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Perficient, Inc. (NASDAQ:PRFT)

Q4 2012 Earnings Call

March 07, 2013 10:00 AM ET

Executives

Jeffrey Davis - President and CEO

Paul Martin - CFO

Analysts

George Price - BB&T Capital Markets

Brian Kinstlinger - Sidoti & Company

Peter Heckmann - Avondale Partners

Operator

Good day, ladies and gentlemen, and welcome to the quarter four 2012 Perficient earnings conference call. My name is Rachel and I’ll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Jeffrey Davis, CEO and President. Please proceed, sir.

Jeffrey Davis

Thank you very much and with me today is Paul Martin, our CFO. I want to thank you all for your time for joining us this morning on the call. As is typical, we’ve got about 10 to 15 minutes of prepared comments after which of course we’ll open the call up for questions. Paul, could you please read the Safe Harbor statement?

Paul Martin

Thanks 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 meanings 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 Securities and Exchange Commission 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 at, www.perficient.com under Investor Relations. Jeff?

Jeffrey Davis

Well, thanks, Paul and again good morning everyone, we appreciate your participation on the call. We’re pleased to share our fourth quarter and full year 2012 results with you.

The fourth quarter capped another strong and successful year for Perficient. Perficient had revenue growth of 18% in the quarter with net income up 61% and EBITDA net of stock comp up 22%. We continue to demonstrate the ability to incrementally raise rates and have moved our average bill rate for North American employees to an all time high at $132 per hour that’s up nearly 6% year-over-year.

We are focused on continuing to drive ABR higher in this year and beyond. I think we’ve got a good gap there as I mentioned before against lot of our competitors.

Something else we’re focused on internally in 2013 are plans around land and expand which involves many things but at the highest level is a process to ensure our sales marketing and delivery efforts are focused primarily on the key and strategic accounts that can result in multiyear multimillion dollar long-term relationships.

It is not a new concept for us. those are the type of relationships that helped carry us through downturn a few years back but we’re bringing more attention to it and putting some additional leverage in place like adjusting incentive compensation plans to drive that strategy.

In 2012, we served 69 clients that were a $1 million plus relationships. That compares to 53 in 2011, that’s about 30% increase. We also had our first two $10 million clients during the year. Our top 50 clients average $3.2 million each during the year compared to 2.9 million in 2011 and 2.4 million in 2010. So this is a strategy or concept we have been executing against for a while there are some of results and again we are stepping up our efforts around there and expect to drive more of those results moving forward. We are quite pleased in fact with our progress to date, landing and growing additional large accounts and I anticipate those trends and numbers will continue to grow in all the right ways again this year and beyond.

Our business has solid momentum right now. The market seems to be steadily improving, clients continue to demonstrate the increased propensity to consider and commit to larger and longer term engagements and that’s reflected in our pipeline in bookings.

Q4 bookings increased 25% year over year and that trend has carried through the first two months of 2013 which I will touch on a little bit later. That’s a function of our growth and our success with the land and expand strategy, yielding larger and longer term deals, it helps us to build the book of business in months farther out and provide additional visibility and stability for the business.

You may recall that January 2012 represented our strongest good bookings month ever. That again was the case this year. Even backing out the bookings contributions from the firms we acquired last year, January 2013, now represents our most successful booking month.

We sold in the fourth quarter 24 deals greater than $0.5 million, they averaged $1.3 million each. That compares to 19 in the third quarter that average $1.2 million each and 16 in the fourth quarter of 2011 that average $950,000. So, that’s a 50% increase to the number of deals over a half a million and about 40% increase to the average deal size of those deals year over year.

Notably, cash flows from operations increased to 134% during 2012, we continue to grow the business and benefit from the flexibility to pursue our acquisitions strategy and fund our share repurchase program.

We invested nearly $7 million in the fourth quarter buying back our shares and will continue to do so as long as we feel that we are trading at a discount.

After Paul shares financial details for the quarter, I will be back to share some more insight, provide a little more color on our performance in Q4 as well as our outlook for Q1 in the full year of 2013. Paul?

