Perficient Inc (PRFT) 2012 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2012 Perficient earnings conference call. My name is Lisa, and I'll be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions). As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Jeffrey Davis, President and Chief Executive Officer. Please proceed, sir.

Thank you. Good morning everyone. With me today is Paul Martin, our CFO. I want to thank you for your time today. As typical, we've got about 10 to 15 minutes of prepared comments, after which we will open the call up for questions. Before we proceed, Paul, would you please read the Safe Harbor statement?

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 meanings of the securities laws. Actual results may materially differ from those discussed in these forward-looking statements, and we encourage you to refer the additional information contained in our SEC filings concerning factors that could cause those results to be different than contemplated in today's discussion.

At times during this call we will refer to adjusted EPS. 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. We have also posted a slide deck, which includes a reconciliation of certain non-GAAP goals for the most directly comparable financial measures prepared in accordance with GAAP on our website at www.perficient.com under Investor Relations. Jeff?

Well thanks, Paul, and again good morning and thanks everyone for joining. We appreciate your participation on the call. And by the way, I want to mention that I know that many of you on the call or listening to the replay were impacted by the recent storms, tremendous storms on the East Coast in some way or another, and I want to thank you for taking the time to join us if you're on live, and I certainly want to wish all of you a quick recovery from those events.

We're actually excited to share our third quarter 2012 results with you since, as we mentioned in the news release, it was another very solid quarter for the Company. In fact it represents the 6th consecutive revenue record quarter with topline growth of 25% year-over-year. Net income increased 48% and GAAP EPS as well as adjusted EPS were records as well. ABR for North American employees increased to $130 an hour, which is the highest we've realized in the Company's history, and we believe opportunity remains to continue to increase the bill rates as I've mentioned in the past.

We're not seeing downward pressure on rates. It's more a matter of whether clients are spending or not, and that's been pretty positive lately as well. Utilization for those employees was at 81%, which is at the lower end of our sustainable range, so there might be some room there for upside also.

We spoke about our continued success and progress in the healthcare vertical on our last call, the Q2 call. Our momentum there remains strong and intact and in fact, our visibility and recognition in the market continues to grow. Last quarter we talked about Microsoft recognizing Perficient as the Healthcare Provider Partner of the Year. And last week we were recognized by IBM as, well, specifically for our work with Premier Healthcare with their 2012 Integration Excellence and Business Analytics Partner Achievement Award.

The healthcare pipeline is strong. In fact, our current opportunities in that vertical represent roughly three times the pipeline of the next largest industry, which is financial services. Services bookings during the quarter in total were up 16% sequentially and are up 33% year-to-date through September. We closed 19 deals during the quarter over $0.5 million, that averaged $1.2 million each, and that compares to 15 in the second quarter that averaged $885,000 and 13 in the third quarter of 2011 that averaged $1.4 million. So on a year-over-year basis, 6 more deals with the average being down slightly.

Q4 bookings started out well in October and we're anxious to close out 2012 strongly. The pipeline is strong, the weighted pipeline is strong, and we expect another nice bookings quarter here in the fourth quarter, and preliminary glimpses at the first quarter look to be another significant opportunity to close business there as well, similar to what we had this year.

After Paul shares financial details for the quarter, I'll be back to share some more insight into our performance in the third quarter and our outlook for the fourth quarter. Paul?

Thanks, Jeff. Total revenues for the third quarter of 2012 were $87.5 million, which represents a 25% increase over the year-ago quarter. Services revenue for the third quarter of 2012 excluding reimbursable expenses increased 22% to $75.9 million compared to the comparable prior-year period. Quarterly year-over-year organic growth was 5%. Services gross margin for the third quarter of 2012 excluding stock compensation and reimbursable expenses increased to 36.5% from 35.9% in the third quarter of 2011, which continues our trend of year-over-year margin improvement.

SG&A expense increased to $17.7 million in the third quarter of 2012 from $13.8 million in the comparable prior-year quarter. SG&A as a percentage of revenue was 20.3% for the third quarter of 2012 compared to 19.7% for the third quarter of 2011 driven primarily by higher bonus expense, partially offset by improved economies of scales and other cost.

