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Perficient, Inc. (NASDAQ:PRFT)

Q4 2008 Earnings Call Transcript

March 6, 2009 9:00 am ET

Executives

Jack McDonald – Chairman & CEO

Paul Martin – CFO

Jeff Davis – President & COO

Analysts

Brian Kintslinger – Sidoti & Company

Richard Baldry – Canaccord

Jon Maietta – Needham & Company

Tim Brown – Roth Capital

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2008 Perficient Earnings Conference Call. My name is Erica and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards end of this conference. (Operator instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Jack McDonald, Chairman and CEO. Please proceed, sir.

Jack McDonald

Good morning, this is Jack McDonald. With me on the phone today we've got Jeff Davis, our President and COO and also Paul Martin, our CFO. I want to thank everybody for their time. We are going to have about 10 minutes or 15 minutes of prepared comments and after that we will open the call up for questions.

Paul, could you now read the Safe Harbor statement?

Paul Martin

Sure, thanks, Jack and good morning. 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.

In addition 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 under News and Events. We have also posted a reconciliation of certain non-GAAP goals to the most directly comparable financial measures prepared in accordance with GAAP on our website at www.perficient.com under Investor Relations. Jack?

Jack McDonald

Perficient had a very solid Q4 particularly when you consider the environment that we're operating in. The revenue for the quarter was down about 9% on a year-over-year basis. Of course if you look at full year revenues for 2008 as a whole, we were up about 6%, again despite the broader challenges. We had a little bit of help there obviously from acquisition.

Revenues for the quarter, again Q4 came in above our estimates and also came in above analyst consensus estimates and we continue to generate healthy cash flow and we are building our balance sheet. Jeff is going to talk about this a little bit more later. But I think it's important to note that, yes, we are in an environment where customers are taking a little bit more time. We talked about this on a number of calls over the past 9 months to 12 months, a little bit slower sales cycle than we saw and there is a little bit more caution out there.

But we are doing a very good job of maintaining our relationships and we are winning new orders and, again, Jeff is going to talk about this a little bit more in a moment. But there are exciting new projects that are starting on a regular basis and that give us hope for the future.

If you look at the number of clients served during the fourth quarter, it was just one fewer client during the fourth quarter of 2008 than during 2007. And, again, I think this speaks well to our ability to maintain client relationship and also our ability to rebound when the market ultimately does.

And in terms of what we're seeing out there on the demand environment unlike what we saw earlier in the decade when the tech bubble burst, we are not seeing wholesale project cancellations; we are not seeing sales pipeline or backlog that's evaporating.

Those are the kind of things we saw post the tech bubble burst. We are not seeing that today. The balance sheet continues to strengthen as it has over the past year or so, quarter-by-quarter. We really have never been in a stronger position from a balance sheet perspective.

Currently about $56 million in net current assets including $23 million in cash at the end of the quarter and that's after repurchasing $9.2 million of stock. The $23 million in cash at year-end 2008, after repurchasing $9.2 million of stock during the year.

Current cash on the balance sheet if you look at where we are today is still $23 million. And that's after an additional $2 million stock buyback and paying year end bonuses to non-executives, billable bonuses to consultants. So, you are looking at a cash balance that is up $15 million since the end of Q3, even with the buyback and even with those other payout.

And that's partly the result of financing fewer receivables, right, given the lower rate of revenues that we are at. But we've also improved our DSO performance. Paul is going to mention this more in a moment, by taking that DSO number down to the low 70s around 71 at the end of the year.

So, doing a very good job of managing customer receivables, and we've always of course had a very good record in that regard, given our blue chip customer base.

We continue to have access to a large credit facility, $50 million credit facility with an accordion feature, that can expand it up to $75 million and we have got zero debt drawn under that facility.

So that puts us in a very strong position to execute for the business, whether we are looking at stock buyback or acquisitions. And again of course we've got operating cash flow out of which we can finance stock buyback.

We do obviously believe in this environment that stock remains undervalued. We've talked about this, $35 million roughly of EBITDA last year. If we were to hit the top end of our range for this year to $200 million run rate for 2009, we'd be looking at roughly $25 million in EBITDA.

So you axe out cash, the stock is trading for about, I don't know, 3.5 times of EBITDA. So, we continue to believe that it's significantly undervalued and then our best rates of return are going to be achieved through share repurchases. So, we are going to continue to that. We announced the additional 10 million buyback short while ago and we are executing on it.

And speaking of the balance sheet, we took $1.6 million impairment charge in the fourth quarter based on a detailed analysis of our goodwill and intangibles. We mentioned this on the third quarter call and in other public statements we've made and in appearances at conferences.

I want to take whatever goodwill we can off the balance sheet. We constantly scrub the receivables and look to take whatever settlements amounts or reserves that we can. It makes total sense to do that in this environment.

Frankly, I was hoping to be able to write-off more goodwill and intangibles, but we looked through it and that's all that we could sort of agree to with the accountants in terms of an impairment charge, going through with the proper methodology.

So we've talked about that in the past, all the questions, all the function I should say of continuing to strengthen and scrub the balance sheet. Particularly, important I think in this kind of an environment.