Paul Martin

Thanks, Jeff. Total revenues for the fourth quarter of 2012 were 83.1 million, an 18% increase over the prior year quarter. Services revenue for the fourth quarter 2012 excluding reimbursable expenses increased 17% to 71.8 million over the comparable prior year period.

Quarterly, year over year organic revenue growth was 1%. Services gross margin for the fourth quarter of 2012 excluding stock compensation and reimbursable expenses increased to 35.5% from 34.7% in the fourth quarter 2011 which continues our trend of year-over-year margin improvement. SG&A expense increased to $15.8 million in the fourth quarter of 2012 from $13.4 million in the comparable prior year quarter.

SG&A as a percentage of revenues was flat at 19%. EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and stock compensation expense for the fourth quarter of 2012 was $12.6 million or 15.1% of revenues compared to $10.3 million or 14.7% of revenues in the fourth quarter of 2011.

The fourth quarter 2012 include amortization of $2.2 million compared to 1.7 million in the comparable prior year quarter, this increase is associated with the 2012 acquisitions. Net income increased 61% to $4.4 million in the fourth quarter of 2012 from $2.7 million in the fourth quarter of 2011. Diluted GAAP earnings per share increased to $0.14 a share for the fourth quarter of 2012 from nine in the fourth quarter of 2011.

Adjusted GAAP earnings per share increased to $0.23 for the fourth quarter 2012 from $0.21 in the fourth quarter of 2011. As a reminder, adjusted GAAP earnings per share is defined as GAAP earnings per share plus amortization expense non cash stock compensation, transaction cost and fair value adjustments of contingent consideration, net of related taxes divided by average fully diluted shares outstanding for the relevant period.

Our effective tax rate for the fourth quarter of 2012 was 37.7% compared to 45.5% for the fourth quarter of 2011. The fourth quarter 2011 included certain non-deductible fair value adjustments associated with acquisitions which resulted in the higher 2011 rate. Our average billable head count for the fourth quarter was 1,553 which includes 1,378 billable consultants and a 175 sub-contractors. The average SG&A head count in the fourth quarter was 289.

Now let me turn to the full year 2012 results. Revenues for the year ended December 31, 2012 were $327.1 million a 25% increase over last year. Services revenue for the year ended December 31, 2012 excluding reimbursable expenses increased 23% to $286.5 million compared to the prior year. This represents 6% organic growth for the year.

Services gross margin for the year ended December 31, 2012 excluding stock compensation and reimbursable expenses increased to 35.7% from 34.9% in the prior year period. SG&A expense increased to $64.9 million for the year ended December 31, 2012 from $51.7 million in the prior year.

SG&A as a percentage of revenues was 19.8% for the year ended December 31, 2012 compared to 19.7% for the year ended December 31, 2011. EBITDAS for 2012 was 48.2 million or 14.7% of revenues compared to 38.7 million or 14.7% of revenues for the prior year. 2012 include amortization of 7.8 million compared to 6.3 million in 2011. The increase is associated with the acquisitions completed in 2011 and 2012.

2012 included acquisition costs of 1.9 million related to three acquisitions completed in 2012, compared to 1.2 million related to two acquisitions completed in 2011. Net income for the year ended December 31 2012, increased 50% to 16.1 million from 10.7 million for the year ended

December 2011. Diluted GAAP earnings per share increased to $0.52 a share from $0.37 a share in the prior year. Adjusted GAAP earnings per share for the year ended December 31 2012, was $0.92 a share, up 19% from $0.77 for 2011.

Our effective tax rate for the year ended December 31, 2012 was 38% compared to 42.4% for the prior year. The decrease in the effective tax rate was due primarily to a research and development tax credit on our 2011 income tax return recorded in the third quarter of 2012 when it became determinable and reasonable estimable. The 2011 tax rate included certain non-deductible fair value adjustments which increased the 2011 rate as well.

The research and development tax credit for 2012 and 2013 was enacted by Congress in January 2013, and the resulting tax benefit for 2012 will be estimated and recorded in the first quarter of 2013.

The estimated tax benefit for 2013 will be included in the full year estimated rate. We are expecting the 2013 benefit to be offset by additional R&D investments primarily related to our healthcare vertical. We ended the year with 2.8 million in outstanding debt and 5.8 million in cash and cash equivalents. Our balance sheet continues to leave us well positioned to execute on our strategic plan.

