Perficient Inc (PRFT) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Q2 2014 Perficient earnings conference call hosted by Jeffrey Davis, President and CEO. My name is Benny and I will be your event manager this morning. (Operator Instructions). And now I would like to hand over to Jeffrey Davis. Please go ahead.

Thank you all for joining us this morning. This is Jeff. With me today is Paul Martin, our CFO. We've got, as typical, 10 to 15 minutes of prepared comments after which we will of course open the call up for questions. Before we move on, Paul, would you please read the Safe Harbor statement?

Thanks, Jeff, and good morning, everyone. Some of the things we will discuss on 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 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 this 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. Well again, good morning, everyone, thank you for joining. We appreciate your participation in the call today. Second-quarter capped a great first half of 2014 for Perficient. It also represented a bit of a milestone for the Company -- our first $100 million plus quarter, which of course was anticipated. But as you can see from the top-line results, revenues in the quarter surpassed our expectations.

Services revenue were up 22% in the quarter year over year with expanding margins contributing to EBITDA net of stock comp up 36% and GAAP earnings per share up 30%. We are scaling the business and growing profitably. That is one of the nice things about the model that we have here and the fiscal discipline we enforce.

Our operating philosophy is to ensure that the bottom line scales with the top line linearly at a minimum. But, as we've been demonstrating and discussing, our goal continues to be to manage the business to deliver profit growth in excess of revenue growth as margins continue to expand.

One of the ways we are driving that performance, and we've talked about this before, in fact, for the last several quarters is by closing the gap between our bill rates and those of our larger competitors. So during the quarter ABR reached an all-time high of $146 per hour for North American employees, which is nearly a 10% increase year over year. By the way, 7% of that was organic and the rest of that lift came from acquisitions we've done over the last year or so.

Going forward we intend to continue to increase rates with a focus doing so incrementally probably more in line actually with cost of living and a little bit on top of that to ensure it doesn't sacrifice volume.

Another opportunity for us to drive profit growth is through our asset sales and we've talked for several quarters about our continued focus on developing and marketing Perficient owned IP to our clients. But during the second quarter I'm pleased to say that we had about $500,000 worth of asset sales and we expect to gain additional traction with that portfolio over time. Again, we've talked about this for some time and we are finally beginning to see some traction and have a nice pipeline built as well.

We will talk a bit more about the second half of the year after Paul provides details about the quarter. But we are confident in the full-year projections for both revenue and earnings we have provided to date. We are seeing a pattern similar to last year play out with a very strong booking starting early in the year and things normalizing a bit as the summer gets underway.

And the primary indicator we've been talking about as of late where we track the strength of the businesses to book-to-bill ratio and that remains quite healthy. On a trailing six-month basis that number stands at 1.18. We sold 29 deals larger than $500,000 in the second quarter; they averaged $1.1 million each. That compares to 35 in the first quarter at $1.4 million and 22 in the second quarter last year of 2013, that averaged $1.1 million.

So again, good year-over-year growth in terms of the large bookings. I think our land and expand model paying off there. With that I will turn things over to Paul for the Q2 recap.

Thanks again, Jeff. Total revenues for the second quarter of 2014 were $116.7 million, a 24% increase over the year ago quarter. Services revenue were $98.3 million for the second quarter of 2013 excluding reimbursable expenses, an increase of 22% over last year.

Services gross margin for the second quarter of 2014, excluding stock compensation and reimbursable expenses, increased to 38.2% from 37.3% in the second quarter of 2013 with increased average bill rates continuing to drive year-over-year margin improvement.

SG&A expense increased to $22.4 million in the second quarter of 2014 from $18.9 million in the comparable prior year quarter. SG&A as a percentage of revenue increased -- sorry, decreased to 17.4% from 17.9% in the second quarter of 2013.

EBITDAS for the second quarter for the second quarter of 2014 was $18.8 million or 16.1% in of revenues compared to $14.5 million or 15.4% of revenues in the second quarter of 2013. The second quarter of 2014 included amortization expense of $3.7 million compared to $2 million in the comparable prior year quarter. The increase is associated with the 2013 and 2014 acquisitions completed to date.

We incurred $1.1 million of acquisition costs in the second quarter of 2014 related to the acquisitions of BioPharm Systems and Trifecta Technologies. Acquisition costs were $1.4 million during the second quarter of 2013.

