Perficient Inc (PRFT) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Perficient second-quarter 2016 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, President and CEO, Jeff Davis. Sir, you may begin.

Thank you. Good morning, everyone, and thanks for joining us. With me on the call today is Paul Martin, our CFO. Again, thank you for your time today. We have about 10 to 15 minutes of prepared comments as usual and then we will open the call up for questions.

Paul, would you please read the Safe Harbor statement?

Thanks, Jeff, and good afternoon 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. 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 discussions.

At times during this call we will refer to adjusted EPS. Our earnings press release including the 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. Again, good morning and thanks for joining us as we discuss our second-quarter results.

Second-quarter total services revenue was up 11% overall and that number would have been higher had it not been for an unexpected development which is the extension of timelines associated with projects at our largest account which I will talk about in more detail shortly.

In the near-term, it has forced us to make some revisions but in the long run there is no impact at all really and it sets the stage for what could be a very strong start to 2017.

We followed very strong Q1 bookings with a solid performance in Q2. June in particular was a great bookings month and just a few days ago we closed the deal nearing eight figures at a global chemical later. On that note, we are making great progress on our strategy to move upmarket. Our sales team is focused on selling bigger and longer-term deals to a strategically defined set of larger enterprise accounts. In fact, year-over-year organic growth in our top 50 accounts segment was 20% in the quarter and 18% year to date. The average tenure of those relationships is now 5.5 years.

While we will always be opportunistic of course in general, we are purposely not pursuing one and done type smaller accounts where the propensity for long-term spend is not commensurate with the pre-sales investment required. And while macro environment signals are a bit inconsistent and I don't think anyone yet has visibility into how the upcoming presidential election and the subsequent ramifications there may impact enterprise demand, we are not seeing signs of pricing pressure.

North American AVR remained healthy at $144 an hour and we continue to realize an increasing offshore mix shift. In fact, offshore hours were up 38% over the prior year period and represented a larger percentage of revenue than ever. That is contributing to a healthy increase in overall billable hours which are up organically 17% over the prior year period.

We also formally launched the Perficient Digital Agency during the quarter and as I mentioned on the Q1 call, feedback from clients, partners, prospects and press has been overwhelmingly positive. Microsoft just named us Partner of the Year in each of the three regions in North America for the second year in a row. To earn that recognition in one region is exciting obviously but to sweep the entire country two years in a row is something else entirely. Really a fine testament to our partnership with Microsoft which as all of you know is becoming an increasingly formidable and important cloud player.

So as I mentioned earlier, we were notified approximately mid-quarter by our largest client that they would be temporarily pausing some of the projects roughly half of the projects that we are working on until 2017 and of course the timing was unfortunate as it related to our second-quarter results and it will impact H2 as well. I want to be very clear the client has advised us they simply wish to postpone some of the work until 2017 primarily due to logistics and managing such a large endeavor. It is an extension of the timeline, not a reduction in the commitment of work to Perficient. So this all stays in backlog, it just gets extended, we have confirmed that within the last week with the client.

Anyone trying to assess the health of the business should understand there is no material difference in our long-term prospects or thesis. Bookings remain strong and our backlog remains solid. This delay simply pushes some of the work we anticipated this year into next year and beyond. If you are measuring Perficient's possibilities in increments greater than a quarter, this is a nonevent.

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

Thanks, Jeff. Total revenues for the second quarter were $124.4 million, a 15% increase over the year-ago quarter. Services revenues were $107.9 million for the second quarter of 2016 excluding reimbursable expenses which is an increase of 11% over the comparable prior year period.

Services gross margin for the second quarter of 2016 excluding stock compensation and reimbursable expenses was 35.4% compared to 36.3% in the second quarter of 2015. SG&A expense excluding stock compensation increased to $23.2 million in the second quarter of 2016 from $22.7 million in the comparable prior year quarter. SG&A as a percentage of revenues decreased to 18.7% from 20.9% in the second quarter of 2015.

