Perficient Inc (PRFT) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 Perficient Earnings Conference Call. My name is Michelle and I will be your operator for today. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's call, Mr. Jeff Davis, CEO and President. Please proceed, sir.

Thank you. This is Jeff Davis. And with me on the phone this morning is Paul Martin, our CFO. I want to thank all of you for your time this morning. We've got about, as typical, about 10 to 15 minutes of prepared comments, after which we'll open the call up for questions of course. Before we begin, I'd like to ask Paul to read the Safe Harbor statement. Paul?

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 non-GAAP rules to the most directly comparable financial measures prepared in accordance with GAAP on our website at www.perficient.com under Investor Relations. Jeff?

Thanks, Paul, and again thanks everyone for joining. We are very glad to be with you today. I think we've got some excellent results to report. Perficient build on our first quarter of 2010 success with really outstanding second quarter, we realize our third quarter of consecutive sequential revenue growth up 6.7% over the first quarter this year and that actually reflects year-over-year revenue growth of 11.4% and that's a pace we haven't seen here since the fourth quarter of 2007.

The revenues and earnings came in above estimates in addition to very strong services revenue, which we are pleased with obviously. We also realized a solid quarter of software sales, which can be a pretty decent leading indicator of future services.

We spoke on last quarter's call about the impressive Q1 sales figure. We had set a record for Q1 sales bookings in the first quarter. And while Q2 normalized a bit as we expected, and I mentioned in the first quarter call that we thought that would happen, still our first half 2010 sales performance overall bookings was very strong with services sales revenue or bookings running nearly 40% higher than the year-ago period.

And, I think it's worth mentioning also that in the second quarter alone, like I said, even though it normalized a bit as we thought it would after that surge in the first quarter, we were still 25% up year-over-year in the second quarter sales over Q2 of 2009.

Key metrics also improved sequentially. Average bill rate was up from $99 to $102. Excluding subcontractors, that number actually improved from $105 to $107. And if you exclude offshore resources, which is a growing part of our business we are excited about; it does affect rates, however. Our rates actually increased from $116 to $120 excluding those resources.

So we continue to stress with our sales team the importance of improving rates and we are actually pleased that we are finding the ability to do that in this market. We talked about not losing deals based on rates or pricing a couple of years back in the depths of the recession, and now we are actually able to recover some of the rate depression that we allowed to occur during that timeframe. Obviously, we think that's another anecdotal sign of an improving environment from the demand perspective.

Employee utilization excluding subcontractors was also up 85%, up 2% sequentially from the first quarter and up more than 10% year-over-year. We increased our use of subcontractors during the quarter in this high growth period, but at the same time we are adding a number of employees in several areas of the business.

We closed 10 deals from a sales perspective over $0.5 million. That's a key metric we often talk about in this call. That's consistent with the results from the second quarter of 2009 in terms of number of deals over $0.5 million. But the average size of those deals was up 20% this year over about $1 million last year, the year-ago quarter, up to $1.2 million this year.

So that is to say that 10 deals closed in the quarter over $0.5 million and the average size of those was $1.2 million compared to $1 million a year ago. So, we got about 20% increase there. Consistent with and supporting that 25% year-over-year increased sales for the quarter that I mentioned earlier. And we also closed considerably more deals obviously below that to support that overall 25% increase.

Obviously, the balance sheet remains strong as well. The company has no debt and more than $30 million in cash and liquid investments. That's flat with the end of the first quarter after using $5 million for share repurchase during the quarter. We also had about $400,000 or $500,000 of deal cost associated with that Kerdock acquisition in the first quarter. So again after using cash for all those purposes, we are still flat at $30 million as with the end of the first quarter.

You may have seen in the press release this morning, the Board recently authorized the expansion of our repurchase program, by the way, by another $10 million, bringing the total authorization since the inception of the program to $50 million. So again, given our results and outlook, we are very happy to be repurchasing stock at these levels and it's my expectation and plans to continue that program for the foreseeable future as long as we see the stock depressed at these levels.

The balance sheet strength also allows us to continue our internal growth investments. We talked about the verticals and other things that we've invested in and built out and I'll talk a little bit about some of the payoff we're seeing there, particularly in healthcare and telecom. But we're going to be able to continue the repurchase program, as I mentioned, and aggressively still pursue our M&A program at the same time.

On that front, it's still my goal by the way to complete another deal by fall and another one by the year-end. So we talk about two to three deals this year, we still expect to be able to get that done.

