Perficient Inc (PRFT) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Q2 2018 Perficient Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, and thanks, everyone, for joining. This is Jeff. With me on the call today is Paul Martin, our CFO. I want to thank you for your time.

As always, we have about 10 to 15 minutes of prepared comments, after which we will open up the call for questions.

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.

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 the most directly comparable financial measures prepared in accordance with GAAP on our website under Investor Relations. Jeff?

Thanks, Paul. Once again, good morning and thanks for joining us as we discuss our second quarter earnings results and outlook for the remainder of the year.

As we mentioned in our news release this morning, we're pleased to report our third consecutive quarter of double-digit services growth and to deliver adjusted earnings above consensus and near the top of our own previously guided range. We anticipated a slightly higher top line result with some early ramp downs and delayed project starts that we believe are temporary, precluded us from achieving those initial goals. That being said, despite the challenges, we did manage to drive the business to more than doubling of net income and GAAP earnings over the prior year quarter.

North American ABR was up modestly, and we continue to believe we have a material opportunity to drive those rates higher over time and close the rate GAAP that exist between us and our largest competitors. Internally, we'll bring significant focus to this metric with our salaries and operational management teams, and I expect in coming quarters we'll see ongoing improvements, which obviously will help drive margins higher.

We talked a little bit on the last call about the acquisition of Southport Services Group. In the quarter -- early in the quarter, sorry, the acquisition early in the quarter and integration there is well under way. But I want to talk about something that just a couple of weeks ago was just the acquisition of Stone Temple Consulting, a highly regarded and award-winning digital consultancy out of Boston, focused on search engine optimization and content marketing services. That group has joined our Perficient Digital team and will play an important role as we continue to deliver the end-to-end customer experience solutions that our client and clients to be are looking for.

More and more, the market is realizing we have the strength and scale to deliver the same work that majors do, but at higher quality, more efficiently and with quicker time and value. We are as good as, and most times better, than the biggest names, and our approach is not only more thoughtful and collaborative but more comprehensive. That growing awareness is leading to a consistently strong pipeline translating more regularly into wins, which builds our backlog and an incrementally strengthening foundation will continue to build on.

Speaking of backlog, by the way, I'm excited to share that just last week, Perficient closed its single largest deal ever. It's a multiyear commitment from a major health org -- a health care organization that's well into 8 figures annually. Now those types of deals that we're able to compete for and win now that we couldn't have just a few years ago. That win plus several other multi-million-dollar deals during July had Q3 off to a great booking start.

With that, I'll turn the call back over to Paul to cover the financial results, before I touch on a few additional items of note in our outlook for the third quarter and updated guidance for the year. Paul?

Thanks, Jeff. Services revenues were $120.9 million for the second quarter of 2018, a 12% increase over the comparable prior year period. Services gross margin for the 3 months ended June 30, 2018, excluding stock compensation and reimbursable expenses decreased to 36.4% from 34 -- I'm sorry, from 37.4% in the prior quarter.

SG&A expenses, excluding stock compensation, increased to $25.3 million in the second quarter of 2018 from $23.9 million in the comparable prior year period. SG&A expenses, excluding stock compensation as a percentage of revenues, increased to 20.8% from 20.4% in the second quarter of 2017, primarily due to the change in the recognition of software and hardware revenues on a net versus gross basis.

EBITDAS for the second quarter of 2018, was $18.4 million or 15.1% of revenues compared to $16.9 million or 14.4% of revenues for the second quarter of 2018. The second quarter included amortization expense of $4.1 million compared to $3.5 million in the comparable prior year quarter. Our effective tax rate for the second quarter of 2018 was 26.2% compared to 68.4% for the second quarter of 2017.

The lower effective tax rate from the 3 months ended June 30, 2018, was primarily due to the U.S. tax -- the lowering of the U.S. tax rate from 35% to 21% related to the Tax Cuts and Jobs Act of 2017 as well as the onetime impact related to the company's determination with the foreign earnings of the company's Chinese subsidiary were no longer permanently reinvested in 2017.

Net income increased 143% to $5.8 million for the second quarter of 2018 from $2.4 million in the second quarter of 2017. Diluted GAAP earnings per share increased to $0.17 a share for the second quarter of 2018 from $0.07 in the second quarter of 2017. Adjusted earnings per share increased to $0.38 a share for the second quarter of 2018 from $0.29 in the second quarter of 2017.

See the press release for a full reconciliation to GAAP earnings. Adjusted EPS is defined as GAAP earnings per share plus amortization expense, noncash stock compensations, transaction cost and the fair value adjustments of consideration and the impact of other infrequent or unusual transactions not related to taxes, divided by average fully diluted shares outstanding for the period.