Now, Q1 is not fully baked yet on annualized basis, although of course, whenever this fourth quarter always happens a little bit later because of the year end audit, so we have a little bit more visibility than would you in a typical quarter.

But on an annualized basis, we are trending near the high-end of our full year guidance. So again, we talked about $180 million to $200 million, and you could see from the press release that we are talking about roughly $50 million in our first quarter, which is really well materially above analysts estimate, and I think a great sign given the current market environment.

Obviously, we are going to see how the rest of the year plays out, as it plays out and there is still a lot of uncertainty in this environment. So we don't want to get ahead of ourselves on that, but we are happy with what we've seen thus far in the first quarter.

Now Jeff is going to speak more on this one later also, but we've made some tough decisions internally to ensure that we are going to be able to continue to deliver cash flow and profitability.

And we've shown this time and time again, that we've proven that this is a management team, this is a company that is an entrepreneurial company that has kept its fixed costs low and has a willingness and ability to address our variable cost to make sure we maintain the kind of cash flow margins and profitability we need not only to survive this environment but to position the company to prosper as the market recovered.

So, we continue to feel very good about our ability to handle whatever challenges this economy might present. Again, we are going to focus, as we have, on customers and cash flow, on building our balance sheet and exploiting opportunities we see in the market, whether that's well priced acquisition as the market, as we move through the cycle a little bit, I think it's still little early for that right now, but we will begin peak back out into the market, we are already peaking back out but you might see us start to move on that towards the end of this year.

We see stability in the marketplace, we will see where that goes, no guarantees on that. But, right now we see a tremendous opportunity in terms of buying back our stock, that doesn’t makes sense for the company and for our shareholders and we again intend to continue aggressively executing on that.

So, I am now going to turn the call lover to Paul Martin, he is going to discuss in detail the financial results for the quarter and the year. Paul?

Paul Martin

Thanks, Jack. Total revenues for the fourth quarter of 2008 were $56.8 million, a 9% decrease over the year ago quarter. Services revenue including reimbursable expenses were $49.2 million, with organic growth of minus 12% on a trailing four quarter average annualized basis, including businesses owned at least two quarters.

The sequential revenue growth in the fourth quarter compared to the third quarter was minus 6.4%. Gross margins for services excluding stock compensation and reimbursed expenses for the fourth quarter was 32.6%, which is down from 39.2% in the fourth quarter of 2007.

The decline in gross margins is primarily a result of lower utilization resulting from softness and services demand. We are actively adjusting our labor cost to match expected demand in the first quarter and beyond.

SG&A expense was $11.8 million for the fourth quarter, including $1.6 million of non-cash stock compensation expense. Excluding non-cash stock compensation expense.

Excluding non-cash stock compensation, SG&A was $10.2 million compared to $10.6 million in the comparable 2007 quarter. SG&A excluding stock compensation as a percentage of revenue was 18% in the fourth quarter of 2008 compared to 17% in the fourth quarter of 2007.

EBITDAS defined as earnings before interest, tax, depreciation and stock compensation for the fourth quarter of 2008 was $6.9 million or 12.2% of revenues compared to $11.2 million or 17.9% of revenues for the fourth quarter of 2007.

The company recorded a $1.6 million or $0.03 per GAAP EPS only impact charge related to the value of intangible customer relationship assets as a result of its impairment analysis. This analysis indicated the recorded goodwill was not impaired at this time.

Net income decreased to $759,000 compared to $4.5 million from the fourth quarter 2007. This is our 22nd consecutive quarter of positive net income. Diluted EPS decreased to $0.03 compared to $0.15 from the fourth quarter of 2007.

Non-GAAP earnings per share was down 41% from the year ago quarter to $0.13 for the fourth quarter of 2008 compared to $0.22 per share in the year ago quarter. Again, non-GAAP EPS is defined as GAAP earnings per share plus non-cash impairment charge, amortization expense and non-cash stock compensation net of the related taxes divided buy average fully diluted shares outstanding for the period.

Now turning to the full year results. Year-to-date revenues for the year ended December 31, 2008, were $231.5 million, a 6% increase over last year. Year-to-date services revenues were $207.5 million for the year ended December 31, 2008, an increase of 8% over last year.

Services gross margin excluding reimbursed expenses and stock compensation was 35.6% for the year ended December 31, 2008, compared to 39.1% in the prior year. The lower margin is primarily a result of lower utilization associated with the slowdown in services demand.

SG&A expense was $47.2 million for the year ended December 31, 2008, including $6.4 million of non-cash stock compensation expense. Excluding the non-cash stock compensation, SG&A expense was $40.8 million compared to $37.3 million in the comparable prior year period.

SG&A excluding stock compensation as a percentage of revenues increased to 17.6% from 17.1% in the comparable 2007 period. Net income was $10 million for the year ended December 31, 2008 with fully diluted earnings per share of $0.33 down $0.21 from the prior year.

Excluding the impairment to intangible assets previously described and then 900,000 write-off of deferred offering costs reported in the third quarter, net income was $0.39 down $0.15 from the prior year.

