Perficient Inc (PRFT) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Q3 2017 Perficient Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Jeff Davis, Chairman and CEO.

Thank you, and good morning, everyone. Thank you for joining us this morning. This is Jeff Davis. With me on the call is Paul Martin, our CFO. Again, I want to thank you for your time. And as typical, we've got a few minutes of prepared comments, after which we'll open the call up for questions.

But before we proceed, Paul, will 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 discussion. The 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 the GAAP on our website under Investor Relations.

Jeff?

Thank you, Paul. Well, again, thank you for joining. We're pleased to be with you to share our third quarter results. We've talked all year about our intent and ability to drive margins higher, and during the third quarter, we continue to do just that.

Services margins rose 180 basis points in the quarter over the prior year quarter. We've also talked several times about the opportunity we have to continue to gradually market bill rates higher. There's a rate gap that exists between Perficient and several of our largest competitors and as we continue to compete against them and beat them, we'll be able to incrementally increase our ABR. North American bill rates hit $148 during the quarter, and there's room to build upon that in the quarters and years ahead. Net opportunity to drive rates higher exists offshore as well, where we realized even larger, sequential, year-over-year ABR growth.

Our realized bill rates for both our China and India GDC were up double digits from Q3 2016. The third quarter bookings were solid, up 26% year-over-year. Our pipeline is solid, and anecdotal feedback and tone from our sales leaders remains very positive in terms of both the quantity and quality of the pursuits were involved. Some of that, of course, is due to the macro improvements in the economy. Heading into 2018, we're optimistic that positive consumer confidence, coupled with the possibility of corporate tax reform, will embolden enterprises to invest even further in driving digital transformation and moving deeper into high-growth and high-opportunity areas like machine learning, IoT and cloud. We're also benefiting from our focused efforts in recent quarters to move up market, pursuing and winning longer-term deals within the Fortune 1000 space. As we've grown our brand, demonstrated our differentiation and proven our value, large enterprises are increasingly willing to give us larger- and longer-duration work.

One of the trends I'm particularly excited about is the success we've had in recent months with our software factory offers. We now have agreements in place with a few very large entities, where our teams are on-site, not specific to one project, but rather embedded within the client's overall development framework, and where our work stands in multiple projects. Our core team is considering extension of the customer's overall development efforts, and this approach creates consistency as well as increased quality and productivity across multiple initiatives for our clients. Of course, this also delivers stable and recurring revenue to Perficient, strictness in client relationship and positions us well for account expansion.

And finally, before I turn the call back over to Paul for the financial results, it's worth mentioning that for the first time in Perficient's history, we ended the quarter with more than 3,000 colleagues. As someone who's been with the company since it was around 100 people, I take great deal of pride in what's been built here, and look forward to the day we move through the 4,000 colleague mark, on our way to the 5,000 and beyond.

So I'll hand the call back over to Paul now for the detailed financial results. Paul?

Thank you, Jeff. Total revenues for the third quarter of 2017 were $123.7 million, a 4% increase compared to the year-ago quarter. Services revenues were $114.1 million for the third quarter of 2017, excluding reimbursable expenses, an increase of 11% compared to the comparable prior year period. Services gross margin for the 3 months ended September 30, 2017, excluding stock compensation and reimbursable expenses, increased 180 basis points to 37.4%. SG&A expense, excluding stock compensation, increased to $24.7 million in the third quarter of 2017 from $22.5 million in the comparable prior year quarter. SG&A expense, excluding stock compensation as a percentage of revenue, increased to 20% from 18.29% in the third quarter of 2016. EBITDAS for the third quarter of 2017 was $19.2 million or 15.5% of revenues compared to $15.1 million or 12.7% of revenues for the third quarter of 2016.

The third quarter included $3.9 million compared to $3.3 million in amortization expense. An adjustment of $0.4 million was recorded during the 3 months ended September 30, 2017, which represents a net impact of the fair value -- fair market value adjustment to the RAS contingent consideration liability and the accretion of the fair value estimate for the contingent consideration related to the acquisition of Bluetube and Clarity.

Our effective tax rate for the third quarter of 2017 was 33.3% compared to 26.9% from the third quarter of 2016. Lower effective tax rate for the 3 months ended September 30, 2016, was primarily due to some additional research in development tax credit related to the 2016 tax year. Net income increased 27% to $7 million for the third quarter of 2017 from $5.5 million in the third quarter of 2016. Diluted GAAP earnings per share increased to $0.21 a share for the third quarter of 2017 from $0.16 a share in the third quarter of 2016. Adjusted GAAP earnings per share increased to $0.34 a share for the third quarter of 2017 from $0.26 in the third quarter of 2016. Adjusted GAAP EPS is defined as GAAP earnings per share plus amortization expense, noncash stock compensation, transaction cost and the fair value adjustment of the contingent consideration and the impact of other infrequent or unusual transactions, net of related taxes divided by average fully diluted shares outstanding for the period. Our earning billable headcount was 2,553, including 2,300 for our billable consultants and 241 subcontractors, and the SG&A headcount was 460.

