Perficient Inc (PRFT) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2017 Perficient Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Thank you very much. Good morning, everyone. With me on the call today is Paul Martin, our CFO, I'd like to thank you for your time this morning. As is typical, we have about 10 or 15 minutes of prepared comments, after which we'll open the call up for questions.

But before we proceed, Paul, would 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 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 discussions. At times during this call, we will refer to adjusted EPS. Our earnings press release includes a reconciliation of certain non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with generally accepted accounting principles, or GAAP, and this 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 compared in accordance with GAAP on our website under Investor Relations.

Jeff?

Thanks, Paul. Once again, good morning, and thanks for joining. We're excited to share our second quarter results with you today. We've talked for a couple of quarters now about our intent and ability to drive our margins higher and during the second quarter we did just that, services margin rose a full 200 basis points in the quarter and we expect sequential margin expansion in Q3 and similar year-over-year results in both third and fourth quarter this year.

But the good news this morning, it not just contained to margins and profitability. Our bookings momentum is very strong right now, in fact, the month of June represented the single largest booking month -- bookings month in our history and it was nearly 25% greater than January 2016, which previously represented our strongest month, that drove our record Q2 bookings totaled up sequentially year-over-year substantially. On the yields of that performance, third quarter's off to a great start, with record bookings for the month of July. Those successes have our sales organization operating with great momentum and with a real energy, enthusiasm and growing sense of confidence right now. Things are very exciting in Perficient. One of the key cap contributors to June's record bookings was the signing of our first $20-plus million statement of work, a milestone win for our digital and health care teams at a world renowned health care provider. And then on the yields of that success, we went on to execute a $25 million win in the automotive industry in July at an existing client and extending us well into '19, in fact, both of those engagements and a lot of these bookings extend into 2019 and produce a backlog heading into 2018 it will be very strong.

Digital transformation is driving mission-critical business in technology investments that in many ways are mandatory to enterprise survival. Across every industry, businesses must develop faster than ever. Companies have a choice, they must disrupt themselves or their competitors and consumers will. And our unique approach, unparallel portfolio, unequal talent and undeniable value resonates strongly in the market. Digital, cloud, AI, IoT, these disciplines are driving tremendous spend and Fortune 1000 enterprises are increasingly realizing the provision isn't for mere provider and space. We're just beginning to capitalize on that awareness. As I mentioned in the last call, and as evidenced by the pursuant winning of larger and longer-term work, our brand and reach is building and our move up market is well underway.

I'll touch on several other exciting and notable topics, including our outlook for Q3 as -- after Paul shares the financial details. Paul?

Thanks, Jeff. Total revenues for the second quarter of 2017 were $117 million, a 6% decrease compared to the year-ago quarter. Services revenues were $104.8 million for the second quarter of 2017, excluding reimbursable expenses, a decrease of 3% compared to the prior year period. Services gross margin for the second quarter of 2017, excluding stock compensation and reimbursable expenses, were 37.4%, an increase from 35.4% in the second quarter of 2016. As Jeff mentioned, we're expecting year-over-year margin improvement to continue into the second half of the year. SG&A expenses, excluding stock compensation increased to $23.9 million in the second quarter of 2017 from $23.2 million in the comparable prior-year quarter. SG&A, excluding stock compensation as a percentage of revenue, increased to 20.4% from 18.7% in the second quarter of 2016.

EBITDAS for the second quarter of 2017 was $16.9 million, or 14.4% of revenues compared to $16.5 million or 13.3% of revenues in the second quarter of 2016. We are also expecting year-over-year EBITDAS margins to continue to improve in the second half of the year. The second quarter includes amortization expense of $3.5 million compared to $3.3 million of the comparable prior-year quarter. An adjustment of $0.6 million was recorded during the 3 months ended June 30, 2017, which represents a net impact of a fair value adjustments to the RAS and Bluetube revenue and earnings base contingent consideration liability in addition to the accretion of the fair value estimate for the revenue and earnings base contingent consideration will end to the acquisitions of Bluetube, RAS declared. Our effective tax rate for the second quarter of 2017, was 68.4% compared to 34.4% for the second quarter of 2016, the increase in the effective rate is primarily due to the poor earnings of the company's Chinese subsidiary that are no longer currently reinvested. Net income decreased 59% to $2.4 million for the second quarter of 2017, from $5.8 million in the second quarter of 2016. Diluted GAAP rates per share decreased to $0.07 for the second quarter of 2017 from $0.17 in the second quarter of 2016. Adjusted GAAP earnings per share increased to $0.29 for the second quarter of 2017 from $0.28 in the second quarter of 2016. Again, adjusted GAAP EPS is defined as GAAP earnings per share plus amortization nonstock -- noncash stock compensation, transaction cost and a fair value adjustment of contingent consideration and the impact of other infrequent or unusual transactions, net related taxes divided by average fully diluted outstanding shares for that period. Our earning billable headcount at June 30, 2017 was 2,497, including 2,270 billable consultants and 225 subcontractors. And then SG&A headcount was 453. Now let me return to the year-to-date results.