Non-GAAP earnings per share was $0.66 for the year ended December 31, 2008, compared to $0.78 in the year ago period. During the year we spent $9.2 million on repurchasing 1.848 million shares.

As Jack mentioned we continue to believe our shares are undervalued and the repurchases will drive future accretion and shareholder value. Our average billable headcount for the fourth quarter of 2008 was 1,168 including 1,027 billable consultants and 141 subcontractors.

At December 31, 2008, we also had 171 average SG&A personnel which resulted in an average total colleague headcount of 1,339 as of December 31, 2008. As demand began to slow, the company reduced U.S. headcount 2% during the fourth quarter. We have reduced our U.S headcount, an additional 5% since the end of the year as we continue to adjust our cost structure based on changes in our customers demand.

We continue to generate strong operating cash flow. Our operating cash flow year-to-date has increased 16% over the comparable prior year period. And as Jack mentioned we ended the year with no debt and $23 million in cash on hand.

Our DSOs and accounts receivable has decreased to 71 days at the end of the fourth quarter. As we've previously stated, our goal is to maintain DSOs between 70 days and 75 days and particularly in this environment, this is an area of keen focus.

With that I will now turn the call over to Jeff Davis for a little more commentary behind the metrics. Jeff?

Jeff Davis

Thanks, Paul. Well, as Jeff mentioned earlier, in spite of the tough economy, I think Perficient did deliver solid results in the fourth quarter. We continue to manage the business profitably and realized higher than expected software sales and margins.

Utilization was just under our target of 80% despite being impacted by holidays and vacations, as the quarter progressed. As you might expect in this environment, we are seeing some pricing pressure in the market but it isn't dramatic and really didn't have an impact on the business in the fourth quarter.

Excluding our staffing and offshore businesses rates, actually kicked up from 114 to 116. If you include those groups, rates dropped from 106 to 104, but that decrease is actually due to an uptake of 15,000 hours of work delivered from offshore facilities. That's about a 70% increase in offshore hours over Q3.

I actually view that as a positive and I will come back to that in a minute. So, clearly we are in a softer environment, but we are continuing to the win new business and new clients. In fact, our client count remained flat year-over-year for the fourth quarter which is another positive sign as Jack mentioned. So, we are effectively managing client turnover and adding new clients, but they are spending a little less.

Something else to take note of is that, while average deal size during the quarter decreased about 2% from Q3, our deal count actually grew and we saw a doubling of sole engagements in the 250 K to 500 K range. So again we are winning those new deals.

We took steps in the fourth quarter and this year to ensure Perficient continues to produce solid profits and strong cash flow. Jack alluded to this earlier as well. This included action designed to deliver utilization in the 80% range and to keep G&A in line.

I do however plan to continue to increase our investments in sales and marketing as well as industry verticals in 2009. I really believe that we can use this downturn to secure new relationships, grow share and strengthen our position when the economy recovers.

There's also good news in the fact that companies remain under significant pressure to continue to implement the types of solutions we deliver, but also to find a way to do it cheaper and more efficiently. That's why another area where we are placing a lot of emphasis is in our offshore capability.

We feel the market environment represents an excellent opportunity for growth in our global development facility in China. And this optimism is actually validated by our success to-date.

If you look at what we've done since acquiring that facility; we've actually grown it from about 80 consultants to more than 140, and have tripled the clients we are serving that from three to nine concurrently.

In addition we've actually added to the skill set there. It was originally primarily Java development now includes Tipco and Siebel capabilities. We've done that through training. We sent teams over there to train those folks and we brought some of them over here by the way to train in the U.S.

GVC [ph] offerings are structured to be incremental. What I mean by that is that it helps us win deals we wouldn't have otherwise pursued versus cannibalizing our other existing onshore business The fact I feel so strongly about the opportunities for offshore and in addition to the standard sales quotas, each Perficient salesperson now has a quota tied to leveraging offshore resources and I am personally involved in regular offshore pipeline collaborations sessions.

I think another fact that really bodes well for the future is that we continue to see our transfer revenue increase. Now transfer revenue is revenue generated when consultants from one business unit are leveraged by another. And that's not a published metric, but it is something we track internally and I think provides a good barometer at cross-selling success.

That's something we have always talked about, the cross-selling and leverage our entire portfolio across geographies and the client base would be key to success and we are seeing that collaboration continue to increase.

Clients are realizing that we can help them in many areas, and we are able bring our best people to the job regardless, whether they are local, traveling from somewhere else, working remotely, or working in our offshore development centers.

Now, this flexible delivery model's a strong value proposition for our clients and an important capability for Perficient. So, even though the market has slowed, we continue to explore opportunities to become a stronger and better positioned firm.

And lastly, I just want to mention, as I did on our last call. You take a look at our track record and know that the discipline and focus that took us from startup to our leadership position today remain in place and as I've said before, I'm confident that when the economy recovers, we are very well-positioned to resume our path to strong growth.

With that I will turn the call back over to Jack. Jack? Is Jack on? Hello?

Jack McDonald

Yes. Sorry, we had a little phone trouble there, folks. Let me just cover where we are for the first quarter guidance. As I mentioned earlier, we are seeing some pretty good signs out there right now.

