Perficient Inc (PRFT) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2014 Perficient earnings conference call. My name is Denise and I will be the operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Thank you and good morning. This is Jeff Davis.

With me today is Paul Martin, our CFO. I want to thank you for your time today. As usual, we've got about 10 to 15 minutes of prepared comments, after which we will open the call up for questions, but before we proceed, Paul will now read the Safe Harbor statement. Paul?

Thanks, Jeff, and good morning, everyone.

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

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, and it's 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. I want to, again, thank you all for joining us this morning. We are pleased to share with you our first-quarter results and recent progress.

First quarter got 2014 off to a solid start for Perficient. Services revenues were up 20% in the quarter and EBITDA, net of stock comp, was up 36%.

And we have talked several quarters about our belief that we can continue to incrementally increase our bill rates to drive margin expansion, and during the quarter, ABR reached an all-time high of $143 an hour for North American employees. Now it's an increase of almost 4% sequentially and more than 8% year over year.

So our ability to raise rates has been aided by our growing brand awareness and reputation, but also by strategic decisions, which we've discussed prior, that we've made around our services mix, as well as the types of clients we are focused on servicing.

We will continue to move upmarket with our portfolio and our enterprise relationships and we expect to continue to be able to raise rates going forward.

We've talked about before the fact that there is a meaningful gap between our rates and the rates of our largest competitors, and that we are able to command an increase and close that gap, and quite frankly, really our skills and our folks, we believe, are more qualified and do a better job than our competitors. Again, that is underscored by the win rates we've shared prior.

On the year-end call, we talked about the fact that in 2013 we had served 74 clients with -- in $1 million plus relationships, with 37 of those clients being $2 million plus. Annualizing our first-quarter results has us on pace to serve 90 $1 million plus clients this year and 46 of those tracking to $2 million plus. And by the way, those results exclude any contributions from our two most recent acquisitions.

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

On a rolling six-month basis, our book-to-bill ratio exceeds 1.2, and we continue to focus on sustaining that metric north of 1 and the outlook is quite strong there.

We sold 35 deals north of $500,000 during the first quarter. They averaged $1.4 million each. That compares to 23 in the fourth quarter averaging $1.7 million each and 35 in the first quarter of 2013 that also averaged $1.4 million.

After Paul shares financial details for the quarter and the year, I'll be back to share more insight into our performance in Q1, as well as our outlook for Q2 and beyond, and touch on this morning's acquisition announcement and our M&A plans for the remainder of the year. Paul?

Thanks again, Jeff.

Total revenues for the first quarter of 2013 were $97.2 million, which represents a 14% increase over the year-ago quarter.

Services revenue for the first quarter of 2014, excluding reimbursable expenses, increased 20% to $88.5 million. Services gross margin for the first quarter of 2014, excluding stock compensation and reimbursable expenses, increased to 36.2% from 35% in the first quarter of 2013, with increased average bill rates continuing to drive year-over-year margin improvement.

SG&A expense increased to $20.7 million in the first quarter of 2014, from $17.9 million in the comparable prior-year quarter. SG&A as a percentage of revenues increased slightly to 21.3% from 21% in the first quarter of 2013.

EBITDAS for the first quarter of 2014 was $14 million, or 14.4% of revenues, compared to $10.3 million, or 12.1% of revenues, in the first quarter of 2013. The first quarter of 2014 included amortization expense of $2.7 million, compared to $1.8 million in the comparable prior-year quarter. This increase is associated with the acquisitions completed in 2013 and 2014. We incurred $1.5 million of acquisition costs in the first quarter of 2014, primarily related to the acquisition of the ForwardThink Group and BioPharm Systems. Acquisition costs were immaterial during the first quarter of 2013.

Net income decreased 26% to $3 million for the first quarter of 2014 from $4.1 million in the first quarter of 2013, primarily due to acquisition costs and an increase in our effective tax rate. Diluted GAAP earnings per share decreased to $0.09 a share for the first quarter of 2014, from $0.13 in the first quarter of 2013.