Revenue for the 6 months ended June 30, 2017 were $228 million, a decrease of 8% over the comparable prior year period. Services revenue for the 6 months ended June 30, 2017, excluding reimburse expenses was $205.7 million, a decrease of 5% over the comparable prior year period. Services gross margin for the 6 months ended June 30, 2017, excluding stock compensation, reimbursable expenses increased to 36.8% from 35.7% in the prior year period. SG&A expense, excluding stock compensation decreased to $47.2 million for the 6 months ended June 30, 2017, from $47.7 million in the comparable prior year period. SG&A expense, excluding stock compensation as a percentage of revenue was 20.7% for the 6 months ended June 30, 2017, compared to 19.2% for 6 months the June 30, 2016. EBITDAS for the 6 months ended June 30, 2017, was $31 million compared to $33.7 million in the comparable prior year quarter, EBITDAS, as a percentage of revenues, was 13.6% in both periods.

For the 6 months ended June 30, 2017, included amortization of $7.2 million compared to $6.2 million in the comparable prior year period. An adjustment of $0.4 million was recorded during the 6 months ended June 30, 2017, which represents a net impact in the fair market value adjustment to the RAS and Bluetube revenue and earnings base contingent consideration in addition to the accretion to the fair value estimates for the revenue and earnings base contingent consideration related to the Enlighten, Bluetube, RAS and Clarity acquisitions. Our effective tax rate for the 6 months ended June 30, 2017, was 57.9% compared to 32.9% for the 6 months ended June 30, 2016. The increase in effective rate was again primarily due to the poor earnings of the company's Chinese subsidiary that are no longer part of the reinvestment. Net income for the 6 months decreased to $5.1 million from $11.2 million in the 6 months ended June 30, 2016, and diluted GAAP earnings per share decreased to $0.15 from $0.32 for the 6 months ended June 30, 2016. Adjusted GAAP earnings per share decreased to $0.52 for the 6 months ended in June 30, 2017, from $0.56 for the 6 months ended June 30, 2016.

The company refinanced its line of credits during the quarter, reducing our rates, extending our debt maturity to 2022 and start getting our bank group. We believe that currently available funds, access to capital from our credit facility and cash flow generated from operations leaves us well positioned to fund future growth. We ended the second quarter of 2017 with $16 million in outstanding debt, an increase of $36 million from year-end. The increase is primarily due to the acquisition of RAS and Clarity during 2017. Our day sales outstanding on accounts receivable were 73 days at June 30, 2017, that compares favorably with a 79 days at June 30, 2016 and December 31, 2016.

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

Thanks, Paul. A little more detail on bookings. We sold 41 deals greater than $0.5 million during the second quarter and they averaged $2 million each, and that compares to 49 in the first quarter of this year averaging $1.4 million each and 44 in the second quarter of last year of 2016, that averaged $1.3 million each, so I want to just highlight again, that's $600,000 increase in average yield size sequentially and a $700,000 increase year-over-year. So that's about 50% increase per deal on deal size compared to last year.

During the quarter, health sciences, financial services, automotive and retail consumer good verticals represented 62% of revenue. Health care was at 27% of revenue, financial services 15%, automotive 10% and retail consumer goods at 10% of revenue. All those sectors, we see as strong currently and going forward. We're expecting a strong second half in particular for health sciences. Our bookings during the second quarter were up more than 30% year-over-year in that industry. Some of our competitors were reporting challenges and slowdowns in the space, but we have significant momentum right now and we continue to take share. We've also become a destination of choice for industry sellers. During the quarter, we landed a highly-regarded health sciences seller from one of our largest competitors.

Speaking of our sales organization, other success during the quarter was the promotion of Patrick Schwierking to Vice President of sales. Pat's been one of our most successful sellers and sales leaders for over a decade here at Perficient. A guy who has been in the trenches for many of our largest wins and who remains central to keep pursuits going forward in client relationships. We're excited and fortunate, it has Pat move into this role and provide leadership to our entire sales team. Also worth highlighting is that we continue to grow the offshore component of our business, in fact, during the second quarter, our offshore revenue was the highest it has ever been in dollars as well as on our percent of revenue basis. As we talked about before, our offshore margins are very strong and our differentiator approach is helping us win work that we otherwise wouldn't have. We expect the offshore portion of our business to continue to build at a faster rate than our overall growth.