The second quarter includes an adjustment to fair value of contingent consideration of $1.7 million related to changes in estimates associated with earn outs included in acquisition transactions that were completed in 2013. We are not anticipating any future fair value contingent consideration adjustments.

Net income increased 40% to $6.4 million for the second quarter 2014 from $4.6 million in the second quarter of 2013. Diluted GAAP earnings per share increased to $0.19 a share for the second quarter 2014 from $0.14 in the second quarter of 2013. Adjusted GAAP earnings per share increased to $0.33 a share for the second quarter of 2013 from $0.28 a share in the comparable quarter in 2013.

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 tax is divided by average fully diluted shares outstanding for the period.

Our effective tax rate for the first quarter of 2014 was 42.1% compared to 38.4% in the second 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. Second quarter of 2013 included the benefit of the research and development tax credit.

Our ending billable headcount at June 30, 2014 was 1,898 including 1,743 billable consultants and 155 subcontractors. Ending SG&A headcount at June 30, 2014 was 333.

I will now turn to the six-month results. Revenue for the six months ended June 30, 2014 were $213.9 million, a 19% increase over the comparable period last year. Services revenue for the six months ended June 30, 2014 excluding reimbursable expenses was $186.8 million, an increase of 21% over the comparable prior year period.

Services gross margin for the six months ended June 30, 2014 excluding stock compensation reimbursable expenses increased to 37.3% from 36.2%. SG&A expense increased to $43.1 million for the six months ended June 30, 2014 from $36.7 million in the comparable prior year period. SG&A as a percentage of revenue was 20.2% for the six months ended June 30, 2014, down from 20.5% for the six months ended June 30, 2013.

EBITDAS for the six months ended June 30, 2014 was $32.8 million or 15.3% of revenues compared to $24.8 million or 13.8% of revenues for the comparable prior year period. 2014 is included $6.5 million compared to $3.8 million in amortization expense. 2014 includes acquisition costs of $2.6 million primarily related to the acquisitions of ForwardThink, BioPharm and CoreMatrix compared to $1.4 million related to the acquisition of TriTek and Clear Task in 2013.

Net income for the six months ended June 30, 2014 increases 9% to $9.4 million from $8.7 million for the six months ended June 30, 2014. Diluted GAAP earnings per share increased to $0.29 from $0.27 in the six months ended June 30, 2013. Adjusted GAAP earnings per share for the six months ended June 30, 2014 was $0.57 a share, up 14% from $0.50 in 2013.

Our effective tax rate for the six months ended June 30, 2014 was 42.2% compared to 31.3% for the comparable prior year period. The increase in the effective rate was primarily due to the expiration of the research and development tax credit which has not been reenacted by Congress for 2014. Our effective tax rate for the six months ended June 30, 2013 included the impact of the research and development credit for 2012 in 2013 which was enacted in January 2013.

We ended the second quarter with $71 million in outstanding debt and $6.6 million in cash and cash equivalents. Our balance sheet continues to leave us well-positioned to execute on our strategic plan. Our days sales outstanding on accounts receivable were 79 days at the end of the second quarter which is down from 80 days at the end of the second quarter of 2013.

I'd also like to add that July was our largest cash collection month in history as we continue to focus on bringing down our days sales outstanding. I will now to the call over to Jeff for a little more commentary. Jeff.

Thanks, Paul. Well, as I mentioned earlier, we are pleased with our second-quarter and first-half performance. We talked in the first quarter about software resale being a lumpy business and the fact that things were down year over year in the first quarter. As you can see in the release, this time the results were to the upside with results exceeding even our most optimistic initial projections.

And again, it is an important role we can play for our clients that is reselling software, as well as our partners, and that can also influence services work. We are really there to win the services business and the resale of the software is more of an opportunistic transaction. A really great performance from our team though during the quarter around the software resale.

The healthcare and financial services verticals continue to perform very well. We are also assembling a great team around consumer products and retail and have meaningful expectations in that space going forward.

Healthcare bookings began to accelerate as Q2 came to a close and our team is pretty bullish that will continue in the second half of the year. We are well-positioned there with our industry reputation, our partnerships and our assets. Having the versatility to implement solutions across many of the leading platforms is a real advantage for us.

Obviously we have done a lot of work with IBM on the healthcare front and we expect that to continue. We have also gained traction during the first half of the year with Oracle. In fact, we won our first million-dollar-plus Oracle enterprise healthcare analytics opportunity at the University of Colorado during the quarter.

