were really holding onto budgets at the beginning of the year, waiting to see how their year unfolded. And thankfully, we're not seeing that right now.

Right now, we're seeing a return to a much more normal cycle of -- here's our plan for the year; we are beginning now; let's establish these programs and projects that are going to go on for 12, 18, 24 months. And here's the contract today.

So I guess, just are you -- how would you characterize the deals that you saw, particularly -- maybe also in the fourth quarter, but particularly what you've seen year-to-date, in terms of their size relative to whatever you consider a normalized demand environment, and in terms of maybe how far clients are thinking out or how much they're willing to make some investments now that maybe take a little while to come to fruition.

Are clients still, like, just ultra-focused on the stuff that's going to pay back boom very quickly? Or are they starting to maybe think out a little bit more?

Yes, it's definitely the latter. With regards to the fourth quarter again, the fourth quarter is never a big strategic spend quarter; it typically isn't in the industry. Because people tend to have a fiscal calendar year, so they tend to kick off their projects in January, like I said. We didn't see that in the last two years. We are seeing it now.

And to your point exactly, the kinds of projects that we're winning now that we're signing up now here in the first quarter -- which by the way, have been in the works for several months. I mean, the guys have been working on getting these deals lined up and working with these clients for the last half of last year, knowing that they're going to kick them off at the beginning of the fiscal year, the beginning of the calendar year, and ink them, and that's thankfully coming to fruition.

So -- but the effects of deals, to your question, are, yes, much more strategic, longer-term, larger commitments than we've seen in the past. I wouldn't say we're back to quote/unquote normal from 2.5 years ago or three years ago, but much, much better and a very marked improvement over what we saw a year or two ago.

And George, I might add, one kind of interesting statistic on that is that in the year-to-date sales, we track them by deal size, is we actually have more closed deals over $500,000 sort of year-to-date than we had in any quarter in 2009. So I think that sort of says directionally, this looks like a different year than we saw in 2009.

Okay. That sort of sets up my next question, which is the 1Q guide looks good, but given the talk around deals and given what you're looking for, for revenue in the first quarter -- not to be too picky, but certainly the lower half of the 2010 guidance looks pretty darn conservative if you think about things on a quarter-over-quarter basis.

I guess, if you could comment a little on that. How conservative would you say you're being? What are your macro and demand assumptions? Are you anticipating any hiccups in the second half? Just around that would be helpful.

Yes, you know, I think it is -- for those of you who have followed us for awhile, know that we're pretty conservative; but I think especially now, I think that's the right call to make. There's just too much uncertainty out there. You hear people talking about W-shaped recoveries and double dip recessions still.

We're very optimistic based on what we see. I do -- and based on that, I would say sure, I think our guidance is a little conservative. Keep in mind, though, that 10% year-over-year is actually substantial growth when you look at it on a sequential basis. We ended the year down from where we started the year. And we're guiding at 10% year-over-year, you're talking about substantial sequential basis.

When you look at the trailing four-quarter sequential growth that we're going to have to post for the year 2010 to get 10% year-over-year, because we ended on a low, it's going to be pretty substantial. It's going to be in the 15% to 20% range. So I don't think it's quite maybe as conservative as it looks on the face of it when you compare the four-quarter sequential to the year-over-year. However, I do think it's, based on what we're seeing right now, I'd say it's conservative. For the first time in a long time, we began to look into Q2 and focus on the Q2 forecast much sooner than we've been able to in the last couple of years.

So those are all very good signs. I'd say that right now, we're still a little nervous and still a little gun shy just based on what the economy has done and the tricks it's played, frankly, over the last couple of years. The cycles have changed and they're less predictable, or have been less predictable for a couple of years. So we don't want to get too ahead of ourselves. However, I'd say if you can't tell by my tone, I'm extremely optimistic that good things are coming.

Okay. Last question if I could, just kind of on a margin perspective, I guess, two parts. First, for 1Q, I know you don't give earnings guidance, but could you, Jeff and Paul, could you guys maybe give us a quick puts and takes on the cost structure that you see in first quarter? Because, obviously, there's seasonal factors but then there's some other factors, given how the demand environment has changed.