Adjusted GAAP earnings per share increased to $0.25 a share for the first quarter of 2014 from $0.22 a share in the first quarter of 2013. As a reminder, 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 outstanding shares for the period.

Our effective tax rate for the first quarter of 2014 was 42.3%, compared to 21.5% in the first quarter of 2013. The increase in the effective rate is primarily due to the expiration of the research and development tax credit, which has not been reenacted by Congress for 2014. The first quarter of 2013 included the benefit for the full year of 2012 and part of 2013 as the research and development tax credit for 2012 and 2013 was enacted in the first quarter of 2013.

Our ending billable headcount at March 31, 2014, was 1,821, including 1,639 billable consultants and 182 subcontractors, and the SG&A headcount at March 31 was 321.

We ended the first quarter of 2014 with $50 million in outstanding debt and $4.7 million in cash and cash equivalents. Our balance sheet continues to leave us well positioned to execute our strategic plan.

Our days sales outstanding on Accounts Receivable were 79 days at the end of the first quarter of 2014, which is up from 79 in the first quarter of 2013. We will continue to focus on keeping our DSAs in the 70- to 75-day range. Jeff?

Thanks, Paul.

As I mentioned earlier, we are pleased with our performance and the consistent double-digit growth of our services business. Software resell was down year over year, but that's a lumpy lower-margin business that we always expect a degree of unpredictability with.

It is, however, an important differentiator for us with both our clients and our partners, so we are going to continue to provide that service, but keep in mind that software resell is not a key operating metric. Services growth and margins are what we define as the health of the business. And again, things going very well on that front.

Healthcare and financial services verticals continue to perform very well. We talked on the last call about our acquisition of ForwardThink Group, and that has really accelerated our progress in the financial services industry. Also, the two acquisitions we completed since our last call bring additional deep industry and technology expertise that clients are willing to pay a premium for.

BioPharm, which we acquired at the beginning of Q2, brought us deep domain expertise in the life-sciences industry. They're focused primarily on clinical trial management, clinical data management, and safety and pharmacovigilance solutions. Also, a very well-run business, great bill rates and margins and growth trajectory.

And this morning, we announced the acquisition of the commerce team from Trifecta Technologies. It is a group of about 40 professionals focused exclusively on IBM commerce solutions, run by a former IBM executive, and a team with a solid reputation with IBM and the market.

They also bring intellectual property that will accelerate our growth around commerce solutions. Obviously, those solutions span industries, but there is certainly a nice concentration of clients in the consumer packaged goods and retail space, an area that I have been bullish on for some time. And I think once the industry moves past the recent events around security and shifts their focus back to growing their business and implementing new technologies, we're going to see a nice pickup there. We are well positioned for that now.

The IP that they bring also fits nicely into our larger plan to continue to build out our portfolio of solution accelerators and industry tools and market them as key differentiators. We have spoken quite a lot about that, and I think, as you all know, that's a key part of our strategy going forward.

So that's three acquisitions in the first five months of 2014, each of which we are very excited about. We will continue to pursue M&A throughout the year, though certainly I would expect that the pace will moderate a bit. Maybe we will execute another deal or two before year-end, most likely early fourth quarter.

That, plus our organic growth, will have us approaching or achieving our goal of reaching a $500 million revenue run rate before year-end, and again, along the way we expect further margin expansion and profitability growth.

So with that, commenting on Q2 2014 and beyond, Perficient expects its second-quarter 2014 services and software revenue, including reimbursed expenses, to be in the range of $108.1 million to $117.5 million, comprised of $103.1 million to $108.5 million of revenue from services, including reimbursed expenses, and $5 million to $9 million of revenue from sales of software.

The midpoint of the second-quarter 2014 services revenue guidance represents growth of 25% over the second quarter of 2013 services revenue.

The Company is raising its full-year 2014 revenue guidance to a range of $444 million to $464 million from the previously provided range of $430 million to $450 million and raising 2014 adjusted earnings-per-share guidance to a range of $1.27 to $1.37 from the previously provided range of $1.26 to $1.36.

With that, Operator, we can open the call up for questions, please.

(Operator Instructions). Mayank Tandon, Needham & Company.

