Perficient Inc (PRFT) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2014 Perficient earnings conference call. My name is Mark and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Thank you. And with me this morning is Paul Martin, our CFO. I want to thank you all for joining and your time. As typical, we have about 10 to 15 minutes of prepared comments, after which we will open the call for questions.

Before that, Paul, can you please read the Safe Harbor statement?

Thanks, Jeff. And good morning, everyone. Some of the things we will discuss in today's call concerning future Company performance will be forward-looking statements within the meanings of the securities laws. Actual results may materially differ from those discussed in these forward-looking statements. And we encourage you to refer 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 measures to the most directly comparable financial measures prepared in accordance with Generally Accepted Accounting Principles, or GAAP, is posted on our website at www.perficient.com We have also posted a slide deck, which includes a reconciliation of certain non-GAAP goals to the most directly comparable financial measures prepared in accordance with GAAP on our website under Investor Relations.

Jeff?

Thanks, Paul. And once again, good morning, everybody. We appreciate you joining. We are pleased to share with you our fourth-quarter and year-end results.

Perficient's performance in the fourth quarter exceeded our expectations, with services revenue above the midpoint of our guidance range; services margins of 40%; and a spectacular software quarter. Those results, coupled with an incremental increase to ABR, Average Bill Rate -- which remains at an all-time high -- drove bottom-line results above our goals and consensus. By all measures it was a strong close to a solid year.

It's clear our strategy is working and our capabilities are resonating with customers who now, more than ever before, need guidance as they navigate the obstacles and seize the opportunities that the digital transformation of our world has created. Investing in the business in technology solutions that customers, suppliers, partners, and employees demand is no longer an option that enterprises can delay. It's an imperative course of action that requires constant diligence and assessment.

The world is simply moving too fast now. Competition is relentless and ubiquitous, and customer experience is crowning winners and creating losers at lightning speed. Perficient is positioned to benefit for many years from this digital dependence. Our broad portfolio, deep technology expertise, and cross-platform and industry experience align perfectly with the opportunity. Every enterprise and every industry is impacted, and we can engage in a system, regardless of the platforms they've built their business on.

I will touch on the notable results and exciting developments after Paul speaks in detail about the fourth-quarter and full-year results. We will also speak to Q1 and provide initial guidance for 2015.

With that, I'll turn it back over to Paul.

Thanks, Jeff. Total revenues for the fourth quarter were $125.8 million, a 29% increase over the year-ago quarter. Services revenues were $99.9 million for the fourth quarter of 2014, excluding reimbursable expenses, which is an increase of 16% over the comparable prior-year period. Services gross margin for the fourth quarter 2014, excluding stock compensation and reimbursable expenses, were 40% compared to 38.5% in the fourth quarter of 2013.

SG&A expenses increased to $24.8 million in the fourth quarter of 2014 from $20.3 million in the comparable prior-year quarter. And SG&A as a percentage of revenue decreased to 19.7% from 20.9% in the fourth quarter of 2013.

EBITDAS for the fourth-quarter 2014 was $19 million or 15.1% of revenues compared to $15.7 million or 16.1% of revenues in the fourth quarter of 2014, with the decrease primarily the result of a higher mix of lower-margin software sales. The fourth-quarter 2014 included amortization expense of $3.9 million compared to $2.2 million in the comparable prior-year period. The increase is primarily associated with the 2013 and 2014 acquisitions.

Our effective tax rate for the fourth-quarter 2014 was 30.6% compared to 35.8% in the fourth quarter of 2013. The decrease in the effective rate is primarily due to the impact of the federal R&D tax credit for 2014 being signed into law for the full-year 2014 in the fourth quarter.

Net income increased 17% to $6.4 million for the fourth quarter of 2014 from $5.5 million in the fourth quarter of 2013. Diluted GAAP earnings per share was $0.19 a share for the fourth quarter compared to $0.17 a share in the fourth quarter of 2013.

Adjusted GAAP earnings per share increased to $0.36 a share for the fourth quarter of 2014 from $0.30 a share in the fourth quarter of 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 taxes, divided by average fully diluted shares outstanding for the applicable period.

Our ending global headcount at December 31, 2014 was 1,856, which included 1,724 billable consultants and 132 subcontractors. And the SG&A headcount at December 30, 2014 was 350.