And then the second part of my two question on margin is, do you see any reason why your business, given the market and demand environment that you see now and how you've set up the business, do you see any reason why Perficient wouldn't be able to return to at least a low double-digit operating margin on a GAAP basis? Assuming you continue to see revenue rebound. Is there anything in pricing or competition or anything like that that would make you hesitate in agreeing with that? Thank you very much.

I'll take that last one first, George, and then I'll let Paul take your first question around margins in general.

The short answer is no. The question is timing. We've got -- our average project or program is going to run nine to 18 months, somewhere in that range. And so we've got rates locked in for the deals that we were able to close last year, thankfully. And it will be some time before we can push those rates up. And I think that's going to be a key factor for us.

We've, I think, demonstrated that we can operate very well and we'll get utilization back to sustainably high levels very, very quickly. It's going to be more the timing around getting the ABR back up. I do think we can move that up pretty quickly. We've already shown, I think, somewhat a result of improved demand environment, an ABR improvement in the fourth quarter. I think we'll see more of that down the road, particularly for the US base.

As we increase, by the way, that China component of our revenue, it's going to have some overall effect on rates; but from the US-based perspective, I do think we'll be driving those up. And once we do, yes, I don't see any reason that Perficient, over some period of time -- and if I would hazard a guess, I think it's probably 12 to 24 months that we could get GAAP EBITDA back into the low double digits. And with that, probably have EBITDAS into the high double digits. And again, I think that's probably 12 to 24 months; could be more or less, based on that demand environment.

Back to your question on puts and takes on Q1 margins, as you alluded to, certainly, there is about a 1 or 2 point impact of the seasonality of payroll taxes that hit harder in the first quarter. That being said, we're anticipating higher utilization in Q1; bill rates probably flat to up a little bit, so the combination of those we're anticipating sequential improvement in the gross margin in Q1 compared to Q4.

Great. Thanks very much, guys.

Richard Baldry, Canaccord Adams.

Your G&A has continued to incrementally come down a little quarter-to-quarter. Your headcount, you noted, has still continued to slowly come down. But with the revenue starting to turn up, could you talk about whether you feel like you're really starting to get into a baseline figure for the G&A line?

Yes, I'll comment on that and then I'll let Paul add to it as well. From a G&A headcount standpoint and spend, there's a bonus factor in there that I'm going to let Paul address and anything else he wants to add.

But I think I've mentioned this before and I've talked a lot about our leverage -- I think we've got, in terms of the general structure, organization structure, if you will, the main players and the main cost elements of not just G&A but actually SG&A. We've not shrunk SG&A as much as we have direct costs, and neither of those as much as demand has over the last couple of years; hence, the numbers.

But in doing that, we preserve the key players and the key organization structure that we needed to take the Company back up again. I think we can get the Company back to $220 million -- $200 million -- $230 million without making major structural investments or changes from an SG&A standpoint.

Now, there will be some incremental cost increases there, as I mentioned. I actually think, from a sales standpoint, not too much. We held on to our sales folks, and in fact, we may have actually increased, in headcount, the salespeople we have. What I anticipate moving into a better demand environment is actually that the sales productivity is going to increase. So, aside from additional commissions, I think a lot of the fixed costs around sales, if you will, are going to be fairly flat. So a good leverage there.

But there are some costs incremental around G&A; we'll have to add back some people. And like I said, there's a bonus factor. I'll let Paul speak to some of that.

Yes, I think in general, there's been a lot of focus in 2009. We've closed a handful of offices and walking that delicate balance of getting that G&A, fixed cost down as low as possible, but also being mindful that as we're going to grow this business in 2010 and beyond, balancing, not cutting into the bone, so to speak, on that.

So I think we feel pretty good about where we are on that balance. So I think we've got the fixed costs sort of where we want them. And as Jeff said, we can get a lot of leverage as we go from $190 million to $220 million without making much in additional investments.

And then the only two sort of exceptions to that would be, as Jeff mentioned as well, bonus. There hasn't been a -- basically, there hasn't been a bonus the last two years; so as we improve, there could be some incremental bonus expense. And then the other one is, from a bad debt perspective, we had a very good year in 2010; we've managed those accounts. So it's possible, like in any business, an account could go bad. But I think we feel like we have a good process to manage and keep a close eye on that, and minimize that risk.