And of course, all these statements are based on current expectations and could change and this is an environment with a little bit of flux in it. Although I would say with respect to first quarter obviously given the fact that this is already March, you have a little more visibility into that than you typically would.

So, if you saw the guidance from the release, the expectation is first quarter, 2009 total revenue; services, software and hardware including reimbursed expenses will be about $49 million to $52 million, $48.7 million to $51.6 million, and that's going to be comprised of roughly $46.9 million to $48.8 million of revenues from services, including reimbursed expenses, and about $1.8 million to $2.8 million of revenue from sales of software. So a very good performance in this environment.

You are looking at a decrease in services revenues obviously on a year-over-year basis of roughly 12% to 16%. But we are trending on that $200 million run rate, which is at the top of our range, and I think a real positive given the current environment.

So with that, Operator, let's go ahead and open the call up for questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from the line of Brian Kintslinger with Sidoti & Company. Please proceed.

Brian Kintslinger – Sidoti & Company

Hi, good morning. First question I had on the cost cutting you have done in the fourth quarter and the first quarter at what point based on your revenue expectations do you expect the utilization to return to sort of what’s you guys have experienced in the past?

Paul Martin

If you look at where we are, Brian, we are targeting for the year, 35% or better gross margins on services X.com [ph] and that is lower than 38%, 39% that we were targeting in a healthy recommend environment. We may do better from 35%, but you’re going to have somewhat on a unit demand environment and some that where we are setting expectations target that’s where we're at.

Brian Kintslinger – Sidoti & Company

And that was where you were in the fourth quarter that because little bit more so you’re bringing down people inspect the best or if not additionally, is that right? Also little bit of pricing.

Paul Martin

We could talk about price – Jeff can talk about pricing little bit more and I think I may have referenced it but I got drop there for a minute but if the pricing environment has been fine the – of course you had some (inaudible) demand, but yes, of course, as we mentioned we took headcount down in response to lower demand environment. We are talking about revenues in the 50 million range in the fourth quarter versus the higher revenue run rate in the first quarter versus the higher revenue run rate for so we made those adjustments consistent with the way we always operated the business, keep the fixed costs low, adjust the variable cost quickly if you see a demand and a change in market demand level, and let’s get back to business being profitable and ultimately grow when this economy recovers.

Brian Kintslinger – Sidoti & Company

I think (inaudible) could you go over some of those pricing rates that you had mentioned?

Paul Martin

Actually, in the fourth quarter we actually saw an increase, if you exclude the offshore. I think it’s become more and more of factors we move on and continue to grow the offshore component. But it was actually 116 versus 114 in the third quarter. 106 – 104 versus 106 when you bring offshore back in to it, but again the function there was that we actually increased our offshore work by 70% in the fourth quarter. So it’s become more of an interest and complicated to the track that, net-net in the fourth quarter we really didn’t have a pricing issue and we had – I think we had good rates for the market for any market really in the fourth quarter.

I do think when I alluded to some pricing pressure I think we are seeing more that now. And I think it will be some impact to that. I don’t think it will be massive, I think it's a 1% or 2%. And I actually think it will be somewhat offset by the fact that we are expanding the offshore capability and the margins are little better there so, so from a margin perspective while the overall rates may go down, I am hopeful that we can keep the margin a little more intact. Utilization is attributed tougher thing to manage its attraction. There is a growth that substantially high growth, but yes, we are targeting 80, 80 plus percent for the year still and we are taking the actions to try to maintain that throughout the year (inaudible) little bit of lag there so sometimes here you are sort of chasing the demand or chasing the top line.

Brian Kintslinger – Sidoti & Company

What percent of revenue was offshore right now – or a percentage delivery mentioned want to view it?

Paul Martin

Yes, percentage of delivery offshore is about 20% – or 10% to 20% if you include, we got a number of offshore folks working onshore, so, it’s 20% if you include them. Now again that those are hours worked of course, the revenue, the percentages much lower, about a fourth of that because of the rate differential.

Brian Kintslinger – Sidoti & Company

And when I cover the – I cover a lot of the offshore advertising, the biggest certainly now is the clients are coming back for rate decreases, so is that where you expect more of the pricing pressure to come from?

Paul Martin

I think it will be more onshore, we got I think very attractive offshore – and keep in mind that we don’t sell, we don’t lead with offshore as offshore, we got a big but it is a somewhat unique model, it’s something everybody is trying to do, but I think actually we are little ahead of the game there, particularly in the mid market where we got this onshore capability and a long history and track record there of high customer touch. Of course, onshore and we are blending into that offshore, so we are not selling offshore as a standalone, we are selling a blended tin and competing in that way.

So we have to compete offshore for offshore where we are competing on the blended level. And there is a lot of companies out there believe in they really can effectively do that, they are all trying to do it. And I am seeing we are better than all of them. But we actually I think we have a leg up again particularly in that mid market and in the technology space that we cover, I think you know that we got some pretty unique skills depth in some unique areas that are really better than a lot of the big guys.