I'll now turn to the 9-month results. Revenue for the 9 months ended September 30, 2017, was $351.8 million, a decrease of 4% over the comparable prior year period. Services revenue for the 9 months ended September 30, 2017, excluding reimbursable expenses, was $319.8 million, essentially flat over 2016. Services gross margin for the 9 months ended September 30, 2017, excluding stock compensation and reimbursable expenses, increased to 37% from 35.7% in the prior year period. SG&A expense, excluding stock compensation, decreased to $72 million for the 9 months ended September 30, 2017, from $70.1 million in the comparable prior year period. SG&A expense, excluding stock compensation as a percentage of revenue, was 20.5% for the 9 months ended September 30, 2017, compared to 19.1% in the comparable prior year period. EBITDAS for the 9 months ended September 30, 2017, was $50.1 million or 14.3% of revenues compared to $48.8 million or 13.3% of revenues in the comparable prior year period.

The 9 months ended September 2017, included amortization of $11.1 million compared to $9.9 million in the comparable prior year period. The increase in amortization is due to the additional intangible assets from the 2016 and 2017 acquisitions. An adjustment $0.8 million was recorded during the 9 months ended September 30, 2017, which represents a net effect to the fair value adjustment to the RAS and Bluetube contingent consideration liability in addition to the accretion of the fair value estimate from the contingent consideration related to Bluetube and Clarity.

Our effective tax rate for the 9 months ended September 30, 2017, was 46.4% compared to 31% for the 9 months ended September 30, 2016. The increase in the effective rate was primarily due to the poor earnings of the company's Chinese subsidiary that no -- that are no longer part of the reinvestment. Net income for the 9 months ended September 30, 2017, decreased to $12.1 million from $16.8 million for the 9 months ended September 30, 2016. Diluted GAAP earnings per share decreased to $0.36 from $0.48 for the 9 months ended September 30, 2016. Adjusted GAAP earnings per share increased to $0.86 a share for the 9 months ended September 30, 2017, from $0.82 in the comparable prior year period.

We ended the third quarter of 2017 with $65 million in outstanding debt, an increase of $33 million from year-end. The increase was primarily due to the acquisition of RAS and Clarity during 2017. Our balance sheet continues to leave us well positioned to execute on our strategic plan. Finally, our day sales outstanding on accounts receivable was 79 at September 30, 2017, compared to 81 at that same point last year and 79 at year-end.

I'll now turn the call back over to Jeff for a little more color, Jeff?

Thanks, Paul. We sold 32 deals in the rough of $500,000 each during the first quarter, and they averaged actually $1.9 million. That compares to 46 in the second quarter at $1.48 million each and 25 in the third quarter of 2016, that average $1.4 million each. So on a -- again on a year-over-year basis, 32 deals averaging $1.9 million compared to 25 averaging $1.4 million last year. As obviously, solid growth and large deal size, as I've mentioned earlier, and volume versus last year.

During the quarter, the health sciences, financial services, automotive and retail consumer goods verticals represented 62% of revenue. Health care at 28%, financial services 16%, automotive 9% and retail consumer goods at 9%. And we mentioned on last quarter's call that we anticipated a strong second half from the health sciences vertical, and during the quarter, we realized a 20% increase in revenue there. I expect we'll see similar results during the fourth quarter. Another vertical worth mentioning is automotive. It's an industry where we always have solid foundation of customers, but where we are really building some momentum right now. Several of the major manufacturers are already clients, and we have significant pipeline in the industry as well. And that success and opportunity extends beyond just the manufacturers though, and into the supply chain as well as financial services arms of these large enterprises. I expect we'll see solid growth in the automotive vertical in 2018.

So turning attention now to our expected results for the fourth quarter and full year. Perficient expects its fourth quarter 2017 services and software revenue, including reimbursed expenses, to be in the range of $126 million to $140 million comprised of $113 million to $119 million of revenue from services, excluding reimbursed -- including reimbursed expenses, and $13 million to $21 million of revenue from sales of software. Fourth quarter adjusted earnings per share is expected to be in the range of $0.32 to $0.38. Perficient is adjusting and narrowing its previously provided full year 2017 revenue guidance to a range of $477.8 million to $491.8 million, and adjusting and narrowing its full year 2017 adjusted earnings per share guidance to a range of $1.18 to $1.24.

