Perficient Inc (PRFT) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2013 Perficient earnings conference call. My name is Dominique and I will be your operator for today. (Operator Instructions)

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

Thank you. Thanks, everyone, for joining. With me today is Paul Martin, our CFO. As is typical, we have got about 10 to 15 minutes of prepared comments, after which we will, of course, open the call up for questions. But before we go on, I would like to ask Paul to 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, 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.

At times during this call, we will refer to adjusted EPS. Our earnings press release includes a reconciliation of certain non-GAAP financial measures to the most directly-comparable financial measures prepared in accordance with generally accepted accounting principles, or GAAP. This is also posted on our website at www.perficient.com.

We have 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. Well, good morning again. Thanks, everyone, for joining. We appreciate your participation on the call. We are pleased to share our fourth-quarter and full-year 2013 results with you today. Fourth quarter capped another strong and successful year for Perficient. Services revenue growth up 20% in the quarter, net income up 26%, and adjusted earnings per share up 30%.

We continue to demonstrate the ability to incrementally raise rates and have moved our adjusted -- or I'm sorry, average bill rate for North American employees to an all-time high of $138 an hour. That is up about 5% year-over-year-end, that is actually on the heels of a 6% gain last year. So in just 2 years, we have been able to raise those rates more than 10%, and we see more opportunities to drive ABR higher again this year and beyond.

Another initiative we continue to focus on you've heard me talk about before is our land and expand selling process. It is a program that we have implemented over the last year and a half or so to ensure that our sales, marketing and delivery efforts are primarily targeting key strategic accounts that can become multiyear, multimillion dollar, long-term client relationships for us.

We have had good success there, and we established a sales leadership team along the way that helps us reinforce this culture and align sales compensation to drive the proper behavior. So some of the results from that are that in 2013, we served 74 clients in $1 million plus relationships, compared to 69 in 2012 and 53 in 2011. 37 of those clients were $2 million plus. Our top 50 accounts averaged $3.5 million during the year compared to $3.2 million in 2012, and $2.9 million in 2011; $2.4 million, by the way, in 2010.

So you can see again a good track record there of continually increasing that average each year as we move along in these larger accounts. And again, our strategy is to continue to gravitate more toward those accounts and move more up channel. We expect each of those trends will continue and the accounts will continue to grow this year and beyond as well.

As we indicated in the news release, Perficient has a lot of momentum as 2014 gets underway. The market continues to strengthen from our perspective. Clients are demonstrating an increased propensity to consider and commit to larger and longer-term projects with us, and that is being reflected in our pipeline and bookings.

Q4 bookings increased 19% year-over-year, and that trend has carried into this year as well. Even backing out contributions from the firms we acquired last year, January 2014 easily represents the strongest bookings month in the Company's history, and obviously has us off to a great start this year in terms of the bookings.

We sealed 23 deals over $500,000 during the fourth quarter, and they averaged $1.8 million each, and that compares to 25 in the third quarter that averaged $1.4 million each, and 24 in the fourth quarter of 2012 that averaged $1.3 million. So from $1.3 million average to $1.8 million average in a year's time.

So velocity and volume with large deals closed, obviously, remains healthy; and deal sizes, again, those will be larger.

After Paul shares the financial details for the quarter and year, I will be back to share more insight and color on performance in Q4, as well as our outlook for Q1 and the full year, and some notes about our plans for M&A. Paul.

Thanks, Jeff. Total revenues for the fourth quarter of 2013 were $97.5 million, which represents a 17% increase over the year-ago quarter. Services revenue for the fourth-quarter 2013, excluding reimbursable expenses, increased 20% to $86 million. Services gross margin for the fourth quarter 2013, excluding stock compensation and reimbursable expenses, increased to 38.5% from 35.5% in the fourth-quarter 2012, with increased average bill rates continuing to drive year-over-year margin improvement.

SG&A expense increased to $20.3 million in the fourth quarter 2013, from $15.8 million in the comparable prior-year quarter. SG&A as a percentage of revenues increased to 20.9%, from 19% in the fourth quarter of 2012. EBITDAS for the fourth quarter of 2013 was $15.7 million, or 16.1% of revenues, compared to $12.6 million and 15.1% of revenues in the fourth quarter of 2012.