Now, I'll turn to the 6 months results. Services revenues were $241.1 million for the 6 months ended June 30, 2018, an increase of 14% over the comparable prior year period. Services gross margin for the 6 months ended June 30, 2018, excluding stock compensation and reimbursable expenses, decreased to 36.3% to 36.8% in the comparable prior year period.

SG&A expenses excluding stock compensation increased to $51.7 million for the 6 months ended June 30, 2018, from $47.2 million in the comparable prior year period. SG&A expenses excluding stock compensation as a percentage of revenues increased to 21.3% from 20.7% in the 6 months ended June 30, 2017, again, primarily due to the change in the recognition of software/hardware on a net versus gross basis.

EBITDAS for the 6 months ended June 30, 2018, was $35.3 million or 14.5% of revenues compared to $31 million or 13.6% of revenues for the 6 months ended June 30, 2017. 6 months ended June 30, 2018, included $8 million of amortization compared to $7.2 million in the comparable prior year period.

Our effective tax rate for the 6 months ended June 30, 2018, was 24.9% compared to 57.9% in the 6 months ended June 30, 2017. The lower effective tax rate for the 6 months ended June 30, 2018, was primarily due to the lowering of the U.S. tax rate from 35% to 21% as well as the determination -- the company determination of the foreign earnings of the company's Chinese subsidiary were no longer permanently reinvested in 2017.

Net income increased 111% to $10.8 million for the 6 months ended June 30, 2018, from $5.1 million in the 6 months ended June 30, 2017. Diluted GAAP earnings per share increased to $0.32 a share for the 6 months ended June 30, 2018, from $0.15 a share for the 6 months ended June 30, 2017. Adjusted earnings per share increased to $0.72 for the 6 months ended June 30, 2018, from $0.52 in the comparable prior year period.

Our earning billable headcount at June 30, 2018, was 2,671, including 2,436 billable consultants and 235 subcontractors. Ending SG&A headcount for June 30, 2018, was 443.

We ended the second quarter of 2018 with 66 -- I'm sorry, $56 million in outstanding debt and $10.4 million in cash and cash equivalents. Our balance sheet continues to leave us very well positioned to execute on our strategic plan. Our days sales outstanding on accounts receivable were 75 days at the end of the second quarter compared to 76 days at the end of the fourth quarter of 2017.

I'll now turn the call back over to Jeff for a few more comments. Thanks.

Thanks, Paul. Well, we sold a record number of large deals in the quarter, 59 deals north of $500,000 that compares to 54 in the first quarter of this year and 46 in the second quarter of 2017. So 59 compared to 46 a year ago. Nice growth in large deal volumes, sequentially on the prior year, obviously.

During the quarter, the health sciences, financial services, retail/consumer goods and manufacturing verticals combined to represent 62% of Perficient's revenue that breaks down as follows: health sciences at 27%, financial services at 14%, retail and consumer goods at 11%, manufacturing at 10%.

So as we mentioned in the past, the breadth and depth and strength of our partnerships is a real competitive advantage for us. One of the developments during the quarter, that we're particularly excited about was Adobe's acquisition of Magento. We're an Adobe premier partner, and an award-winning Magento Enterprise partner, and one of the few firms with deep expertise in both platforms.

So in fact, we have more than 100 colleagues dedicated to each and have launched more than 400 projects in these platforms in recent years. So as those 2 organizations come together, we're incredibly well positioned as they offer a technology stack and allow those enterprises to manage content and commerce in 1 place in an integrated fashion.

Overall, a solid quarter capping off a solid first half and as we headed to the latter half of the year, we're optimistic that we'll finish the year strong and start 2019 with significant momentum.

Now turning our attention to the expectations for the third quarter and full year. Perficient expects its third quarter 2018 revenue to be in the range of $122 million to $127 million. Third quarter GAAP earnings per share is expected to be in the range of $0.18 to $0.21. Third quarter adjusted earnings per share is expected to be in the range of $0.38 to $0.41. And Perficient is narrowing its previously provided full year 2018 revenue guidance range to $490 million to $505 million and adjusting its 2018 GAAP earnings per share range to $0.65 to $0.75. We're also slightly raising our adjusted earnings per share guidance to $1.45 to $1.55.

So with that, operator, we can open up the call for questions.

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

This is actually Kyle Peterson on for Mayank today. Just wanted to get a little more color on you guys for the kind of organic services revenue growth for the year. Obviously, you guys mentioned, you guys had some delayed project starts that weighed on this quarter and then the big deal went, too, just want to see how all the puts and takes you think are going to shake out on just the organic side.