EBITDAS for the second quarter of 2016 was $16.5 million or 13.3% of revenues compared to $13.4 million or 12.4% of revenues in the second quarter of 2015. The second quarter includes an adjustment to fair value of contingent consideration of $1.4 million related to a change in estimate associated with the earnout for the Enlighten acquisition that was completed in 2015.

Our effective tax rate for the second quarter of 2016 was 34.4% compared to 19% for the second quarter of 2015. The increase in the effective rate is primarily due to nonrecurring tax benefits related to prior year research credits that were recorded in the second quarter of 2015.

Net income increased 45% to $5.8 million in the second quarter of 2016 from $4 million in the second quarter of 2015. Diluted GAAP earnings per share increased to $0.17 a share for the second quarter of 2016 from $0.12 a share in the second quarter of 2015.

Adjusted GAAP earnings per share increased to $0.28 a share for the second quarter of 2016 from $0.25 in the second quarter of 2015 and again adjusted GAAP EPS is defined as GAAP earnings per share plus amortization expense, non-cash stock compensation, transaction costs and fair value adjustments of contingent consideration net of related taxes divided by average fully diluted shares outstanding for the period.

Earning billable headcount at June 30, 2016 was 2434 including 2256 billable consultants and 178 subcontractors. Ending segment headcount was 449.

I will now return to the year-to-date results through June. Revenue for the six months ended June 30, 2016 were $248.2 million which is a 13% increase over the comparable prior year period. Services revenue for the six months ended June 30, 2016 excluding reimbursable expenses was $217.6 million, an increase of 11% over the comparable prior year period.

Services gross margin for the six months ended June 30, 2016, excluding stock compensation and reimbursable expenses decreased to 35.7% from 36.1% in the prior year period. SG&A expense excluding stock compensation increased to $47.7 million for the six months ended June 30, 2016 from $44.4 million in the comparable prior year period. SG&A as a percentage of revenues was 19.2% for the six months ended June 30, 2016 compared to 20.3% in the comparable prior year period.

EBITDA for the six months ended June 30, 2016 was $33.7 million or 13.6% of revenues compared to $29 million or 13.2% of revenues in the comparable prior year period.

The six months ended June 30, 2015 included amortization of $6.7 million compared to $7.2 million from the comparable prior year period. This decrease was primary due to intangible assets related to previous acquisitions becoming fully amortized partially offset by the addition of intangible assets from acquisitions completed in 2013. An adjustment of $1 million was recorded in the six months ended June 30, 2016 which was primarily the result of a fair market value adjustment to the Enlighten earnings base contingent consideration liability.

Our effective tax rate for the six months ended June 30, 2016 was 32.9% compared to 27.7% for the six months ended June 30, 2015. The increase in the effective tax rate again is primarily due to the additional research and development tax credit recorded during the six 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, 2016 increased 39% to $11.2 million from $8.1 million in the six months ended June 30, 2015. GAAP earnings per share increased to $0.32 from $0.24 for the six months ended June 30, 2015. Adjusted GAAP earnings per share for the six months ended June 30, 2016 was $0.56, up 12% from $0.50 for the six months ended June 30, 2015.

We entered the second quarter with $36 million in outstanding debt. This is a decrease of $20 million from March 31 and we had $9.5 million of cash and cash equivalents. In June, the Company also amended and extended the maturity of its agreement -- extended the maturity date to July 31, 2018 and reduced our LIBOR margin by 25 basis points. Our balance sheet continues to leave us very well-positioned to execute against our strategic plan.

Our days sales outstanding on accounts receivable were reduced to 79 days at the end of the second quarter of 2016 compared to 81 days in the second quarter of 2015.

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

Thanks, Paul. So as it relates to bookings, we have sold 44 deals over $0.5 million each during the second quarter. They averaged $1.3 million. That compares to 50 in the first quarter that averaged $1.4 million each and 33 in the second quarter of 2015 that averaged $1.2 million. So we made great progress in bookings in the second quarter year-over-year. As you can see, a meaningful increase the deal volume.