Fourth-quarter 2013 includes amortization of $2.2 million, which was flat with the comparable prior-year quarter. Net income increased 26% to $5.5 million for the fourth quarter of 2013, from $4.4 million from the fourth quarter of 2012. Diluted GAAP earnings per share increased to $0.17 a share for the fourth quarter of 2013, compared to $0.14 in the fourth quarter of 2012.

Adjusted GAAP earnings per share increased to $0.30 a share for the fourth quarter of 2013, from $0.23 for the fourth quarter of 2012. As a reminder, GAAP -- adjusted GAAP EPS is defined as GAAP earnings per share, plus amortization expense, non-cash stock compensation, transaction costs, and fair value adjustments of contingent consideration, net of related taxes divided by average fully diluted shares outstanding for the period.

Our effective tax rate for the fourth quarter 2013 was 35.8%, compared to 37.7% for the fourth quarter of 2012. This decrease in the effective tax rate was primarily due to the research and development tax credit and the U.S domestic production deduction.

Our ending available headcount at December 31, 2013, was 1,740, which includes 1,573 billable consultants and 167 subcontractors. Ending SG&A headcount at December 31, 2013, was 301.

Now let me turn to the full-year results. Revenues for the year ended December 31, 2013, were $373.3 million, a 14% increase over the comparable period last year. Services revenue for the year ending December 31, 2013, excluding universal expenses, was $326.6 million, an increase of 14% over the comparable prior-year period.

Services gross margin for the year ended December 31, 2013, excluding stock compensation and reimbursable expenses, increased to 37.6% from 35.7% in the prior-year period.

SG&A expense increased to $77.6 million for the year ended December 31, 2013, from $64.9 million in the comparable prior-year period. SG&A as a percentage of revenues was 20.8% for 2013, compared to 19.8% for 2012.

EBITDAS for the year ended December 31, 2013, was $56.6 million or 15.2% of revenues, compared to $48.2 million or 14.7% of revenues in 2012. 2013 has included amortization of $8 million compared to $7.8 million in 2012. 2013 includes acquisition costs of $2.3 million, primarily related to the acquisition of TriTek, Clear Task and CoreMatrix, compared to $1.9 million in 2012 related to the acquisition of PointBridge, Nascent and Northridge.

Net income for the year ended December 31, 2013, increased 33% to $21.4 million from $16.1 million in 2012. Diluted GAAP earnings per share increased to $0.67 a share, from $0.52 in 2012. Adjusted GAAP earnings per share for the year ended December 31, 2013 was a record $1.11, up 21% from $0.92 in 2012.

Our effective tax rate for the year ending December 31, 2013, was 32% compared to 38% in 2012. The decrease in the effective tax rate was due to the research and development tax credit for 2012 and 2013, and the US domestic production deduction for 2010 to 2013.

We ended the fourth quarter with $19 million in outstanding debt and $7 million in cash and cash equivalents. Our balance sheet continues to leave us well-positioned to execute against our strategic plan. Our days sales outstanding on accounts receivable decreased to 74 days at the end of the fourth-quarter 2013, which is down from 75 days at the end of the fourth quarter 2012. We will continue to focus on keeping DSOs in the 70 to 75 day range.

I will now turn the call back over to Jeff for a little more commentary. Jeff.

Thanks, Paul. Well, as I mentioned earlier, we are pleased with our momentum right now. I mentioned bookings this year have started out well. We will be getting together again here, of course, in just a couple of months to discuss Q1 in detail. But I think it is worth noting that through the end of February on a trailing 5-month basis, bookings are up 18%. That strength is pretty broad-based, by the way, from an industry perspective.

Healthcare, financial services continue to do very well, but energy and utilities, auto and manufacturing, are also performing well.

Everyone saw our acquisition last month of ForwardThink Group, our biggest deal ever from a revenue perspective. A great firm, by the way, strong East Coast presence, very meaningful relationships with the world's largest financial services firms. Very well run, great rates and margins, high-end strategic work, great group of folks; type of management and consulting that really leads to a lot of technology implementation work.

These guys are really more on the front end, driving the strategy that leads to the types of projects that Perficient traditionally does. So the combination is very strong, and we are excited about the work that we will drive -- the growth that we're going to be able to drive together.

Additional M&A remains a near-term goal for the quarter -- I'm sorry, for the year. We are in very active discussions with a handful of firms and remain very optimistic that we can add, I would say, at least another $30 million of revenue this year through acquisitions. That, plus what we believe will be solid organic growth, will have us approaching and possibly surpassing our articulated goal of $500 million revenue run rate this year. We will have to see. It is a bit of a stretch, but we are feeling actually pretty good about the momentum, as I mentioned earlier.