Our day sales outstanding on accounts receivable were 75 days at the end of the fourth quarter 2012, which is down from 78 days at the end of the fourth quarter of 2011. We will continue to focus on maintaining DSOs in the 70 to 75 day range. I'll now turn the call back over to Jeff for little more commentary. Jeff.

Jeffrey Davis

Thanks Paul. Well as I mentioned earlier we're pleased with our momentum right now. I mentioned bookings during the year had started out well, we'll be getting together in just a couple of months to discuss the Q1 results in detail, but I think it' s worth noting that through the end of February, on a trailing three months basis bookings are up 25% organically. That strength is pretty broad based from the industry perspective. Our largest industry healthcare continues to do very well with just under a 10% increase there.

A couple of other key areas where we made investments, financial services and retail are up as well. We are also seeing meaningful growth in industries like telecom; consumer goods and manufacturing, each of those are up significantly from the comparable year-over-year period.

I think it’s also worth highlighting that our differentiated offshore model continues to resonate well with clients. Revenues from our global development center operations were up 25% in 2012. We expect those trends to continue and also plan to increase our capabilities in both China and India this year.

On top of the health of the existing business, we will continue to aggressively execute our M&A against our M&A plans. We remain in very active discussions with a handful of firms and remain confident in our goal of adding $50 million or more in run rate revenues this year. Assuming we achieve that expansion, we expect to be entering next year with the revenue run rate north of $400 million annually.

And if we're able to drive the margin expansion we expect will come from increasing ABR and fine tuning utilization combined with G&A leverage, we will also see significant increases in earnings. So again things are going well. We are pleased with the quarter and the year and looking forward to more growth in 2013.

So turning to the future, commenting on Q1 Perficient expects its first quarter 2013 services in software revenue including reimbursed expenses to be in the range of $81.1 million to $85.4 million, comprises $76.2 million to $80.2 million of revenue from services included reimbursed expenses, and $4.9 million to $5.2 million of revenue from sales and software. The midpoint of first quarter 2013, services revenue guidance represents a growth of about 12% over the first quarter of 2012 services revenue. The company is issuing its full year 2013 revenue guidance to a range of $345 million to $365 million and a 2013 adjusted GAAP earnings per share guidance range of $0.97 to $1 or so.

With that we can open the call up for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of George Price of BB&T Capital Markets, your line is now live, please proceed.

George Price - BB&T Capital Markets

Just a couple of things. First I guess looking into 2013 I wondered if you could maybe expand on the guidance a little bit in terms of margin expansion, what you expect for the year and specifically off of what base are we talking about.

Jeffrey Davis

So, the base would be the average gross margin for 2012 in total and I'm speaking specifically to services gross margins. So, we’re looking at 150 to 200 basis points of improvement to services gross margins specifically, and overall we think that will drop down to a 100 to 150 and both the EBITDA and EBITDA net of stock comp which by the way we’re tracking pretty closely now.

George Price - BB&T Capital Markets

And should we expect more of that, I guess in terms of progression, quarterly progression through the year, is there going to be more of a backend loaded year do you think or now I don't know if you can give us any thoughts maybe on seasonality if there is anything that you see in terms of how that will fall down?

Jeffrey Davis

The margin expansion, I think it will be pretty consistent throughout the year. We’re starting at a good point with rates up year-over-year nicely. We’re actually moving utilization in the right direction, we’re focused on getting that up this year, we ended last year about 80% for North American employees and we typically like to run at more in the 82 to 84 range. So, we’re on a mission to make that happen this year, and we’re already seeing the results. So, I think it will happen throughout the year and it’s my hope in fact that we’ll end the year on even higher kind of run rate expanded basis, again driven by ABR and higher utilizations, that answers your question.

George Price - BB&T Capital Markets

Okay and in terms of the guidance ranges revenue and EPS can you talk a little bit more perhaps about the assumptions that are embedded behind the upper end and the lower end, it might be macro or it might be particular client movements you did mention some investment, R&D investment in healthcare. But just if you can elaborate on sort of what assumptions are behind the ranges.

