Perficient Inc (PRFT) 2015 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second-quarter Perficient earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to the President and CEO Mr. Jeff Davis. Please proceed, sir.

Thank you. Good morning and thanks everyone for joining. We appreciate your participation on the call this morning.

As we indicated in the preliminary results we issued earlier this month, Perficient's performance in the second quarter fell below our initial forecasts. The softness we experienced in Q1 carried further into the quarter than we had anticipated and impacted the results. However, as we indicated with our preliminary results and you'll note from our Q3 guidance we believe things have already turned and the second half of the year will be substantially stronger with growth on both the top and bottom lines.

Q2 bookings were very strong and the pipeline remains as large as it has ever been. Additionally, revenue per billable day continues to increase and projects that had been delayed are now underway and growing as we had hoped.

Before I continue I'm going to ask Paul Martin to read the Safe Harbor.

Thanks, Jeff, and good morning everyone. Some of the things we 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 earnings per share. Our earnings press release includes a reconciliation of certain non-GAAP financial measures to the most directly comparable financial measure prepared in accordance with generally accepted accounting principles or GAAP and that 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. So we continue to focus on leveraging the ABR improvements we've made over the last several quarters across a larger book of business to drive organic growth.

Another point, though, to make here is billable hours. We've talked about a mix shift from onshore to offshore as offshore growth outpaces onshore. The total billable hours in Q2 were actually up 5% sequentially and up more than 13% annually.

We're also getting more leverage from our global delivery team. 6.5% of revenues in the quarter came from our offshore team versus 2.5% in the year ago period. Obviously some of that comes from the acquisition we made of Zeon earlier this year but not all of it.

As I said before the offshore business is growing at a pace ahead of the onshore business which is positive. Our margins offshore are significant and in addition to that represents a key differentiator in terms of our competition as well. And our ability to use offshore as an extension of our project teams versus just a BPO allows us to charge meaningful rates, $45 an hour to $50 an hour for offshore resources, again yielding very, very high margins.

So while overall utilization was lower than we had planned in the quarter and lower than our goal we're confident we can manage it back into our target range in the low 80s going forward. We've talked about this a couple of calls but it remains worth reiterating that enterprises are reacting to market forces and competitive landscapes moving faster than ever. All companies are dealing with digital transformation and rising consumer and constituent expectations.

And our expertise around digital experience, business optimization and industry solutions has us positioned extremely well to benefit from the digital transformation that's underway. In fact, Perficient is now the agency of record or primary digital and creative provider to a handful of large accounts and more than two dozen midsize and smaller accounts.

You can see much of that work by the way at commerce.Perficient.com. If you're interested I encourage you to take a look at it.

Our strong partnership with many of the world's leading technology innovators continues to help drive our business and underscores our differentiation. We continue to receive meaningful recognition from our partners for our work and expertise.

Particularly exciting during the quarter were the accolades we received from Microsoft, a really great achievement for us. We were named partner of the year in all three of their regional markets: East, Central and West in the US. Obviously it's an honor to be recognized as the top partner in just one market but to sweep the entire country is something else altogether.

We're very excited about it. In fact Rich Figer, the senior director of US enterprise partner group sales at Microsoft stated having, and I quote, unanimous confidence for Perficient across our partner sales executive teams in all three regions across the United States. So extremely well positioned there.

It's confidence like that from our partners and our track record of maintaining and growing long-term client relationships that continue to reinforce our belief that we're continuing to build something great and unique at Perficient.

I'll touch on a few other notable topics and speak to our outlook for Q3 after Paul shares the details about the second-quarter results. Then as usual we will open the call up for questions. Paul?

Thanks, Jeff. Total revenues for the second quarter were $108.5 million, a 7% decrease over the year-ago quarter. Services revenues were $97.2 million for the second-quarter 2015; excluding reimbursable expenses, a decrease of 1% to prior-year quarter.

Services gross margin for the second quarter of 2015 including stock compensation. Reimbursable expenses were 36.3% compared to 38.2% in the second quarter of 2014.