If we are able to drive the margin expansion we expect that will come with the increasing ABR I mentioned earlier, continue to fine-tune utilization, we should see another increase in margins as well this year. So another positive sign that we see going into 2014.

So again, things are going well. We are pleased with the quarter and the year, and looking forward to more growth and even better results in 2014.

Now, onto 2014, commenting on Q1 2014 and the full year. Perficient expects its first-quarter 2014 services and software revenue, including reimbursed expenses, to be in the range of $97 million to $104.2 million, comprised of $91.5 million to $96.2 million of revenue from services, including reimbursed expenses, and $5.5 million to $8 million of revenue from sales of software.

The midpoint of the first-quarter 2014 services revenue guidance represents growth of 22% over the first-quarter 2013 sales services revenue. So again, a very solid start to the year with 22% year-over-year projected for the first quarter.

The Company is issuing its full-year revenue guidance range of $430 million to $450 million, and adjusted earnings per share guidance range of $1.26 to $1.36 for 2014.

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

(Operator Instructions) Mayank Tandon, Needham.

Thank you, good morning. Jeff, just to kick things off, can you talk about what the organic growth was in the fourth quarter and then what is embedded in your expectations for both the first quarter and for the full-year fiscal 2014?

Yes, the organic in the fourth quarter was just under 10%, 9.8% to be exact. The midpoint of our guidance for the first quarter is around 6% or 7% organic. And I want to point out, by the way, that a year ago we were flat in the first quarter. So being -- or pointing to up 6%, 7%, obviously is a much better foundation going forward.

Likewise, for the year, the midpoint on organic growth I want to say is about 7% for the year.

Okay, great. Then when you talk about the bookings, I think if I heard you right, you said the 5-month trailing number through the end of February is up 18% year-over-year. What does it look like on an organic basis?

The trailing 5 months I want to say is about 5%. February was a little softer than January, but that is -- on a monthly basis that moves around a lot. So we are expecting a big March and that will probably bring it back up to at least high single if not low double digits on the organic side.

Our book-to-bill ratio organically remains over 1.1.

Sure. And then just moving down the P&L, wanted to get a better sense of the expectations on margins over the course of fiscal 2014, both gross and operating. And then just maybe talk about the seasonality in terms of margin expansion over the course of the year.

Yes, absolutely. So margin expansion for the year we expect about the same as we had last year, or as our goal was last year, at least. So 100 to 200 basis points on gross margins and likewise, 100 to 200 on EBITDA. I think we have got some good leverage on EBITDA, so I think we will actually beat the expansion on the EBITDA side slightly over the gross margin side. But still expansion similar, I think, to what we realized last year is what we are expecting again this year.

And then in terms of the seasonality in the year, I would say very parallel with last year. We are seeing the year start a little slower, just like it did last year, but we are expecting it to see a nice pickup in Q2 and beyond. And again, we are saying 7% at our midpoint, organic growth. We realized about 4% last year. And if you do some just simple math and look at, as I said before, we're 6%, 7% in the first quarter, that is 6% to 7% above last year, obviously. And we ended the year at 4%.

So if you do the simple math, we have got a shot I think at that low end of double-digit organic growth for the year. But I do think we will see more growth as the year progresses beyond the first quarter.

Okay. And then just one final question on the tax rate, Paul. Maybe you could give us what is embedded in the EPS guidance on the tax rate side.

Yes, so the tax rate will be up a couple points over the rate that we experienced in 2013. So the adjusted rate should be somewhere in the 38%, 39% range.

38%, 39%. Excellent, I will jump back in queue. Thank you.

Brian Kinstlinger, Sidoti & Company.

Hi, good morning, guys. The first question I had, your organic revenue growth was 7% for the year. Maybe, Jeff, can you talk about which industries you think are going to grow faster starting, which might grow slower; maybe what will drive that?

You know, actually we are seeing decent improvement across the board. I do think healthcare is going to remain strong. We have got some opportunities in the works there that I think could drive significant growth again in that space. But we are also seeing other industries come along nicely as well, so the relative growth for healthcare may not be as strong as it had been in the past.