Jeffrey Davis

Sure. I think, as you can read into the Q1 guidance, do you think the year is going to be a little more backend loaded but that’s supported by our bookings. I mentioned trailing 12 months bookings 25% year-over-year organic that’s considerably up over last year. Last year the bookings were bigger, really in the fourth quarter of '12 and the fourth quarter of ’12 primarily and the first quarter was strong but I think not as strong as we’re seeing right now. And then in addition to that, we look forward into the pipeline and do actually bookings projections for 60 days out, so what we’re seeing in that by the way historically been very accurate, we’ve been running that for about two years now, so March and April both look very strong.

We know that we saw bookings begin to slow a little bit into the second quarter last year relative to the first quarter, so we don’t see that at the moment. It’s only April that we can see right now but we’re optimistic that the momentum is going to continue the bookings and that will drive a bigger backend to the year.

I think the overall guidance is reasonable if not conservative and sure there is still uncertainty about the macro-environment. Last year we’ve experienced again some softness primarily around healthcare but in general too and there were couple of events obliviously leading, I think drove that, one was actually the supreme court ruling around the Affordable Care Act and we saw things soften up a little in healthcare around that continue to stay soft through the election as we saw again some other areas sectors also kind of softening up around the election.

Post-election though things pick right back up and there is a lot of activity now, but again that did impact our both fourth quarter and I think the first quarter of this year but we’re looking to see a pickup in the second quarter and beyond.

And then in terms of the EPS, again I think it’s just driven by the margin expansion that we spoke about. The range there ties pretty nicely to the range we provided on revenue of course if we came in at the higher end of that range, we even beat it on the revenue side. We’ll be able to drive I am sure earnings outside the range we provided there.

George Price - BB&T Capital Markets

Okay and just last thing just to follow up and then I’ll get back in queue. You talked about seeing the softness in the 2Q last year, correct me if I’m wrong but I recall correctly the softness was sort of more in the back of the second quarter in ‘12, so if you’re looking at your 60 days out. I guess, can you differentiate it all between say what you’re seeing you know 60 days out here versus you know what you saw 60 days out the same time last year, maybe a little bit too granular of a slice but just curious.

Jeffrey Davis

That’s okay and actually I don’t want to clarify, the 60 day book is actually projected bookings that’s one deals. We also look at pipeline and so the pipeline is substantially larger than it was last year both in weighted and in gross, so that give us some validation that we’re not going to see the slowdown in Q2 that we saw last year and I would also say anecdotally, there is more activity, there is more going on even now, it’s still earlier in the year but even now then, I think we saw last year. And particularly in healthcare, we again are looking at a significant pickup there, primarily on the provider side of that equation. As I mentioned before, we're probably 60:40 revenue split payer to provider now and we expect that to even up, not because payers are going to drop off but because we expect a substantial pickup with providers. And we got a pipeline defined for that that. I mean specific deals, specific clients we're targeting primarily through the premier channel but beyond that as well.

Operator

Your next question comes from the line of Brian Kinstlinger of Sidoti & Company. Please proceed.

Brian Kinstlinger - Sidoti & Company

[I am sticking a little bit with] [ph] the expected pricing leverage you are talking about, the improving marketplace including a record high bookings, can you just speak to once again the bottom of the revenue guide, it seems they is limited to no organic revenue growth if I take out the quarter reserve the couple of acquisitions you have that aren't full year comparisons, could you just talk about that low end and what it assumes, does it assume a slowdown and a worse environment.

Jeffrey Davis

Yes, honestly it just reflects the uncertainty that I think still exists for most businesses out there and the micro environment they we're in. And a lot of it is driven by what we did experience last year and again as I explained with George’s question, we don’t believe it’s going to happen this year but at the same time we feel like the responsible thing to do is to take it into account and have again a reasonable if not conservative guidance number and I think that’s, the bottom end of that range is reflecting that conservatism.

Brian Kinstlinger - Sidoti & Company

And I think Paul has mentioned, I may have got this wrong that there was 6% increase in pricing and 6% organic growth by your calculations. Why do you think there has been such a little volume growth in why and when might that change?