And finally I'm sure you all saw the news of our late June acquisition of Clarity Consulting, it's a fantastic Chicago-based firm, we're really excited about bringing onboard. Integration there is underway, we're excited about the clients and capabilities they brought. They're doing really impressive things around digital, specifically IoT, self-service kiosks and similar types of solutions. We've also brought some really impressive intellectual property we're excited about, which is a context in our product leveraging Skype for Business. At Approximately $27 million from revenues, this represents one of the larger deals we've done and we might get at least one more deal done this year and remain an active discussion for several firms. As I stated before, our goal is $50 million to $60 million of acquired revenue run rate and we're at about $40 million right now.

So turning the attention now to our expectations for the third quarter. Perficient expects the third quarter 2017 services and software revenue, including reimbursed expenses to be in the range of $120.5 million to $134 million, comprised of $114.3 million to of $121.7 million of revenue from services including reimburse expenses and $6.2 million to $12.3 million of revenue from sales of software. Third quarter adjusted earnings per share expected to be in the range of $0.32 to $0.34. We're narrowing our previously provided full year guidance to a range of $490 million to $510 million and narrowing our adjusted earnings per share guidance to a range of $1.19 to $1.29. And I want to note here, that we continue to see a pretty significant and rapid mix shift to offshore as I highlighted earlier. We're performing more work on the remote bases and we're also seeing the industry obviously rapidly shifting to SaaS instead of on-premise software licensing. So each of those trends creates a modest headwind on top line overall and we're certainly seeing less reimbursement expenses and, again, lower software revenue bookings as SaaS software is booked in a completely different manner. So we'll see -- continue to see those come down, the nice part of that good news there is that it will actually create margin expansion, which we already put some nice margin expansion on services, so they will help overall as well.

Operator? We can take questions.

(Operator Instructions) Our first question comes from the line of Mayank Tandon with Needham.

Jeff, I wanted to just probe a little bit deeper into the bookings trend, so obviously a good sign that you're seeing, record bookings trends, but why isn't that translating into maybe improved topline performance in the second half. Even despite the headwinds that you just mentioned regarding offshore in terms of the revenue? And then as we look into '18, should we see a better uptick in terms of organic trends as these bookings now convert to revenue?

Yes. Absolutely. I think they are yielding some results. The midpoint of our guidance for this quarter is back to flat. And I expect that in the fourth quarter, if the trend continues, we'll be somewhere in the mid-single digits, perhaps upper-single digits. The strongest correlation of bookings to revenue is about a 4 or 5 rolling months. So I expect that the surge in bookings that we enjoyed at the end of the second quarter and beginning here of the third quarter will have a greatest impact in the fourth quarter and leading into 2018. Things -- we did have some project delays on some of these -- in larger engagements in the quarter. Actually, we're only about 1% or 2% below than the midpoint of our guidance, and like I said overall for the year, I think we're still within 1% of our original organic guidance and I do expect organic growth to return materially in the fourth quarter and going into '18.

Great. And then what is driving the bookings improvement? Is it really more sales execution on your side? Is it industry uptick you're seeing just more deals and the conversion rate is picking up? What is driving the uptick in bookings?

I think the market's a little healthier but I think it's less that and honestly, I think we're starting to finally see some fruition of the investments that we've made over the last couple of years in our sales team in terms of the organizational structure, the additional capacity and focusing on the an appropriately balanced incentive program. So I think that's actually beginning to pay dividends now, and I think that's going to be sustainable. And like I said, while we see some improvement in the market, I think another component to it is in our brand building and our differentiation for our clients. The referenceability is fantastic, we are very unique in our ability to deliver true end-to-end capabilities around digital transformation. The agencies can't do it, the traditional technology shops can't do it. It's something that we've been doing for years and we've have invested a lot in that over the last couple of years, having a very formidable portfolio from beginning to end as it relates to digital. And I can tell you that is what's resonating, that's what won us the $20 million engagement in June, that I alluded to, and a health provider -- health care provider and helps us continue to win and sustain these relationships. Just to come back real quick to bookings. Our top 50 accounts right now, are on a run rate to have grown almost 20% year-over-year. So again, as we talked about it before, we're really focused on a land and expand strategy, so that validates, and speaks to the power of that. Obviously, we've got programs around next the 50 to 100 as well to accelerate growth there. But I think we see good things coming and as I said before, the backlog that we built up to these strong bookings, should have us really well positioned finishing out the year and going into '18.