Finally, a quick comment on Q3 guidance and I'll provide obviously full details a little later in the call. But after realizing double-digit annual growth in Q2, we're pleased to be able to provide a Q3 guidance range with a midpoint that represents 20% annual growth.

It's been a while, obviously, since we've been able to post and project double-digit annual growth. So we are feeling quite good, as you can tell, about the current performance and momentum of the business and we are excited about that. Again I'll come back on a little later to provide a little more color. But first, I am going to turn the call over to Paul, our CFO, to discuss the quarterly financial details. Paul?

Thanks, Jeff. Total revenues for the second quarter of 2010 were $55.5 million, a 23% increase over the year-ago quarter. Services revenue for the second quarter of 2010 excluding reimbursable expenses increased 18% to $47.9 million over the comparable prior-year period. Sequential services organic revenue growth was 6.7%. This is the third consecutive quarter of sequential revenue growth after five consecutive quarters of revenue contraction.

Service gross margin for the second quarter of 2010 excluding stock compensation and reimbursable expenses was 35.2%, which is up 5.2 margin points from 30% in the second quarter of 2009. Our improved utilization and higher domestic average billing rates, as Jeff described, helped drive this improvement.

SG&A expenses increased to $12.4 million in the second quarter 2010 from $10.1 million in the comparable prior-year quarter. Excluding non-cash stock compensation, SG&A expense was $10.4 million compared to $8.4 million in the second quarter of 2009. The increase in SG&A was primarily driven by higher bonus and sales related costs. SG&A excluding stock compensation as a percentage of revenue was 18.7% in the second quarter of 2010 compared to 18.8% in the second quarter of 2009. SG&A excluding the impact of changes in bonus costs decreased from 18.5% of revenues to 16.4% of revenues in the second quarter of 2010.

EBITDAS defined as earnings before interest, taxes, depreciation and amortization stock compensation expense for the second quarter 2010 was $7.1 million or 12.8% of revenues compared to $4 million or 8.9% of revenues for the second quarter of 2009. We reported net income of $2.1 million for the second quarter 2010 compared to a modest loss of $200,000 in the comparable prior year period.

Diluted GAAP earnings per share increased to $0.07 a share for the second quarter of 2010 from a loss of $0.01 per share for the second quarter of 2009. Non-GAAP earnings per share increased to $0.15 for the second quarter 2010 from $0.08 for the second quarter of 2009 and increased sequentially from $0.12 earned in the first quarter of 2010.

Non-GAAP earnings per share is defined as GAAP earnings per share plus amortization expense, non-cash stock compensation and transaction related matters net of related taxes divided by average fully diluted shares outstanding for the period.

Our effective tax rate for the second quarter of 2010 was 37.9% compared to 186% for the second quarter of 2009. As we talked about last year, the second quarter of 2009 was impacted by the effect of projected sales tax and permanent items over a smaller projected income base and a smaller benefit from certain non-taxable foreign income.

Our average global headcount for the second quarter of 2010 was 1,066, which is composed of 883 billable consultants and 183 subcontractors. Total average SG&A headcount for the second quarter of 2010 was 170. We will continue to adjust our cost structure based on changes in customer demand.

Turning to the six month results, revenue for the six months ended June 30, 2010 was $104.4 million, an 8% increase over the comparable prior-year period. Year-to-date services revenue for the six months ended June 30, 2010 excluding reimbursable expenses were $90.6 million, an increase of 6% over the comparable prior-year period. Organic services revenue growth was 11.3% on a trailing four quarters average annualized basis.

Services gross margin for the six months ended June 30, 2010 excluding stock comp and reimbursable expenses increased to 33.7% from 30.2% in the comparable prior-year period. Again, improved utilization and higher domestic billing rates helped drive the year-to-date improvements.

SG&A expense for the six months ended June 30, 2010 was $22.8 million compared to $20.7 million in the comparable prior-year period. Excluding non-cash stock compensation, SG&A expense was $18.9 million compared to $17.2 million in the comparable prior-year period. The increase in SG&A was primarily driven by higher bonus, sales related costs and recruiting expenses.

SG&A excluding stock compensation as a percentage of revenue was 18.1% for the six months ended June 30, 2010 compared to 17.8% in the six months ended June 30, 2009.

EBITDAS for the six months ended June 30, 2010 was $12.6 million or 12.1% of revenues compared $9.3 million or 9.7% of revenues for the comparable prior-year period.