Jeffrey Davis

Yes, I think it’s going to change this year because I don’t think we’ll have 6%, well let’s clarify, that was 6% across the year. We've realized within the year probably about 3%, so there was in fact volume growth there in addition to the ABR growth but you know Brian a lot of this does come back to the strategy that I explained earlier in land and expand. We are transforming the business gradually I think cautiously to one that addresses more large clients, longer term engagements, longer term relationships and some of that, you can’t do everything all at once, so some of that has to do with driving ABR and in some cases, it might even effect some of the organic top line growth but we're replacing it with higher ABR and frankly higher quality opportunities and higher quality long-term relationships.

Brian Kinstlinger - Sidoti & Company

And then just a real pick up on the Premier relationship and maybe Jeff, have you at all changed your outlook on the potential of this or is it still has the same potential that you thought, maybe a year and a half ago when this was brought to you.

Jeffrey Davis

I think we still have great potential, as much as we thought then. The one thing that has happened with Premier and one thing that affected us last year was that the traction has been slower than we initially I guess at least had hoped. Early on it's hard to know exactly what’s going to happen and I think both us and Premiere thought that we would be moving a little faster. Some of that, again it was back to, we know providers were sort of sitting on their hands hoping that the Supreme Court would strike down some of this stuff and or the election results would be different, and or that there will be delays around some of the mandate. I think the writing is on the wall, we're definitely seeing a lot of pickup in activity.

So specifically, the Premiere opportunity and Premiere channel, and I actually want to come back to some investments we are making there too; but we added two clients in that channel last year so we had a total or currently we have five active engagements including Premier directly but just to give you a sense of we're at right now. We are working on six additional opportunities actively at the moment and anticipate adding between five and 10 new channel accounts for this year over the course of the year. I would say the solution or the product is more hardened now and more ready and I think again buyers are more anxious to start these activities that we know that they are going to hitting a wall with it, so we're pretty optimistic about it, we remain optimistic about the overall opportunity and actually specifically this year so we would hope, maybe what happened in the second half of last year and again in fact we did add a couple of clients, we think is going to happening more this year, even beginning like I said in the first half of the year.

Brian Kinstlinger - Sidoti & Company

So what kind of assumption is better than the second half of the year; is there a major ramp embedded in your revenue guidance?

Jeffrey Davis

Well there is across the board, I wouldn't say a major ramp; but across the board we are expecting better strength in revenue growth in the second half versus the first half. Premier is a part of that but actually like I said we are optimistic that we will begin to see some traction there in the second quarter. If not in fact, still this month.

Brian Kinstlinger - Sidoti & Company

Okay in the fourth quarter it seems SG&A dropped dramatically from the third quarter, I haven't seen that happen in your business model too often quarter-to-quarter we have seen that drop and maybe I missed it. Was there any specific reason, is that sustainable? How should we think about SG&A?

Jeffrey Davis

It’s a bonus Brian, we took a pretty substantial bonus accrual in the third quarter that we didn’t repeat in the fourth quarter so that's primarily what you are seeing there and know it's going to be lumpy I mean to answer your sustainability question. I will say that G&A is scaling over time and including this year I expect us to get some benefit from that this year. Again, this year relative to last, we also are hoping to hit our goals more effectively this year than we did last year frankly, so we would be recurring more of a bonus this year than we did last year, so that will offset it some, but again we’re seeing nice scale there. Just to finish the thought, sales we expect will scale with revenue.

We're not to going to need to invest more relative to revenue but we will continue to scale sales and marketing with revenue.

Paul Martin

And Brian, that's a bit of a distinction from the 2012 to 2011 comparison, we did make some incremental investments as a percentage of revenue in sales and marketing and we see that flattening out in '13, so we'll see that G&A leverage you know come through.

Brian Kinstlinger - Sidoti & Company

Last question I have, Paul can you just, it always confuses me, can you just give us pure services in 1Q in the year that's embedded in your guidance, not including reimbursable?

Paul Martin

So excluding reimbursable roughly the guidance assumes 4% to 8% organic growth, the range of the guidance.

Jeffrey Davis

Well and another way to say it too, is that in that range at the midpoint, the 345 to 365, it’s $40 million combined software and reimbursed expenses, so it's at the midpoint…

Paul Martin

6%.