We certainly expect a lot from financial services. I can't say enough, I think, about the value that the ForwardThink acquisition brings to the table in terms of our ability to drive additional revenue around the financial services industry, as well as on the insurance side, also. These guys are more focused on pure financial services, but we are seeing some nice improvement in the insurance space and mutual fund wealth management space as well from a financial services perspective.

But, you know, automotive is strong, great relationship with FordDirect is potentially moving into a big relationship or bigger relationship with Ford proper. Volkswagen and a number of other automotive -- either auto manufacturers or second-market folks that we are working with, still strong there.

And we still like oil and gas and utilities. We've got a good presence in the South. We are seeing a nice pick-up there as well, and retail again is strong. So as I said, it is kind of across the board. Those are probably the highlights in terms of the areas we expect most growth.

Softness from an industry standpoint, we really don't see it too much. Manufacturing, always a low spend, but even that I think from our perspective at least is improving some. So all in all, I would say the tide is lifting boats from what we can see, at least in our world.

And then maybe in 2014, as part of the 7% organic growth, what percentage is going to come from price increases (multiple speakers)?

Last year we -- sure, sorry. Last year we enjoyed about 5% rate increase. I am not -- we are more conservative than that in our planning. So what is in that 7% is probably a realized price improvement of say 2% to 3% for the year, and the rest would be organic growth -- or hours, organic hours growth.

One thing to keep in mind is that our offshore continues to outpace onshore growth, as you might expect it would. And with that, of course, the rates are much lower. So billed hours may increase -- the 7% is on revenue. So if you look at billed hours, we might see an increase beyond the 7% minus the 3% of rate improvement, if that makes sense.

Right, right. And then I ask you every quarter, can you just give us some statistics on the Premier channel and what your expectations are maybe for 2014; how you ended the year?

Sure, absolutely. Actually, quite a lot has changed there, Brian, too, so it's a good thing you brought it up. We still have a healthy pipeline. We are still working with Premier. We expect probably more services opportunities there than anything in working with some of the Premier members.

However, we have entered into a relationship with IBM and are taking a lot of those same solutions, and particularly the assets that we have spoken about in the past, direct to market with them in the provider space. In fact, we should have our first major sale of the assets here this quarter, before the end of the quarter. We have got a deal now that is actually just in legal review with the client, and we expect it will close in March for about $350,000 for those assets.

And, of course, services would come along with that. So the Premier channel has kind of shifted to the Premier/IBM channel, is the way I would describe it, and the pipeline has improved with that shift. Obviously, IBM has got a big salesforce. They like our asset a lot, and we are working with -- from the CTO of their healthcare group down, and we are expecting some good things out of that relationship.

A little early to project in dollars, but I would say, again, we have got a lot of opportunity there. And I think a much better outlook, a better opportunity, than if we were just working with Premier.

If I can just drill down on that, I want to touch on the software piece that you mentioned. But first, how many Premier member hospitals are you working with at the end of the year?

We had 10 coming out of last year, and 2 more in pipeline right now.

There is 6 in pipeline.

6 in pipeline, sorry. Thank you.

And then what you are talking about with IBM, is that the software piece you have been talking about for, I think, in the last two or three calls? And how much -- $350,000 I think is what you are talking about, the software license. Is that embedded in the guidance as well?

It is in -- yes, it is in our numbers for Q1. That deal is because it is nearly done. But there is -- go ahead.

Sorry, so that is software license, and where would that be booked? Because your software line item is a remarketed software, I think. So will that still be seen in software or will that be seen then in your services piece?

No, this will still be software. It will just be very high margins, very high-margin software.

Right, okay. So what is the pipeline do you think for that software piece? And that is a little different than the rest of your business and the higher margin. Can you just sort of speak to how IBM as well as Perficient is looking at selling that? Is there maybe a pipeline you can give us to measure?

You know, honestly, Brian, not right now. It is early in that relationship. This whole area has been somewhat elusive, as you know. But again, a good sign is that within weeks of us forming this relationship with IBM -- and this is Global Business Services, by the way, I should mention, the consulting side. So within weeks of us, again, developing that relationship, we have already closed a deal, or nearly closed the deal, I should say.

So I am optimistic that we could see three, four or more of these opportunities between now and the end of the year, none of which is in our pipeline now. For you to know on the margin on that is nearly 100%. There is a small commission that goes up on with it, but it is about 95% because we have already expensed the cost.