EBITDAS, which is defined as earnings before interest, taxes, depreciation, amortization, and stock compensation, for the third quarter of 2012 was $13.1 million or 14.9% of revenues compared to $11 million or 15.6% of revenues for the third quarter of 2011. The reduction as a percentage of revenue is driven by higher bonus expense. The third quarter of 2012 included amortization expense of $2.3 million compared to $2 million in the comparable prior-year quarter. This increase was associated with acquisitions completed in 2011 and 2012.

Net income increased 48% to $5.1 million for the third quarter of 2012 from $3.5 million in the third quarter of 2011. Diluted GAAP earnings per share increased to $0.16 a share for the third quarter of 2012 from $0.12 in the third quarter of 2011. Adjusted GAAP earnings per share increased to $0.26 a share for the third quarter of 2012 from $0.22 in the third quarter of 2011. As a reminder, adjusted GAAP EPS is defined as GAAP earnings per share plus amortization expense, non-cash stock compensation expense, transaction cost, and fair value adjustments to contingent consideration net of related taxes divided by average fully diluted shares outstanding for the period.

Our effective tax rate for the third quarter of 2012 was 31% compared to 39.5% for the third quarter of 2011. During the third quarter and in conjunction with completion of the 2011 federal and state tax returns, the Company and its advisors completed a research and development tax credit study for 2011. As a result of the study, the Company generated tax credits that were taken on its 2011 return. This tax credit is the primary driver of the reduction in the third quarter effective tax rate.

The research and development tax credit expired on December 31, 2011. Congress has not passed legislation in 2012 to extend this tax credit. If such legislation becomes law and creates a tax benefit for 2012, the Company will estimate and accrue the benefit of the research and development tax credit in the quarter it becomes law.

Our ending billable headcount at September 30, 2012, was 1,575, including 1,364 billable consultants and 211 subcontractors. This includes the addition of 62 billable consultants and 4 subcontractors acquired as part of the Northridge acquisition, which closed on July 1st. Ending SG&A headcount at September 30, 2012, was 288, which includes 6 employees added with the Northridge acquisition.

Now turning to the 9-month results. Revenue for the 9 months ended September 30, 2012, were $244 million, a 27% increase over the comparable period last year. Year-to-date services revenue for the 9 months ended September 30, 2012, excluding reimbursable expenses increased 25% to $214.8 million. This represents 8% year-over-year organic growth for the 9-month period.

Services gross margin for the 9 months ended September 30, 2012, excluding stock compensation and reimbursable expenses increased to 35.8% from 35% in the comparable prior-year period. SG&A expense increased to $49.1 million for the 9 months ended September 30, 2012, from $38.3 million in the comparable prior-year period. SG&A as a percentage of revenue was 20.1% for the 9 months ended September 30, 2012, compared to 19.9% for the 9 months ended September 30, 2011.

EBITDAS for the 9 months ended September 30, 2012, was $35.6 million or 14.6% of revenues compared to $28.3 million or 14.8% of revenues in the comparable prior-year period. 2012 has included amortization expense of $5.7 million compared to $4.7 million last year. This increase was associated with the 2011 and 2012 acquisitions. 2012 has included acquisition costs of $1.8 million related to the acquisitions of PointBridge, Nascent, and Northridge compared to $1.2 million related to the acquisitions of Exervio and JCB in 2011.

Net income for the 9 months ended September 30, 2012, increased 46% to $11.7 million from $8 million in the 9 months ended September 30, 2011. Diluted GAAP earnings per share increased to $0.38 from $0.28 in the prior-year period. Adjusted GAAP earnings per share for the 9 months ended September 30, 2012, was $0.69 a share, which is up 21% from $0.57 in 2011.

Our effective tax rate for the 9 months September 30, 2012, was 38.1% compared to 41.2% for the comparable prior-year period. The decrease in the effective rate is primarily due to the research and development credit taken during the third quarter of 2012, which I discussed earlier.