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

(Operator Instructions) Your first question comes from the line of Mayank Tandon from Needham & Co.

Jeff and Paul, a few questions here. Wanted to just get a sense on guidance. If I look at the numbers for the 3Q, they were pretty good, except for the maybe decline in the software, hardware revenue. But services revenue was positive and you had good margins. But the guidance for 4Q and for the full year is narrowed lower. Could you maybe just comment on what your thought process is around the guidance?

Yes, I think we're seeing just a little more seasonality than we would normally see in the fourth quarter, which actually is, kind of, normal based on the past history. That said, I think sequentially, we're down maybe -- we're guided down maybe 1 or 2 points sequentially. And overall, for the year, it's only about 1 point down on services. Most of the adjustment is in software and reimbursed expenses. And as we continue to do more work in our DDCs for both internationally and in Lafayette, which we're experiencing less travel requirements, which is actually a positive all the way around, but it obviously is taking down reimbursed expenses. And likewise, the industry -- software industry shifts more to a SaaS model and cloud and away from on-prem, we're seeing that impact software as well. So it's a modest adjustment in services, and most of the adjustment is software reimbursed expenses.

Got it. But underlying business remained strong. You said bookings were pretty good. Health care is strong, broad-based growth, so nothing really fundamental that's going on in services that would be impacting your guidance just outside of seasonality.

Yes, that's exactly right. I think the guidance represents like 1% to 7% organic growth this quarter year-over-year in services.

Got it. And what was the organic growth in the third quarter in services?

Down about -- yes, it was down about 2%.

Got it, okay. And then in terms of bill rates, you mentioned that you saw a nice increase in the quarter. Obviously, that helped revenue and margins. What is your expectation in terms of bill rate increases in the fourth quarter, but more importantly, as you go into '18?

We're going to try and talk about this for a while. I'm going to stick with the same guidance, about 2% to 3% per year. So we'd expect Q4 of 2018 to be about 2% to 3% above Q4 of '17, if that make sense. So it's 2% to 3% across the year.

Okay. And then one last question for me. In terms of looking ahead into '18 on overall revenue, especially in health care -- obviously, we've seen a nice uptick for your business. Is it company-specific or are you seeing just -- there hasn't been much clarity in Washington around health care. So I'm just wondering if you do get any kind of clarity, will that actually be a potential tailwind. If you could just provide a somewhat thought process around what's going in health care, both for your company and of course, just generally for the IT services market? That would be helpful.

Yes, absolutely. I've said this for a while and I believe it continues to be true, I think we're seeing evidence of it that the way that we are positioned in health care, in a large way, around digital transformation for the most part, I think is largely unaffected by Washington. The impact of Washington, where there's some uncertainty introduced, does create some [bits] and starts along the way as we've seen. But the primary thesis and the work that we're doing in this space doesn't go away. And as we've demonstrated time and again, even if it -- even if there's a little bit of a valley, it always comes back. And the reason for that is, the work that we're doing is all around the paradigm shift in the industry to more consumerism, patient as a consumer, better outcomes for treatment as well as service. So I think that continues. That's the work that we do. And I honestly think it's, sort of, independent of anything that Washington is doing. The industry has become more competitive. It's become more consumer-oriented, and that drives most of the business that we're doing in this phase. And like I said, I don't see that ending any time soon.

Your next question comes from the line of Frank Atkins with SunTrust.

I wanted to ask a little bit about the people side of the business. Some nice growth in headcount. Can you remind us of your philosophy in terms of headcount addition relative to the pipeline or work you're getting? Do you, kind of, hire ahead of or concurrent with that? And then secondly, what are you doing to attract and keep good talent in this environment that's getting more and more tight?

Frank, good questions. So we rarely hire ahead. We do sometimes when it's a very special skill that's in demand and has limited supply. For the most part, we keep candidates warm in the candidate pipeline, and as the work closes, we bring them on. That's what allows us to keep our utilization in the high-70s and at long-stated goal of 80%, 81%, and we achieved that this quarter. And so that's our philosophy in terms of that question is. Keeping our pipeline warm, bringing them on as the work's available and get them billable right away, with a little bit hiring ahead, again, in the specialty areas. In terms of how we recruit. I think our culture is very helpful, actually. If you compare us to our primary competitors like Accenture, Deloitte and people like that, it's a very different business here. I can tell you that it's far less parochial, far more entrepreneurial and a meritocracy. So we try to give people an opportunity in a platform to show what they can do and reward them for that performance. And I think that helps us in recruiting and retention. Despite the uptick in demand, we're able to keep up with them.