Jeff, just looking at 1Q revenue, it seems a little bit on the light side in services. I just wanted to see if there was any soft spots this quarter that you saw or was it just purely seasonality in 1Q that would've caused the services to come in a little bit on the lighter side of the expectations?

Yes, it's a little bit lighter than our midpoint as well, I think about 1% or so.

And yes, we definitely saw a little bit of an impact, I think -- you normally don't hear me attribute much to this kind of thing. I think, actually, the weather had a bit of an impact as much on getting people where they needed to be as maybe even on bookings in the middle of the quarter, and not bookings so much as sales cycles extending in February, literally I think the logistics around some of the travel involved, et cetera, in getting deals closed on both the client side and on our side.

That said, those cycles contracted immediately again in March, and we turned in strong bookings for March and ended up finishing pretty strongly with revenue per day up pretty nicely in March.

So, I think that those things associated with seasonality and maybe the weather are behind us now, and we have got -- basically reiterated our guidance for the year. If you look at what we did there, and we have always talked about the year, like last year, being a back-end loaded year, mostly due to the new seasonal trend that we have seen for two or three years now. So, again, we basically reiterated the guidance that we put out there initially for the year.

What we did is added to it the stubs from the acquisitions, minus the actuals versus midpoint in Q1. So, we still feel good about the year. I think we are through that now, but your observation is correct. It was a little lighter than we expected.

Okay, you also answered my second question around the guidance. It seems mostly that is coming from the contribution of the acquisitions, but organically you are bringing your numbers down a little bit just to reflect the 1Q impact. Is that right?

That's exactly -- yes, just the 1Q, that's exactly right.

Okay.

(multiple speakers) the midpoint is still 6% to 7%.

6% to 7% in terms of organic growth for the year?

Yes.

Okay. And then one more question, and then I will jump back in queue. On the healthcare side, we've heard some of your larger peers talk about some delays related to the regulatory side, also some management changes at large healthcare companies. Any impact of that in terms of your business?

Yes, healthcare was one of the sectors that was off to a slower start from a revenue perspective in the first quarter, although it's picked up a nice head of steam now.

And from a pipeline perspective, I can tell you it's stronger than ever. As a matter of fact, it made up 37% of our bookings in the first quarter. So overall, I think we did see a slower start than perhaps last year or prior, but really not dramatic, and again, we see it picking up even as we speak right now and expect a strong year for healthcare.

Okay, thank you. I will get back in queue.

Peter Heckmann, Avondale Partners.

I had a follow-up to Mayank's question on healthcare and the regulatory outlook. Can you talk about how some of the deadlines, whether or not they specifically affected your business? Whether some of those deadlines may have been distracting buyers or some of the mandates may have been distracting buyers, and can you talk about how you see some deadlines, whether it's ACA or ICD-10, meaningful use, how you see those unfolding over the next year or two in terms of benefit versus distraction?

Yes, good question. I think it's probably neutral for us, benefit versus distraction, because we do certainly get some revenue from those mandates, but I would tell you that the majority of our revenue is really rooted in the transition -- transformation, really, of the industry.

Most of the work that we are doing for these businesses, both payer and provider, is really around data analytics. Some of that is mandated, but a lot of it is running on its own steam now because of the competition -- the competitive nature of the industry or that we are moving into a more competitive nature.

So again, it helps us to have mandates out there that drive reporting requirements and things like that because someone has got to do that work, and we have an opportunity and, of course, have done some of that and are continuing to do that. However, to your point, our business, what we really see as the big opportunity with the long tail, is helping these guys transform their businesses to what you would compare to, say, retail today or any other well-run industry where businesses are highly competitive and they are managing to effectively deliver quality services at an effective cost.

There is a lot of work to be done in the industry to get from where we are today to that point. So to your point, it can also be a distraction, but like I say, I would call it kind of neutral.

I will tell you, not surprisingly, the government has lost a lot of credibility in terms of people taking the deadlines seriously, as many times as they have moved them and continue to.

