Perficient Inc (PRFT) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Q4 2017 Perficient Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host, Chairman and CEO, Jeff Davis. You may begin.

Thank you. This is Jeff Davis. Thank you for your time this morning. With me on the phone is Paul Martin, our CFO. As typical, we've got about 10 to 15 minutes of prepared comments, after which we'll open up the call for questions.

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 discussion.

At times during this call, we will refer to adjusted EPS. Our earnings press release, including a reconciliation of certain non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with generally accepted accounting principles or GAAP, is posted on our website at www.perficient.com. We have also posted a slide deck, which includes a reconciliation of certain non-GAAP goals to their most directly comparable financial measures prepared in accordance with GAAP on our website under Investor Relations.

Jeff?

Thanks, Paul. Once again, good morning. Thanks, everybody, for joining. We're excited to be with you to hear our fourth quarter and full year 2017 results as well as our confident outlook on 2018. As we mentioned in our news release this morning, fourth quarter results were strong, and as the new year gets underway, Perficient's business is firing on all cylinders. Performance across all key indicators is accelerating. And as you can see in our full year outlook, we believe Perficient is poised for double-digit services growth -- services revenue growth and earnings growth in 2018.

Our optimism stems from many things, but most important variable is that we continue to gain share by building broader and deeper relationships and winning larger and longer-term enterprise work. In 2017, revenue from our top 50 accounts averaged $5 million apiece. That number was $3.9 million just 3 years ago and stood at $2.9 million 6 years ago. So that's clear evidence that are (sic) [that we are] landing and expanding and increasing our influence and impact with our most important customers. The breadth and depth of our portfolio is resonating strongly in the market, and we're uniquely positioned as the firm big and strong enough to deliver the same work the majors do but more efficiently, at higher quality and with quicker time to value. Some of these firms we are routinely beating are 50 to 100x our size from a revenue and market cap perspective. So our runway for growth is not months or quarters but years and decades ahead.

Bookings in the second half of 2017 were very strong, and year-to-date 2018 have been solid as well. I attribute a meaningful portion of that to the investments we've made in our sales organization in recent years. We've discussed this pretty extensively over the last couple of years, that we've designed and implemented a prescriptive model, which drives focus on key customers while substantially increasing sales capacity with more feet on the street.

All of this is driving momentum right now, and we'll benefit not only in terms of growing pipeline but also remain focused on expanding margins by gradually growing average bill rates and closely managing utilization. And Paul will touch later on how the 2017 Tax Cuts and Jobs Act has and will continue to positively impact Perficient, but we expect a favorable benefit disproportionate to the benefit it may have for most of our competitors.

There's really quite a bit of wind in our sails right now. I can't understate that. The economy is strong, consumer confidence is high, and all of that translates into enterprises demonstrating greater propensity to invest in growing their businesses and driving digital transformation. Amidst that environment, our brand continues to strengthen and grow, and more customers are realizing, as I mentioned before, that Perficient can be their primary partner in those journeys.

With that, I'm going to turn the call back over to Paul to cover the financial results before I touch on a few additional items of note and our business outlook. Paul?

Thanks, Jeff. Total revenues for the fourth quarter 2017 were $133.5 million, a 12% increase compared to the year-ago quarter. Services revenues were $114.4 million for the fourth quarter of 2017, excluding reimbursable expenses, an increase of 17% compared to the comparable prior year period.

Services gross margin for the 3 months ended December 31, 2017, excluding stock compensation, reimbursable expenses and the tax-related bonus, increased to 38.6% from 36.6% in the comparable prior year period.

SG&A expenses, excluding stock comp and tax-related bonus, increased to $25.1 million in the fourth quarter of 2017 from $22.2 million in the comparable prior year quarter. SG&A expense, excluding stock comp and tax-related bonus, as a percentage of services revenues decreased to 21.9% from 22.7% in the fourth quarter of 2016.

EBITDAS, excluding tax-related bonus, for the fourth quarter 2017 was $20.7 million or 15.5% of revenues compared to $15.4 million or 12.9% of revenues in the fourth quarter of 2016. The fourth quarter included amortization expense of $3.9 million compared to $3.4 million in 2016. An adjustment of $4 million was recorded during the 3 months ended December 31, 2017, which represents the impact of the fair value adjustment to the Clarity revenue and earnings-based contingent consideration liability to reflect Clarity's performance in excess of original estimates.

Our effective tax rate for the fourth quarter 2017 was minus 44.2% compared to 40.5% in the fourth quarter of 2016. The lower effective rate for the 3 months ended December 31, 2017, was primarily due to revaluing the company's deferred income tax liability to reflect the lowering of the U.S. tax rate from 35% to 21% related to the Tax Cut and Job Act of 2017.

