Perficient Inc (PRFT) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one 2013 Perficient earnings conference call. My name is Angela, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I'd now like to hand the call over to Mr. Jeff Davis, CEO and President. Please proceed, sir.

Thank you and thanks, everyone, for joining. With me on the call today is Paul Martin, our CFO. Again, I want to thank you for your time this morning. As is usual, we've got about 10 or 15 minutes of prepared comments, and then, of course, we will open the call up for questions.

Paul, will 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 meaning of the securities laws. Actual results may materially differ from those discussed in these forward-looking statements, but 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.

At times during this call, we will refer to adjusted EPS. Our earnings press release, including a reconciliation of certain non-GAAP financial matters 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've also posted a slide deck, which includes a reconciliation of certain non-GAAP goals to the most directly comparable financial measures prepared in accordance with GAAP on our website under Investor Relations.

Jeff?

Thanks, Paul. Again, thanks, everyone, for your time this morning. We are pleased to share our first-quarter 2013 results with you.

We are off to a solid start for the year, and we have reported a quarter that came in near the high end of our previously guided range and one where Perficient delivered revenue growth of 14% with net income growth of 38%.

Average bill rate was $132 an hour for North American employees, which remains an all-time high and is up 4% year over year. As we mentioned before and I've mentioned in the past, I still fill like there is a GAAP there that we are going to continue to close relative to our competitors.

Q1 bookings increased 10% year over year and 28% sequentially. We closed 35 deals over $0.5 million each on average during the quarter -- during the first quarter averaging $1.4 million each. That compares to $24 million in the fourth quarter at $1.3 million and $28 million in first quarter of 2012 at $1.2 million. So, a nice improvement there as well.

Also, notable during the quarter were software sales of nearly $8 million. That's a relatively small piece of our business, but an important one for client and partner relationships, and we anticipate more success there in Q2 and throughout 2013.

The Q1 numbers, of course, don't include any contributions from the acquisition of TriTek Solutions that we announced just last week. I'll talk more about that addition later as we obviously are very excited to add them to the team. It deepens our portfolio, and we gain important intellectual property assets and maybe most importantly or as importantly a significant expansion into the northeastern US with that transaction.

So on the topic of intellectual property assets, I am also going to comment on the news release we issued yesterday around the solutions we are developing in the healthcare industry after Paul shares financial details for the quarter. Of course, I'll also comment on the outlook for Q2 in the second half of 2013.

Paul?

Thanks, Jeff. Total revenues for the first quarter of 2013 were $84.9 million, a 14% increase over the year ago quarter. Services revenue for the first quarter of 2013, excluding reimbursable expenses, increased 11% to $73.6 million. Services gross margin for the first quarter of 2013, excluding stock compensation of reimbursable expenses, increased to 35% from 34.1% in the first quarter of 2012. SG&A expenses increased to $17.9 million in the first quarter of 2013 from $14.8 million in the comparable prior year quarter. SG&A as a percentage of revenues increased to 21% from 19.8% in the first quarter of 2012.

EBITDAS, defined as earnings before interest, taxes, depreciation, amortization and stock compensation, for the first quarter of 2013 was $10.3 million or 12.1% of revenues compared to $10.1 million or 13.5% of revenues in the first quarter of 2012.

The first quarter of 2013 included an amortization of $1.8 million compared to $1.6 million in the comparable prior year quarter. The increase is associated with the 2012 acquisitions.

Our effective tax rate for the first quarter of 2013 was 21.5% compared to 40.1% for the first quarter of 2012. The decrease in the effective tax rate is primarily due to the research and development tax credit for 2012, which was approved in January 13 and factored into our first-quarter provision as a discrete item. An estimate for the 2013 current credit was also included in our first-quarter provision.

Net income increased 38% to $4.1 million for the first quarter of 2013 from $3 million in the first quarter of 2012. Diluted GAAP earnings-per-share increased to $0.13 a share for the first quarter of 2013 from $0.10 a share in the first quarter of 2012.