So generally things are going very well. We feel very good about the first half of the year and are expecting a solid second half as well. Things in Q3 may not accelerate quite as quickly as we had originally anticipated, but we still feel very good about the full year, which is evidenced by the reiteration of our full-year earnings and revenue guidance. And we're also still focused of course on M&A and expect we will execute at least one additional deal this year.

So now commenting on Q3. Perficient expects its third-quarter 2014 services and software revenue, including reimbursed expenses, to be in the range of $111.2 million to $120.6 million comprised of $104.7 million to $110.1 million of revenue from services, including reimbursed expenses, and $6.5 million to $10.5 million of revenue from sales of software.

The midpoint of the third quarter 2014 services revenue guidance represents growth of 18% over the third quarter 2013 services revenue. With that we can open the call for your questions. Operator?

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

Jeff, just to kick things off on the organic growth front, could you remind us what was the organic growth on the services side in the second quarter? And what is embedded in your expectations for the back half of the year?

So services for the second quarter was just below 5%, it was 4.9%. The midpoint of guidance for Q3 is about 3%. So down a little, a tougher comp against last year, but, as I said earlier, the pickup in Q3 not quite what we expected. Still feel pretty good about the end of the year.

So for total year I would -- the midpoint of our guidance is about 7% on services and I expect us to be in that range. I think we are -- I think the total range is 5% to 9% and we will be in that obviously as we have reiterated.

Okay. What is driving the organic growth to that level, because one would have expected organic growth to pick up given some of the drivers we've seen in the healthcare sector and the financial services sector? What is causing it to actually come in a little bit lighter than one would have maybe anticipated at the start of the year?

Yes, it is a slower -- I think it is a slower sales cycle primarily. The opportunities are out there, the pipeline is solid. And it has just been more a matter of extended sales cycles I think. The pickup in healthcare came a little later than we anticipated at the end of Q2. However, it is strong now.

So we do expect to see some impact of that still this year or from that. But again, it is more extended sales cycles I would say kind of across the board and particularly in healthcare moving a little slower than we had anticipated.

Okay. And then just to drill down a little bit further in the verticals. Can you remind us the type of work you are focused on within the healthcare segment and within the financial services given that they are your two largest verticals?

Yes, sure, absolutely. So in healthcare it is primarily business analytics. We are helping a lot of both providers and payers prepare themselves or continue to prepare themselves for a more competitive environment. Some of that is driven by mandates, some dating back to the stimulus package, some are related more to the Affordable Care Act.

But really it is more driven by -- which is why we are excited about it and feel it has got a long tail -- it's really more driven by the transition and the paradigm shift really in the industry to a more competitive more transparent industry. So we are helping those clients, again, prepare for that by getting their own arm -- their arms around their own businesses and doing a lot of analytics work there.

Within financial services, actually the group that we acquired beginning of the year this year, ForwardThink, is primarily management consulting. So these guys help with process work, efficiency, laying out strategies, a lot of which, by the way, does drive technology.

We have already managed to see across sell of business from that acquisition into our more traditional technology-based business of a few million dollars so far year to date. That is bookings, not necessarily realized revenue, but that will continue to come.

So with financial services I would say it is much more around efficiency gains and also new products and services within that industry as it struggles to continue to -- or struggles to increase its own margins as they have been kind of hammered back over the last few years. Does that answer your question?

That is very helpful. And then, Jeff, I am just wondering, given that you've become bigger, which of course is a good thing -- you've got more scale and more capabilities. Does that also mean you are running into some of the larger players on these competitive situations which could be in a way affecting your organic growth?

Yes, I think there is some truth to that. Certainly we're seeing the big guys more often. We are still enjoying -- like on a trailing 12-month basis our win rates remain north of 60% against that group collective. But, yes, I mentioned earlier about our focus being more on volume now as we move forward into the second half of the year and slowing down probably the rate increase.

Again, I don't want anybody to think that that means our margin expansion doesn't continue -- I think it does. And in fact I believe you will see in the second half some of the economies we are going to be getting on SG&A and seeing some nice returns there below the operating margin and below gross margin.

So that will continue but it is going to be through other avenues, increased utilization and economies of scale in the business. Again, we're going to continue to increase rates because we still think there is a gap. But we are in fact going to focus more on driving more volume as we move into the second half of this year and into next year.