We ended the quarter with $11.5 million in outstanding debt and $3.5 million in cash and cash equivalents. Our balance sheet continues to leave us well positioned to execute our strategic plan, including acquisitions and share repurchase. Our day sales outstanding on accounts receivable are 81 days at the end of the third quarter, which is consistent with the third quarter of 2011. We are continuing our focus on reducing DSOs. I'll now turn the call back over to Jeff for a little more commentary. Jeff?

Thanks, Paul. Well, again a solid quarter and we're really expecting another one in the fourth quarter. Obviously, the fourth quarter is one that's traditionally impacted by seasonality, which means that our guidance midpoint is down sequentially, but up year-over-year. And despite that we're actually looking at a strong Q4 and actually quite nice momentum headed into next year we believe.

Anecdotal feedback from client checks as well as external data have us pretty optimistic right now about 2013. Obviously, we have some unknowns out there, such as inputs or impact from the political elections, fiscal policy decisions, et cetera, but the broader IT spending climate from our perspective seems to be continuing to improve.

In fact, Morgan Stanley a couple weeks ago issued some findings from a survey of 150 CIOs, 100 in the US and 50 in Europe that was quite bullish on the environment for 2013 IT services spend in the US. They projected more than 5% growth for US IT budget spending pointing to above-average optimism and a continued shift in CIO mindsets from cost cutting toward investing for growth, with analytics and big data, areas where we obviously have a lot of expertise really right in our wheelhouse, as being key CIO focus areas and spending drivers. So that's pointing to over 5% growth for next year from a study that pointed to about 3.5% or so growth for 2012. So they're looking for what about a 30% -- 20%, 30% improvement to IT spend in the United States for 2013.

Regarding M&A, it's possible we could still execute one more deal this year, as I mentioned on the last call, but given this late date, it's more likely that it will be early next year. We do have something in the works, but again, the actual close may slip into the early part of 2013. Above and beyond that it's still our intention and our goal to close another or add another $50 million of run rate revenue through acquisitions in 2013. Again, that's above and beyond the deal I am referring to right now. So obviously, we remain in active discussions with several firms.

And just to kind of wrap up where we are right now, again top and bottom lines continue to grow nicely. We're pleased with our progress and remain optimistic about the business going forward. And specifically regarding the fourth quarter and the full year, Perficient expects its fourth quarter 2012 services and software revenue including reimbursed expenses to be in the range of $81 million to $85 million comprised of $75.7 million to $79.3 million of revenue from services including reimbursed expenses and $5.3 million to $5.7 million of revenue from sales of software.

The midpoint of fourth quarter 2012 services revenue guidance represents growth of 18% over the fourth quarter 2011 services revenue, and the Company is also narrowing its full-year 2012 revenue guidance to a range of $325 million to $329 million from the previously provided range of $317 million to $332 million.

The Company is also narrowing its full-year adjusted GAAP earnings per share guidance to a range of $0.91 to $0.95 from the previously provided range of $0.90 to $0.96. So you can see the midpoint for overall revenue up slightly in this adjustment, and the adjusted earnings per share consistent on the midpoint, the midpoint staying the same at $0.93.

So with that, operator, we'll open the call up for questions please.

(Operator Instructions) Your first question comes from the line of Peter Heckmann with Avondale Partners. Please proceed.

Good morning, guys. Good quarter.

Thanks, Pete.

Thanks, Pete.

When I look at kind of revenue by platform, pretty dramatic increase in work done with Microsoft year-over-year. Can you talk about how you would characterize that, whether it's specific to your SharePoint portal work or one specific vertical, or is it just kind of how the quarter shook out?

Well, of course, a lot of that comes from the acquisitions we did, which were focused in that area, but it's really -- in terms of the technology, it's really 2 primary areas. One is definitely SharePoint, which has been well received and there is lot of activity out there. We continue to see clients moving more and more, or leveraging more and more that platform along with others. It's interesting, you actually see that coexisting with a lot of other maybe competing products now.