Adjusted GAAP earnings per share increased to $0.22 a share for the first quarter of 2013 from $0.20 in the first quarter of 2012. Adjusted GAAP EPS is defined as GAAP earnings-per-share, plus amortization expense, plus non-cash stock compensation transaction costs, fair value adjustments to contingent consideration net of related taxes divided by average fully diluted shares outstanding for the relevant period. Our ending global headcount at March 31, 2013 was 1539, including 1359 billable consultants and 180 subcontractors. Ending SG&A headcount at March 31, 2013 was 272.

We ended the quarter with $6 million in outstanding debt and $4.1 million in cash and cash equivalents. Our balance sheet continues to leave us well positioned to execute our strategic plan. Our day sales outstanding on accounts receivable were 75 days at the end of the first quarter of 2013, which is down from 78 days at the end of the first quarter of 2012. We continue to focus on keeping DSOs between 75 and 80 days.

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

Thanks, Paul. As I mentioned earlier, nice quarter for both revenue and bookings. I commented on the sequential and annual bookings improvements earlier, and I think it's worth noting that our April performance has also helped Q2 bookings get off to an impressive start as well.

In fact, on a trailing four-months basis, so basically year-to-date through the end of April, 2013 bookings are up 14% over 2012.

So add to that the contributions we will receive from TriTek's book of business and you can see why we remain very optimistic for the second quarter and the second half of 2013.

I want to provide a little more detail now on TriTek as well. So operationally it's a great business with impressive bill rates and margins. What we are really excited about, as I mentioned before, is the opportunity going forward. We've really long looked for a way to gain some critical mass in the Northeast, and adding obviously 100 people or more than 100 people actually in DC, Boston and New York helps us significantly in that regard. So we're excited about that expansion.

In addition, TriTek's focus on the financial services and insurance markets is another compelling aspect to the deal. As you know, we've been building a financial services vertical, modeled after our success in the healthcare industry, and this is obviously going to accelerate our traction in that space as well with a good book of business and targets that are right in our sweet spot, right in our wheelhouse. So there are customers that are a good size for us and we believe we can execute our land and expand strategy with.

The IBM Pegasystems and EMC partnerships are obviously other important factors. It's great to move meaningfully into the Pega space. We already had a small Pega business, small Pega practice, and this obviously gets us some critical mass there and also supplements our existing partnership with EMC. But really TriTek's IBM portfolio and reputation was a key catalyst.

Our work around IBM technologies and that partnership is as important today as it was 15 years ago when Perficient was just getting started. At any time, we have an opportunity to add a firm that deepens our IBM capabilities and enjoys a stellar reputation within IBM as TriTek does, we're going to explore it. So we're excited about getting them into the Perficient group.

Finally, we're excited about the intellectual property assets TriTek brings to Perficient also. They built about a dozen BPM, Business Process Management, and ECM, Enterprise Content Management, products that supplement revenues, but also accelerate solution delivery and serve as key differentiators in the marketplace.

Throughout the years, we have built and acquired a small collection of IP assets around various technologies. But the acquisition of TriTek, along with the announcement that we made yesterday, signals our more serious intent to expand in this area.

So referring to yesterday, I am talking about the joint announcement that we made with the Premier healthcare alliance. We will be developing several tools that we'll offer to the premier channel for those members to integrate more quickly and as well as provide mandated reporting with Premier Connect. That's the platform that we've been developing with Premier and IBM for some time now.

It's only because of our long-standing relationship and partnership with Premier that we have a proper visibility to be able to develop tools like this. It's a significant investment. I discussed it on the last call, but we're confident that there will be significant interests for them in the marketplace. In fact, we've already got interest from a number of customers, and in fact, one of these solutions is bundled in a deal that we are working on right now that we expect will close in the next couple weeks.

So, we're not going to provide any specific revenue projections yet around these assets, nor are they included in any of our guidance. But we do expect that they will generate meaningful ROI and that they will help further distinguish Perficient in the marketplace.