SG&A expenses increased to $24.8 million in the second-quarter 2015 from $22.4 million in the comparable prior-year quarter. SG&A as a percentage of revenues increased to 22.9% from 19.2% in the second quarter of 2014.

EBITDAS for the second quarter of 2015 was $13.4 million or 12.4% revenues compared to $18.8 million or 16.1% of revenues for the second quarter of 2014 with the decrease primarily the result of lower than anticipated revenues. The second quarter of 2015 included amortization of $3.4 million compared to $3.7 million in the comparable prior-year quarter. This decrease is primarily due to intangible assets related to previous acquisitions becoming fully amortized during the quarter, partially offset by the addition of intangible assets from acquisitions during 2014 and 2015 and the implementation of our ERP system which went live in the third quarter of 2015.

Our effective tax rate for the second-quarter 2015 was 19% compared to 42.1% in the second quarter of 2014. The decrease in the effective tax rate is primarily due to an additional research and development tax credit recorded during the three months ended June 30, 2015 which was related to the finalization of the Company's 2014 research and development tax credit.

Net income decreased 37% to $4 million for the second quarter of 2015 from $6.4 million in the second quarter of 2014. Diluted GAAP earnings per share was $0.12 a share for the second-quarter 2015 compared to $0.19 for the second quarter of 2014. Adjusted GAAP earnings per share decreased to $0.25 a share for the second quarter of 2015 from $0.33 in the second quarter of 2014.

As a reminder adjusted GAAP earnings per share is defined as GAAP earnings per share plus amortization expense, non-cash stock compensation, transaction costs and fair value of contingent consideration net of related taxes divided by average fully diluted shares outstanding for that period.

Our earning billable headcount at June 30, 2015 was 2205 which included 2,077 billable consultants and 128 subcontractors. Ending SG&A headcount was 399.

Now let me turn to the six-month results. Revenues for the six months ended June 30, 2015 were $219.1 million, a 2% increase over the comparable prior-year period.

Services revenue for the six months ended June 30, 2015 excluding reimbursable expenses were $195.8 million, an increase of 5% over the comparable prior-year period. Services gross margin for the six months ended June 30, 2015 excluding stock compensation reimbursable expenses were $36.1 million compared to -- I'm sorry, 36.1% compared to the 37.3% in the prior-year period.

SG&A expense increased to $48.9 million for the six months ended June 30, 2015 from $43.1 million in the comparable prior-year period. SG&A as a percentage of revenue was 22.3% for the six months ended June 30, 2015 compared to 20.2% in the comparable prior-year period.

EBITDAS for the six months ended June 30, 2015 was $29 million of 13.2% of revenues compared to $32.8 million, or 15.3% of revenues in the comparable prior-year period. For the six months ended June 30, 2015 included $7.2 million of amortization compared to $6.5 million in the prior year.

Our effective tax rate for the six months ended June 30, 2015 was 27.7% compared to 42.2% for the six months ended June 30, 2014. Again the decrease in the effective tax rate is primarily due to an additional research and development tax credit recorded during the three months ended June 30, 2015 related to the finalization of the Company's 2014 research and development tax credit.

Net income for the six months ended June 30, 2015 decreased 14.5% to $8.1 million from $9.4 million in the six months ended June 30, 2014. Diluted GAAP earnings per share decreased to 20 percent share from $0.29 per share in the comparable prior-year period. Adjusted GAAP earnings per share for the six months ended June 30, 2015 was $0.50 a share, down 12% from $0.57 a share in the comparable prior-year period.

We ended the second quarter of 2015 with $60 million in outstanding debt, down $7.5 million from March 31 and $6.8 million in cash and cash equivalents. Our balance sheet continues to leave us well-positioned to execute against our strategic plan.

Finally, our days sales outstanding on accounts receivable were 81 days at the end of the second quarter of 2015, up from 79 days in the second quarter of 2014. This continues to be an area of strong operational and financial focus.