Net income increased 74% to $6.4 million for the fourth quarter 2017 from $3.7 million in the fourth quarter of 2016.

Diluted GAAP rates per share increased to $0.19 a share for the fourth quarter compared to $0.11 in the fourth quarter of 2016. Adjusted GAAP earnings per share increased to $0.37 a share for the fourth quarter of 2017 from $0.27 in the fourth quarter of 2016. Adjusted GAAP earnings per share is defined as GAAP earnings per share plus amortization expense, noncash stock compensation transaction costs and the fair value adjustment of contingent consideration and the impact of other infrequent or unusual items not related to taxes, divided by average fully diluted shares outstanding for the period.

Earning billable headcount at December 31, 2017, was 2,572, including 2,350 billable consultants and 222 subcontractors. Ending SG&A headcount was 452.

I'll now turn to the full year results. Revenue for the 12 months ended December 31, 2017, were $485.3 million, a decrease of less than 1% over the comparable period last year. Services revenue from the 12 months ended December 31, 2017, excluding reimbursable expenses, were $434.3 million, an increase of 4% over 2016.

Services gross margin for the 12 months ended December 31, 2017, excluding stock compensation, reimbursable expenses and tax-related bonuses, increased to 37.4% from 35.9%, a 150 basis point improvement.

SG&A expense, excluding stock compensation and tax-related bonus, increased to $97.1 million for the -- for 2017 from $92.4 million in the comparable prior year period. SG&A expense, excluding stock compensation and tax-related bonus, as a percentage of revenues was 22.4% for 2017 compared to 22.1% in 2016.

EBITDAS, excluding tax-related bonus, for the 12 months ended December 31, 2017, was $70.8 million or 14.6% of revenues compared to $64.2 million or 13.2% of revenues in 2016. The 12 months ended December 31, 2017, included amortization of $15 million compared to $13.4 million in 2016. The increase in amortization expense was due to the addition of intangible assets from the 2017 acquisitions. An adjustment of $3.2 million was recorded during 2017, which represents the impact of the fair value adjustments to the Clarity, RAS and Bluetube revenue and earning-based contingent consideration liability in addition to accretion of the fair value estimates for the revenue and earnings-based contingent consideration related to these acquisitions.

Our effective tax rate for the 12 months ended December 30 -- 31, 2017, was 31.5% compared to 32.9% for the 12 months ended December 31, 2016. The decrease in the effective tax rate is primarily due to revaluing the company's deferred tax -- deferred income tax liability to reflect the lowering of the U.S. tax rate. Partially offsetting this benefit was the full charge of accumulated foreign earnings imposed by the 2017 tax act.

Net income for the 12 months ended December 31, 2017, decreased to $18.6 million from $20.5 million. Diluted GAAP earnings per share was $0.55 in 2017 compared to $0.58 in 2016. Adjusted GAAP earnings per share increased to $1.23 for 2017 compared to $1.08 in 2016.

We ended the fourth quarter of 2017 with $55 million in outstanding debt, an increase of $23 million from 2016. The increase was primarily due to the acquisition of RAS and Clarity and $36.8 million of share repurchase, partially offset by operating cash flows. Our balance sheet continues to leave us extremely well positioned to execute on our strategic plans.

Our days sales outstanding on accounts receivable were 76 days at December 31, 2017, compared to 79 days at the end of 2016.

I'll now turn the call back over to Jeff. Jeff?

Thanks, Paul. So a little more on bookings. We sold 48 deals during the fourth quarter, north of $0.5 million each. They averaged $1.3 million. That compares to 32 in the third quarter averaging $1.9 million and 40 in the fourth quarter of 2017 that averaged $1.1 million. So 20% growth in large deal volume and 18% growth in large deal size versus the prior year quarter.

During the quarter, the health sciences, financial services, automotive and retail/consumer goods verticals represented 58% of our revenue: health care, 28%; financial services at 13%; automotive at 9%; and retail/consumer goods at 8%. So we reiterated on last quarter's call that we anticipated a strong second half from the health sciences vertical, and revenue there was indeed up 18% year-over-year. Q4 health sciences bookings were quite strong as well, up 28% year-over-year. We also saw strength in bookings in retail and consumer goods, up 44%; financial services, up 41%; and telecom, up 55%.

Strategically going forward, we're focused on things like increasing the leverage of our global and domestic development centers. I expect that through 2020, those will grow at an even faster pace than our overall business. We're also remaining nimble and ready to pivot through M&A as well as by building partnerships in anticipation of where we see the market headed. For example -- and there will be more news on this in the coming weeks, but we're investing significantly with Pivotal to train and certify hundreds on our team to support the future we see there. We also continue to make significant investments in many other areas, not the least of which is FFDC, where we enjoyed 20% growth in 2017.