Your next question comes from Frank Atkins with SunTrust.

Wanted to ask, what was the organic growth rate for the quarter?

Minus 7%.

It was down about 7%. And again, as our guidance for Q3 has us about flat. So good sequential growth and then beginning to pick up some year-over-year growth.

Okay. Great. And then can you talk a little bit more about Clarity in terms of the growth and the margin for that business? And then is that included in guidance?

It is included and you know, we -- it's early to predict the growth outlook there, that's -- it has good momentum, it has good momentum since we began diligence, we see that continuing factor fantastic synergies really between some of the skills that they bring to the table around custom development and a few other areas in terms of devices IoT, that I mentioned earlier that we're able to plug right into our channels. So we should see, consider using cross-selling there, likewise, I think we got some folks already working on a couple of their projects, so good movement there. In terms of their margins, they're line with Perficient's, probably a little above our average.

Okay. Great. And last one for me. Can you talk a little bit about average bill rate, what's the impact of Clarity there? What do you see in terms of the pricing environment and your ability to drive average bill rate up going forward?

Yes, Clarity's bill rate is above our average, so that'll be accretive to the bill rates but we've also driven ABR up organically about 1.5%, year-to-date, which is -- our goal was 2% to 3% across the year, so we're on track or moving nicely to get there. With some help in the second half, we should be able to. That's one of the things that's contributed to the margin expansion along with the improved utilization at 80%.

(Operator Instructions) Your next question comes from Joan Tong with Sidoti & Company.

I just have a couple of questions here. And Jeff, can you mention -- can you talk about like the general operating environment out there? You said that it improved a little bit but really the booking, the increase is because of your sales execution. I'm more interested on the health care front, given a lot of headlines regarding ACA, a lot of uncertainties, any color would be helpful.

Yes, absolutely. There's always uncertainty in health care and obviously the geopolitical environment or the political environment, but we're seeing good strength. We had a fantastic bookings in the quarter -- in the second quarter in health care, I mean, up substantially year-over-year and on a relative basis, so our revenues are about 27% in Q2 around health sciences, the bookings in health sciences is made up like 40%, 50% of our bookings in the quarter. So we're seeing great demand there and I'm telling -- I will tell you that I think the reason for that is what I said before about digital transformation, I think we're uniquely positioned, we've been in health care for several years now, so we got the demand expertise around the industry, but what health care companies both providers and payers are doing now is addressing the shift in consumerism in health care. So we are able to combine our digital capabilities, our agency capabilities, our user-centered design capabilities with that integration and technology capability and provide some -- exactly what these guys need from under one roof. So they haven't to farm it out to multiple shops. I think that's really resonating and we're really building a significant brand in health care as well. So I would say that we stand away from sort of the back office, we never implemented EMR, we've done a lot of analytics and patient analytics using EMR data, but we were never an EMR implementer, and I think that's what these guys will see or competitors are seeing softness in is around the back office and I frankly think that they don't have the skills that we do to address the consumer or patient phasing solutions that these guys are seeking right now to stay competitive.

And then regarding like the focus of winning larger and longer work and you said you're developing a backlog. I'm just wondering how material it is? I can only imagine is it pretty like small in terms of the mix and in any given quarter between revenue coming from backlog versus term business and maybe you can talk about the pipeline of larger deals and how you see going forward that makes like term versus the backlog maybe over like a longer -- medium or over longer-term period of time?

Sure. In fact, that's absolutely true. The duration of our engagements, infinitive to the top 50 accounts and I should say contracts, I mean the engagements must be clear in these top 50 accounts. These relationships are 6 years old on average. Many of them have been around longer than that and obviously some fall off rarely and yet we continue to grow, it was 10% even 20% year-to-date right now in that space. So it's a very good thing obviously, the more we can have in backlog, the less we have to worry about replacing. So it gives us a nice stable platform to operate from. Right now the snapshot of backlog in -- from bookings in the second quarter, going into 2018 is actually up about 30% year-over-year, and keep in mind, this is a project-based business and so that's a fairly low bases or fairly small bases but I do think that's a meaningful indicator.

And I'm showing no further questions at this time. I'd like to turn the call back over to Mr. Jeff Davis for closing remarks.

All right. Well, thank you all for joining us today and very excited about the outlook and looking very much forward to demonstrating strong Q3 in our call in 90 days. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you all may disconnect. Everyone, have a wonderful day.