But also actually we're starting to see some nice traction with Office 365 in the Cloud. So we're one of a few partners that are leading the way with Microsoft on rolling that out, and that's certainly contributing to some of that improvement as well, but most of it is SharePoint.

Okay. And could you go over those bookings numbers again? I signed on just a hair late. It sounded like bookings in the third quarter were up 16%. Was that year over year?

Yes, that's year-over-year. No, I'm sorry, that's sequential. I'm sorry. And then year-over-year, what do we have, Paul?

It's up 33% year-to-date.

Yes. So we have year-to-date through September up 33% for the year. So as you recall, bookings were slightly down actually, and even both sequentially and year-over-year in the second quarter, but they've rebounded back.

It looks like they're up about 15% sequentially.

Okay 15%, not 16%.

Okay. That's great. And can you characterize across the verticals how that might have shook out? You've seen a fair amount of discussion among some of the healthcare IT vendors about a little bit of a pause in decision-making. Are you seeing the same thing in your healthcare practices, and if so it sounds like there's something else that's more than offsetting it, and if you could talk about that as well?

Yes, yes. And actually we have seen that also, but all the evidence, and in fact we're close to those clients -- well, we're close to all of our clients but specifically there we've got some consortiums that we work with and that's -- we're seeing that but it's temporary. And then, Paul, do you have -- what were some of the other moving forward verticals?

Yes. So we saw growth in financial services, retail, computer electronics, and high-tech, and we actually, Pete, have a deck out on our Investor Relations site that lays out the top 10 verticals by quarter.

So let me reiterate on the healthcare. Like I said, while it's slowed a little bit the pipeline is really pretty incredible. We've closed around just the Premier relationship, we booked about $13 million in business year-to-date around that relationship, and we've got about $29 million in pipe for 2013 that we have a lot of optimism a good chunk of that will close.

And then year-to-date with BlueCross BlueShield we're up about 10% roughly year-over-year there as well. So healthcare remains strong, but I think there's a little bit of a pause here. I suspect somewhat related to the elections and somewhat related to just budgetary cycles. I mentioned this before where a first-half/second-half phenomenon seems to exist, and I think it contributed to sort of slower bookings in the second quarter and then a rebound back here in the third quarter, and again we anticipate nice bookings in the fourth quarter.

And Pete, when you look at our percentage of revenues by quarter, we did the Northridge acquisition at the beginning of Q3, which really didn't have much healthcare so that also contributed to healthcare going down as a percentage of our total.

Okay. Okay. And just one clarification. If I have the numbers correctly, it looks like your headcount, offshore headcount is down year-to-date. Is that a reallocation of priorities, a retention, or just kind of that's how the numbers shook out?

Yes. No, it's not retention. It is actually a little bit of a shift of focus to India, but the down trend that you're seeing is actually from a class of interns that we have. We do an internship program in China, so we had a significant class of interns there, many of whom we didn't -- we elected not to keep on and actually drive our utilization a little higher in China, again as we're kind of focusing on building out India.

So the result of that is actually we have more revenue in China, so the utilization is actually up into the 80s, which is a little higher than we typically want to run there, but it was a conscious decision.

Okay, that's fair. I'll get back in the queue. Thanks.

Thank you.

(Operator Instructions) Your next question comes from the line of George Price with BB&T Capital Markets. Please proceed.

Hi. Good morning guys. Nice job. Just wanted to though focus on one thing in terms of the margins. Below I think what we were expecting and in a couple of cases down a bit quarter-over-quarter. And I think if I look back, Jeff, last year, it was more -- they were kind of flattish, fairly comparable but gross margin seemed to drop a bit more on a quarter-over-quarter basis and took EBITDAS down on a quarter-over-quarter basis, and I was wondering if you could kind of maybe go into a little bit more detail around what was driving that?

Yes. It's actually -- there's actually a really straightforward answer for that. So our bonus plan is tied to adjusted earnings per share, which we actually managed to squeeze out a little more than we even anticipated. But it's due to the tax rate effect that Paul covered in his script.