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

Thanks, Paul. We sold 33 deals north of $500,000 during the second quarter averaging $1.2 million each. That compares to 38 in the first quarter, averaging about $1 million each and 29 in the second quarter of 2014 averaging $1.1 million.

So four more deals and a higher overall average year over year of $100,000 per deal. A good year overall in large steel bookings and we had solid volume growth sequentially and annually for deals below that range. So from an industry perspective healthcare, financial services and retail and consumer goods verticals remain our strongest performers.

We've talked for several quarters about our continued focus on developing and marketing Perficient-owned IP to our clients. While we didn't close any material sales during the second quarter our pipeline continues to grow there. We expect additional sales this year including actually in the third quarter.

Finally, we're continuing to look to supplement our organic growth with accretive M&A and with firms that help deepen our expertise and expand our reach. We're looking to complete two to three more deals remaining in 2015.

So turning our attention now to the expectations for the third quarter, Perficient expects its third-quarter 2015 services and software revenue including reimbursed expenses to be in the range of $111.5 million to $122 million comprised of $104.5 million to $110 million of revenue from services including reimbursed expenses and $7 million to $12 million of revenue from software sales. At the midpoint of the third-quarter 2015 services revenue guidance represents growth of 7% over the third quarter of 2014 services revenue.

So with that we can open the call up for questions. Operator?

(Operator Instructions) Mayank Tandon, Needham & Company.

Thank you, good morning Jeff and Paul. Jeff, I wanted to just kick things off in terms of the weakness you saw in 2Q, the difference between delays and cancellations and do you expect to make up all the revenue you lost in 2Q or will there be a portion that will not come through because of cancellations, etc.?

Yes, thanks Mayank. We really didn't have cancellations materially. I would say cancellations are a part of the business and Q2 was normal in that regard.

It was really delays, both delays to deal closures so some extended sales cycles and a few big engagements, a few big deals as well as delays and just ramping up on deals that were already closed. So the one large deal that we've talked about a few times. We're really the source of that delay.

I think the answer to your question in terms of whether we'll earn all that revenue or not I think over time the answer is yes. Again we didn't see cancellations, what we saw was delays. But we started from a lower point now coming from Q2 to Q3.

So unfortunately those people didn't go to work on other projects waiting for this projects to start. A good chunk of them were on the bench which is why obviously revenue was down and margins are down for Q2.

Now it's rebounded, so I would look at it as though honestly Q3 is sort of what we expected Q2 to be and then we'll build on it from there. So we are expecting a pretty strong Q3. As the guidance reflects we've tried to be conservative of course in our guidance based on what happened in Q2.

So we feel good about it and feel confident and we do believe that we can build on that in Q4. It's too early to determine that but I'm optimistic that while these delays hurt us in Q2 I think ironically they may actually help us in the fourth quarter and going in primarily transitioning from the fourth quarter to the first quarter.

We typically have a seasonal slow start to the first quarter due to the fact that a lot of projects reset or a lot of renewed contracts start in January and don't necessarily start on day one. The good news is we've got a big chunk of contracts now that extend beyond six months that have closed and should extend into Q1 and help us bridge that gap that we normally see.

So I'm optimistic we'll buck the seasonal trend in the early part of Q1. Again it's early to say but I think that might be some silver lining in what we experienced in Q2.

Okay, that's good to hear. Then in terms of organic trends, just from a modeling perspective, what was the organic growth or the negative growth in the second quarter and then what are you expecting for the back half of the year?

Yes, it was down 9%, a little under 9% for the quarter. Our guidance right now is roughly flat before Q3, down a little actually at the midpoint but again we tried to be conservative there. And if I'm correct on how we bridge Q4 and Q1 I actually expect us to see growth again in Q4.

One of the things I want to point out and I alluded to it in the script, though, we are seeing a mix shift. So while revenue was down and we talk about focusing on hours, so revenue was down 9% obviously a negative. Hours, though, were down organically half of that, 4.5%.