Okay. And then just a final question, [bolt-on] margins actually. So when I look at the guidance is it fair to say -- hopefully I'm doing the math right -- at the midpoint of your guidance you are looking for at least over 100 basis points of margin expansion on the gross line and then a similar amount on the EBITDA line?

Yes, I think that's right. Like I said, probably heavier on the EBITDA line. I mean, I think we are modeling maybe 150.

In the back half of the year?

Yes -- well, for the total year also.

Total year, okay. Great, that is very helpful. I will jump back in queue if I have anything else. Thank you.

Peter Heckmann, Avondale Partners.

I wanted to -- I am sorry if I missed it, I had a distraction there for a moment during the last question. But on software reselling revenue for the quarter, can you talk about was there one unusually large deal in there or how did that break down? And then as regards your guidance for the full year, you continue to feel that that software reselling revenue is going to have pretty good growth in the back half year over year?

Yes, we continue to see better and better traction around resell. As I mentioned before, while it is [transactionally] opportunistic, it is becoming a more strategic part of the overall picture, particularly in our relationships with those partners. But, no, actually the makeup of the deals -- there's a couple of larger deals in there, but there was not one single large deal.

What I would tell you is, and I think we talked about this on the Q1 call, that a lot of the software that we closed in the second quarter was things that kind of shifted over or spilled over from the first quarter that we were close to closing, would normally maybe have closed in the first quarter. And that is probably an indicator of some of the more extended sales cycles that I mentioned earlier.

But we had quite a lot of transactions close in the very early part of Q2 and then more of a kind of normal Q2 after that for a total accumulation of a substantial resale quarter. And in terms of the back half, again I do think we are going to continue to see more traction there. So we feel pretty good about where that is going to be.

And again, strategically it is important with our partners and we do make money on it of course. The standard margin on that is probably about 11%, 12%. But there are some other incentives as well that we participate in.

Great, great, that is helpful. And then, again, apologize if it has already been asked, but on the financial vertical a big increase year over year. There was one acquisition that had a financials focus, but could you point out any other trends that might be helping that?

I know you have been investing in the vertical itself in trying to build out your sales capability. Is this an evidence that that is working for you or are there other industry drivers that is causing a rebound in spending in financial services?

I think for the work that we do the financial services industry is pretty healthy. And by the way, yes, if you look at the total numbers year over year, a lot of that growth is driven by the acquisition of ForwardThink which was about $30 million we closed in February, Paul?

Yes.

So we've got a chunk of revenue in there on a year-over-year basis, inorganic. However, the organic growth in financial services actually has been pretty strong as well. Even if we exclude that acquisition it has still been over 20%.

So we see it as healthy. And when I referred to the work that we do, I'm talking about, again, driving efficiencies into the business, what I like to call fine-tuning, building SIM applications that help you get that last 10% as well as the business analytics, etc., I think lend themselves very well to what is going on in that industry right now. But can't underemphasize the importance of the additional team that we added at the beginning of the year.

Okay, great. And then it did appear that you had pretty good control on the SG&A line, especially given the closing of two acquisitions. Were there any other initiatives that were going on there that may have contributed to that? That -- as a percent of revenue that number looks really good. And I guess inferring from some of your guidance commentary it sounds like that should continue in the back half?

Yes, I think it will continue in the back half for sure. In fact, I think it might even improve some as we modeled it. And there's not been specific initiatives, we've always tried to manage the bottom line carefully? And as I have said, I think really a lot of it is just we are really beginning to realize the benefit of the scale, to your point, or maybe Mayank mentioned it.

But like I said, we've always tried to manage that carefully and there is no exception now. But the part of that that I think will continue to scale with revenue pretty closely to it and some peaks and valleys may be a little ahead, maybe a little behind but it is both sales and marketing. We are going to continue to invest in those areas.

But the G&A, again, is substantial enough and fixed enough such that -- and we've got a scale here now. I think we talked about putting a new organization in place at the beginning of last year. So I think again, while we were kind of burdened with that additional cost last year, that is behind us now and we are seeing really the benefits of it. And it is an organization that I think allows us to scale well beyond our $500 million goal.

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

(Operator Instructions).

Okay. Okay, sounds like we don't have any more. Thank you all for your time today. I look forward to talking to you in a quarter. Thank you.