So taxes were down dramatically. That drove adjusted earnings per share up, which caused us to take a much larger bonus accrual than normal. Overall for the year, by the way, the bonus accrual isn't enormous. I think we're accrued at about 40% here three-fourths of the way through the year, but that's really what drove that. If we had not had that effect in there, we probably would have taken -- I think the effect was about $600,000 of additional bonus, a couple hundred thousand of that was up in -- up above the line and some of it was SG&A. So it affected both gross margin as well as EBITDAS.

Okay. And from a bonus standpoint is adjusted EPS the primary weighting, the only weighting? Is there any weighting to organic services revenue growth, for example, or margin, one of the margin components?

Well, we allocate the bonus based on those factors, but we accrue the bonus based only on adjusted earnings. The reason for that is that we set the bar so high that we know that we're not going to be accruing unless we're driving top line growth. We run the company operationally efficiently. There is no more wiggle room there I would say. So it has to be through top line growth.

And you may or may not recall last year we had -- it swung the other way. So we had an additional state income tax hit last year that impacted us, or actually federal income tax hit that impacted us as well due to long-term travel. So it kind of swings both ways. That came out of the bonus pool, so some of this went into the bonus pool.

Got you.

George, from a margin perspective, if you pull out the increase in bonus, margins would be notionally about flat with Q3 of '11.

Got you. Okay. And just in terms of 4Q, I think you talked a little bit about this, but you have typical seasonality. Can you talk about do you expect anything different to play out in that with those typical seasonal trends versus other years in 4Q?

Yes. I think it's a little different than last year because of the softer bookings at the end of Q2. I think that's impacted our October. However, our revenue per billable day, which is really how we break it down, that lowest common denominator, is actually on the rise. So I think that impact has sort of come and gone. It was primarily in October. It did impact obviously the guidance to some degree.

In addition to that, too, we added some additional caution around Hurricane Sandy. We had about 100 to 125 people who were impacted either at client sites, and as an example we've got a large contingent at the State of Pennsylvania that's been closed all -- that announced early on this week that they're going to close all week long, and a number of other people who either couldn't get to their client site, some of whom were able to work remote, some were not, and then again in some cases we had clients closed for anywhere from 1 day to the entire week.

So we've tried to bake some caution in around that. I honestly don't think that's going to be sort of a real material impact. It's maybe, I would estimate between two-tenths and five-tenths of a percent of revenue, but that's baked in there too.

And George, let me clarify one thing on the gross margins. I stated that incorrectly. There is about a 60-basis-point impact on gross margins from bonuses. So they're up 60 basis points, so year over-year absent the bonus it would have been up 120.

Yes. For the year, just since we brought that back up, for the year, I'm still showing about a 100 bp improvement on gross margins. That's about 50 below what I thought we would be, but that 50, to Paul's point, is attributed to this additional bonus that wasn't necessarily planed for.

And then EBITDAS, because of the bonus effects, I think will be flat year-over-year. I had hoped for another 100 bps there, but I think again mainly because of this bonus, it's going to be closer to flat. EBITDA, not EBITDAS, EBITDA actually is up year-over-year as well.

Okay. Just Jeff, could you just go back through some of that impact in terms of employees? I guess the net of that with the hurricane, because I would imagine some of the mid-sized firms out there, depending on their particular exposure, we may hear more about this.

But so I think you said 125 people on site. Is that sort of everybody Northeast, or was that those particular clients? And then I think just to confirm you said you thought that was only, what, 20 bps to 50 bps of growth. Was that year-over-year for the fourth quarter or for the year?

Sequential -- no, I'm sorry. Sequential for the fourth quarter.

Okay.

Sequential for the fourth quarter. Maybe a 20 bp to 50 bp impact. And yes, it's about 125 employees, 125 to 150 employees that either live in that region or are working in that region, both of which are impacted in their ability to either get to the job site in some cases or of course where have clients there. And we have a number of clients in New York, New Jersey, Mid-Atlantic and North that had various levels of impact. We've got one client who's got 30 feet of water in their building. We have another client that shutdown for 1 day and was back in business on Tuesday.