Now I'm going to return -- or turn to the full-year results. Revenue for the year ended December 30, 2014 was $456.7 million, a 22% increase over the comparable period. Services revenue for the year ended December 31, 2014, excluding reimbursable expenses, was $386.7 million, an 18% increase. Services gross margin for the year ended December 30, 2014, excluding stock compensation and reimbursable expenses, increased to 38.4% from 37.6% in the prior-year period.

SG&A expense increased to $90.2 million for the year ended December 31, 2014 from $77.6 million in the prior year. SG&A as a percentage of revenue was 19.8% for 2014 compared to 20.8% in 2013.

EBITDAS for the year ended December 31, 2014 was $17.5 million or 15.9% of revenues compared to $56.6 million or 15.2% of revenues in 2013. 2014 included $14.5 million of amortization compared to $8 million in 2013. 2014 has included acquisition costs of $3.4 million, primarily associated with acquisitions of ForwardThink, BioPharm, Trifecta and Zeon, compared to $2.3 million related to the acquisitions of TriTek, Clear Task and CoreMatrix in 2013.

Our effective tax rate for the year ended December 31, 2014 was 38.3% compared to 32% for the year ended December 31, 2014. The increase in the effective tax rate was due primarily to the year ended December 31, 2013, including more than one-year benefit recorded for research and development credit and the domestic productions deduction.

Net income for the year ended December 31, 2014 increased 8% to $23.2 million from $21.4 million in the year ended December 31, 2013. GAAP earnings per share increased to $0.70 from $0.67 in 2013. Adjusted GAAP earnings per share for the year was $1.30, up from $1.11 or up 17% from 2013.

We ended the fourth quarter with $54 million in outstanding debt. This is down $20.8 million from the September 30, 2014 debt numbers. And we had $10.5 million in cash and cash equivalents at December 31, 2013. In addition, in early January, we expanded our line of credit from $90 million to $125 million in conjunction with the Zeon acquisition. Our balance sheet continues to leave us well-positioned to execute on our strategic plans.

Our day sales outstanding on Accounts Receivable were 81 days at the end of the fourth quarter, down from 92 days at the end of the third quarter. There were strong collections in January, and DSO's have now been reduced into the mid-70s. We expect DSO's to return to historical levels in 2015.

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

Thanks, Paul. Again, a great quarter and a solid year, and we are expecting more of the same in 2015.

We closed 40 deals north of $500,000 during the fourth quarter, and they averaged about $1 million each. That compares to 35 in the third quarter at $1.4 million each, and 23 in the fourth quarter of 2013 that averaged $1.7 million. So, good volume growth in terms of the number of large deals booked.

As I mentioned on last quarter's call, driving volume is going to be a key focus for us this year as we work to move organic growth back up towards the high-single digits. And we have done an excellent job in recent quarters of driving average bill rate improvement, and now we are strategically working toward leveraging that across a larger book of business.

The big data and analytics, digital, cloud and management consulting are all driving success for us. As I mentioned earlier, digital transformation and customer experience are key focus areas for our clients. And our perspectives and expertise are resonating very well in the marketplace. From an industry perspective, the healthcare and financial services verticals continue to perform very well and steadily.

Also worth noting is the acquisition of Zeon Solutions, which we completed at the beginning of the year. That team brought a great mix of digital skills, particularly expertise with new commerce platforms like Magento that we previously didn't -- we didn't previously work with, as well as significant digital marketing experience that complements and deepens our existing capabilities in this space.

And so speaking of M&A, in 2015, we will be continuing to look to supplement our organic growth with firms that help deepen our expertise and expand our reach. We will be looking to add an additional $50 million to $60 million through two to three transactions by the end of the year.

So, turning our attention now to the expectations for the first quarter and full year, Perficient expects its first-quarter 2015 services and software revenue, including reimbursed expenses, to be in the range of $107 million to $116.5 million, comprised of $102 million to $107.5 million of revenue from services, including reimbursed expenses, and $5 million to $9 million of revenue from sales of software.

The midpoint of the first-quarter 2015 services revenue guidance represents growth of 18% over first-quarter 2014 services revenue. The Company is issuing a full-year 2015 revenue guidance range of $470 million to $505 million, and a 2015 adjusted earnings per share guidance range of $1.38 to $1.49.

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

(Operator Instructions) Peter Heckmann, Avondale Partners.

This is Shane in for Pete. Regarding the bill rate, is there still some room to grow that over the course of the year?

Yes. We expect it will continue to rise. We are shooting for -- you know, we have enjoyed about 8% to 10% in each of the last three years. And as I mentioned on the last call, we are going to probably dial that back a little bit just because we're going to be opening some new accounts this year, focusing again on the organic volume growth.