So the entire organization is rallying, focused on a subset of key accounts where we've determined we have the most significant growth opportunity. So I've given you the stats on our top 50. We're going to begin talking more and more about what we call the growth 50. This will be, of course, somewhat of a fluid list, but our marketing, sales and delivery teams are all aligned and collaborating to drive increased business in that group of customers that we have. And as we report successful quarters and years going forward, I expect the accounts that comprise the growth 50 will be very key contributors.

Again, in closing, we're as optimistic as we've been in many years. Our colleagues are executing incredibly well against the strategies we've put in place, and existing as well as new customers are increasingly concluding that Perficient is the partner of choice when it comes to transforming their business for the future.

So turning our attention to expectations for the first quarter and full year. Perficient expects its first quarter 2018 revenue to be in the range of $115 million to $119 million. First quarter adjusted earnings per share is expected to be in the range of $0.32 to $0.35. The company is issuing its full year 2018 revenue guidance range of $470 to $500 million and its GAAP earnings per share range of $0.68 to $0.82 and a 2018 adjusted earnings per share range of $1.40 to $1.52. The midpoint of that range represents annual services growth of about 11% and earnings growth of 19%. Bear in mind that with accounting regulation changes, we no longer book the top line of software revenue, so we're focused primarily on services now. And that's what these numbers represent.

Operator?

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

Jeff, could you talk a little bit about the client budgets this year versus, say, 12 months ago, when you entered '18 versus '17? And then just in terms of size and scope of opportunities that you're seeing and specifically within the banking segment, a lot of your peers have called out banking as a vertical that's seeing higher spend levels on digital because they're benefiting from tax reform, and of course, less regulatory pressure as well has freed up IT budgets at banks. Maybe you could reference that as well.

Sure, absolutely. Thanks, Mayank. Yes, I would say what we're seeing is sort of a tide lifting all boats. But to your first question, there's definitely improved spending, I would say, pretty much across all segments compared to what we were seeing a year ago or prior. So I think there's an improved sentiment. I do think that we'll see that continue and probably accelerate as some of these -- some of the tax reform kicks in. I know for us, we're going to be making investments with that. And I'm sure -- and what we're hearing from our customers is they plan to as well. Specifically to financial services, yes, I mentioned we saw a nice improvement there in the second half of the last year, particularly a significant improvement in bookings, which is an indicator -- leading indicator of exactly what you're talking about. And we've got a particular opportunity. Most of the business that we do and serve are, I would say, maybe 50% or better is management consulting. So we've still got an opportunity to further penetrate that on the technical side. And in fact, we're making investments around our corporation to further penetrate that with things like HITRUST and other investments in our own environment. So we certainly anticipate growth there, but again, I would say, we're seeing growth fairly broad-based.

Got it. And then how would you categorize the pricing environment? I know in the past, you've talked about there being plenty of headroom for you to increase rates just based on the disparity between where you're at versus some of your peers. So maybe you could give us some perspective on your expectations on pricing increments in '18.

Yes, absolutely. So we managed to move rates up a little over 2% last year. Our goal this year would be the same thing, something in the sort of 2% to 3% range. I do think, as I stated before, as you pointed out, that the gap between us and the big guys is great enough that, that can continue for a long time. But at the same time, we want to keep a pace that won't be disruptive or create a headwind for our sales teams. So 2% to 3% is what we're driving toward this year. And again, rather than kind of rush that and run the risk of pricing ourselves out of anything, that's probably the pace that I would expect for the foreseeable future. If the market tightens, I think that's -- that pace increases. So 2% to 3% for this year, and I still think we've got another 20%, 25% to go from where we are now. And as the market changes, that obviously could increase going forward.

Great. And then one final question on margins. I think I may have missed this, but what is your expectation on margin expansion, both on the services line and also on operating or EBITDA margin? And then what are some of the puts and takes we should be considering as we build out the model for margins?

So on gross margins this year, I would say 100 bps plus. One of the reasons that's maybe a little below where we were last year is we've got a little tougher comp, but also, it's the investments that I alluded to or I mentioned around Pivotal, so maybe some investments there. We'll reach a breakeven point on that likely in the second quarter, and so we'll experience more expansion in the second half than we will in the first. But for the year, again, I would say 100 bps plus. And then likewise, EBITDA, EBITDAS, probably in the 100 to 200 range. So maybe 150 is the midpoint on that.

(Operator Instructions) Your next question comes from the line of Brian Kinstlinger from Maxim Group.