So we did the best we could to kind of poll everybody and understand what the impact was, but obviously it's imprecise at this point, so that's why we came up with the 20 bps to 50 bps.

Sure, sure. All right. Fair enough. Let me just ask a couple more around demand, kind of segueing off of that. I think it's fair to say you've seen a rather mixed picture out of the broader tech space in the third quarter thus far. In many cases many companies have indicated a noticeable pullback in client spending in September. You obviously saw a little bit of sluggishness earlier in the summer, and it seems like that has -- that you've rebounded off of that and things seem to be coming back.

I guess just given your focus with a lot of different technologies and what your clients are spending on even, in some cases, beyond just you guys, would like to hear about what you're seeing, what's your take on the soft September tech trend, and I guess any implications or risks you see as we go into the fourth quarter? I mean IBM is clearly a company you have a good relationship with, right, and they're a pretty good data point for exactly that.

Yes. No, I agree. I can say clearly we pay attention to that and it has us thinking about it or concerned. It's right now we're not seeing the evidence of it. Now that could change.

We've started the quarter with decent bookings in October, so no big surprises there. We've obviously got to get through November and December, and December particularly should be a strong bookings month. So frankly we'll know more then.

Anecdotally things still look quite positive. The pipeline is where it should be given the growth that we want. Our book-to-bill ratio year-to-date in total is about 1.08, 1.09, and again, as we look forward and look at the pipeline and our expected close, we run a report actually ad hoc, but at least typically a couple of times a month that shows what our expected close bookings are based on a weighting methodology, et cetera, and it's pretty accurate, and it looks pretty good for the fourth quarter. And again anecdotally going into the first quarter, repeat of last year, we're already in negotiations with clients about the renewals next year or continuing relationships next year, and the spend among most of those looks to be higher.

The BlueCross BlueShields, we don't know yet what it's going to be there, but I expect it to be flat or maybe better. But this Premier channel, the overall channel, in introducing a lot of new companies, new members into the pipeline. The pipeline as it stands today here on November 1, 2012, our pipeline is already up to nearly $30 million in 2013, and that's very early in the game and that compares to $13 million that we booked year-to-date in that channel.

So those things combine; our traction in financial services and the efforts that we've made there to build out that vertical. As Paul mentioned, that's one where we had some nice bookings and moved ahead there in the quarter. All those things combined have us I would say cautiously optimistic, and the caution comes from the things you noted, what our peers or competitors are saying, or our partners are saying, has us concerned, but we're not seeing a dramatic impact yet. Again, that could change quickly, but so far so good for us.

And just real quick and then I'll circle around. Did you give -- I'm sorry if I missed it, but did you give a metric just in terms of the bookings in October? Was there a growth number?

We don't have it yet. We'll actually be compiling that today. We don't have it in yet, but I couldn't even really speculate. It was a solid number.

Okay.

Well over 20 million for bookings.

Okay. All right. I'll get back in the queue. Thanks very much.

Sure.

(Operator Instructions). Your next question comes from the line of Brian Kinstlinger with Sidoti & Company. Please proceed.

Hey. Good morning guys. How are you?

Hey. Good morning, Brian. Good.

So the first question, you talked a little bit about healthcare, but it is down sequentially if you use that percentage against services or total revenue for two quarters. So I guess you said you've been talking to them and you think there is a huge pipeline. What do you think that drop in revenue sequentially for the last two quarters is related to?

I think it's a pause made primarily with a couple of clients. Actually most of the decline, and Paul mentioned this, in both of those quarters is a function of dilution from the acquisitions we did that had no healthcare clients. That's the primary driver.

Right. I'm talking about total dollars though. Total dollars are actually down.

Yes. As Jeff mentioned I think there's a pause in a couple of accounts, but again as we look at the pipeline that has us quite optimistic about how we're going to go forward on that.