But we are looking still probably 5% to 6% of ABR increase. And then we'd like to supplement that with another few percent of organic volume growth as well. So that's our goal. That's what we're shooting for.

Okay, that's helpful. And then regarding some of the recent weather, are you seeing any weather-related impact to utilization in the quarter?

You know, it's hard to measure that because it has been sort of widespread. I can't say that we've seen anything materially impacting us so far this quarter. I'm sure there's some impact there, but again, we are not aware of any major standouts.

Okay, that's fair. And then I wanted to ask a last one before I get back in the queue. What was the book to bill rate in the quarter?

Book to bill was -- I want to say a little over 1 this -- again this quarter. So, consistent with what it has been.

Okay. Thank you. Nice quarter.

Thank you.

Mayank Tandon, Needham & Company.

Hi, this is Elizabeth Chwalk for Mayank. Can you guys give us some color around seasonality for 2015? I'm wondering if this changes, given recent acquisitions, and how revenue and margins will trend over the course of the year?

That's a good question. I think we're going to see a very similar pattern to what we saw last year. So, fourth-quarter is always seasonally -- utilization is always a little bit down in that quarter due to the holidays that are there.

And the first quarter is a slower start to the year, so some of that is just carryover from the holidays. But also it's just ramping up on new engagements that start at the beginning of the year. So we are going to see -- again, I would say, from a utilization standpoint -- hopefully, overall, we are going to drive that up some this year. But again, a similar pattern to last year. So, seasonally down a bit in Q1 and Q4, and probably peaking in Q3.

And similar to prior years, you'll see in Q1, from a cost perspective, just with the reset of all the payroll taxes, et cetera, margins tend to sequentially go down. But it will follow a similar pattern to 2014.

Okay, thank you. And can you -- so did you break out your organic growth contribution for 4Q and the full-year fiscal 2014?

It was 7.3% in the fourth quarter, and for the year, it was 4.8%.

Okay. And I think you said that you were expecting high-single digit organic growth for next year. Can you guys break out what the dollar contribution you expect from Zeon?

We've actually guided to a similar organic growth to what we had last year. We are shooting to drive that higher. And ultimately, the things that we put in place, I've spoken about on the last call, I believe, will probably take effect more in the second half of this year.

So again, similar to last year. But I think, again, we've put some things in place in terms of our sales competition plan and our strategies around sales that I think will drive higher growth ultimately. But this year, again, our guidance is similar to what our performance was last year, in terms of organic growth.

Zeon contributes, I want to say, about $30 million -- or, I'm sorry, about $24 million.

$24 million.

Sorry, $24 million.

And then last question -- any color around your healthcare business? What were some of the changes you saw for 2014? And how do you feel about this business looking out into 2015? What are some of the possible upside drivers to that business?

Yes. We continue to see tremendous opportunity in healthcare. We don't see any slowdown there. In fact, I think it still is going to be outpacing every other industry for us this year. Lots of analytics work.

In addition to that, a lot of digital transformation work. We built a lot of patient portals, consumer portals, those patient facing the applications. But also, as I mentioned, lots of analytics.

This is an industry, both on the plan side, the payer side and the hospital systems, that really is running outdated or has been running outdated systems, and now needs to begin to think more like, literally, retail or consumer products. And they need a lot of systems in place to understand the data that they have, and understand how to focus on that patient and reach out to that patient as a consumer, as a customer.

And we're -- that's where I would say we are seeing the biggest opportunity. Of course, there's still remediation around some of the government mandates. But we are, I think, beyond that, at least Perficient is, and on to what I would say is more of the focus work, which, again, is analytics and understanding how to compete while managing costs, et cetera, in this kind of new era for healthcare.

Okay, great. I appreciate it. Thank you.

Thank you.

Brian Kinstlinger, Maxim Group.

So the first question I've got -- I think the mid-point of the Q1 services revenue guidance is down a bit, if I exclude the $4 million plus of Zeon revenue. I'm wondering is it that projects are slow to ramp while some projects are ending? I thought 4Q was generally seasonally the weakest with vacation and billable days. So I'm just trying to understand the fourth-quarter to first-quarter trend in revenue.

Yes. You know, for the last two years, really, I would say going back to 2013, Brian, we've seen a slower start to the year. It is a slower ramp; in January, the buying cycle has changed a little. And we are seeing stronger bookings in the first quarter, but some of those would have been bookings that would have typically, several years ago, maybe closed in the fourth. So it is slower.