The healthcare and financial services verticals again represent a significant portion of the revenues collectively accounting for 48% of revenues. Those two verticals remain our largest from a bookings perspective but we saw strength in automotive and telecom verticals as well.

Before we close, I also want to reiterate that it remains our intention to add a couple of more deals this year via M&A. Obviously we will be as patient as we need to to find the right deals and there are no guarantees we will but we remain in advanced discussions with a few firms we believe could be good strategic fits.

So again in summary, a solid quarter other than the adjusted and extended project timeline associated with a large customer that impacted the back half of the quarter and will push some of the revenue and earnings from 2016 into some of the out years. As I mentioned before, the long-term thesis remains intact and we expect a solid second-half despite this account centric delay.

So turning our attention to our expectations for the third quarter, Perficient expects third-quarter 2016 services and software revenue including reimbursed expenses to be in the range of $118.5 million to $128.5 million comprised of 109.5 million to $115.5 million of revenue from services including reimbursed expenses and $9 million to $13 million of revenue from sales of software. The midpoint of the third-quarter 2016 services revenue guidance represents growth of 3% over third-quarter 2015 services revenue.

The Company has revised its full-year 2016 revenue guidance to be in the range of $495 million to $515 million, its 2016 GAAP earnings per share guidance to a range of $0.70 to $0.82, and its 2016 adjusted earnings per share guidance range of $1.25 to $1.35.

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

(Operator Instructions). Joan Tong, Sidoti & Company.

Good morning, guys. A couple of questions here. I guess first off related to that larger deal and I guess my question is looking at you guys pretty much had the same issue last year when those project work got pushed out for that particular large transaction. So I am just wondering is this something related to these type of projects actually come in stages so when you are done with the first stage and you are moving to the next and there always seems to be some sort of timing variation and delay, can you just elaborate a little bit more?

Sure, Joan. Actually this wasn't a break in the phasing of the projects. What happened, this is a very, very large undertaking on the part of this client. It is about $0.5 billion in services total over about five years and frankly the logistics I think just prove to be challenging. There were interdependencies across several projects that were underway simultaneously and some of the dependencies for the work that we were doing -- and by the way I want to be clear that we stated we were on track, quality is not an issue, not a concern, the client is happy with our work but they really need to get some more foundational things in place.

So what it means by the way is that our revenue from the client for this year is probably going to be somewhere between half and two-thirds of what we expected. Now again that client is committed to ramp back up that other project stream and begin that work early next year. So we should see that same client ramp back up.

So this is not normal. Again it is a large undertaking for them. I think the logistics proved to be more challenging than anticipated and they needed to take this time to get some of those dependencies in place before we pick back up this other work.

It is hard to say for sure whether we will see this again from this client, with the same client last year, but I don't think so. I think once these dependencies are in place and the foundational work is largely complete, it should actually be off and running and we shouldn't see more disruptions.

Okay, okay. Got it. And then Jeff, you mentioned the bookings continue to be strong in the second quarter after the very good quarter in the beginning of the year. So I am just wondering are we seeing actually better like bookings or it is kind of like continue at the same pace and just want to gauge other than this particular project being pushed out, any softness outside of this large deal?

I don't think so. We are really not seeing anything broad-based and again if it hadn't been for this client, we wouldn't even be having this conversation. So we feel good about what we are seeing, bookings are up double digits year to date, year-over-year. So we feel pretty good about the bookings.

Keep in mind the question always arises when will we see that translate to double-digit revenue? I think we will get closer to that as time marches on but the projects that we are selling now as I mentioned during the prepared statements are larger and longer-term. So some of that year-over-year increase is actually going out into a longer-term backlog. Very, very good fundamental for the business and very healthy but it won't translate directly into revenue growth.

The other thing that I will take this opportunity to just mention again or reiterate is the mix shift to offshore continues at a pace that is actually very good for the business but it is even at a pace beyond what we'd anticipated. So that actually presents somewhat of a headwind to topline revenue growth but as I mentioned, 17% organic hours volume growth. That number was zero three years ago, even negative three years ago. So we have shifted the business to focus on volume as well as topline revenue growth and we are certainly seeing the volume come through, the topline revenue I think would happen there had it not been for this particular engagement.