And do you think it in any way relates to the election? Is there any discussion around your customers about waiting to see election results, or does that not relate to the type of projects right now you're doing?

I don't know that anyone is saying that but there is no question that it -- I'm sure it impacts it. Not that I don't think -- I don't think they're going to stop spending sort of no matter what happens. I think they're waiting to see where they need to apply their resources.

So yes there is some discussion about it, but I think it's intuitive as well that they're waiting right now to see which way the wind's going to blow. They're still going to spend money. They have to, but their priorities may shift.

Quickly could you go over, utilization was down I think you said, so there's room for upside there. Why was utilization down? I guess how many -- I know you mentioned something about hedge adds from acquisitions. How many organic hedges did you add net?

I'll let Paul look that up, but on the utilization we were at 81%, which is actually pretty healthy. That's in the range that we try to run in. I would say Q2 and Q3 we like to be more towards mid-80%s, but again 81% is a respectable number. Some of that had to do with adding the number of resources that we added through acquisitions applying frankly our processes and methodologies to those acquisitions, but I'm not sure how much they had contributed to it or not. I don't know if we've got that breakdown on the headcount from organic.

Yes. So we added 62 billable employees with the Northridge acquisition, and we're actually up 30 -- it looks like 33 in total. So we're actually down --

Yes. So we're net down actually.

Is that from voluntary turnover or involuntary turnover?

A combination, and keep in mind that our bill rates are up $3 too. So we're getting more growth from bill rate versus just headcount.

Right. Okay. And then if we look at Premier, it sounded to me that you might be close to adding a couple of new customers. When I looked at your new customer list I think I only saw one that was an existing customer, so maybe talk about where negotiations are with that consortium that you're working with and maybe some of the newer hospitals that are entertaining your services?

Yes. And I confess I'm not as crisp on exactly where we are in negotiations with them, but I know that things are moving forward with the group of four. I believe we just signed the third one of the four just a few -- a couple months ago. I think we talked about that. And the fourth is still there, but beyond that we've actually lined up a number of new names, and I'm looking at the pipeline that I alluded to earlier and there is about three new clients listed on this -- in this pipeline above and beyond the three that we're engaged with and of course above and beyond Premier themselves.

Great. And looking at the NASCO partnership, I think you've only had it about for three months, maybe four months if I'm not mistaken. You've done a lot of BlueCross BlueShield work prior to that. Is there anything changed since then? Has this partnership sparked conversations with new Blues? Just maybe give us an update of what that's done for you over the last few months, if anything?

Yes. No, I think it's early actually for those entrees. As we get closer to laying out the complete framework and details and actually begin some of the build-out of the services that we're building for them for claims processing, that's the point at which we're going to have the opportunity to get a lot of entrees to the 20-some odd Blues that use that service. So I think that will come, Brian, more in the early half of -- the early part of next year, sometime in the first half, maybe as early as the first quarter, where we will be able to leverage that and get some new entrees there.

I think we've got 9 Blue entities right now and I believe there is, like I said, 20-some odd use NASCO. We won't win all of those, but it will be an opportunity for us to go in there and do a lot of integration work for them, to line up their services to the NASCO clearinghouse. And then of course once we're in the door there, our track record has been very good in expanding beyond the specific opportunity.

Great. The last question I have is software/hardware seem to be higher than it ever is. It's not overly important to your business, but I guess I'm curious was there anything that drove that September quarter and does it mean anything for the future of your business in terms of installing something that requires a lot more services around it?

Yes. I think it's -- I always think there's not a 1.0 or 1-for-1 correlation obviously to software, but it's not a bad indicator either. Just because it's up doesn't mean we're going to see the kind of -- would we sell 40% more software than we did in the prior quarter. I'm not expecting services to jump that quickly that fast, but again it's not a bad indicator.

We're pretty focused on the software, not for software as revenue but because the software we know leads us right into services. And we're leveraging that channel more than we have in the past. We've got some people focused on it that are producing these kinds of results. We're also reselling a little more software, little more varieties of software than we did in the past, adding some more from Oracle to our already strong kind of IBM resale.