The midpoint of the guidance, though, organically, is about -- I want to say about 2%, 3.5%. So, it's not down; it would be up about 2% to 3%?

It's 3% in the fourth quarter.

Yes -- in the first quarter. The fourth quarter was 7%.

Okay. And then if we look at your second half of the year, you have had a bunch of larger deals that you have won at slightly higher price -- total cost of -- or total value. I'm curious -- is most of this around this sort of what we call smack in some other -- and digital? Or -- I guess I'm just trying to understand. Is it transformational? Is most of your new wins related to these new areas? Maybe just color on what's driving those large sales.

Yes, I would say there's a good chunk of that in there. And the reality is that what people are referring to now as digital and digital transformation is really the work that we have been doing for a decade. So I would tell you that a vast majority of our business already was that, and continues to be that.

It is the digital transformation of these businesses and the ability to connect, whether it's through mobility or the Web or whatever, to customers, partners, whoever, whatever constituency that they need. And so I would tell you that I certainly see a pickup there. We are certainly driving more business that's directed and spend that's influenced by the CMO.

So that's the shift. But a lot of the sort of nuts and bolts are very similar to what they have always been. We have added more front-end capability. We are the agency of record for a number of our customers, and we do a lot of that work. And like I said, we have for a long time. So, I would say yes, that is where the business is, but it's been there for a while.

And you recently added offshore capabilities through acquisitions. You already, obviously, had some too. Do you see the delivery mix continuing to shift post this acquisition towards offshore? Are you evaluating more opportunity to send more work offshore? Or do you think the delivery mix will continue to be about what it is right now?

I think it will be similar, for the simple fact -- the similar mix is now -- for the simple fact that of what we just talked about, that a lot of that digital transformation work, the work that we do is highly iterative. And some of it lends itself to be better performed on-site.

But -- however, at the same time, to offer our clients the opportunity to lower their total cost, total investments, we're going to continue to drive offshore and continue to offer that up. But in most cases, it's really up to the client. Some clients have embraced it and like to leverage it. And we certainly have that capability with extremely high quality. Some clients are not as interested.

And like I said, some of the work we do, at least in some phases, doesn't necessarily lend itself to. So again, I would say the mix is going to continue to be similar going forward.

I would add to that that we announced last year that we opened a domestic Development Center, our Nearshore development capability in Lafayette, Louisiana. And we are staffing that up now and ramping that up now. We are actually serving three customers out of that facility already.

And we are very optimistic that that's another -- going to be another kind of bridge that drives a -- or provides a little lower cost with high-quality but isn't offshore. So you've got the benefit, obviously, of no language barrier, very modest time zone constraints, things like that. So I think that we are going to see a lot. We have already seen a lot of interest there, and I think we'll see pretty fast growth in that facility.

All right, thanks. And we didn't hear anything today about the software asset sales. Maybe you can update us for the fourth quarter if there was a contribution to profitability at all? And maybe how it's in your outlook or how you see 2015 playing out as it relates to those software assets?

Yes, there is like a tremendous amount. We have software assets, by the way, in several areas. The key one, as we talked about many times, is in healthcare. It commands the higher price and, I think, has good traction.

So there is a tremendous amount of interest in that. We've got a good pipeline this quarter. We actually expect to close two deals there totaling $600,000 to $700,000. Last quarter, a couple of deals slipped into this quarter from last quarter. So last quarter was only about $200,000. But that doesn't -- I wouldn't say that's a correlation to the interest level. Interest level is actually increasing.

Great. And then in healthcare, you mentioned the solid demand. The Supreme Court certainly started yesterday their case on listening to the case on federal subsidies and whether they are legal. And if they determine that federal subsidies aren't legal and the Affordable Care Act maybe crumbles for at least a year, do you believe there is any changes in short-term discretionary spending from the industry?

You know, I think that's possible. Any time there's a major sort of sweeping policy change, if that happens, I think the industry sort of pauses maybe to reevaluate where they are focusing. But the good news is very little of what we are doing is directly related to the Affordable Care Act.

So I don't think it would be much of an impact. Like I said, the concern would be more, is there a pause or a hesitation just in general to sort of reevaluate the portfolio of investments that those companies are making? I think, in the end, the investments they are making and that we are working with them on, again, aren't related to the Affordable Care Act and will continue on. So, I really wouldn't expect to see much impact from it.