I think in the bonus and commissions combined are what, maybe 4% or 5% of revenue.

Yes.

Or 4% to 6% of revenue. So a lot of leverage there and a lot of incremental margin on those less dollars coming in on the top line.

Thanks. As you move back probably toward a more active M&A strategy, could you maybe flesh that -- how that's worked, in the past, out? In terms of the size of the companies you've gone after, the deal terms, or structures you've preferred, typically?

And then maybe talk about things like the valuations that you're starting to see in the private market, whether you think they're rational -- noting that in a down economy, probably some people feel that their businesses should be valued higher than maybe they are, whether you think that that has been a factor in the people's minds yet.

And then maybe a refresher on the resources you can bring to bear in M&A. I believe you've got a pretty substantial line of credit that's untapped, et cetera. Thanks.

Sure. Yes, I'll talk to some of that and let Paul speak as well. In terms of the types of deals that we're going after in the deal structure, and we've talked about this on previous calls, I'd like to move up in terms of the typical deal size. Our last deal, or one of our last deals, was the largest deal we'd ever done, about $25 million. It was also one of our best deals; an excellent company and it's added a ton of value to Perficient.

We'd like to do more of those. However, I think right now, it's prudent to start smaller. We're quite adept at doing deals. I think we've proven -- we've got a real proven model and proven success around it. So, the ranges in my mind is, gosh, you know, $10 million to $30 million. And I think that moves up again in fairly short order here. In 12 months, I might be saying $20 million to $50 million, if you could find those companies in that range.

But $10 million to $30 million now. And again, I think the prudent thing to be to first to start a little smaller on that. Structure is going to be 50/50 cash and stock. It's our typical deal and we rarely ever waver from that -- maybe 60/40; but typically, about half-and-half stock and cash, with the stock locked up over a three-year period for retention of those principles. And by the end of that three years, we've either got a succession plan in place or we've got a principal that sees Perficient as a career that's going to stick around.

We've got a good track record on that, by the way. About 70% of the folks that we got through acquisition are still with us. And those that aren't were really by our choice. So we've got an excellent track record with regards to that.

Multiples -- honestly, not a ton of change. We were getting into the 5 to 7 range and the higher end of that range when we put the program on hiatus at the end of '07. And I think for a healthy business, the range is going to come down a lot. It's maybe 4 to 6 now versus 5 to 7.

You can find cheaper businesses out there in fire sales and such, but that's not our model. We want to do deals that add value to the business right away, that are accretive right away and that are solid. So we're finding companies that have been healthy and, in some cases, even thrived during this downturn, which I think is a testament to both their services and offerings as well as their management ability. And that's what we're appealed to. And again, maybe there's a 15% savings right now in a 4 to 6 range versus a 5 to 7, but I expect it to be somewhere in that range.

I think the only thing I would add -- obviously, we're in a great position from an ability to finance these deals; the combination of doing 50% of the consideration in cash. And we have $28 million in cash, a $50 million line, and continue to generate cash -- we're well-positioned to finance basically as big a deals as we can absorb. So I think probably the metering and gating item on the growth and acquisition is just our ability to identify and find these deals, and get them closed and integrated.

Jon Maietta, Needham & Company.

Just had a few quick ones here. Paul, maybe we can start with just a couple of things to flesh out the model. 2010 tax rate -- should we just kind of run the rate that you've been running the past year or so or --?

Yes, so I think as we're looking at that and planning that, I think from a cash EPS, the rate will be around -- should be around 40, and from a GAAP EPS, with some of these other items, it will be kind of in the high 40s.

Okay. And revenue breakdown by industry vertical -- Jeff provided Telecom and healthcare. I was wondering if you could provide the other (multiple speakers) --?

Sure. Yes, so, energy -- so just to recap, 18% in the quarter on telecom, 16% on healthcare, as Jeff mentioned; 10% on energy, 10% on financial services, 10% on consumer products, 7% on pharmaceuticals, are kind of the -- I guess that's the top six.