Okay, great, that's helpful. And then a nice tick up in deal size, going to $1.9 million. Anything behind that? And what does that do for the company going forward in terms of margins and visibility of revenue?

Yes. It's a -- yes, I would say there is something behind it. I think it's beginning to realize some fruition on the sales investments that we've made over the last couple of years. We've -- I won't drive into a lot of detail, but we've taken a much more strategic approach and direction to sales. We have more resources focused on specific accounts, particularly those accounts that we believe will yield better results, of course, in terms of growth. And I think we're seeing that this is the culmination of that or beginning to see the culmination or fruition of that. The other thing absolutely has to do with -- as we grow larger and our brand grows, we are invited to participate in not only more deals, but also larger, more complex engagements. That's why, by the way, that while our bookings are up 26% year-over-year, we're not going to see revenue at that level -- that level of growth. But that's due the fact that these are longer-duration engagements. So a lot of that extra $0.5 million on the average, if you will, on those deals that I referred to earlier, is an extension in the future. But to your questions and your point, that obviously does gives a -- give us better visibility. We have a higher backlog going into 2018 than we ever had before, both in absolute dollars and as a percent of what we expect to do in revenue next year, which obviously helps us put a foundation in place that we can build on and drive better growth.

Okay, great. And my last question is on the financial services vertical. Any changes there? We've heard from some of your peers that there's strength in insurance and some of the regional banks, while the larger banks are struggling a little bit more. Any trends or areas of strength or weakness you could call out in financial services?

I would call it stable. I don't think it's going to be a fast-growing vertical for us any time in the next quarter or 2. But it certainly has returned to stability where we actually saw some weakness in the past, which is encouraging. I do think that it will grow. And the opportunity that we have, that we haven't fully exhausted, is actually introducing a lot more digital transformation and technical work into that industry than we're doing today. A lot of what we're doing is management consulting, which is excellent work. It's high margin and places us in the right -- we're in the right part of the organization. But we need to leverage that more than we have to drive more of our digital work. And we're -- we've got programs underway to get that done. So I am optimistic we'll be able to grow in that industry as long as it stays stable by introducing more the portfolio into some of the accounts that we've had for a while.

Your next question comes from the line of Joan Tong with Sidoti.

A couple of questions here. And -- so you said the organic growth -- organic decline was 2% in the third quarter, and you're looking for 1% to 7% organic growth year-over-year for the fourth quarter. Are you talking about revenue? Are those revenue numbers or volume number?

It's net services. Net services revenue.

Yes, net. So it's net services revenue. So your average bill rate go -- went up. So I assume volume would be, obviously, lower than those numbers that you just provided, right?

Little bit. Now keep in mind though that there is this continued mix shift to offshore. So it's not as much as of a gap as you might, sort of, calculated. So we are throwing in volume offshore faster than we are inshore.

Got it, got it. Make sense. Make sense. And then Jeff you mentioned bookings went up 26% year-over-year. Did I get that number right?

That's correct.

And how about health care? Usually, you talk about health care like bookings as well.

We'll look that up. I don't have it at my fingertips.

Health care was fairly strongly in the quarter from a bookings perspective. It looks like it was up about 13% year-over-year.

Okay? 13% year-over-year.

Okay. Good. And then -- so Jeff, any sort of help in terms of 2018 early read -- your margin, obviously, expanded very nicely in 2017. Contributed, I would say, mostly by the migration to offshore as well as the capacity cut and also the bill rate increase. So next year, what's your thinking in terms of all these different element? Which one you think or 1 or 2 of them will contribute more to margin expansion next year?

Well, I think we've got utilization running pretty close to sustainable math. I mean, we can probably get another point out of it. But to your question, I think the opportunity is greater in ABR and offshore. And it will still be a combination of the 3. I'm not sure we'll be able to put up quite the expansion we did this year, given that we had a fairly soft comp. Although I would expect margins to expand, at least, modestly. We haven't done the modeling yet in detail, but you know 100 basis points or so, which actually puts us, kind of, best-in-class except for the offshore guys.

Sure. Sure. And then how should we think about volume going forward? You talk about sales improvement, more resources, bigger deal. Should we see volume to pick up a little bit next year as well?

Yes, absolutely. I think with the bookings that we have, the 5 points that we have, the client base that we have, I think we've got a good shot at sustained growth. And I've said this before, 5% plus, maybe 5% to 10% range in 2018, which is kind of where we're going to be in the -- I'll say 1% to 7% for Q4. And I think that bumps up going into 2018, and I think we can sustain that. So with that, we'll definitely drive some additional volume, certainly offshore, expect that to come (inaudible). And -- but onshore as well, we expect to grow the volume.