Brian Kintslinger – Sidoti & Company

Okay. And in terms of G&A, was there cost cuts there and if so what can we expect as we are looking forward. Obviously you had some charges in the second half of the year in SG&A, but excluding those and when you might have some as Jack alluded to how should we look at sort of where you are there?

Jeff Davis

I think the best thing I could tell you on that is; that we made those investments last year. They are largely in place by the end of the year, so you can probably look at the run rate in dollars coming off of Q4.

Paul Martin

Now we're going to invest some more this year and I expect that to go up a little, although there should be some offset there. We have done some reductions in G&A and we'll continue to do that as we can. There are some of those pieces you can't live without, so offset some of those investments. We will make a little more investment this year. I don't think it's going to be dramatically impactful to the SG&A dollars.

I think you will see that percentage of revenue maybe go up a little bit as the top line has contracted some and hopefully we are flat for the rest of the year. That would be good. And it really is better to be up. But if you contract some, you will see a percentage increase. I think the dollar run rate coming off at Q4 is close to where we're going to be and I think Q1 in particular which I can't predict the details of it exactly but when you see the Q1 results I think you will see a run rate that's probably going to be sustainable through the year on dollars and maybe even tick down because we are doing some trimming like I said in some other areas and we are investing some of that and some of it may make it's way to the bottom line. We may actually manage to reduce costs in other areas of G&A even though we are increasing in other areas more. We may increase, may decrease more than we are increasing I'm trying to say.

Brian Kintslinger – Sidoti & Company

Last question on taxes. Did you mention, Paul, what occurred, it looks like about a 50% effective tax rate or something like that –?

Paul Martin

Yes, so that's essentially related to as the income number drops to a fairly low number there is a number of fixed costs and some of the I mean elements related to state taxes, et cetera, associated with the impairment drove that to a higher level. It should not be at that level in the first quarter, it ought to return to more 41, 42 kind of more normal levels.

Brian Kintslinger – Sidoti & Company

My question is, wouldn't the impairment, isn't that, is that not, if it's not deductible, wouldn't the – I see, I'm sorry. Okay, that's good, thank you.

Operator

Our next question comes from the line of Richard Baldry with Canaccord. Please proceed, sir.

Richard Baldry – Canaccord

Thanks, could you talk about sort of end market or verticals which you saw maybe surprising strength given that they came in sort of and are guiding to be in sort of the higher end of your expectation prior than maybe some that weren't as strong? And then also curious about whether this environment overall in terms of the larger deals, you think you will be more competitive given the turmoil in some of the largest providers in the space whether it's missing billions of dollars or facing bankruptcy issues like that, they clearly great execution problems for them? Thanks.

Paul Martin

On the industry verticals, yes, I think we are seeing some strength particularly in Q1 in healthcare. It actually, we had a large project wrap-up in healthcare in Q4. So, as a percentage of revenues, it was about 14% down a little bit from the third quarter. Energy and utilities 15% and telecom 15%. So, those are some of the key areas. And I think in general in these large markets and particularly in the once we made the investments in the industry verticals we see those as areas of strength. And Jeff, you want to take the questions related to our competitor’s turmoil?

Jeff Davis

Yes, just a follow on a little bit on the verticals too and we are seeing some pretty good strength in energy and healthcare and I think that's going to continue. I think the healthcare is a little bit murky right now because of all the legislation and how it's going to affect healthcare. But I still feel like, ultimately that will be a positive and the plans; the administration has for that it's going to drive some changes. The electronic health records and things like that are going to be a benefit to us.

And energy, again as it does continue to be a strong sector, as Paul said. But in terms of competitors, it surely helps. We keep an eye on that and as there's turmoil there, I think that's actually some of the reasons we have opened-up some opportunities for offshore right now and grown as much as we have.

We recently – one of things we are doing on offshore too, we used to be primarily focused, and remember that, we've been doing offshore for five years in the Eastern Europe facility but it was a little smaller scale, and this larger scale approach to offshore and CMMI Level 5 capability etcetera in China is a little newer to the mix over the last say year, year and a quarter. We've really leveraged that as I mentioned earlier, grown it a lot, and I think that's going to be a much more competitive force going forward than their capability than we had in the past. So I think we are going to see some more opportunities coming in there. We already have some.

One of the things we are adding to that actually is some recurring revenue opportunities. I think we talked about this before. A lot of our business is really more or less recurring revenue anyway. We've got long-term relationship with clients 80%, 85% repeat revenue rate with these clients year-over-year. So we've got clients coming back each year for more services from us. Most of that's project based, so they don't sign up for a year long contract for a chunk of revenue, a chunk of dollars typically. We do get some of that and we are seeing more and more of that in fact as we are doing this blended or flexible delivery model that I referred to earlier.

One of the offerings that we are putting off there is not only application development but also support and maintenance in an ongoing or recurring fashion. And we've got a verbal now on a couple of deals. We actually already got some of that in the bag. We've got a verbal on some nice deals with this sort of new positioning that we've got, that I think are going to close.

So this environment is helping in that. I think to your point, there is some disillusionment in some of the big firms out there. And these are large clients that we are doing this with, which is really an interesting phenomenon. I think it speaks well to Perficient's delivery record and what we have done for these clients.