That's fair. And then, how about on BFSI or trends that you are seeing there? I guess what I am seeing overall is it seems like banks, securities firms are spending pretty selectively. Regulatory demands continue to be a big driver there as well, but can you talk about some of the success you are having in financial and if there is any trends that you can extract from that?

Yes, and I agree with what you said. It is selective, and that's where us acquiring ForwardThink positioned us extremely well. This is a high-end firm with people with very deep expertise in specific areas within financial services, including regulatory, as well as even just business process and competitive services within the industry.

So we are seeing good growth there already with that acquisition, and of course, we combined our existing financial services with them and, in fact, the team collectively is already driving crossthrough sales of technology. If you recall, that's primarily a managed -- management consulting business, and our intent was -- and we agreed mutually along with the founders there was a great opportunity for them to drive that kind of revenue. And we are already seeing that.

So I think we have got a unique situation with us in terms of, one, the strength these guys bring and the specific skills that they have, the knowledge that they have, domain expertise, combined with our technical capability, I think, is going to continue to build traction. And like I said, it is fairly unusual to see that happen within the first six weeks of an acquisition, but in fact, we closed our first technical opportunity that they brought to -- they brought Perficient into -- legacy Perficient into within six weeks. So, we feel good about the space and particularly because of ForwardThink.

Good deal. All right, I will get back in the queue.

Brian Kinstlinger, Sidoti & Company.

Can you highlight the progress you're making on -- with your software assets on the healthcare space? Maybe did you recognize any license revenue during the quarter, how you're going to market with your proprietary products, and maybe expectations for the year?

Sure, we have got -- we're stepping up, actually, our marketing efforts there.

So to answer your first question, we did not book any revenue in Q1 from those asset sales. We have a verbal now for a $250,000 deal that will go forward. They have already signed the services piece, so there would be no point in doing that if they weren't committed to the software. We expect that will close here in short order.

And we have got about $2.3 million in gross pipeline just for the asset and deals that could close this year. The weighted pipeline, the weighting -- when you apply the weighting or the odds to that is about $900,000. So, we feel pretty good about our opportunity to close four or five of those deals this year at $200,000 plus each. So, about $1 million or so. None of that is in our guidance right now, by the way.

And when you say $900,000, is that the software license piece, nothing services related? Is that what you are intending?

That's right. That's right. That's just the license for our product, for our assets.

And then, Jeff, today's acquisition was quite small, so I am wondering if there was something more strategic behind this deal related to these software assets.

It was, and the software assets are certainly a plus, as I mentioned earlier and we talked about before. It's more and more of a growing component of our strategy to build a bigger and bigger portfolio of these kinds of assets that can either be sold or, in some cases, simply used as accelerators or bubbled in with services, say, on a fixed-fee arrangement that will yield very high gross margin. In fact, that is exactly what Trifecta has done.

So it is a very high -- it is smaller, but it is a great space. IBM commerce is doing very well in the market in general, so it's a good demand. We already had a practice around it, so we are very familiar with it. Had all the ties into IBM, but again, what these guys bring to the table are assets and they've been able to successfully use those assets bundled in deals and driving substantially high gross margins, in many cases north of 50%. So, that was the attraction and we feel like we can scale that.

Great. Then you touched on this, I think, but you've consistently posted bill rate increases and have highlighted your discounts to large multinationals. Those companies, as well as two Indian outsourcers, have touched on pricing pressures being more pronounced, so I guess I'm wondering. Do you expect this to be a factor anytime soon in your ability to increase prices? But then on the other side, are you seeing better win rates over these large competitors, given your lower rates than theirs?

Our win rates have remained consistent. It is about 65% in aggregate against those big guys. It varies from name to name, but roughly 65%. It's been consistent. It hasn't gone down as we have increased rates, so that tells me we have still got room.

That's an area that we are sensitive to because we have been pretty aggressively increasing rates, as you know, but as we have -- we collect win/loss data and why we win or lose a deal, and one of the things that I recently analyzed, in fact, was losses due to pricing, and hasn't increased at all. Over the course of the last two years, that has remained pretty consistent.

So it tells me that we are not pricing ourselves out of deals at all, really. We are not seeing any increase to that. That said, I do think that there is a point we close that gap enough that we will begin to see some headwinds.