Jeffrey Davis

Yes.

Brian Kinstlinger - Sidoti & Company

Sorry 40 million software and reimbursed expenses…

Jeffrey Davis

Combined, yes. That's 315 or 325.

Operator

Thank you, your next question comes from the line of Peter Heckmann of Avondale Partners, please proceed.

Peter Heckmann - Avondale Partners

Has there been any change in your offshore resources and mix between countries in 2013 and if so can you talk about some of the dynamics that are driving that?

Paul Martin

Yes, its yes, and the dynamics are geopolitical, actually we saw a great growth in China last year and it continues to be really our premier facility in terms of quality and capabilities, but we are investing more in India. Some clients are reluctant to do business in China, I think those concerns are unfounded but nevertheless to deal with that and appease to that segment, we've been building up India for a while and we'll continue to do that. I don't know that India will necessarily outpace China this year, our overall offshore growth continues to be good and I think they may keep pace and, given that India is smaller, I think as a percentage it might increase a little more.

Peter Heckmann - Avondale Partners

And we've seen a couple of larger players acquire; are you seeing any change in the relative appetite for the acquisitions you target, that may change some of the economics that you typically seek out?

Paul Martin

No, not really, honestly; we are still in the same. We got, as everyone knows, it has been some time now since we have done an acquisition, all for good reason. We run a very disciplined process and while we have the opportunity to buy a couple of companies for a variety of reasons, we decided not to. One of those we'll actually revisit later. But we've got a number of deals in flight now, actually a pretty high level of activity and the multiple range; the economics are pretty much the same as we've done over the last two or three years. So, so far we've not seeing a lot of competition out there for the acquisitions that we are targeting.

Peter Heckmann - Avondale Partners

Okay, so we should still expect some level of accretion from these deals and you anticipate the size of the average deal going up or most of the properties you look at, pretty consistent in that regional market with nearly 10-20 million revenue.

Paul Martin

Yes, yes and no. We love to do larger deals, there are fewer out there. As a private company, it’s difficult to get over that say $15 million to $20 million arm. We do have some of that size by the way, 20 plus that are in the hopper. And by the way I want to temper that with, we might be a sub $10 million of Shoppe too if it's the right strategic scales that we want to add to our portfolio. I guess the short of it is probably average about the same, as it has historically; but driven more by maybe a wider range. We have got a couple of things specifically in mind that will be a little bit smaller, but they are early kind of emerging technology companies that we are very interested in.

Peter Heckmann - Avondale Partners

And have you seen any additional request on the part of clients for you to provide more of an outsourcing solution or provide ongoing maintenance or processing for the solutions that you are working on.

Paul Martin

We have picked up, we do offer a -- I mean it is support outsourcing or offering, and we have seen nice pickup there. We have got some handful of key accounts there and actually a real marquee account with Caterpillar, that our relationship started there and actually is now expanding into a substantial relationship both in MSO as well as direct project work now. So we do see that. I wouldn’t say that the appetite is dramatically increased for that, although it has some and honestly we’re pushing that offering more because obviously it blends well to our land and expanse strategy and the stickiness that we want to have with these clients. So, again not a dramatic change, we’re pushing it more but there is some pickup.

Operator

Your next question comes from the line of George Price of BB&T Capital Markets.

George Price - BB&T Capital Markets

Just I wondered Jeff, if you could maybe talk a little bit more about some of the changes in the sales incentives and how you go into market, how that’s changing, what the particular goal is, how you see that kind of helping business and flowing through the business as we go through the year?

Jeffrey Davis

I think the traction is gradual. And I mentioned before that we’ve actually been executing on this for a while, we don’t talk about it because we want to actually see some results from it. But I provided those results in terms of number of clients that we have now over $1 million et cetera as we’re kind of growing in those capabilities. So, the incentives is quite frankly is simply that our sales guys make more money delivering or selling larger deals, longer term deal the inherently will have higher gross margin typically given the efficiencies that you gain right in those longer term deals, you got less turnover that you have deal with.