A lot of these are existing clients, there's a trust factor there, a royalty factor built there. And a lot of them are very glad that we have their capability and they are shifting some of the work they would have may be outsourced to the pure sort of offshore guys more to us. Now I think that's dramatic, and we're not going to grow that facility to 1,000 people in 2009, but that kind of growth is in fact our is in fact our goal for that facility over the next two or three years.

Richard Baldry – Canaccord

Can you talk maybe about, whether some of your clients would be shy about adding to their permanent headcount obviously right now, whether that can maybe smaller project, they would move to an outsourced basis, they wouldn't prior that they try to focus on in-house but really trying to streamline their costs would give you some extra opportunities, you might not otherwise see?

Jeff Davis

No, absolutely. I don't think it's the in game, but I think it's fantastic, and it is the fantastic launching point that we are using now. We are able to do these blended team delivery that I talked about or even substantially offshore more in the mid-market fashion.

The big guys go after teams that are 50, 100, hundreds literally, hundreds, thousands of people. We are not targeting that; we can't compete at that level. But there aren't a lot of firms out there that have that U.S. based front-end, but also this back end that can actually tackle a mid-market, sort of medium size project and help the client save some money.

It's not dramatic because they are not huge engagements, and primarily development is being offshore; you've got a lot of business consulting on the front end of that around requirements gathering, architecture and those sorts of things, they tend to be still high touch. But we are able to offshore big chunk of that and save them some money. And I think we are already seeing some traction there and some activity there exactly for the reason you describe.

As I mentioned before, looking to get stuff done still, the things we do are business critical. There's not a lot of fluff in our portfolio. These customers still need to do this work. And to the extent that they are delaying some of it now, they are going to come back and spend it later.

So, yes, you hit the nail on the head. That's actually something we see as a big opportunity and we are starting to actually get some traction there as well. We are starting to actually see it happen for real.

Richard Baldry – Canaccord

Thanks, and congrats on a good execution in a tough environment.

Jeff Davis

Thanks a lot.

Operator

Our next question comes from the line of Jon Maietta with Needham & Company. Please proceed.

Jon Maietta – Needham & Company

Thanks very much. Jeff, I just wanted to piggyback up those questions about the industry verticals. You made some investments there in healthcare and telecom in '08. Is most of the heavy lifting done there with regard to building up the infrastructure on those practices?

Jeff Davis

Yes, I think for those two practices it is. Now we already had by the way, it's sort of embedded within our Oracle-Siebel Practice Team which is gosh a big team now. It's probably say 20% of the business, a CPG capability. And CPG is actually still doing pretty well right now. Even during a downturn the customers matter, and so Siebel and CRM and attracting, retaining, servicing customers is a big deal in a downturn. It's a big deal any time, but even in a downturn customers tend to spend money on that. So CPG was kind of always there.

We do a little bit of work focused around public sector, and then also obviously these two verticals we talked about telecom and healthcare, largely build out. We are looking to potential add some sales capacity, as I mentioned before, that was part of the sales capacity that I was referring to and continue to spend there.

I think now more than ever in these times you got to continue to spend, increase the spend in marketing and sales. You know, it's a more competitive environment so you've got to be out there more feet on the street and more brand awareness and more field events occurring. So yes, I think the infrastructure for delivery in those teams is largely in place, this is a small amount of spend maybe around some additional sales. But we've got a solid team off and running and some exciting things happening there, and we are starting to see some traction with those as well.

Although as I said, I think those are an investment for the long-term. I think we will absolutely see results from those this year, but I really expect to see some meaningful impact and really kind of a transformation on our go-to-market that will occur over the next couple of three years based on those verticals.

Jon Maietta – Needham & Company

Got it. Okay. And then just maybe quickly if you could talk about sort of the 1AR in the quarter, what the demand looked like in exiting January compared to February would you have seen sort of month to-date in March?

Paul Martin

You know, I described it earlier. We've got, I think just what I said before. Same we are seeing that we saw in the fourth quarter. We're retaining relationships that we have to the extent that they've got work to do and we're adding new ones. The business is out there. The pipeline is down a little but that gross pipeline is there, it's just deferrals, delays. I think there is a lot of fear out there to be honest with you. And people are they need to do these things, they want to do them, they're just a little hesitant to pull the trigger.

So we are just seeing those continued extended sales cycles. We haven't seen much of clients saying I have no budget this year, let's not talk or I had this project slated and it got cancelled or we're midstream in a project and it gets cancelled. We haven't seen much of that. The clients are still planning. We've got deals in our pipeline. They are just a lot more hesitancy to go ahead and pull the trigger and get them going.

Jon Maietta – Needham & Company

Okay. Thanks very much.

Paul Martin

Thank you.

Operator

Our next question comes from the line of Tim Brown with Roth Capital. Please proceed.

Tim Brown – Roth Capital

Yes. Hi, good morning, guys.

Jack McDonald

Good morning.

Jeff Davis

Good morning.

Paul Martin

Good Morning.