Okay. And then utilization in the quarter? I missed it.

Yes. So all-in utilization on the quarter was 79% compared to 78% in the third quarter.

Got you. Okay. And then, Jeff, with regard to the business, it sounds like more activity in the pipeline. It sounds like bigger deals in the pipeline. Everybody I talk to, it sounds like there's still the same level of scrutiny being applied to deals in the pipeline. So I guess my question is, have you seen -- have the margin sales cycle duration shortened at all? Or is it still kind of the same there?

Yes, I think the sales cycle is probably about the same. There might have been a little bit of contraction, but I even think that's somewhat cyclic. Again, we've seen a big surge here at the beginning of the year; thankfully, more typical. But those deals have been in the works for quite awhile.

What we are seeing, though, are larger deals. So, for our sales guys -- I mean, I agree with this -- but for a similar amount of effort, you're getting a larger deal in the backend. So we're getting some productivity gains on the sales effort side. But there's still a lot of scrutiny -- ROI, a lot of ROI analysis going into these projects and we're helping customers with that.

And the good news is that that's going on. What customers were doing a year ago was keeping projects so small that they were kind of below that radar. Now they're taking on these larger, more strategic initiatives. And they're inviting us to help them do that ROI analysis and help justify that in some cases. So that's an improvement, for sure, from what we've seen over, say, a year ago.

Got it. Okay, that's helpful. Thanks very much, guys.

[Paul Summers, Nations].

Did we lose him? Paul? Operator, we may want to move on.

Brian Kinstlinger, Sidoti and Company.

Great. Two quick ones. First of all, I missed it -- did you guys repurchase shares already in the first quarter? Or have you not done so and you're saving that, obviously, monies for acquisitions?

Yes, so we have done some share repurchase in the first quarter. We really don't provide specifics on that until the quarter is completed. I will say that it's probably slowed down, and as Jeff mentioned, sort of saving some of that powder to move in the acquisition direction.

Okay. And can you just provide the revenue by platform, such as Oracle, IBM --?

Sure. Yes, so IBM was the top, [to] 27%, same as last quarter. Oracle was 17%, up from 16% in Q3. TIBCO was 14% compared to 15% in Q3, and Microsoft was 13%.

Thank you. That's all.

George Price, Stifel Nicolaus.

First of all, wanted to ask just a kind of broad statement on offshore. So, we continue to hear that it's even more important going forward. There's more and more work that clients are looking at to push through a global delivery kind of model, even things that a year or two ago, they might not have considered as much -- continue to focus on cost.

So with that in mind, I wondered if maybe you could give us a little more color on your thoughts about the offshore and global delivery strategy in 2010. Is China going to remain the primary focus? Are you thinking of doing anything in India? Do you have any targets about how much in terms of capacity you'd like to have offshore maybe by the end of the year? That sort of thing.

Sure. We've got about -- I want to say 14% or so of our employees are offshore now. And actually, utilization there -- we try to run, actually, utilization lower, say, in the 60% range because we bring folks in and run them through training programs. We're doing more -- we're doing a lot of hiring in China right now, thankfully, and doing a little more experienced hiring because of the demand that we have there. So, in short, the answer is yes, we expect China to grow quite a lot through the course of this year.

I wouldn't be surprised if, on a headcount basis, it was double the size that it is by the end of the year or maybe between 50% and 100% increase between now and the end of the year. And hopefully, again, maybe 100%.

You know, for the work that we do, a lot of highly iterative, a lot of the business integration type work we do, and even some of the CRM work we do, there's not a ton of pressure to do offshore. We think it makes sense and we certainly encourage clients to explore it where it does for their benefit, but competitively, we're seeing that more in other areas of the business.

I would say offshore from our perspective just opens up more opportunity for us that maybe we wouldn't have had before. I still think we would have a healthy business before but I think this makes it healthier. And keep in mind, of course, our offshore margins, you know, project base gross margins are 65%. Now, it's 65% on a smaller basis, but we're realizing about $35 an hour for our China offshore resources, versus those pure offshore firms that are doing staff augmentation, et cetera, in China, maybe getting $25.