So, we’re passing on a chunk of that to them as an incentive and frankly this incenting some of the more opportunistic types of deals that we use to pursue and are pursing less and less these days. I can’t provide specific goals but or I could but suffice it to say it’s more multimillion dollar relationships, expect more global 2014, Fortune 1000 type of customer and/or by the way smaller customers that have high dependence on IT and a high IT spend.

So, we’re targeting our customers more, we’re driving relationships that driving two relationships that can be ongoing long term and longer term engagements again that will keep it churned on, increase the efficiency, help us get back to the utilization goals that we have before and again we’re providing incentives to the sales guys as well as some of our delivery folks.

We’ve got a sales conference coming up here in April and the entire conference is dedicated to the processes that we’re defining around this strategy. So, we’re excited about, I think we will see accelerated traction, we’ve already seen some but I do think we'll see accelerated traction coming out of that, probably realized more in the second half of the year.

But by the way, our guidance in the commentary I made earlier about a pickup in the second half of the year is not dependent on this, that’s just from where things are today. If this were to actually yield great results coming out of sales conference I’d expect even acceleration to that.

And by the way George while I have you I want to come back to something that I think is important to mention, you asked about it and I’d like to answer around the investment with Premier. So we’re as Paul mentioned, will offset the R&D tax credit benefit that we’ll get this year or at least we’re planning to we’re anticipating investing about in equivalent amount this year and it could vary some, but roughly about an equivalent amount this year and building our own assets associated with the Premier channel, the Premier solution and actually some of the IBM solutions that are entwined in that. So we’re working through that right now but we’re preparing to make that commitment and plan to see that coming.

The assets are related to primarily accountable care organization reporting, not directly mandated but more or less implied or mandated by CMS for Medicare reimbursements and more likely be government healthcare reimbursements as well, so we see this as a substantial opportunity out there, it will be beyond the Premier platform as well so it’s a perfect low risk investment for us to make.

George Price - BB&T Capital Markets

Okay and in terms of the tax rates that we should see Paul for the first quarter and for the full year, if you provided them I apologize that I missed them but we’re talking kind of low 30s for the first quarter and maybe upper 30s for the full year given the R&D tax credit stuff if you can just nail me down on that?

Paul Martin

And predicating tax rate is always a challenge but yes, I think the rate in Q1 with the benefit from the 2012 are de-tax credit should be in the low 30s and the full year rate I think it was 38% on a GAAP basis for 2012 and we’re expecting it to be a 1.5 point to 2 points lower than that in 2013.

George Price – BB&T Capital Markets

Okay all right so somewhere between 36, 37?

Paul Martin

Yes that’s reasonable, yes.

George Price - BB&T Capital Markets

Okay and the fourth quarter gross services revenue was slightly below the guidance range, if I am looking at it right and I just wondered, Jeff, if you could kind of elaborate on what you think happened there, did things kind of slip out into the first quarter or what drove that?

Jeffrey Davis

It was primarily (inaudible) starts. So with the guidance in the forecast, we had going into guidance, by the way I will point out, we have almost never missed guidance, it may be the first time in many, many years but with the forecast we counted on some starts that did get pushed out. Sandy impacted us a little bit, I don’t want to use that as an excuse but there is a few hundred thousand dollars of lost services where we had folks that couldn’t travel. We actually had one client that was directly impacted, we also know a lot of people who were stuck in gridlock, travel gridlock for a week or so and so that has been impacted us well. But honestly I would say it was more probably business pushing beyond we expected in the first quarter. The good news is those deals were booked and started now and didn’t go away. So, most of them I think again have not gone away and are starting this quarter.

George Price - BB&T Capital Markets

Okay and do you have, Paul, the cash from Ops, CapEx and software for the quarter?

Paul Martin

Yes, so the 10-K either has been filed or will be filed you know here in the next hour. All that’s in there and if you want I can, certainly follow up if you have any questions as you look at that.

Operator

Thank you and I’d now like to turn the call over to Jeffrey Davis for closing remarks.

Jeffrey Davis

Well thank you all again for your time today. As always we look forward to speaking to you again in a couple of months to talk about Q1. Thank you.

Operator

Thank you, ladies and gentlemen, that now concludes your conference call for today. You may now disconnect. Good day.

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