So again sort of a positive. And if you look forward to Q3, I think we'll actually see again flat to growth in hours and that should repeat again in Q4 and going forward. We really focus on driving volume up.

We expect that didn't benefit us as much in Q2. Obviously it was down some but we held that bench for these late starts. That's behind us now.

We do expect to drive utilization into the 80s beginning here in Q3. And with that shift to offshore we should begin to see more margin expansion and actually overall growth in billed hours organically.

Okay, that's helpful. And then I noticed in the press release you didn't confirm or reaffirm the guidance you've provided for the full year back in early July. I just want to make sure you are reaffirming that range that you had provided back then.

Yes, we are going to stick with the full-year guidance we issued a couple of weeks ago, a few weeks ago.

And then just a couple of follow-up questions on the model. Paul, could you just give us a sense of what the tax rate may look like in the back half of the year, the trajectory in terms of margins 3Q and 4Q? And last but not least what the shares might look like given some of the buybacks you've completed?

Yes, so on the tax rate the adjusted tax rate should be somewhere in the 37%, 37.5% range in the back. Obviously the lower rate in Q2 that I talked about was driven by this adjustment to the research and development tax credit. Margins, certainly with utilization increasing will be increasing and I think you're going to be roughly flat with where they were in Q3 of last year, maybe up a little bit.

And share count.

And share count obviously depending upon what we do here in Q3 with buyback should come down and we're modeling it down if we do additional buys.

But it's about $34.3 million right now fully diluted?

Yes.

Okay. Great. I will get back in queue. Thank you.

Peter Heckmann, Avondale.

Good morning, gentlemen. Just following up and I may have missed some of the detail but looking at some of your operating metrics I was surprised to see that utilization actually held better than I expected and some of the more of the miss in the quarter appears to be really (technical difficulty) just negative leverage on your operating expenses. And can you talk about that utilization and the gross margin number?

What are all the puts and takes in there between offshore? Clearly a big decrease in software reselling revenue. But certainly the way you got to the bottom-line number was a little bit of a surprise versus what I expected based on the preannouncement.

Yes, so utilization overall including offshore was actually up. So again part of the impact here is a mix shift which will be positive long term but at the same time so we had some utilization being made up by offshore, but we were holding more expensive resources on the bench and onshore. So that was the biggest impact to the gross margin really.

I will let Paul talk about the operating margin and some of the SG&A. I know we had some one-time cost there. Paul, do you want to detail it?

From an SG&A perspective if you look at year over year by quarter certainly revenues coming in lower than we anticipated affected the percentage. But we also had sales moving from trade shows and sort of one-time things that were higher on this quarter as well as some professional fees associated with this R&D tax credit that we talked about. In addition to that we have made some investments in finance, HR and IT in anticipation of growth and we anticipate the SG&A as a percentage of revenue did go down as we get into these higher revenue numbers in the back half.

And then in terms of average bill rate for North America employees a new engagements, how do you expect that is going to change given some of the changes to the mix, your onshore facility, that type of thing?

I still think we're going to see some expansion for US rates, onshore rates as well as offshore actually. Our offshore rates are phenomenal for offshore rates. Like I said before $45 to $50 an hour and substantial gross margin.

It's a small, still smallest piece of the business but it's not moving the needle tremendously, although it is adding tremendous value. So we do expect rates that will expand somewhat going forward. I think we were flattish, slightly down maybe in the quarter.

But one of the things to keep in mind, these larger engagements that we've talked about will be lower rate. However, the margins will still be as strong or stronger due to the fact that since they are long term they will be very high utilization projects.

So we've made great concessions to win a $50 million engagement as an example that runs a couple of years. However, the margin on that opportunity should be as strong or stronger than our average. If that makes sense.

So again you might see rates flatten a bit or bounce around a little bit where they are now. Overall I do expect expansion but not at the pace we were given the mix shift of the business.

Got it. Okay, that's helpful. Thanks.

Frank Atkins, SunTrust.