Yes, we're interested in India and exploring, I would say, more talk right now, exploring the possibility of expanding there as well. We're very, very happy, though, with our China facility. The quality is excellent. The team there we have is excellent and we're very, very happy with that at the moment. The only reason I think we'd expand into India would just be to give us a little more diversity from a client-facing standpoint.

Right. And then just quickly on a stat -- did you give utilization excluding subcontractors in China? I think that's the stat you guys gave.

Yes. So that was -- let's see, so we have -- it was 79% including subcontractors, excluding -- we have too many numbers here -- but excluding subcontractors, 75%.

Okay. And if I could, just a couple of questions on the acquisition side. First of all, when you were talking about the 5 to 7 range for acquisitions, you were talking about EBITDA, right? 5 to 7 and then 4 to 6?

Yes.

Okay. I just want to make sure I (multiple speakers) --

And just a clarification on that utilization. US-based employees only, 79%, down from 81% in the third quarter, which is all due to the seasonality of the holidays in December. But it was actually up from 78% year-over-year. So employees only, including China -- and again, we run utilization by definition, by design, lower in China -- 75% up from 74%. So you can see that China -- even though US-based employees were down, overall, with China, was up because of the (multiple speakers) [tick up] in China.

Right. Yes, I got you. And then on the acquisitions, you're saying immediately accretive -- on what basis? Is that a cash EPS basis? GAAP EPS basis?

Yes, that's a cash EPS basis. Typically, we acquire some intangibles in these deals and some of those are amortized. Like the backlog, for example, is amortized over typically, let's say a three to six month period. So they would typically turn sort of GAAP EPS positive, let's say, within a couple of quarters.

Okay. Last question on just the M&A environment in general. I think you've talked a lot about, certainly, what you're looking for. I was wondering if you would comment at all, even very generally, on what you're seeing maybe out in the market in terms of the -- some of the larger firms out there, what they're looking for; if you think that some of the consolidation trends that we've seen -- you know, we had Perot, we have ACS, we have other larger companies and even some smaller ones. Do you think those consolidation trends are going to continue? Thank you.

Yes, it's hard to say. I think when those occurred, I would have thought these were heating up at that time. I haven't seen that so much. It's kind of cooled off a little bit from what I can see. I do think that's inevitable.

I think as the industry heats back up, it's still a highly fragmented industry and I think there's a lot of consolidation opportunity out there. And you've seen some -- is it KP&P that's done some -- actually acquired some of BearingPoint back out of (multiple speakers) (inaudible) -- PWC did some pieces as well. I think we'll see more consolidation going forward.

I don't anticipate, even when there was sort of a fever pinch on consolidation before, we saw a little bit of competition for the M&A program we were running, but it wasn't a tremendous factor. There's -- again, it's such a fragmented industry; there's so many opportunities out there, so many targets out there. And I'm actually pretty pleased to say that we've got a pretty good reputation. There's a lot of those firms that are looking to -- that are interested in maybe doing a deal later this year that have reached out to us as an acquire, because they've heard good things about us and the program we run. So I'm not terribly concerned about it from that standpoint.

If I can sneak one more quick one in. The deal size is picking up a little bit in terms of size, complexity. When did you see that start, Jeff?

You know, I would say we -- from a sales cycle standpoint, the guys have been working on them for months, like I said, maybe even in the -- probably in the second half of last year.

We saw a turning point, we had a great quarter, $48 million sold in the third quarter. And along with that were a lot more strategic discussions and improved relationships, where you just saw the confidence coming back, I would say, in the executive offices of our clients and their willingness to, not only let some projects then, which was a nice quarter for us, but also begin discussing what was our program going to be for 2010.

And so we saw things beginning to turn anecdotally then. And again, we're encouraged, but the proof is in the pudding, as they say; and so right now, it looks like some of that's coming to fruition.

Got you. Great. Thanks for the time.

With no further questions in queue, I would now like to turn the call back to Mr. Jeff Davis for closing remarks.

Okay. That's really it. Again, we appreciate your time and your interest today. We remain optimistic and more confident than ever about our future, and here's to a great 2010. Thank you all.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.