Net income for the six months ended June 30, 2009 was $2.9 million compared to $700,000 for the six months ended June 30, 2009. Diluted GAAP earnings per share increased to $0.10 a share from $0.03 a share for the six months ended June 30, 2009. Non-GAAP earnings per share for the six months ended June 30, 2010 was $0.26 a share, up 44% from the $0.18 delivered in the comparable 2009 period.

Our effective tax rate for the six months ended June 30, 2010 was 40.2% compared to 58.8% for the comparable prior-year period. The decrease in the effective rate is due primarily to the effect of projected state taxes and permanent items over a larger projected income base and a larger benefit from certain non-taxable foreign income.

During the second quarter of 2010, we spent $4.9 million on repurchasing 480,000 shares. As of June 30, 2010, we have spent $33.5 million on repurchasing 5.1 million shares since this 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 six months ended June 30, 2010 of $9.7 million compared to $15.1 million for the six months ended June 30, 2009. The decrease in operating cash flow is primarily a result of an increase in accounts receivable associated with funding our growth.

We ended the quarter with no debt and $30.3 million in cash, cash equivalents and investments compared to $28 million at December 31, 2009. Our day sales outstanding, our DSOs on accounts receivable was 70 days at the end of the second quarter. This compares to 72 days at the end of the second quarter of 2009 and 73 days at the end of 2009.

As we previously stated, our goal is to maintain DSOs below or between 70 and 75 days over time. Maintaining DSOs within the 70-75 day range will be a key ongoing initiative that we will continue to pursue.

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

Thanks, Paul. As I mentioned before, just a few more comments here before we open the call up for Q&A, but again a really solid first half of the year.

During the quarter by the way, from a diversity standpoint, our top five customers again combined to represent only 25% of our revenues. Healthcare was our largest industry at 20% of revenues and by the way that's from a revenue perspective. From a sales perspective, it's actually closer to 25% and I expect that we will continue to see healthcare kind of pulling away. But telecom was at close second at 19% also performing well for us.

From a solution perspective, portals, business integration and CRM were our strongest disciplines. Enterprise performance management, which is something we added to our portfolio via the Kerdock acquisition is also delivering very, very strong performance. Continue to see very strong demand in that space. We are happy to have that on board.

And we continue to receive partner industry recognition during the quarter. Obviously, that doesn't necessarily generate revenue, but it helps to generate revenue. Obviously, the [reference] ability there and I think it also validates the fine work that our folks do.

And we won a high profile business partner award from IBM and we're also recognized by a leading healthcare trade publication for our healthcare consulting expertise and revenues. And even though, it wasn't technically a second quarter achievement, we also recently named by Microsoft as its Healthcare Provider Partner of the year. Obviously, that's a pretty impressive recognition when you take into account the fact that they have got thousands of business partners out there. So we are pleased to receive those and again I think it's validation of the work that our folks are doing out there.

Looking at the rest of the year and beyond, we're obviously now actively assembling the pieces of the puzzle that we need to scale our organization to that $500 million revenue run rate goal.

Another exciting factor about the growth is that as Perficient scales in the quarters and years ahead and I think you have already seen that in the results so far this year. But there is more of this to come, I believe, that there is a lot of operating leverage in the business than we have talked about before. We're going to benefit more and more from that as we march toward that $500 million goal and we should be growing profitability substantially along the way.

So to summarize, Q2 was an excellent quarter, represented our third quarter of sequential revenue growth. We posted strong sequential organic growth and year-over-year growth, it's now back to double digits. M&A diligence and activity is well underway. Our long-term plan to build a $500 million company is reaffirmed and on track.

Obviously, it remains to be seen how choppy the recovery might be as we go forward, but we are fully confident now that it is solidly underway. There might be some fits and starts, economic dependence there, but we are satisfied that we are moving upward.

So lastly, the third quarter guidance. The Company expects third quarter 2010 services and software revenue, including reimbursed expenses, to be in the range of $50.9 million to $54.4 million comprised of $48.4 million to $50.9 million of revenue from services including reimbursed expenses, and $2.5 million to $3.5 million of revenue from software sales. As I mentioned, the midpoint of this third quarter guidance represents 20% year-over-year growth.

So, with that, we'll open the call up for questions. Michelle?

Thank you. (Operators Instructions). Your first question comes from Jon Maietta from Needham & Company. Please proceed.

Hi, thank you. Jeff, I was wondering if you can talk a little bit about sales activity, bookings activity on the Kerdock side, and what you are seeing out of that acquisition.

Yes, it's quite strong. I can't give you specifics simply because I don't have them. But I can tell you that we are hiring as fast as we can in that unit. So, tremendous strength in that business unit.