Okay, got it. Got it. And then finally regarding that eight figure chemical company business that you booked after the quarter, can you sort of talk about the timeline for us?

Yes, it is about a two-year and three month engagement I believe in total. It is about $8.5 million, $9 million of revenue there and a great win for us. That is a big win. To your point earlier a lot of these things are phased and so to win one that large is exciting for us and we are pleased. It is a relationship we have had, we have done some other work for them in the past and that is what got us this win. We have done some smaller engagements but very critical strategic investments around Hyperion actually and so we are back and we won this larger piece of business.

All right, thank you very much.

Frank Atkins, SunTrust.

Thanks for taking my question. I wanted to ask what organic growth in the quarter was and as we look at the large delay, what impact does that have on this year's organic growth and maybe you could size the amount that might be pushed into 2017?

Sure. The organic growth in the quarter was about 6%. Overall for the year we are looking at I think if you look at the midpoint of our guidance, we are somewhere in the low single digits for the year again, really all due to the impact of this engagement.

The dollars to your question that go into next year if this ramp up occurs and again we have been assured as recently as a week ago that it will represent somewhere on the order of $15 million to $20 million of incremental revenue next year just from this account.

Okay, that is helpful. As you look at the delay here what gives you the confidence that this is just a delay and there might not be some sort of re-scoping or changing in the value of the work over time?

We are pretty close to the client and I mean we are still there doing a substantial amount of work. We've got probably about a $15 million revenue stream or better now. So we are there every day, our folks are working very closely with the top executives that are sponsoring this engagement and of course all I can tell you is what they are telling us. And every indication has been from the time they first notified us to as recent as a week ago that their intention is absolutely to proceed with the project plan they had, they just delayed one particular work stream.

Okay. And then as you get this type of delay that puts you in the position of a difficult balance of utilization and headcount and keeping good people so that you are prepared to do that work. How are you thinking about that balance as well as the cost side?

That is exactly right and so you will see that you have already seen that utilization was impacted in a quarter primarily due to this. And you are right, while we did reduce headcount in the quarter to reflect this reduction in revenue, you don't want to lose good people so some of those people did need to come back to the bench until we could find other work for them and that is ongoing but going well. And I think on a go forward basis going back into Q3 now and into Q4, we should see utilization come back up as we get those folks placed and move past the reductions that we needed to do, we should see utilization rise again, it should be back to some reasonable margin expansion.

Okay, great. Thank you very much.

Mayank Tandon, Needham & Company.

Good morning. Jeff, in terms of the demand environment I heard what you said but we have heard some comments from other companies in terms of a broader slowdown just because of Brexit and the implications of that on the global economy some uncertainty, it appears to me that you are not seeing that. Could you confirm that?

Secondly, could you comment on why you are not seeing it versus many of your peers, what actually is calling that out in the recent quarterly earnings calls?

Yes, you know, I would say again that we are not seeing a marked change. I would describe this environment as tepid. I would describe it the same though as it was a year ago, two years ago and even three years ago. It has not improved, we haven't seen a significant shift. I think some of the reason for that for us is we are smaller than some of the players that you are referring to so we are in a little bit of a microcosm. But B, healthcare. Our healthcare is up 30% year-over-year so I think healthcare remains healthy for us and that helps -- obviously is helping to continue to drive opportunity for us.

The other thing I would tell you is our land and expand strategy and moving into these larger enterprise accounts if you recall one of the factors that motivated us to move in that direction was the last recession or the recession in 2008. And the reality is our Fortune 1000 customers, our enterprise customers really didn't decline much at all for us, some of them even grew. And so we've got a much different client mix now and we are doing again high ROI, mission-critical projects that are smaller engagements I think than maybe some of the larger players are taking on. And I think still get budget approval as an example. Again partly because of their criticality and partly because they are not as expensive as maybe some of the things bigger guys are doing.