Yes. I do think -- it's interesting, I've seen some of the other competitors out this morning with the similar situation, I was surprised by that, actually, because we continue to see the climate is quite strong. So these incidents in the quarter, I think we're pretty well isolated to a couple of customers from our perspective. That gives -- what that means is, obviously, we've got an opportunity to mix some of this up in the second half. But it's also reflected in the narrowing of our guidance range. The midpoint remains the same, but we, of course, added some revenue from an acquisition. Basically, the early wind downs and delayed starts that I referred to, represent about $10 million in the year and that guidance reflects the fact that we think we can make up about half of that still this year.

Okay. And then, I guess, just how much of that of, I guess, the $5 million that you recouped from that kind of in the back half, about how much of that is from Stone Temple kind of versus just kind of existing wins?

Well, the makeup of the $5 million that I was referring to would be new organic business. Stone Temple will add about $4 million to the second half of the year.

Okay. And then, I guess, just last one from me then I'll hop out. Just kind of in terms of the new deal wins, you guys mentioned the 1 health care win and just kind of some other good trends early in the third quarter. Are there any kind of recurring themes in terms of verticals that are standing out besides health care? Or kind of what are you guys seeing in terms of client demand right now?

Yes. Sorry, I can't understate health care. But we're seeing good demand, and really, I'd say kind of a resurgence in retail, particularly around commerce. So we've got good business there. But I'd say, really, the automotive manufacturing and retail are all quite strong for us right now. And of course, (inaudible) serves a meaningful part of business, not quite as strong as some of the other sectors, but still solid. But I would say, again, standouts, you have to say it's health care for us for sure. But then those others are doing well also.

(Operator Instructions) Your next question comes from the line of Frank Atkins with SunTrust.

I want to ask first, what was organic growth in the quarter? And could you give us a quick update on the sales force in terms of how well you're staffed? How well they are performing and productivity as you see it there?

Yes, good questions. The organic growth in the quarter was about 2% year-over-year. And in terms of the sales team, we are running probably about the highest staff level we've ever had, a little bit over 100. Our goal for the year is to get to about 115, I believe, full-time sales folks. And yes, the productivity is improving there. I think the macro environment is improving some so that's contributing. But I do think, and Frank, you know the history, that the work that we've done in the last couple of years of particularly bringing these new people on, many of them are coming up now on kind of their 1-year anniversary, where they're really starting to contribute. So I think we're seeing some boost from there. Our pipeline right now is the strongest it's ever been. The bookings we had last quarter on an organic year-over-year basis, I think have been the -- are the strongest probably in years. So despite these setbacks, like I said, we're going to be able to replace a lot of that. And I still am optimistic about the outlook going forward as that sales team continues to mature.

Okay. Great, that's helpful. And then you mentioned the large deal in health care. Can you talk about why you think you won that? Where did you differentiate yourself in the process? And then also, could you give us the average deal size for the quarter?

So we won that because of the existing relationship, really. We've proven ourselves time and again with this customer that we've had a very, very long-term relationship. I want to say going back 10 years. And they've been our #1 customer for, gosh, the last at least 4 or 5. And so this is a continuation, ongoing engagement around digital transformation for their entire business. And so getting that commitment, that multiyear commitment, obviously, helps us with stable revenue but also shows -- I think reflects the trust that they've given us in the work that we've done for them. And then average deal size in the quarter?

Yes. So, Frank, it was just a little under $300,000 and it was about $265,000 in Q1. So a little bit increase in the average deal size.

And that, by the way, that excludes this big deal in July, obviously, that's the...

For the second quarter.

Yes, that will be a Q3 deal. Right.

Okay, that's helpful. And the last one from me. Can you talk a little bit about the environment for kind of acquiring and retaining talent? We continue to have very low unemployment and it seems like things are getting very competitive here. Have you seen any change there? And what are you doing to make those investments to keep and keep good, skilled people?

It's a great question. I'll answer this in the way that I always do because it's true, that no matter kind of what the economy is doing in this industry, it truly is always hard to find good people, particularly with skills that are in high demand. And that's never not the case in this industry or maybe you have to go back to 2001. So it's always a challenge. We've got a very formidable talent acquisition team. We also focus very much on minimizing attrition, or obviously, retention of our employees in many ways. One is, obviously, competitive compensation and benefits, but also, a sense of belonging and creating a collegial culture where people want to be here. And I think it's worked very well for us. Our attrition rates are a little below industry averages over the last 12 months, and we're seeing still good opportunities to hire people. It's definitely tighter, and as so, we've been kind of ramping our -- or have been ramping up, I should say, our talent acquisition capacity. And I think we've got a model that's very scalable, so we should be able to deal with it as we go forward.

And I'm showing no further questions at this time. I would now like to turn the conference back to Jeff Davis.

Well, thank you all very much. I appreciate your time today, and I'm very much looking forward to speaking to you again in 1 quarter. Thank you.

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