Hyperion, I think, had that sort of slowdown after joining Oracle, much like Siebel did, but now it's really on fire. And we are really pleased with that acquisition and the results there.

And Jon, we had I think 93% utilization in that business unit in Q2 and actively hiring because demand is stronger.

Yes, well, okay. And then Jeff, maybe just commentary around bookings activity sort of quarter-to-date, is it sort of in line with how you exited June or any change?

Actually we've seen some pick up, so a little bit of pick up in July off of kind of May-June and I expect we'll continue to see that throughout the quarter.

It's a similar cycle I think to what we saw last year where things did kind of slow down a little bit really in the kind of May, June, July timeframe. It looks like those are going to be kind of the trough much like last year. I think it's a cycle that we are in now based on the way people are budgeting in this economy, but we are seeing some pick up now and the pipeline is strong.

Okay. And then Paul around SG&A, you talked about bonuses and things like this. So that was a little bit higher than what I was looking for. On an absolute basis, should that line item be flattish, would that come down a little bit on an absolute basis sequentially or how should I think about that?

Yes. So certainly part of that is we had a very strong quarter and kind of rough numbers probably a third of the annual bonus is in the second quarter. So you will see almost regardless a sequential decline in the bonus accrual. And I think holding those other costs relatively constant, there is modest amount of increase in sales related cost, but not much. A lot of those costs are fixed.

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

One other thing Jon is that that would exclude any acquisition cost that we have, but we will one-line those when we have those.

Got it. Thanks.

Thank you.

Your next question comes from the line of Lou Miscioscia of Collins Stewart. Please proceed.

Okay. Thank you. Revenue guidance was obviously in line with what the analysts were expecting. But just trying to understand the drop quarter-to-quarter and maybe just give us also some comments on competition?

Sure. I think we are expecting about flat is roughly where the midpoint is quarter-to-quarter and I'd attribute that really to the surge that we had in the first half. So we are maintaining a run rate here, as I mentioned before, that's substantially up year-over-year.

And there could be some upside into that as well. But the only thing that I would translate that as or attribute that to like I said was the robust growth that we had. Frankly, more than we expected in the second quarter. So that's what we are seeing.

From a competition standpoint, we are faring very well. I think I mentioned this before. The competitors that we see most often tend to be the larger firms naturally operating on a national basis where we compete. And our win rate against those firms is 60% to 65%, I am talking about firms like Accenture, Deloitte, Cognos and Infosys. So we are quite pleased with our results there.

We've seen some competition go by the wayside over the last couple of years, but those tend to be the smaller sort of local firms that sort of -- which had actually unfortunately gone completely out of business or are really struggling to compete now.

Okay, great. And just maybe to expand that. I know you had said that things picked up in July, so it sounds like bookings are getting back on track. And I guess you expected just looking forward sequentially may be month by month into the end of the year, I think it will be strong for the next three months and then maybe tail-off a bit into the end of the year or how do you --

The cycle that we saw last year was actually good strength in this quarter and tailed off a little bit towards the end of the year literally as people were kind of going on holiday but we saw a pretty strong second half that began to pickup about this time of the year last year.

Right now, I'm sort anticipating the same thing. It's hard to know, of course, what are in people's heads in terms of their budgeting plans, exactly. Obviously anecdotal, we are talking to clients and we are getting introduced into new accounts daily. That wasn't happening too much a year or two years ago.

So, we are adding a lot of new customers and new business and it's encouraging to me that people are still spending money out there and that we are going to see a continued sort of healthy sales cycles, a healthy sales results through the end of the year.

Okay, great. And then, final question is just on hiring. How tough is it to find good folks out there as lot of others in the sector are also trying to hire?

I think it's always tough to find good people. We've had good results on the hiring front. We've got a good recruiting team that does an excellent job. We're going to be expanding our recruiting capacity. Actually as we're entering this cycle of growth. So we're actually hiring recruiters.

We've already got I believe, six full time on staff and it's down from a peak of six or seven, actually. I think it's down from a peak of maybe 10 or 12. and we're going to be adding back to that team. But we are successfully recruiting people.

I think Perficient is an employer of choice for technology folks. I think we are better employer than some of the offshore guys trying to hire domestically more attractive and I also think we're better than some of the big guys here like Accenture or some of the big four accounting folks that are getting back into consulting.

We really value technology and the technologists that bring it to the table as well as the business consultants. So, the other domestic guys tend to be a little more slanted toward the business side.

Okay, great. Thanks Jeff. Good luck for the rest of the year.

Thanks, Lou.