Thanks so much. You talked about some of the lengthening sales cycles with some of the larger projects. Are you seeing any changes in the sales cycle time or other projects or other industries in general across the business?

You know, I think Frank we did in Q2. So that was one of the things that caused the challenge we had in Q2 was there were some specific ones that were responsible for the most material component of the impact. However, there was kind of an across-the-board sales cycle extension.

Deals closed but maybe not as rapidly as we expected sort of in aggregate. That's actually changed. Bookings have been quite good, were quite good actually in the latter part of the second quarter, have been strong starting out this quarter.

We expect a strong July and August here. And it's too early to see September but we've got some really good momentum going that I am anticipating will continue.

So I can't put my finger on what caused the more macro across-the-board slowdown in terms of the sales cycles or extension of sales cycles. That was a factor but it seems to be past us now.

Okay, great, that's helpful. I'm where are you in terms of capacity on the sales side? Are you getting to the point where the deal inflow is going to need to necessitate some heads added there or are you pretty comfortable with where you are?

No, we are going to be adding capacity. We've got, in fact we've got a strategic team assembled right now to drive additional capacity in sales. We've done some hiring already and we anticipate doing more.

I believe, though, that as the business scales the sales as a percent of revenue might climb a bit but I think we will be able to grow into that or grow with that. And we've already got some strategies to offset some of the additional investment there and other areas.

So overall SG&A impact might be modest. Again if we can get the top-line growth that I think we'll get it won't be huge but we are investing in that to your point with the intent of driving additional organic growth.

It's still our goal to get this business to high single-digits organic growth or better. I believe we can do it. I think the portfolio we have and the position we have in the market is there and I do think sales capacity is one of the challenges and we're addressing that now and adding sales capacity right now.

Okay great. And lastly from me, taking a step back and looking at the broader hiring environment, what are you seeing out there that's much tougher to get folks on board or are you having to do anything to incent people to stay? A little bit of just color on the hiring and retention environment.

Good question. Retention is good. Our voluntary attrition is running right around 20%, slightly above. Our goal is to have it basically slightly below; frankly, I think below 18% or so is unhealthy.

People it's a tough business and when people need to move on they need to move on, so we're satisfied with the retention. It's actually better than it was a year or two ago.

In terms of attracting talent I'll say what I always say to this and it sounds cliched but it's very true. It's always hard to find good people. I don't know of any skilled IT folks that are unemployed, it's just not the environment we are in and it's not the environment we been in for a long time.

So it depends on the technology or their skills of course. Some areas are very, very hot. Some areas are more stable or mature and we always try to hire the best, so it's always a challenge.

We've got a great recruiting team, though, and we've done well in hiring into some of these larger demand areas that we're experiencing right now. So that ramp up was a challenge for our recruiting team but they've been able to keep pace with that ramp now that it's finally started.

All right, great. Thank you very much.

Brian Kinstlinger, Maxim Group.

Hi, good morning guys. Could you talk about the large healthcare customer, just remind us what you're doing for them? And just give us a sense do you still expect it will ramp over the next six to nine months to where you had originally expected or was there any scope change to that contract?

You know, right now we've got to be cautious. I would say right now we do expect and all indications from the customer are that that ramp will stay, will now stay on pace to what we expected. And I think ultimately it ramps to I want to say it's $30 million, $40 million annually, maybe even beyond that.

However, again we're not counting on all that necessarily because things can change. The logistics of what they're taking on is challenging so we want to be nimble and be able to pivot if that pace slows.

However, they are committed, I was going to say they are committed to the engagement. We've heard nothing other than they are absolutely committed to making it happen.

But the work that we're doing for them is the overall engagement they refer to it as the complete digital transformation of their business. I think I mentioned before they've got $0.5 million of services only budgeted for this and it is the digitization of everything patient facing as well as doctor facing within their organization. So mobile, analytics, portal, everything that falls under that umbrella are all things that are on the table.

And was the delay of function of they weren't prepared or they wanted to slow the process or was it a function of anything on Perficient's end?

Well no, unfortunately we were ready.