I also meant what I said earlier. I do think that we are better at what we do than our competitors are, so it isn't just pricing that helps us win. But I think eventually, like I said, we will see that begin to -- the growth in rates or the increase in rates began to slow, but not for the foreseeable future. We feel pretty good about -- basically this year with Q1 and once we go backwards, which, by the way, could happen in a quarter or so, in a given quarter, but overall for the year, I think we have already hit our goal and it seems very likely that we will exceed it.

Now with the 8% increase in bill rates, sometimes it is unclear how much is acquisition related in your organic business, so maybe getting through all of that, what does it suggest about volume trends year over year in the March quarter?

Yes, so that number, by the way, that increase that I am talking about is actually all organic. If you add -- it's about 8% with or without the acquisitions, actually. So the acquisitions on average were already at the rates that we are at, if that makes sense. So it's -- they are kind of neutral impact there.

And I'm sorry, what was your other question?

What does that mean about volumes if bill rates were up 8%? What are you seeing organically without the (multiple speakers) volume?

Yes, I think volumes are down some in billed hours, not as much as it might appear because we continue to ship more business offshore. That makes up some of that gap.

But as I think I've mentioned before, and I think this is going to continue for a while, but I think it's starting to turn even now, but as we transform the business, we are moving away from being tremendously opportunistic and being more strategic and focusing on those accounts where we can have long-lasting relationships with meaningful revenue.

And along the way, I am sure that has sacrificed some volume in the business, but it's also gained those rates. So it's a trade-off between the two. If we stayed big market, we wouldn't be getting the trade expansion. Our costs would remain the same. Our margins would be lower; our growth would be higher in terms of volume.

So, we consciously have chosen the former and I think it was the right decision. And actually, I think we are going to see even organic volumes begin to pick up here, particularly in the second half of the year.

Great. The last question is a quick numbers. Thanks for all your answers. I just missed the book-to-bill number. I was writing too quick and missed it. So if you can just -- I think you provided it. I wonder if you could give that again.

Yes, it was north of 1.2.

Great. Thanks so much, guys.

Mayank Tandon.

Jeff, just to pick up off last comments that you made around pricing, so when we look at the organic growth for 2014, the 6% to 7%, how does that break down between further pricing increases versus hiring and any potential for utilization improvement?

We do expect some utilization improvement, by the way, but we also do expect some net new hiring as well.

That said, we have already driven rates up sequentially quarter over quarter, Q1 over Q4, by 4%. That's not going to continue. We are not going to drive rates up 4% every quarter, but if that yields, say, 8% for the year, if we are able to maintain that 8% year over year and every quarter going forward, I expect that our organic growth would be more towards the higher end of our range because I still expect that volumes, again, will increase in the second half.

So, it's a combination of all those things. We will do some net new hire, but we will also be driving utilization higher, probably about 100 basis points or maybe 200.

Okay, I understand. And then, final question, just in terms of buybacks versus further M&A, you touched on maybe a potential acquisition or two later this year. How are you thinking about it in terms of maybe share buybacks versus future M&A?

We're going to continue -- so we've got, as I mentioned before, probably a break here of the better part of two quarters on M&A, primarily so that we can ensure that we have effectively integrated the deals that we've done.

By the way, all of that is going very well so far, but again, we have done some rapid succession here, so we're going to take a little pause for that reason.

During that period of time, we will continue to buy back both -- programmatically through 10b-5, as well as opportunistically in the market as windows open for us.

So we're a big believer in buyback. We've always talked about balancing the use of cash between buyback and acquisitions, and yes, right now while we stepped up acquisitions, we will probably be a little less aggressive on buyback, but I still have a goal of exhausting our current authorization before the end of the year. We've got about $8 million left on that, Paul?

Yes.

Yes.

Okay. Thank you very much.

We have no further time for questions. I would now turn the call back over to management for closing remarks. Please proceed.

Okay, thank you all again for your time today. As you can see, I think we are off to a strong start, very bullish about the rest of the year and going forward. Take care.

This concludes today's conference. You may now disconnect. Have a great day.