Great to see this solid organic growth. You mentioned some priorities in terms of investments you're making into growth. Are there new groups being added? Or are there hires being created to address higher growth-rate areas? Is that what's happening? Or are you investing to expand the skill set of your employee base? And then I couldn't write it down fast enough, you mentioned 1 or 2 areas of growth in terms of applications and growth areas. If you can just repeat those, I couldn't get them down.

Yes, absolutely. Brian, thanks. Pivotal is the key area. I mentioned Salesforce as well. And again, we continue to make investments there and enjoyed great growth there last year at 20%. But Pivotal, Pivotal Cloud Foundry, which is the Platform as a Service, is where we see a big opportunity. We've developed a strong relationship with them really just in the recent months, probably over the last 6 months. And yes, we intend to hire pretty substantially into that. That is not reflected, by the way, in any of our guidance as it's still early on in the process, but we're making those investments now both in terms of training and creating certified Pivotal developers and, of course, in hiring those resources. Our intent and expectation around that is that most of that revenue will be incremental and will be incremental to the guidance that we've provided now. So we wanted to be cautious, but I can tell you that things are off to a great start. And so that's one that we're certainly excited about, expect to see some upside around.

Now is the market for Pivotal such that, as you have new employees trained or new employees with those skill sets, that there's so much demand that they can be immediately placed? Or how long will that ramp take once you have that employee base or consultant base to fill requisites?

That is a great question. They'll go right out. We have a substantial pipeline around that. A lot of companies are adopting that as their primary process and platform for development. Big companies like GE, Ford, Express Scripts here in St. Louis and a number of other large companies that we've engaged with. Also, through our relationship with Pivotal, as they're experiencing a significant surge in growth, they are looking more and more to partners for delivering the services as they're focusing more on enablement. So we're -- yes, we're super excited about it. And yes, directly to your question, pretty much as soon as these guys finish training, they're going to be billable.

Great. And then looking at the offshore delivery mix, you talked about that being an inhibitor to growth on the top line but also plan of investment. But it looks like it stabilized in the last quarter, the offshore delivery mix. So maybe talk about some short-term and long-term goals of offshore delivery capabilities and percentage maybe of your mix.

Yes. I think long term, I think that mix can rise to 25% ultimately of revenue, which would be a substantial change here. And again, I think that's pretty long term, but I expect that even though it might have been more in lockstep with the overall business, I think that's partly because the overall business did pretty well in Q4. But I still think that, that business will outpace the overall business by about 5 points. So if we're growing 10%, the U.S. is growing 10%, I expect 15%. Between the DDC, which, by the way, is technically in Lafayette, Louisiana, and also our GDCs in India and China, so we're expecting that kind of growth there. By the way, Pivotal is going to be a part of that, so we're going to be gearing up for offshore delivery with Pivotal as well. And I think we'll see a lot of demand there at those attractive price points.

Great. Last question I have. A few times in the past, when you guys more recently, the more recent years, have provided a solid top line outlook, like today's solid organic growth, you've been tripped up unfortunately by a large health care customer. I think it's happened twice. So maybe some insights into that customer's demand plans for growth. Is it as large of a customer that we thought it could be? I just want to understand that customer concentration from that customer that's hit you a few times.

Yes, absolutely. And actually, I would tell you that things are very, very stable there. And by basically everything we see in all of our top 50 right now, we're seeing really good stability. The progress that they're making on their program, which is where we've kind of got caught before, it wasn't necessarily the areas where we were working, it was more dependencies, but that has been resolved, and I would say things are going very smoothly for their program overall. And our delivery is going well. Our relationship with them is very strong. And, Paul, what's the concentration of that account right now?

Yes. So the largest 4 accounts are 16% of our revenues, and I think the largest one itself is about 4% or 5%.

Yes. So it's down to 4% or 5% concentration. I would tell you, on an absolute basis, the revenue is close to our highest run rate there. So the good news is the rest of the top 50 have kind of risen around it and diluted it, which is great from a risk standpoint. But we -- it is, of course, hard to anticipate any of those kinds of issues, but we're pretty darn confident we're not going to see any of that.

Your next question comes from the line of Michael Martin from Michael J. Martin.

Just one question. What kind of income tax rate are you assuming for this year?

Yes. So for 2018, we're expecting the GAAP rate to be around 27% to 28%, and the adjusted rate will be a few points below that.

Your next question comes from the line of Mayank Tandon from Needham & Company.

All my questions have been answered. Thank you.

(Operator Instructions) I'm showing no further questions at this time. I turn the call back over to Jeff Davis.

All right. Well, thank you all. As you can see, a great end or finish to 2017. I think we've got a wonderful outlook and really actually anticipating some upside potential for the year here going forward and beyond. Thank you.

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