Right, that makes sense. Thank you for that. Then in terms of your expectations on pricing for the remainder of this year and then also maybe also comment longer-term how much more room you have to catch up with some of the larger players?

And then I also wanted to ask about the margin expectations for the remainder of this year given the guidance revision both on the services gross margin line and also what you expect in terms of EBITDA margins?

Sure. Yes, this is obviously a set back to that within the quarter and a little bit of a bleed into Q3 but I think we are seeing improvement even now so for the year, I would say 50, maybe 100 basis points on services gross margin total. And I would hope to see some of that translate or that translate to EBITDA, EBITDA net of stock comp. Again, I think we've got a shot at 50 to 100 basis point expansion.

In terms of rates I think, I know there is still a gap between us and the big guys. We will push on rates as we move forward but quite honestly if you recall over this kind of two-year transition, we have really had our team focusing on those volumes and the results there have been phenomenal. 17% organic growth in billed hours volume year-over-year this quarter and the mix shift to offshore.

Those things will also help us drive margin expansion. Obviously offshore is profitable, better margins. So I do expect to continue to see margin expansion opportunities aside from again this one client issue.

And again rates, we've got a balanced incentive program in place for our sales folks. That balance is margin and volume so I think we are going to continue to see rates improve. They are stable now roughly flat but I think we will see them inch up here as we move forward. And we are aware of where they are at, we would like to move them up gradually. We don't want to break the momentum frankly that we have got going with winning this business and driving volumes at the moment. But I think we will be able to drive those up gradually still over time.

Great, that is hopeful too. And then the final question from me given the pullback in the stock here today, just in terms of plans you may have for share buybacks and if you could remind us how much is left authorized under the current buyback program?

I think we've got about 17 million remaining on the program and certainly when we are able to, we will be buying as we always are at these levels and beyond really.

Great. Thank you for taking my questions.

Brian Kinstlinger, Maxim Group.

Good morning, guys. So while it was a tough quarter, congrats on the volume changes in the business. I have to say I for one have been writing about that for awhile so it has been a nice trend there and I don't think an investor should underestimate the impact of the offshore mix like you have highlighted.

So the first question I wanted to ask do you see the offshore mix as a percentage of delivery mix continuing to move offshore, maybe talk about that over the next year or two timeframe?

Yes, absolutely. I don't know if it is going to maintain the pace again, almost 40% year-over-year this quarter, I don't if it will maintain that pace but I frankly wouldn't be surprised if it did. As a matter of fact the same large account that we have been referring to recently made a visit several of their folks made a visit to our facility in Chennai to certify it to begin giving us offshore business. And we are seeing that trend continue in these large enterprise accounts. Keep in mind that our offshore capability is a little bit different than the big guys and we can do what they do but we do something I think is more important and that is we've got these highly skilled people that are essentially peers in terms of experience level and skill set to the folks here in the US.

So they are really an extension of a project team so it helps bring costs down but you've still got that same level of quality and experience and also using agile methodology. I think our clients that we have been with for a long time are really recognizing that that is pretty powerful stuff and giving us more and more opportunity to take share away from the big guys.

Great. And then I joined the call late I'm sorry so I missed some comments. But did you talk about 2Q bookings compared -- I mean how it trended versus maybe 1Q and how the early trends in third quarter have been playing out and to that extent maybe industries that have been weak or strong?

So June was very strong, we commented on Q2 was strong. I mentioned that year to date bookings are double-digit, low double digits so like in a 10% to 15% range year to date so good. They are always backend loaded so I wouldn't comment much on Q3 because quarters are always backend loaded. That seems to be the buying pattern but we feel pretty good about it.

Now in terms of industries, certainly energy, utilities which thankfully is a small piece of our business now continues to decline not surprisingly. Maybe a little softness in FinServ as I think you have heard some of the other firms talk about for some time now. But healthcare up 30% year-over-year so very strong in healthcare and I think that is going to continue to be kind of a beacon of growth for us.

And to that large customer, is that the same customer that was delayed a year ago? Is that the same customer?