Yeah, it figured.

Part of the reason the margins got hit. And again I would say in hindsight we probably we maybe could have seen that it was going to be more difficult for them than they realized but it's a huge undertaking. The program is made up of many, many project teams and just the logistics of getting all that pulled together and managed effectively so that their dollars are being used wisely, it took them longer than they had originally anticipated.

But again the pace is good now. We had no indication to believe that it will change now, although we're being wary of that possibility. And we'll see how it presses on but yes the delay was more on them than us but certainly understandable.

And then with the large new deals getting delayed I guess I'm curious why the US rate dropped so sharply in the second quarter.

I think the rate only dropped a couple dollars. Don't forget that the acquisition of Zeon pulled the rates, so the organic drop was only a couple of dollars an hour. And that's I think you can expect that to bounce around a bit as I said earlier but the larger drop that you may be referring to actually (multiple speakers)

Year over year, you're right.

Yes.

It's (multiple speakers)

The fee on fee dropped the majority is what you're saying and organically it's not as much.

It's flattish organically and that's kind of what we expect. It's a dollar or something.

Okay. And then I guess I want to talk about your satisfaction with the sales productivity. I guess in response to the new incentive package also has there been significant turnover there, has your numbers changed for the number of sales people you have?

There hasn't been voluntary turnover to speak of. I think there are some people who were struggling who opted out but that's ongoing.

Let me say it this way. I would say there's been no more voluntary turnover than we would normally see. And with maybe one or two exceptions nobody cited the plan.

I think the folks have embraced it now. We continue to tweak it. The intent of that plan obviously was not to be punitive in any way at all.

It was to help drive more alignment to our strategy and I think the folks understand that. We're working with them to help them meet their goals and I think they've adapted to it really quite nicely.

In terms of productivity our folks did a great job and I'm very pleased actually with what they accomplished. They work hard and put up good numbers. Frankly with some of the attrition that we had both voluntary and involuntary we find ourselves with less capacity than we'd like to have and less capacity than we believe we need to drive the organic growth goal that we have.

So as I had mentioned earlier we are working very hard and in a very focused way to change that and bring people on board. In fact we've hired I think three or four salespeople in just the last couple of weeks.

Great. The last two I want to touch on and I'll do them separately is two divisions we don't talk about or verticals very often. The first was the industry obviously has reported very weak numbers is energy and you've seen some pressure in the last two quarters.

It's small for you guys. I'm just curious should we expect a little bit more volatility in the near-term given energy prices or is there a pipeline to stabilize that small piece of revenue?

Yes, it's a good question. I don't have a crisp answer. I do expect that we'll some more fluctuation there.

I think we're at a fairly stable point though. I don't necessarily think it will be tremendously volatile. And for us utilities are included in that and I think utilities seem to be faring much better than the producers.

So we feel pretty good about that side of the business. A lot of data there, a lot of BI opportunities in the utility space. So we're hoping we can make up any losses or drops from the producer side on the utility side.

But yes, we do expect continued volatility. I do still think, though, that the other verticals, not the least of which of course healthcare and fin serve can compensate and more than compensate for that.

The other one and I'm just talking about we rarely talk about on the positive side we saw electronics and hardware have a nice sequential spike. Is that one large win?

Is there something more broad-based going on there? Is that something we should continue to really follow closely because it's going to move one way or the other?

You know, it is coupled to a couple of key wins. We've always done pretty well in that space but it's not been a huge vertical for us. And I expect it will be about the same as it has been, when things settle out it will be about the same percent of revenue that it's been historically.

Telecom is a space that we continue to see good opportunity in. We've got a fantastic relationship with a key account there but also expanding beyond that account leveraging that skill set.

Thank you so much.

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

All right, well thank you all for your time today as usual. And I'm very much looking forward to an excellent Q3 and the opportunity to have a call here in 90 days talking to you all about a great quarter. Thank you very much.

Ladies and gentlemen, thank you for your participation. This concludes today's conference.

You may now disconnect. Have a great day.