Tim Brown – Roth Capital

Hey, Jeff, I just a follow-up question on the offshore, I think you mentioned you were looking to ramp up to about 1,000 people over there over the next couple of years. I'm just curious if there is any chance of revenue cannibalization and have your clients demands more of a blended solution?

Jeff Davis

I think that's going to happen anyway and I think if we don't do it we are going to loss that business. And I think there is good margin in that, though. Keep in mind that top line around projects like that is going to be smaller because of the rates but there's also still good margin there. And then the margin in dollars isn't quite as big. I don't think so.

Again, we don't necessarily go out and lead with that. We use it as a competitive tool right now. And we've always been flexible and responded to what the market is doing to the extent that we can do things onshore, that we think that yields a better delivery for the customer and they are not insisting on offshore. We are going to continue to do that and we will continue to do that for the foreseeable future. I think, though there will be a greater demand for that and the thousand headcount that I was referring to, is over a couple or three years and obviously dependent even on some economic recovery.

But during the slow down, I think we are going to see more for that demand. That's a pendulum, I am sure you know that swings back and forth pretty dramatically, I mean pretty frequently over the past, say ten years you've seen a lot. So, future is hard to predict. I think we could get that to 1,000 in the next couple or three years as a part of our plan to continue to grow our business to a substantial level, to get it to $500 million.

Obviously that's all dependent upon some economic stability and some recovery. The good news is and we've seen this before, we've seen this move before as Jack referred to, the good news is, like I said, the stuff we are doing is not nice to have projects. These are things that people have to do. They are defer – they can defer them and delay them but they are going to have to spend that money eventually. And I think, we've done a nice job of competing always against the big guys and against the smaller guys, the niche firms as well. And I think that will happen, it's just a matter of when. So, I think that's a growth opportunity for us more than a cannibalization honestly of the onshore work. We can do both.

Tim Brown – Roth Capital

And, you are seeing your clients ask for that upfront more and more.

Jeff Davis

We are seeing more interest in that now for sure, yes. Like I said, as they are trying to save some money right now, and that may change down the road, but off shoring is here, it's been here for awhile, it's here to say. And I think as more firms demonstrate the ability to do it effectively with good quality and get the clients the results they want at a lower cost they are going to pursue it.

Jack McDonald

And I would just jump in and add one other thing there is this is a process that we started three years ago. And again the game here is not to ape what the big offshore guys are doing, that would not be a good strategy. But I think we have as Jeff is talking found a way to feather in offshore into this high customer touch, highly whether it is integration focused consulting model. So this is done by design. Now it happens to be working well in this environment, and I think it will continue to grow.

And I also just want to punch up what Jeff was saying about margin, because this is very high margin work. And it also presents the opportunity for us to begin be introducing additional lines of business that involve recurring revenue, for example in the maintenance area. We talked about that a little bit in the past and that is something that we will continue to look to pilot here because we are flexible. We do respond to market demand, and we are not going to run out there with a big investment in something until we see demand for it. But there is the potential for some additional lines of business as well. So I actually see this as something that far from being cannibalistic is going to help us sort of expand the waterfront on which we play and ultimately grow the revenue pie.

Tim Brown – Roth Capital

Okay. And then just looking at the service revenue line, your Q1 guidance really suggests that kind of the rate of decline is slowing down quite a bit. Is that something you think you can actually grow in Q2?

Jack McDonald

Let me just make a comment on that. I think Q2 is going to tell us a lot and I think it's too early to say where Q2 is going to come in. So I mean obviously we would love to see that stability and be flat in Q2 or potentially be up. But it's just too soon to say at this point. And given the environment we are operating in it would be kind of silly to get ahead of it at this point. So we will see where it comes in, and we are obviously working hard to execute.

And for us as a business if we can come through this year at the top end of that revenue range, at that $200 million range, not only will we generate strong cash flow, have the opportunity to continue to buy in our stock and shrink our share base, but we will be very well positioned for any kind of economic recovery in 2010.

And you could see a dramatic bounce back in earnings because you've got highly profitable marginal dollars as you get above $200 million in revenues. So we are pushing hard on it. All stops are out and we will see where it comes in.

Tim Brown – Roth Capital

And then just one final question, Jack, and just on the acquisition front. The companies that you previously talked to, I got to think a lot of them are facing quite a difficult financial future. Can you comment on what you are seeing with some of the smaller competitors out there, and whether or not you might be able to come in and buy them quite a bit cheaper than they were looking for, say, six months ago?

Jack McDonald

Yes, you've really got two kettles of fish out there. You've got firms that are struggling that we wouldn't want to buy at any price, and then you have some firms that are in areas that still have strong market demand and are still putting up some decent results.

And the issue with that bucket which would be the bucket we will be interested in is, it takes a while for value expectations to adjust? What we really did was pull back from that market entirely for couple of quarters here. And we will start peaking again a little bit, and if we can see EBITDA multiples come down to four or five, five and a half times and if we can see some improvement in our stock, back to a more normalized level, and I think that's got to be at least $6 or $7 a share, I'm not saying that represents full value because I think that's still only fraction of it. But you need to see some kind of return to that kind of price point and a reduction in multiples on value of acquired businesses and then you could get back to deals that are accretive.