And just quickly, one more question on the software. How do you recognize that? When it is closed, do you book 100% of that $350,000, for example, right away?

Yes.

So typically, that would include -- if it includes maintenance, that gets recognized over time, but the actual sale of the software perpetual license will be recognized upfront.

Great. And then, Paul, for modeling purposes, can you just give us part of your forecast for amortization of intangible expenses and stock comp? Maybe you gave that; I didn't hear.

Yes, give me a second here. Yes, so the amortization will be increasing as a result of the acquisitions that we did, or the ForwardThink acquisition that we did, and a full quarter of CoreMatrix. So we are looking for about $2.2 million in amortization in Q1 and a little over $10 million for the year. From a stock comp perspective, I'm looking at that -- it's roughly $3 million in the first quarter and $12.5 million for the year.

Great. I just wanted to touch on the bookings. I wanted to make sure I got it right. The organic bookings in the last five months were up 5%, and then what were they in the fourth quarter?

Organic bookings in the fourth quarter, I want to say, was about 12%.

12%?

Yes. It was high; it was strong.

And then the five months ending February, I think maybe I asked that, but was that 5%?

Yes.

Great, okay. Thank you so much, guys.

Thanks, Brian.

(Operator Instructions) Peter Heckmann, Avondale.

Good morning, guys. Nice results. The EPS guidance range for 2014, the midpoint was higher than what I would have expected you to have started the year with. Can you talk about some of the things that are giving you confidence on the margin line?

Yes, it is the margins that we are exiting 2014 with. So we have got some good leverage, as I mentioned in SG&A, that I think we are really starting to gain some benefit around. We did kind of a stairstep reorganization at the beginning of last year, which is behind us now, and don't expect any of those additional costs for some time again. It will be a while before we'd even do that, so that is part of it in the SG&A side.

And then, of course, we anticipate, as I mentioned before, continued improvement to ABR and an ability to hold the line on costs, and possibly even squeeze a little more out of utilization. But even without that, I think these are realistic targets. And again, the short answer is we are coming out of 2014 with much improved margins from where we entered with.

That's fair. That's fair. And then can you talk about your organic hiring plans? You may have mentioned it. I am out of the office and so I had a little bit of static there, but organic hiring plans for here in the first half; and what specific niches are you finding most difficult to hire in?

Yes. So in the first half, since the year I think is -- again growth, I think, will pick up throughout the year. So in the first half, it is probably a little slower in terms of hiring. You want to drive utilization up a bit, so we will focus more on that than doing a lot of hiring. Of course, we are always hiring.

But for the year, again, I would go back to just the simple math of about 4% driven through new hours, if you will, and probably a little more than that. Because offshore is growing at a faster pace than onshore, although it is still a smaller component of the business overall.

So 4% to 5% net new headcount throughout the year. More of that in the second half than the first half translates, by the way, to about 80 to 100 people.

Got it. All right, I will get back in the queue. Thanks.

Mayank Tandon, Needham.

Thank you. Jeff, so just one clarification around margins. You said 100 to 200 basis points of expansion on gross. That would be for the services line, right, not for the consolidated number?

I'm sorry, yes, net services gross margin, I should say.

Okay. So the gross margins total will also expand, but not to the extent that services margins will, because of the software and hardware piece. Is that (multiple speakers)?

Yes. Well, and actually if we sell some of our own software or hardware, that could shift. But it is more, frankly, the reimbursed expenses with zero margin, but that is really what pulls down gross margin. So when I talk about getting to 40%, I am talking net services to your point. And then software will likely be dilutive to that as well, and certainly reimbursed expenses is, also.

Okay, that makes sense. And then the EBITDA margin, you also said 100 to 200 basis points, but that is really where the leverage kicks in to your point about EBITDA margins actually, potentially, surprising to be upside even as gross margins expand. Is that fair?

Yes, I think so. Yes, I think what we are seeing now, and we saw it in the second half of last year, as long as we can maintain this momentum that -- let's say we put up 100 basis points on the net services gross margin; I think that translates to maybe 125 to 150 on the EBITDA line.

Got it, makes sense. Thank you very much.

Thank you.

This ends today's question-and-answer session. I would like to hand the call back to Mr. Jeff Davis, President and CEO.

All right. Well, thank you all again for your time. We are very excited about the outlook for 2014; look forward to talking to you all again in a couple of months and throughout the year. Thank you.

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