As a matter of fact, to be honest, I think it might allow more spending. If, in fact, companies are spending money to comply with the Affordable Care Act, and it goes away, I think there will be more opportunity for them to spend money on the things that matter, like the analytics that I mentioned earlier.

Great. Last question I've got -- Paul, can you update us on what you see the effective tax rate as part of your assumed -- what's assumed in the adjusted earnings guidance for 2015?

Yes. In the 2015 guidance, the adjustment rate is 38%.

And that's a little bit higher for the GAAP earnings?

Yes, it will be like 39.5% to 40% for GAAP. And the reason it's higher than this year's rate is because, again, this R&D tax credit was passed in the fourth quarter for 2014. And the accounting rules, you only record that if and when it's passed for 2015. So, if it's passed, you would expect the rate to come down.

Right. Okay. Thank you so much.

Thanks, Brian.

Frank Atkins, SunTrust.

Thanks so much. Can you talk a little bit about color you are hearing from clients, and kind of the demand in the financial sector, and just what's going on in the financial services vertical?

You know -- yes. Financial services, as I mentioned, continues to be steady for us and strong. We added that strong capability and management consulting focused on that industry early last year. That has been performing very well. And the industry itself continues -- it's a highly regulated industry and the regulations do change.

Even nuances in the regulations can have significant ripple effects throughout the organization, both in terms of the process, business process, and also systems. So we enjoy the benefit of both, actually, since we do systems work and, of course, this management consulting. We see continued opportunity there. I think as long as the government has a heavy hand in that industry, and I don't see that changing any time soon, there will be ongoing opportunity for us.

Okay, great. That's helpful. And can you talk a little bit about the hiring and kind of the retention environment for kind of frontline consultants and what you are seeing out there right now?

Sure. You know, when this question comes up, I always say this just because it is a fact, and that is that it's always a challenge, I think, to hire or find really great talent. Usually the guys that are unemployed or looking for a job aren't necessarily the ones you want to hire.

So, I wouldn't put the challenge any higher now. I actually think that we've got an incredible wealth of talent here at Perficient. And that tends to breed talent and attract other talent. And we do real well when we go head-to-head with competition on hiring folks. We've got a good environment here and, I think, a culture that lends itself very well to the types of consultants that we are looking for.

So, we are not intimidated by it. I do think there will be some wage inflation. We have budgeted for that. It's in our guidance. And I think it will still be below what our rate increases are for the year.

Okay. And then lastly, as you look towards the year guidance, can you describe what your implications or assumptions were in terms of software and hardware revenue for the full year?

It's got about $40 million of software and hardware in there. I think maybe it contains a range of $40 million to $50 million of software and hardware. So the midpoint on that guidance -- obviously, we did $52 million last year, so we've got a conservative assumption in there, I think, for this year.

And seasonally, by quarter, I think we would probably see a similar pattern to what we saw in 2014.

Yes, very back-end-loaded.

Okay, that's helpful. Thank you very much.

Thank you.

(Operator Instructions) Michael Martin, Michael J. Martin & Associates.

Thanks for taking my call. Could you give us a little more details on the huge increase in the hardware and software revenue in the fourth quarter, as well as the sharp decline in margins on that business?

Sure. I don't know that there was a tremendous decline on the margins. The software always runs -- we average literally about 13% on software resale. We may have had, I think, one or two larger deals in there that are what we call renewals, which are lower margin. So there may have been some decline as a result of that.

And again, I would attribute that somewhat to the surge as well, a couple large renewals. However, that said, we've had great success with the two partners, the primary partners that we resale software for, which are Google and IBM. And Google is probably picking -- both of those were record years for us, by the way, both those spaces.

So I think we will have another great year or good year in software. Again, I think you can expect over the course of the year the average margin on software to be in the 10% to 13% or 10% to 15% range, probably right around the middle of that. And software is lumpy. We had a good quarter. We were aligned with a lot of clients in terms of their needs for additional hardware and software. And again, I think we will see something similar this year.

And one other thing that Jeff mentioned earlier -- we had a relatively modest amount of internally developed software sales, which essentially have 100% margin. So the mix of that also affects the overall software margins.

Yes. Sorry. By the way, my 10% to 13% excludes internally developed software.

Thanks so much.

Thank you.

I would now like to turn the call over to Jeff for closing remarks.

Okay. Well, thank you all for joining. We look forward to speaking to you again in a couple of months and look forward to a great 2015 for Perficient. Have a good day.

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.