(Operator Instructions). Your next question is from the line of Matt McCormack from BGB Securities. Please proceed.

Yes. Hi, good morning.

Good morning.

My question is relating to pricing. Obviously, you had some pretty good pricing leverage in the quarter. And, I guess, just how do you balance pricing, I mean, do you still think you've got room to increase it? And how do you balance that with your win rate?

Yes, that's a good question. We're not seeing yet -- there is always some pricing competition right. A good buyer can get any sort of a transaction down to that. But we tend to be a value seller already. So, I think there is room there between us and some of these other guys right now without affecting our win rates. And I expect that we will be able to move our rates back up.

Pre-recession, our rates, domestic employees were about $125 an hour. And so, I expect we will be able to get back to that without a problem. And actually we were expanding at that time as well.

So, I think as the demand continues to recover and get healthier we will be able to move our rates upward as well. And I expect $125 and beyond domestically is what I think we can do over the next year, two, three years, or even really a year or two, as long as the demand side is healthy.

And when you were at $125 did you have the similar 60%, 65% win rate.

Yes, yes.

Okay.

We have always enjoyed that. I think our win rate honestly is less driven around pricing per hour. It can be sometimes pricing in the deal but quite honestly some of those firms that I mentioned come into these competitions with a lot more hours in their bid than we do. Because frankly I don't think they have all the skills that we have and the depth that we have. So, when it does come in our pricing that's often the contributor to the pricing delta. But at lot of times it doesn't come down to pricing, it really comes down to how we show in the competition.

Okay. And then, in terms of the bookings, I guess, could you just go into little bit more detail about which specific vertical types of company that you are seeing the strongest demand from?

Yes, certainly healthcare, but we are also seeing a good pickup in consumer products. That's another vertical that we focus on primarily around the CRM part of our business. Certainly a good recovery there and some nice spend there. But healthcare is clearly the big story.

We are seeing though as we thought we would, we talked about this on call may be a few months ago that financial services picking up quite nicely as well. It moved into double digits again from a sales booking standpoint. We were down probably mid-single digit, maybe 5% of our bookings. And I think it moved over 10% in this quarter, it was about 11%. So, we are definitely seeing a pickup there, healthcare. Good stability in energy and telecom and then like I said a pickup in consumer products as well.

Okay. And then, I guess, lastly you talked about executing on your acquisition strategy. I mean, what that -- you mentioned I guess the telecommunications and healthcare vertical, is that kind of where we should expect to see you making deals in the future?

You know, we have looked at doing vertical deals and we might do that. Those seem to be kind of hard to find honestly. So, we will probably focus on not so much geographic footprint expansion as much as continuing to add to our technology portfolio, if you will. So, we look at buying firms that are in those verticals and certainly have those as sort of the top of our list.

But other things that are on our list as well are in the IBM space is an example from a technology standpoint. Our IBM business has grown dramatically. It was actually growing while the rest of the business was still contracting in kind of 2009 timeframe.

So, we've got some IBM technology on our list as well and obviously we leverage -- the way our verticals are setup is to leverage all the technologies that we have. So, we've got domain experts in that business unit pulling on and driving demand into our national business units, which deliver the technology pieces.

Okay. And then, just my last question. Obviously, we are starting to see growth accelerate. So, in terms of the headcount, I mean, how has the pyramid, I guess, been through the downturn meaning did you keep it somewhat top heavy. So now, as you are trying to accelerate growth, you really only have to get kind of entry level employees. So, it would be -- so you've got a lot more leverage I guess as you are going forward. Is that kind of how to look at it or do you really have to go out and hire along the stack right now?

No, that's exactly right. I mean, we are doing a little bit of hiring on the stack, but it's along the stack, but it's leverage hiring to your point. So, most of the hiring that we are doing is rebuilding the pyramid that we kind of cut the base away from. And where we are hiring at the higher end of that, we are also filling out the bottom for those areas as well.

So, it's an excellent question. It is where a lot of that operating leverage is going to come from that I referred to earlier. Right now, I think, the hiring we've done year-to-date has been on average about 7% to 8% lower cost resources than our existing staff on average. So, yes, we are building up on pyramid and we are hiring in lower cost, less experienced folks.

Okay, great. Thank you so much.

Thank you.

If there are no further questions, I would now like to turn the call back over to Jeff Davis for closing remarks.

All right. Well, thank you all again for your time today. Obviously, we are excited about the results we've experienced here in the first half of the year and excited about the outlook. I appreciate your time and interest and we will talk again in a quarter. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes the presentation and you may now disconnect. Have a great day.