Yes, unfortunately, yes.

I realize different.

Although I would say actually maybe it is a good thing because we've only got one. But yes, it is the same.

Okay. And then you talked about headcount a little bit and the changes to that so should we expect a few more headcount reductions to manage that over the next few quarters or keep the headcount constant? Maybe talk about how you are going to manage it which is obviously tricky?

It is and the other thing we want to be mindful of as I said earlier, we've got highly skilled people that were on this engagement and we are going to hang onto those folks. We are obviously going to have to and have already made a number of reductions. I think that I alluded earlier that kind of carries over into Q3 so that is still underway as we are sorting out who are we going to be able to get placed in other engagements and frankly who we are going have to -- or the numbers that we are going to have to reduce unfortunately.

But I think most of that is behind us, we've got a little more work to do and again I think we will get back to good margin, not only good year-over-year margins but even some expansion.

Brian, you will notice that when you look at the details on our investor deck that the average headcount between Q1 and Q2 was down I think seven people but the ending is down 68 so obviously there was more activity later in the quarter which will benefit in the second half.

Great. Thank you so much.

Peter Heckmann, Avondale.

Good morning, guys. Watching that trend over the last couple of years looks like the margins in software and hardware reselling are moving up a little bit. Is that due to a change in the mix of what you are selling there or potentially some of the tools that you have rolled out on the healthcare analytics side?

It is going to be mostly driven by our internally developed assets and the highest priced one is in the healthcare space. We've got several others that go along with that as well. I think that is the primary driver of margin expansion. The resale is about the same as it was.

This really makes it lumpy because if we have an active internally developed software quarter, it is 100% margin and it obviously brings up the overall average.

Got it, got it. And then within the press release you note a partnership with Amazon Web Services, is that also a reselling partnership for Perficient clients?

Obviously it is providing services to move people into Amazon's cloud but I don't know whether frankly we have a resale opportunity. A lot of times on a SaaS model like that we might get a spiff for bringing them a new client so we are not reselling the software again since it is cloud or SaaS.

Okay, okay. And then just lastly, could you give us an update on the digital agency efforts and any changes? It looks like it is a fairly hot area, some other of your competitors are making some acquisitions in that area. Any change to the competitive landscape there or is there enough demand to kind of support and build out at a number of competitors?

I think there is enough demand. Our intent isn't to go out and conquer the world from an agency standpoint. Our intent was to bring the skill set into our account base and that has been extremely effective. I won't mention the name, we are probably under an NDA, a large hospital system in California well known, a lot of Hollywood types go there, we have a $5 million agency pure agency engagement that we have there that was borne out of the relationship that we already had.

So I would say it is resonating very well again. It can also be a door opener, this gives us an opportunity to go into a new account as well and have a conversation with the CMO and as we all know, the CMOs are more and more influencing or directly controlling IT spend. So we think it is going to benefit both in that way.

And again, we may go head to head with other agencies but that is not the primary intent. The primary intent is we have another great service here that we have been sort of under promoting, we have had for a while but under promoting and taking that back into our existing account base.

Okay, great. Last question, this is back of the envelope had a busy morning this morning but it looks to me like the reduction in the midpoint of your EPS guidance is somewhat greater than what we would expect given the reduction in revenue. Would there be an element of conservatism in there or maybe some other items that are worth calling out?

I think that is a reflection, Pete, of when this revenue got reduced we weren't able to reduce costs as I mentioned as quickly and in fact as I said also, we made the decision strategically to hang onto some of these folks that are great folks. So that impacts our margins and I think it is more a reflection of that than anything.

Okay, that is helpful. I thank you.

At this time I'm showing there are no further participants in the queue. I would like to turn the call over to management for any closing remarks.

Thank you all once again. As I said before, thesis very intact, this is all just moved to backlog so we are looking forward to an improved second half and we will be talking to you again in three months. Thank you.

Ladies and gentlemen, thank you for your participation on today's conference. This concludes your program. You may now disconnect. Everyone have a great day.