So before we get to the Q2 outlook, just a quick word to reiterate our plans around M&A. I've talked about TriTek obviously, and I want to point out that it remains our goal to pursue deals that would add somewhere around $50 million in revenues in 2013 and again next year in 2014. TriTek was a $19 million firm, so that has us looking for another $30 million or so this year, possibly more if we find the right opportunities. As you know by now, we run a very disciplined process, so we don't do deals for deals sake.

No guarantees, of course, but the pipeline is full. And we're actually in due diligence with one firm right now and detailed discussions with a couple more. So, again, things are going well. We're pleased with the start to 2013 and feel very optimistic around regarding the remainder of the year.

Commenting on Q2 and the full year, Perficient expects its second-quarter 2013 services and software revenue, including reimbursed expenses, to be in the range of $87.5 million to $93.7 million comprised of $82.5 million to $86.7 million of revenue from services, including reimbursed expenses and $5 million to $7 million of revenue sales from software.

The midpoint of the second-quarter 2013 services revenue guidance represents growth of 10% over second-quarter 2012 services revenue. The Company is reaffirming its full-year 2013 revenue guidance range of $358 million to $378 million and raising 2013 adjusted earnings per share guidance to a range of $0.98 to $1.08.

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

(Operator Instructions). George Price, BB&T Capital Markets.

Thanks very much. Jeff, the first thing I wanted to focus on this morning is on the margin side. So the top line, the headline numbers in terms of revenue and adjusted EPS seemed fine. But kind of looking at from the margin perspective, you know the margins were a little disappointing, I guess, made up for by the tax rate.

Operating margin was down year over year. You noted the EBITDAS margin was down year over year. Can you kind of go into that a little bit? Was there anything unusual there? Did you perhaps use the low -- did you see the low tax rate coming? Did you make some of your investments in the quarter knowing you could offset that? If you could give a little bit more color on that?

Yes, actually one of the biggest standouts on a year-over-year basis is bonus accrual. We did accrue about $750,000 of bonus in the quarter, in an effort to kind of smooth that throughout the year, by the way.

So we do still anticipate the margin expansion that I've talked about before, somewhere between 100 bps and 200 bps on gross margin, and probably around 100 to 150 on EBITDA and stock comp. So EBITDAS and then obviously better than that actually on GAAP and EBITDA, as well as net income.

So it's primarily bonus accrual. We did have some investment in R&D as well. And anything else, Paul, that you want to add?

Yes, the other thing was the higher software compared year over year with the lower margins on software that also affected EBITDAS margins.

Okay. So do you, I guess, expect that -- do you expect to see year-over-year increases on a margin basis for the rest of the year?

Yes, absolutely and for the year in total.

Okay. Second thing then would be, were there any unusual or one-time expenses or anything you would call out in the quarter? I didn't see anything in the release, but just figured I would ask.

Yes, on the SG&A side, certainly, as you saw the R&D credit, we did the work and had the professional fees associated with that that were probably in aggregate $300,000 or $400,000 that are mostly one time.

So that is for the R&D tax credit?

Yes, sir.

Okay. Okay. And then services revenue of $77.1 million was, I guess, maybe a little below versus my estimate kind of in the lower portion of the guidance range. Jeff, maybe you could comment on that and maybe in the broader context of how you see -- demand environment looks great from a booking perspective, but did the year kind of start off a little more sluggish perhaps than you thought it might or any comments there?

It has. I think we were hoping for a little better start to the year in both the first quarter and this quarter. But feel good about the year overall. As you pointed out, the bookings are strong. So we are real optimistic still for the year in total and particularly in the second half.

So it was a little slower, and I think, you know, other folks in the industry saw similar things. I'm not sure they're seeing the same pickup now, but we certainly are. So, again, that has us optimistic. But yes, it's a little slower start, as you noted. I think we are just a little below the midpoint for Q1 on guidance. But yes, we were hoping for some upside.