Okay, got it. And then finally, you mentioned AI, IoT, and do you think that you have that capability? Do you feel comfortable when you look at the current capabilities, or going forward and maybe some of the acquisitions will focus in those 2 areas, IoT and AI as well?

Well, we actually have a quite a bit of capability today, I think I've mentioned this before, but we're a key Watson partner with IBM today. And we're doing a lot with Watson, and -- including some various things in health care around oncology and things like that, leveraging the Watson engine. So we certainly have that capability. I think we've got 35 people or so dedicated to the Watson practice already from zero 1.5 year ago. And then yes, IoT, absolutely, we've done a fair number of things over the years. And recently, kiosks, things like that. But with the acquisition of Clarity, they brought expanded capability in that space as well. And so they've done things such as with a large consumer product company, everybody would know the name if I was going to mention it. But using IoT for inventory management in the grocery stores or in the storage space and monitory shelf inventory, things like that. So that work is already underway.

Joan, one other thing I want to add is (inaudible) 13% was revenues from the quarter. And the bookings were relatively flat through a very strong second quarter in ultra bookings.

And your next question comes from the line of Brian Kinstlinger with Maxim Group.

Paul, first, a quick numbers question. If I assume, and tell me if it is reasonable, $10.5 million in services revenue for Bluetube, RAS and Clarity, those are the 3 acquisitions that don't have a year-over-year comparison, is that in the ballpark?

Yes, that's probably -- maybe a little bit light, but it's pretty close.

Okay. That make sense. Then, I mean I -- otherwise it was about 1% services growth. But I guess, my question is, in the past, despite solid bookings, especially in the back half of the year, it hasn't been -- it's been a challenge to grow volume 5% or so. So to continue to move to offshore and despite these solid bookings, what gives you the confidence that this year you'd be able to post organic revenue growth above bill rate growth?

Well, if we replay the bookings numbers, I mean, they're up pretty substantially. Now as I said before, there's a chunk of that from acquisition, there's a chunk of that, that actually goes into longer-term duration deals. The good news on that is that's work that we don't have to replace. So I think the momentum will build. But I'll tell you, Brian, it really comes back to the work that we've in sales. We, kind of, turn sales, both the organization structure and to some degree, the compensation structure. (inaudible) is a little strong, but we've done a lot of work there. And reorganization, specifically, with growth in mind, that was our whole motive in doing that. And as I've said before, I think we're starting to see some fruition. And you are right. Bookings have been up in the past, where the growth is a product of -- to the degree of the bookings. And as I've said before, it's probably going to be the case again, or I'm sure it will be, but bookings were up 26% quarter-over-quarter. And the tightest is correlation, there's never one-to-one, the tightest correlations about 5 months -- trailing 5 months. So the bookings in Q2 and a little bit in Q3 is going to get us the 1% to 7% growth in Q4. And the bookings that we just had in Q3, up 26% year-over-year. And then we anticipate we'll have again in Q4. We had a very strong October already. So we expect again that, that 1% to 7% can grow into 5% to 10%. And I expect that we'll begin to see that in the first quarter or at least the first half of next year. And again, with the new model in place, I think that's a sustainable range.

Great. Last question I have. As you look at the landscape of IP services guys, a bunch, especially the Indian guys, have the low value-add maintenance, but it creates a long tale of annuity recurring revenue. I don't think Perficient does it as much as Clarity. I am curious what management has thought or evaluated in terms of somehow trying to increase recurring revenue. I realize a lot of your revenue comes from repeat customers, but they are not annuity string, they're replacing old projects. So is there a way that Perficient can, in the future, change or improve the strategy to increase the content of recurring revenue?

Sure. It's a good question except we don't talk a lot about, but we've been doing that already. I talked about that software-factory approach that I mentioned in the prepared comments. That is exactly that. Those tend to be 2- or 3-year commitments from a lot of our clients. We're running about -- out of our, let's call it, $40 million a month. We're running about 20% of that. We call a fix-monthly basis. Now some of those deals renew annually, but some of those are 2- or 3-year long deals. But I would say that, that sort of $8 million is a very solid base of recurring revenue. I expect that to increase.

And I am showing no further questions at this time. I would now like to turn the conference back to Jeff Davis for closing remarks.

All right. Well, thank you, all, again, for your time today. We look forward to speaking again in the late February, early March, talking about the year and what we see for 2018. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may now disconnect.