Our general philosophy and our rules of engagement have not changed. We want deals that are immediately accretive from a cash EPS basis and that serves key strategic function in terms of either growing our geographies or bringing on board skill sets that we need to sell nationally. And I think as well that what you will see us do if and when we get back into the acquisition business; the early deals will probably be national boutiques that have service offerings that we can resell on a countrywide basis through our sales channel.

Tim Brown – Roth Capital

Okay. Thanks for taking my questions.

Operator

(Operator instructions) Our next question is a follow-up question from the line of Brian Kintslinger, Sidoti and Company. Please proceed.

Brian Kintslinger – Sidoti & Company

Can you tell us how much you have left on your share authorization, and given what you bought, can you give us a rough assumption of the share counts in the first and second quarter?

Jeff Davis

Sure, Paul, you want to walk through that, we did what 9.2 million –

Paul Martin

Yes. 9.2 million, it was about 1.8 million shares in the year ended in December, and we bought back roughly 400,000 to 500,000 so far in 2009 for roughly another couple million dollars.

Brian Kintslinger – Sidoti and Company

Well, I got that. I was just curious if the dollars flow through each quarter, so I'm curious where you are roughly in March and June (inaudible) total shares.

Paul Martin

Yes. So roughly we are at 9.2 so we've roughly spent 11 of the 20 total authorization.

Jeff Davis

Yes, the additional two, Brian, was the stub ph amount from the first quarter. So I think we are at 11 of a total of 20 to 9.5.

Brian Kintslinger – Sidoti and Company

9 million left. And when you report the March quarter how many shares do you think you will include shares, diluted shares you estimate you will be reporting?

Jeff Davis

Yes, somewhere around $29 million.

Paul Martin

Yes, obviously, what we'd like to see happen over the course of the next year is get that number down and something closer to 25. We talked about that in the past. And that remains our goal and that's going to depend of course on the business and whether we see stability, what kind of cash flow that we are generating as a result of that and what the stock price is.

So, if we have an environment where this business is stable and the stock stays in the gutter here or goes further down, we will buy more aggressively. And that's the goal to try to shrink that share base. I'm not guaranteeing we are going to get there, but that's what I would like to see happen over the next year.

Brian Kintslinger – Sidoti and Company

Jack you talked about goodwill about the auditors not, and I agree with you of running that down. But the business end isn't getting any weaker than come the second quarter which is a telling time. Does that mean we will likely not see goodwill impairment?

Jack McDonald

That's correct. That's correct. Paul did a pretty thorough scrub on that with our auditors. We've got a regularly scheduled year end process. Paul could talk about it more but we go through and scrub it based on an established methodology with the auditors. And frankly even the write down that we did, Paul, right, a good chunk of it was not even sort of generalized goodwill, it was actual sort of (inaudible).

Paul Martin

Right, it was a customer relationship intangibles. And, Brian, what we do is I think all companies do is it's based on a future cash flow model and we certainly use numbers in line with what our guidance is for 2009. And I think relatively conservative assumptions for the out years in that model that indicated we did have an impairment. So, I think as things continue on and stabilize that should be an issue. Obviously, if the world gets dramatically worse, like every other company, we will have to revisit that.

Brian Kintslinger – Sidoti and Company

Maybe you wrote down intangibles as opposed to goodwill that would suggest that next year we will see a step down in amortization of intangible assets. Right?

Jeff Davis

That's right. The effect of that's about $100,000 reduction in amortization a quarter.

Brian Kintslinger – Sidoti and Company

Okay. And then the last question I have is related to severance. If you cut 5% of the people, what kind of severance does that equate to in the first quarter that you will spending, if any?

Paul Martin

Yes, I don't know if I can give you an exact dollar amount on that. We do – severance varies, obviously based on tenure and some other factors. It's not significant and it’s not massive, I should say. A couple of weeks is a typical severance offering. And so, in dollars like I said, I couldn't actually tag that down for you. I don't think it's going to have a huge impact. I will tell you that we started out with some bench in January. So, January gross margins weren't great. They've increased as we've gone along and as I said; our target for the year utilization is 80 plus percent. So, you can sort of look at it that way. I don't think there's going to be a lot of overhead cost associated with the severance.

Jack McDonald

And Brian, sort of rough math on that, it would be a couple hundred thousand dollars of severance. So, it impacts the quarter but it's not dramatic.

Brian Kintslinger – Sidoti and Company

And you had 100,000 and, 200,000 I take it in the fourth quarter given the 2% reduction as well, small amount?

Jack McDonald

Yes, it's probably, probably half of that. 100,000 to 150,000 is probably a good number.

Brian Kintslinger – Sidoti and Company

Thanks very much, guys.

Paul Martin

Thank you.

Operator

There are no further questions at this time. I will now turn the call back over to Jack McDonald for closing remarks.

Jack McDonald

Okay. Thanks very much. We appreciate your time this morning and we look forward to speaking with you again on the first quarter call. Thank you.

Operator

Thank you for your participation on today's conference. This concludes the presentation. Everyone have a great day.

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