Last thing and then I'll turn it over. I noticed you added some more Blue Shield of California, Florida Blue. Are those new Blue relationships?

The Blue Shield of California is fairly new. I think it actually initiated last year in a small way, but it's actually blossoming into a very sizable relationship now.

Florida has been a customer and actually did slow down their spend for probably a year or so, and then we reinitiated that relationship with a good-sized project and again hopefully will broaden the relationship from there and expand that account as well. We're in a multimillion dollar plus engagement with them right now.

How many Blues now and I guess are there any incremental opportunities, I guess, from a scale perspective? Maybe that's not the right way to look at it. But if you could comment on that, and then I'll get it back in queue. Thanks.

I think it's a good question. I think we have got 10 total entities or flavors of Blues right now. Maybe it's even 11. And I do think -- you know, I don't know that there's a scale opportunities as much as we're not -- they do operate all independently. But we do actually have a dedicated team that is built with a charter of basically establishing these relationships, leveraging the relationships we have to open new doors in other Blues. Because while they are independent, they do talk, and obviously a reference from one Blue to another is meaningful. So we are pursuing that.

Great. Thanks.

Brian Kinstlinger, Sidoti & Co.

So just to look at it and make sure I have it correct, actually if I look at the services gross margin, I calculated at 36.3% versus 35.5% last year. So it seems to me on the gross margin line at least, it was all the mix of increased software. Is that not accurate?

No, I think that's right. That's right. And then it is the EBITDA that took a little bit of a hit for those things that we talked.

Right. Right exactly. Okay. In the recent (inaudible), you mentioned you had the Premier project that you're starting up. I'm curious, it sounds like that's separate from what you were already doing with Premier and selling into the hospital base. Maybe I'm wrong. First, I'll confirm that. But then second, is this going to help speed up the new customer wins with Premier members?

I think the answer is it is actually part of the same platform. So we built this platform, Premier Connect, and that was this data model and this recording engine we've been talking about for a couple of years now. And that's basically ready for primetime now. We've implemented it with a couple of customers and are ramping up with a couple more.

And when I say ramping up, by the way, there is follow-on opportunities for us in terms of revenue, but in terms of the install and getting us up and running.

And yes, I do believe these assets that we are building will help accelerate traction for both us and Premier with this platform. Basically the platform replaced some of Premier's existing toolsets, but really hadn't done a lot in terms of meeting the mandates and some of these other things that are required for hospitals to provide reporting on.

So the assets that we are building are going to do that in a couple of very key areas. So we do believe it will get traction, help them get traction, help us as a partnership good traction.

By the way, I do want to mention on that channel since you brought it up, we talked about this just two months ago I think in the Q1 call, and we have added two customers since then. I'm not going to name them, but we've added two since then.

I think I mentioned then that we believe we are going to begin to get some traction around this, and in fact, we are seeing that now. And that's one of the many things that had us optimistic about the second half of the year. We've added two customers, just initial stages right now. So not a ton of revenue, but they will grow quickly into sizable revenue. We actually have two verbals, two more verbals. And, as I mentioned, one of those verbals -- and by the way, those are in the multimillion dollar range. And one of those, by the way, we will actually be leveraging the assets that we're building, at least a portion of the asset that we're building.

So how many do you have now? Is that -- I think you had five before, including Premier, and where do you think you'll end the year?

We have six now, so I think it was four before plus two, and maybe we had closed one of those when we spoke last. We have got six now, two more verbals, and by -- in pipeline, we've got, you know, two, four, six, eight, 10, 12 -- 12 new names in pipeline. I would expect there's a good chance that half of those will close before the end of the year. So we could end the year with 12.

Just give us a sense because the hospitals and the members there are in varying sizes. Some are small doctors; some are big hospitals. So -- would you think the average annual contract value for those are all multimillion? Because I take it you're not doing the small doctors' offices. So just give us a sense of what an average. I don't need a high or a low, but where do you generally think that is going to play out?