Great. Thanks guys.

Thanks, Brain.

Your next question is a follow-up from the line of George Price. Please proceed, sir.

Hi. Thanks very much guys. Just a couple of follow-ups. I think a lot of the questions have been asked. But Jeff, just in terms of uses of cash, and you mentioned where you guys stand on M&A. Does the recent uptick in uncertainty, not so much I guess from something like the elections, which I think hopefully will be a fairly temporary event, but maybe more the uptick that we've seen recently in uncertainty around things like corporate earnings and just broader macro environment, does that make you any more hesitant to do M&A at this point?

It doesn't honestly. There are -- we were talking to lot of quality firms that have solid backlogs and see the path forward much the way that we do, that again, I don't want to come across naive but I think, and this could change, but even if things weren't as positive as we'd like, I don't think there's going to be a -- we don't see a possibility right now for any kind of major contractions. So it really doesn't.

There's quality deals out there. We like M&A. It's benefited the business tremendously. We want to continue that, and the fact of the matter is too, to put it bluntly, if we did go into a contracting period, the business will generate a lot of cash as we're collecting AR.

And on the repurchase side, do you intend to continue to repurchase shares?

Yes, we do. Right now we had a 10b5 program that expired in the end of June, and we'll re-up that when we can. We've been in blackout since it expired. But as soon as we get an open window we're going to recreate that.

We're going to keep it -- it'll be more modest than maybe we've done in the past at the price levels we'll go after, because of course we're preserving cash, leaning more towards acquisitions. But we're going to continue to keep it out there and take advantage of any dips.

Okay. Okay. And just you've talked also about seeing the larger average project sizes that you've been booking over the last year helping you to build out a bit more of a backlog in a business that structurally is inherently a shorter-cycle business, and I guess could you give us your thoughts maybe on where that stands now, whether you feel -- how much of a benefit do you see really coming from that as you stand ending this year maybe going into next year? Just some additional thoughts or update on that?

Yes. No, that's a good question and I still fundamentally like our business and the project-based business. The rates are better, the margins are better. And it's work, obviously, to continue to rebuild that backlog, but we've got a pretty decent track record of doing that and even just in a tepid macro environment.

That said, we do have some long-term clients that are putting more and more pressure on us to enter into 3- and 5-year agreements. And honestly, George, there are a number of customers that I believe we could do that with, but I think it comes at a price and we've been intentionally avoiding it.

There are some relationships that, because of the nature of the relationship and the sophistication of the buyer that we think we'll be able to work out some agreements that are mutually beneficial that we will be doing that with more going forward. But I still fundamentally like the project-based business.

And I'd want to reiterate to you our recurring revenue is still in the 85% range. So 85% of our revenue this year is going to come from clients we served in the prior year or prior, and obviously another -- whatever 7%, 8% this year on top of that is coming from new customers. So while you've got to work to get those deals closed, they're there and they do close and there's a long track record of that.

Right. Right. And last thing, Paul, real quick. I saw broken out in the P&L that you had a little over a $100,000 in sort of what I consider kind of one-time acquisition-related costs. Was there anything else unusual on the cost side?

No. The acquisition cost, as you point out, we broke out, but there is nothing else unusual other than the tax rate, which we've covered as well.

Right. Right, right. Okay. All right. And I guess just you'd expect the tax rate at this point, all else being equal, to revert back to roughly a 40% rate for the fourth quarter?

Yes. So I need to make one point on that. Yes. So that is the case. If Congress enacts and renews this R&D credit for 2012, then you would expect it to be below that.

Right. Got you. Okay. Great. Thanks.

Thanks, George.

There are no additional questions at this time. I would now like to turn the presentation back over to Mr. Jeffrey Davis.

All right. Well thank you all once again. And again, here we're all thinking about you and for those of you who are impacted up there wishing for a speedy recovery and looking forward to talking to you again in about a quarter. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.