Great question. The average is probably $1.5 million to $2 million I would say for the first year, and again I think there is a long tail on this.

Now, I haven't gone through all the numbers, but healthcare revenue two years ago ramped aggressively last year, and Monterrey did for a couple of reasons I think that we've discussed in past calls. What is your expectation this year given the regulatory changes and your partnerships that are starting to gain traction? Will we see acceleration?

Oh yes. I think we are definitely going to see acceleration on an absolute basis, as well as probably a relative basis. Of course, the acquisitions kind of have a dilutive effect there, unless we buy something in the healthcare space, which we looked to do, but that's probably unlikely given where values are right now -- our valuations are.

But I would say definitely going to grow in total dollars, absolute dollars, and I think also relatively probably as a percent of revenue. I think we finished last year around 24%. You know, if we didn't do any other acquisition, I wouldn't be surprised if it was closing back in on 30% again. It was 33% of bookings, by the way, in the first quarter.

And without looking at acquisitions or percentage of revenue, just specific growth rates of the -- organic growth rates of the verticals, which ones might you also think you see strength in, and which ones are you looking at -- there is a little bit of weakness, and that won't be the main focus for the Company for this year.

I think the ones that are of focus -- and for us, we do see strength in -- certainly healthcare. We still see good opportunity and strength in financial services, and we just bolstered that with TriTek obviously, and had a lot of confidence in that space. Really unique offerings there.

And retail actually is another strong sector for us, as well as telecom. We've got significant relationships both in telecommunications, as well as cable or cable companies that are in telecommunications. So for us, that is a strength.

In terms of weakening, nothing that is I would say atypical. I mean you know manufacturing is never a big spender. Probably maybe if anything I would say maybe I think for us again and I think we are kind of a microcosm is maybe in the energy sector, but actually we've got descent bookings there and long-term commitments as well. So that's one that probably I would say maybe plateaus. Doesn't contracting, but maybe plateaus.

The last question I missed and you may have said it. I'm trying to type things fast. But, Paul, did you give the breakdown of the verticals as a percentage of revenue?

Sure and we actually have that on the website as well.

Okay. I can grab it there.

But it's 24% healthcare and financial services 13% are the two largest.

Great. Thanks so much.

Peter Heckmann, Avondale Partners.

I think it might've been my phone, but I had a little bit of a breakup there when you were talking about the bookings. It sounds like real strong bookings. Could you go over some of that, if you would, and talk a little bit more about the trend that you've seen over the last couple of quarters in terms of bookings? And if you can kind of correlate that with any external shocks? It seems that we will have a good month and then maybe an off month and then a good month, and then comment a little bit how the second quarter is starting out?

Yes, I think -- so we had a solid Q4. Q1 was good. It was 10% year over year, and actually year-to-date, though, April was quite strong, certainly on a relative both sequentially, as well as year over year. And so with April, our year-to-date, we're up 14% year over year in bookings. And looking forward into the rest of Q2, I expect that is going to continue.

I think I mentioned to you before that I've got some different tools and analysis that we are using, and it's a pretty good predictor of both May and June. Some I am actually very excited about what that is telling us about, what the likely May and June bookings are going to be, and we should have a very strong Q2. Counter, by the way, to what happened last year.

So we were not sure if that was some kind of new seasonality or not. You may recall that in Q2 last year, bookings were actually down on a year-over-year basis. I'm very confident that is not going to happen again this year. So, we're excited about that. Again, that's why remain optimistic for the second half and the balance of the year.

Got it. That's really helpful. As regards the offshore headcount, would we expect that to grow this year by any significant amount, or is the mix about right at current levels?

It's probably -- in terms of mix, it will outpace the US. Now I wouldn't say dramatically. I think last year the growth there was 20% or so I think in revenue, offshore revenue last year. And headcount didn't follow in kind because we actually intentionally drove utilization up a little bit. But we have had utilization more or less where we want it now. So headcount growth will probably be linear with revenue growth there, and again, I would expect that the growth offshore will outpace the US. I don't know if it will be double again or not, but it will be something ahead of the US. So we'll be doing some headcount addition there.

Okay. And so we have seen solutions related to TIBCO tail off a bit as Oracle has gained strength. Can you talk about bookings within TIBCO? I am just curious. It seems like there are some interesting things going on there.

Yes, we are actually kind of renewing our relationship again as we often do with TIBCO. They're an interesting partnership. I'll say it that way. But we're seeing good strength there, and you know we've got -- I think I've talked about this before. We've got Leap Wireless. Cricket was a big TIBCO customer of ours, and that relationship is winding down, winding down naturally, by the way.

So on par, we will probably be flattish with TIBCO, but we're certainly seeing some good opportunity and some traction out there.

Okay. That's helpful. I'll get back in the queue.

George Price, BB&T Capital Markets.

Thanks, guys. So, Paul, just to kind of close out on the tax rate. What do you expect for the full year, and what should we kind of think about, I guess, on a go forward basis on a quarterly basis given that we have the 2012 R&D catch-up out of the way, but we have each quarter you're going to take an accrue for the 2013?

So it ought to be that -- and they're going to be pretty closely adjusted, and the GAAP rate should be around 36% for the second through fourth quarters.

Okay. All right. Whatever that -- what does that in your mind pan out for the year roughly around?

It will pan out in the year, I think, roughly around 35% or so because there is more income in the last three quarters. 35%, 36%.

And you said that the adjusted and the GAAP will be pretty close?

Yes. I mean obviously the GAAP was lower than the adjusted in Q1 because of that discrete item over a smaller base. So that piece will carry over, but the rates for the second through fourth quarter should be pretty similar.

Got you. Okay. Jeff, on bookings you gave us some metrics; you know talked a little bit about confidence looking into the second quarter. Can you maybe talk a little bit about trends within the bookings, kind of what you're seeing deal size, perhaps mix, pricing, you know how the clients may be putting together the work in terms of phases? Anything to sort of better understand what is on the minds of those who are -- your clients who are buying.

Yes, they are larger longer-term deals. In fact, so I talked about the average deal size of $1.4 million for the 30 some odd deals we closed -- 35 deals we closed in the first quarter. $1.4 million, that's up from $1.3 million in the fourth quarter and up from $1.2 million a year ago. So they are larger and longer-term.

Another good metric there. You know, I guess, the insured we are seeing good strength among the customer set that we're pursuing. So I mentioned this on the last call, but we are -- we have a concerted effort, and this has been underway for a number of years. But I think we are accelerating or stepping up the efforts to move our focus to more of a large customer base, that Fortune 1000 base. And with that comes these larger, longer-term deals, more stability, and the ability to develop a relationship that lasts multi years, there's multimillion dollars per year.

So a good metric there is on our top 50 customers. Last year we did $3.2 million on average with those top 50, up from $2.9 million the year before. So, again, growth that's outpacing the Company's growth, and I think as we build a bigger base there and that becomes a larger percentage of our revenue, I think it's going to help accelerate growth as well.

In the first quarter of this year, we had in the top 50 the run-rate, the annualized run-rate, and of course, this will be -- that is dynamic, so there will be some shift. But annualized run-rate with this top 50 is $3.5 million. So, again, already up another 10% over last year.

Okay. That's helpful. Pricing, I guess, I know you have talked about still upsized opportunity relative to what you're seeing in the market from competitors. How much more upside do you think you could get in the current environment? What do you expect to pull down on an average basis, I guess, this year?

Yes, good question. So we started the year where we finished the year and in the first quarter, it was consistent at $132 an hour in the US. And actually up a little bit more in offshore, so 4% year-over-year.

I think I mentioned on the last call, I am not necessarily -- we are not necessarily planning so it's not baked into, by the way, those margin expansion projections I mentioned earlier that we will get another 4% this year. I do think that acceleration or that velocity slows a bit as we close that GAAP more and more.

So to answer your question, I would like to see 1% or 2% realized in the year so that our average for the year is maybe $135, something like that. And in terms of how far that can go before I think it really starts to slow or plateau, I honestly think it's in the mid-$140s in the current climate. And of course, as the market continues to heal or improve in terms of the macro environment and the economy, I think we'll see demand pick up and I think they will actually reaccelerate and again move beyond $145 million with inflation and cost of living and especially if the IT market tightens.

Okay, going back to the strategy of pursuing the larger clients, Fortune 1000 kind of clients, do you -- maybe you haven't picked up on this yet, maybe it's not happening, but just raise a potential scenario. Obviously, the macro situation in Europe is pretty weak, probably a little weaker than even perhaps people thought it would get. I know you don't have any direct exposure there, but certainly some of those larger clients that you are talking about do business on a global basis and probably many of them have some business there. Have you picked up on any potential for customers like that to try and do anything to their spend or their investment here in the US or with providers like you here in the US to sort of offset maybe things getting weaker than expected in Europe?

Yes, it's a good question. I'll say that I don't think we've seen any trend there. I mean there are certainly pockets of companies that are facing challenges for whatever reason. I don't think that we could isolate it to -- in any of those instances that I think of that come to mind when I say that, I don't know that any of them have said, yes, it's specifically global economy-driven or European-driven as much as a generalization that sales are off or revenue is off or costs are too high. But, again, I would say no more than normal is what I'd observe there.

And actually let me qualify or clarify my comments about Fortune 1000 also. We have a lot of customers that are midmarket customers that have complex IT needs and sizable budgets because IT is a significant part of their business. We obviously -- that's the Blue Crosses and a lot of those customers in the healthcare space. Obviously, those are targets, meaningful targets of ours as well. So it will be a balance of those as we go forward.

Right, okay. All right, thanks very much.

(Operator Instructions). George Price, BB&T Capital Markets.

Hi, I just had one more. On the offshore side, any update on the strategy for expansion in India, the headcount there, kind of how you see that playing out. And I don't think this is the case at all, but do you see any potential impact from some of the more restrictive terms that have been thrown around in the pending proposed Senate immigration legislation?

Yes, good question. Actually our growth in India will probably outpace China simply, again, we introduced that sort of as a geopolitical hedge. We are able to amass some solid talent there. Our attrition experience there is really quite good, so it has been very stable for us. And I think it's going to continue. We are kind of a small, but new player in the space down there and we seem to be able to attract good talent and the folks seem to enjoy working for us. And some customers will choose India over China based on a lot of the media reporting on IP risk. So I do think it will outpace.

In terms of the immigration legislation that they are kicking around, I don't think we are going to be impacted by that. We have less than 15% of our employees that are on H1Bs or L1s. So I think we would, out of the gate, fall below any threshold that I've heard being bandied about right now.

And we don't really tend to rely on that too much. We do seek those folks out, very talented people. And when we can, we will sponsor an H1B, but it hasn't been a key to our hiring strategy. So if we have to do less of it, I don't think it's going to impact us directly too much.

The one concern that I think everybody should have would be we've already got I think a shortage in this country on talented IT-skilled people and obviously that's just going to tighten it more. So it's going to drive costs up and probably make it harder to hold onto talent.

Right. Just on India, what's the headcount there now, what do you think -- do you have any thoughts on what you end the year at?

We are about 55 or so?

We got another quarter of billable, it was 32, but 55 I believe is the total.

Okay, all right. So 32 and then by the end of the year, 50 or better, would you say?

Yes, yes.

Great. All right, thanks, guys.

Thank you.

Thank you. There are no further questions. I would now like to turn the call back over to Jeff Davis. Thank you.

Okay, thank you all for your time today. We appreciate it and look forward to talking to you in another quarter.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect.