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Executives

Jack McDonald – Chairman & CEO

Paul Martin – CFO

Jeff Davis – President & COO

Analysts

John Maietta – Needham & Company

Jeff Martin – Roth Capital Partners

Brian Kintslinger – Sidoti & Company

Richard Baldry – Canaccord Adams

Colin Gillis [ph] – Brigantine Advisors [ph]

Perficient, Inc. (PRFT) Q1 2009 Earnings Call Transcript May 7, 2009 9:02 AM ET

Operator

Good day ladies and gentlemen, and welcome to the Perficient first quarter 2009 earnings conference call. My name is Erica, and I will be your operator for today. At this time all participants are in a listen-only mode. We will have a question and answer session towards end of the conference. (Operator instructions)

At this time, I would now like to turn the call over to Jack McDonald, Chairman and CEO. Please proceed.

Jack McDonald

This is Jack McDonald. With me on the phone today are Jeff Davis, our President and COO and Paul Martin, our CFO. So I like to thank everyone for their time this morning. As is the usual case, we will have about 10 or 15 minutes of prepared comments, after which we will open the call up for questions.

Paul, would you please 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 first quarter, particularly if you consider the environment that we're operating in. While revenues for the quarter were down about 11% year-over-year, they did come in above analyst consensus estimates. So we beat estimates on revenues and came in at the high-end of our initial guidance range. We are also continuing to generate strong cash flow, and if you noticed we built our balance sheet further during the quarter, even while repurchasing shares.

So generating strong cash flow and beating estimates, we feel very good about the first quarter. Now as we lookout to the rest of 2009, we are feeling good about the guidance that we put out of $180 million to $200 million of total revenues for the year. And in addition to that, we are taking prudent actions as is always the case to reduce costs. So we should be in good shape on that front as well.

Jeff is going to talk about this a little bit more later. Obviously the market remains challenging, and clearly there is an influence from macroeconomic conditions on purchasing patterns by clients, but as we discussed on our last call there are some positive signs.

First off, we are still winning business and we are not seeing any kind of wholesale project cancellations, not seeing a diminishing pipeline. In this current environment it is not at all like what we saw after the dotcom crash. In the early part of the decade, we saw a real hit at the pipeline and massive project cancellations, not like that.

One sign that has us cautiously optimistic is if you look at our last forecast our weighted pipeline and closed deals totals have turned higher for the first time this year. So it is essentially a 90 day compare when is actually in the backlog, if you look at weighted pipeline, the tip of the plane is really turning up now, and that should be a sign, there is no guarantees, but it should be a sign that we have seen a leveling off and potentially an up tick in demand in revenue level.

So we will continue to monitor that but it is a positive sign. It means that we have got more deals in the pipeline with a reasonable closure expectancy that are moving through those various sales stages.

While our balance sheet continues to strengthen each quarter, we have never been in a better financial position from a balance sheet perspective.

The company has no debt. We've got nearly $25 million in cash at the end of the quarter, and that's after repurchasing another roughly 3 million of stock during the quarter. Of course that is in addition to our $50 million credit facility. There is zero drawn under that, although we do have access to that capital as we need it. And it puts us in a strong position to continue to execute on behalf of the business. So, you know, in this environment that means repurchasing shares at the appropriate time that could mean getting back out into the market and doing some acquisitions.

First our 10b-5 plan for stock repurchases remains in place. We announced a $10 million plan that we fully executed on last year, then we announced a second $10 million plan that we have $2 million [ph] in at. So still some substantial buying to be done under that second $10 million plan, there is $6 million to $7 million of additional buying to be done and we will continue to aggressively purchase under that plan.

So as I mentioned earlier, we continue to make adjustments to cost to ensure that we will be able to continue to deliver cash flow and profits, and we have proven time and time again that we will take the steps that are appropriate for the long-term health of the business, and continue to feel very good about our flexibility, and our capability to handle any challenges that the economy might present. We have a very flexible cost structure, built the business that way, low fixed cost, variable compensation structure, use of subcontractors that can also be a shock absorber in a challenging market environment, very low CapEx requirements for this business, and of course, ultimately a culture that is entrepreneurial.

This is a business that we built on and invested equity of less than $16 million, actually less than $10 million if you consider dollars returned to shareholders to repurchase shares. It is an entrepreneurial lean business, and we have proven time and again our ability to survive a tough environment and come out stronger on the other side.

We mentioned in the press release, and I put out an announcement a couple of weeks back, and are happy to say that we have got two new appointments to our Board of Directors, John Hamlin and David May. John and David both bring meaningful industry and financial markets expertise to the team, and I'm certain they will make substantial contributions. And so we are very happy to have them on board.

So, we continue to focus on customers and cash flow, building our balance sheet, continuing to monitor the acquisition market. As I say I don't see it is jumping back into that right now given that our shares are such a value, we will continue to buy back those shares and do what makes sense for building long-term value.

So with that I am now going to turn the call over to Paul Martin, our CFO, and Paul if you could take us through the quarter's results in detail. Thanks.

Paul Martin

Thanks, Jack. Total revenues for the first quarter of 2009 were $51.3 million, an 11% decrease over the year ago quarter. Services revenue including reimbursable expenses were $45 million, with organic growth of negative 13.4% on a trailing four quarter average annualized basis, including businesses owned at least two quarters.

The sequential revenue growth in the first quarter of 2009 compared to the fourth quarter of 2008 was minus 8.6%. Gross margins for services, excluding stock compensation and reimbursable expenses, for the first quarter was 30.5%, which is down from 34.7% in the first quarter of 2008.

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

SG&A expense was $10.5 million in the first quarter, including $1.8 million of non-cash stock compensation expense.

Excluding non-cash stock compensation, SG&A expense was $8.7 million down $500,000 compared to $9.2 million in the comparable 2008 quarter. SG&A excluding stock compensation as a percentage of revenue was 17% in the first quarter of 2009 compared to 16% in the first quarter of 2008.

EBITDAS defined as earnings before interest, taxes, depreciation, amortization and stock compensation for the first quarter of 2009 was $5.3 million or 10.3% of revenues compared to $9.1 million or 15.9% of revenues for the first quarter of 2008.

Net income decreased to $915,000 compared to $3.1 million from the first quarter of 2008. This is our 23rd consecutive quarter of positive net income. Diluted GAAP earnings per share decreased to $0.03 a share from $0.10 a share in the first quarter of 2008.

Non-GAAP earnings per share was down 35% to $0.11 a share for the first quarter of 2009 compared to $0.17 per share in the year ago quarter. Non-GAAP earnings per share is defined as GAAP earnings per share plus amortization expense and non-cash stock compensation net of the related taxes divided by average fully diluted shares outstanding for the period.

Our average billable headcount for the first quarter of 2009 was 1078, including 968 billable consultants and 110 subcontractors. In addition to the billable headcount, at March 31, 2009 we had an average 170 SG&A personnel, which resulted in a total average colleague headcount of 1248 as of March 31, 2009.

We have reduced our average billable U.S headcount by approximately 7% in the first quarter and have reduced it an additional 6% in April, as we continue to adjust our cost structure based on changes in customer demand.

During the first quarter, we spent $2.8 million and we repurchased 625,000 shares. We have spent $11.9 million in repurchasing 2,473,000 shares since the plan's inception last year. We continue to believe that our shares are undervalued and that repurchases will drive future accretion and shareholder value.

As Jack mentioned, we continue to generate strong operating cash flow. Our operating cash flow for the first quarter was up 3% over the comparable prior year period even with lower EBITDAS. We ended the quarter with no debt and $24.9 million of cash on hand.

Our days sales outstanding and accounts receivable was 73 days at the end of the first quarter compared to 74 days at the end of the comparable prior year period even considering the impact of this tough environment. Our goal is to maintain our DSOs between 70 days and 75 days over time. Maintaining DSOs within this range will be a key ongoing operating focus.

With that I will turn the call over to Jeff for some commentary behind the metrics. Jeff?

Jeff Davis

Thanks, Paul. You know, as Jack mentioned earlier, in spite of the economy, I think Perficient really delivered what I consider to be pretty solid results in the first quarter. We continue to manage the business profitably.

Utilization was just under our target range of 80% at 78% including some (inaudible). And we continue to win new business closing 11 deals north of $0.5 million and a few multimillion dollar deals from existing and new accounts. So even in this climate we are opening up new accounts and building new relationships.

We also continue to benefit from, and I believe it helps us mitigate risk through this downturn serving a diversified client and industry base with a broad horizontal solutions and technology platform mix. In fact, during the quarter our top five customers combined represented just 21% of revenues, and no single industry accounted for more than 18% of revenues.

On the cost side, we took steps during the first quarter to ensure Perficient continues to generate strong cash flow. As Paul referenced, we have reduced variable cost by about 10% since the beginning of the year as we adjust to demand. Obviously, these were never easy decisions, and we really hope that this necessity is stemming, but we will continue to make these reductions as the market dictates if necessary.

As we mentioned in the year-end call, we continue to feel this market environment really represents solid opportunity for growth at our offshore facility in China. The company obviously remains under significant pressure to continue to implement the types of solutions we deliver, but to do so at a reduced cost, and of course that is true now more than ever in the environment that we are in, through the actions that we have taken to drive the offshore growth, and I'm referring to more intense sales focus, all the Perficient sales professionals are now carrying offshore quotas. We also are conducting regular offshore planning sessions as I mentioned in our last call. I'm personally involved in many of those.

Broader focus and skill mix in the global development centre. We have introduced and recently closed recurring revenue deals involving ongoing application maintenance and support, and obviously we are training the folks there in the offshore facility on new technologies. We have got a broader portfolio to offer there.

You know, as the market recovers, I am confident that we will resume our strong growth path. As we emerged from the tech bubble, if you look back at that with 18% organic growth, compounded annual growth rate from 2003 to 2007. I think despite the fact that we're a much larger firm now that double-digit growth rates are not only possible, but are likely.

The investments that we are made and the infrastructure that we have built over the past few years has us even better positioned to take advantage of the recovery at it begins.

I think we mentioned this before, and we alluded to it in the release, but we are seeing customers really backlogging projects. These projects that are not being done right now are not going away. They are going into a backlog and are going to be having to be done. That is the message and that is the information we are getting back from our conversations with CIOs and line of business folks is that these projects will need to be done, and we are hearing maybe at the end of 2009, maybe 2010 is the timeframe where I expect some of that to really pick up.

And lastly, I will comment a little bit on what we are currently seeing in the market. Q2 looks to be a pretty challenging quarter, but I think there is some potential positive indicators as we look of the forecast and look (inaudible). It is too early to know if this is sustainable, but we have seen an improvement in the pipeline both gross and weighted pipeline over the past month.

(inaudible) forecast every two weeks. So the last two cycles over the past month, we are seeing improvement on both gross and weighted pipeline in each of those cycles for the first time this year. So I think that is reason to be somewhat encouraged. In addition to that, the Q3 forecast is showing some improvement over the Q2 forecast at this equivalent stage 90 days ago.

In other words, as you look at the Q3 forecast today, it actually looks better than the Q2 forecast did 90 days ago. Again, we will see if that is sustained or not but if it is, it means we should be seeing some improvement in the third quarter.

As I said, it is too soon to know if this is the bottom, and if it is how soon we will see meaningful improvement like any other business, it is a function of the economy but it is still encouraging to see some of these potentially positive signs.

With that I am going to turn the call back over to Jack for the Q2 outlook. Jack.

Jack McDonald

Thanks. The following statements are based on current expectations, and these statements are obviously forward-looking and actual results can differ materially.

Our expectation for the second quarter is pretty solid. The company expects second-quarter 2009 services and software revenue, including reimbursed expenses to be in the range of $43 million to $46 million and that is comprised of $41.8 million to $43.9 million of revenues from services, including reimbursed expenses, and $1.2 million to $2.1 million of revenue from sales of software. So the top end of that change $46 million is about $1 million short of consensus, but again given the environment we feel pretty good about that.

And as I mentioned earlier, we are also feeling good about our guidance range for the year of $180 million to $200 million in total revenue, and as Jeff was indicating and I mentioned earlier, we have taken aggressive actions on cost. So we should be in good shape there as well.

So with that, let me ask the operator to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Your first question comes from the line of John Maietta with Needham & Company. Please proceed.

John Maietta – Needham & Company

Thanks a lot. Jeff, I was wondering what you are saying in terms of close rates as you look across the quarter right through today, sort of the linearity. I know close rates are down year-over-year, but you know, any change in trends there?

Jack McDonald

Close rates in terms of our success, in terms of closing deals, or you mean just the overall pace of closes.

John Maietta – Needham & Company

No, just the overall pace of closes.

Jeff Davis

Yes. It’s actually trending up that was – what I was referring to. When I talked about weighted pipeline, we look at weighted pipeline and closed deals, and again you know, I'd be very cautious in talking about this because it has only been two cycles. So for the last four weeks we’ve actually seen it trending up. It had trended down. We started the year okay. It did begin to trend down at the end of the first quarter, and then you know, really probably mid-February through March, we actually saw it trending up again in April. You know, hence the reason for some optimism here, but we have seen a dip and again we are rising up a bit, whether that's a blip or sustainable or not remains to be seen.

John Maietta – Needham & Company

You know that's helpful, and then with regard to moving work offshore to China, is there a certain – I know it is early days, but is there a certain industry where have you been doing the majority of the work or certain you know types of software development or –

Jeff Davis

Yes. It's – I must say it's pretty much across-the-board certainly from an industry perspective. You know, mostly it's obviously software development. We do it around really all the platforms, IBM, BEA. We are training folks as I mentioned on more technologies including TIPCO and even Oracle CRM. Right now the concentration is probably mostly around IBM and the Oracle technology.

John Maietta – Needham & Company

Got it, okay.

Jeff Davis

But again industry wise it’s pretty diverse.

John Maietta – Needham & Company

Okay, and is that mostly testing type stuff or what specifically –

Jeff Davis

It’s development, and now as I said earlier we were beginning to do application support and maintenance as well and so it's actually an offering I'm pretty excited about, but most of it today is development, and we do – you know, we got a couple of clients, a few clients where we do significant outsourced development for the systems that are necessary to drive their business. We've got a healthcare payer client that manages or outsources State Medicare and Medicaid programs and now the CHIP program, and we've built with them the underlying software that supports that process. We've got a number of clients that have some more stories, different industries with similar types of solutions.

John Maietta – Needham & Company

Perfect. Thanks a lot.

Jeff Davis

Thank you.

Operator

Your next question comes from the line of Jeff Martin with Roth Capital Partners. Please proceed.

Jeff Martin – Roth Capital Partners

Thanks. Good morning. Hi guys.

Jeff Davis

Good morning.

Jeff Martin – Roth Capital Partners

Can you give a little more color into what gives you the conclusion that Q3 is showing improvement over Q2, and you mentioned that in this stage a quarter ago, Q2 was looking little worse than Q3 is looking now. Give a little more insight into that?

Jeff Davis

Sure, and again I want to emphasize caution around this. It's early, but we did want to share with you what we're seeing. We run – one of the key things that we look at when we run the forecast is what we call the 90-day compare. You know, when times are good, our visibility can extend beyond 90 days in this climate, probably even a little short of 90 days. So one of the key things we look at is hey, what was the forecast 90 days ago, and of course for an equivalent look at that right now, we're looking at Q3 obviously.

We are on to Q3 as of today, and in looking at the Q3 forecast comparing it to the Q2 forecast 90 days ago, we are showing some, what I call modest improvement. I actually think that that there is a chance that they will even get better because of the other thing that we mentioned, which is that we've seen a gross and weighted pipeline. The weighted pipeline is really probably the key metric there. Weighted pipeline has taken the probability of a close, which is assigned by the business developer to any singular deal and applying it to the value of that deal.

So we have seen that trend up pretty significantly as well over the last two forecast cycles, which is over a month or every two weeks. Does this answer your question.

Jeff Martin – Roth Capital Partners

It does, it does, thanks, and then –

Jeff Davis

You know, hope (inaudible) you know, but it’s at least an encouraging sign right now.

Jeff Martin – Roth Capital Partners

Sure, and then could you also give little more insight into you know, what your thought process is on whether or not you'd make acquisitions at this point. You haven't done one in I think a year and a half now?

Jeff Davis

You know, I think I am going to let Jack comment on this as well after my true sense is out, and let him comment too, but I think it's early to get serious about that. As Jack mentioned earlier on the call, we are certainly staying active in the market. You know, we want to be visible out there. We've actually had some folks that we had talked to over the past year or two or two or three even come to us now and you know, seeking to be acquired, but you know there are a lot of – it's really a mixed bag out there.

There are a lot of businesses that we talked in the past who are really, really not doing well and we don't want to buy a fixed rubber [ph]. This is, you know, it is not – sort of not what we do anyway, and certainly I think now it's not the time for that. So it is the following nice thing we need to avoid, and obviously we need to see that there is some stability, I think in this sector and just in general, but again we are staying active out in the market, and we’d like to get back into the acquisition game as soon as we feel like those things are in place. My opinion is this is probably not this year, but I'm hopeful that we'd have a couple of deals teed up you know, as soon as that recovery seems like it is sustained and that you know, maybe as early next year, but I'll let Jack comment as I said.

Jack McDonald

You know, I completely agree with that. The only thing I'd add is we've got a great piece of capital right now, and repurchasing our shares, which we need to believe are significantly undervalued. So we'll do that. Jeff is just exactly right. That's what we are doing. We’ll see that up tick, and you know Jeff mentioned earlier that potential for double-digit organic growth coming out of a recession like this one. You add that opportunity to our ability to get back into the M&A market once the economy turned, and you know you could see some significant growth from the combination of the two as we head out into 2010. Obviously, no guarantees on any of that but we are optimistic.

Jeff Martin – Roth Capital Partners

Okay, and then Paul what – I missed it and you probably said it. What was the cash flow from operations number for the quarter?

Paul Martin

Yes, I said it was up 3%, and the cash flow from operations numbers was about $4.8 million.

Jeff Martin – Roth Capital Partners

$4.8 million and –

Paul Martin

Yes, and we filed the Q this morning, so all that is out there.

Jeff Martin – Roth Capital Partners

I will just look there. Thanks guys.

Jeff Davis

Thank you.

Operator

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

Brian Kintslinger – Sidoti & Company

Hi good morning guys.

Jeff Davis

Hi Brian.

Brian Kintslinger – Sidoti & Company

The first question I had and I joined late, so I am sorry if you have advanced this. But what is the linearity in revenue. Maybe even more importantly the trend has occurred in April and early in May. Have you seen a slight downtick. Is that what we’ve seen so far?

Paul Martin

Yes. We started. You know let me remind, I guess everybody a little bit about we talked I think on the last call, and you know we’ve got the guidance out there for the year of $180 million to $200 million, and I think we spoke about the fact that we thought that would be sort of an L, or maybe even a soft U with a small tail on the end there, and we were actually pretty pleased with the Q1 results. They are a little better than we had, I think anticipated.

However, the revenue did trend down, not dramatically but did trend down through the quarter. We have seen that slow if not stabilized now and April and May looks to be the same. June is probably the wild card whereby the way there is upside. I mean the forecast that we put out there, the guidance we put out there reflects the forecast. So there maybe some upside in June. Visibility, I guess overall in this climate is pretty dim, but we’ve seen some trending down, we’re seeing that trend slow, and we’re actually seeing pipeline, weighted pipeline in particular pick up. So, again cautiously, I would say that we’re hopeful we are seeing a reversal in that trend.

Brian Kintslinger – Sidoti & Company

We haven’t heard about a weighted pipeline too often. So is a weighted pipeline basically opportunities to clients that either are discussing out there and yet waiting your opportunity to win them versus competition?

Jeff Davis

Yes, it’s a good question. The weighted pipeline I'm referring to is as I mentioned before is just simply taking the probability of a win there, assigned by the business developer to the value of that deal. So, when you get a dollar view of the pipeline. So you got the gross pipeline, and then you've got that same pipeline with those probabilities applied to it to get you the weighted pipeline. I will tell you that the odds or the percentages are very, very, very low until we’re in a proposal stage. So the answer to your question is you know, the majority, the vast majority probably 80% to 90% of that weighted pipeline is made up of deals where we have a proposal on the table.

Brian Kintslinger – Sidoti & Company

And, I guess how do you come to a conclusion, probabilities are so obviously arbitrary. So is it based on clients and what your history is with them versus a new client. I mean how do you guys come up with percentages?

Jeff Davis

Yes, to be fair it is subjective but, you know, we’ve been at this for you know, 10 years as Perficient and most of our, well if not all of our business developers have been in this industry for at least that long or longer. So, we don't have any sales folks right now. A very, very small percentage of our team that hasn't been around for a number of years. So it's a process that we developed over the years. True, it’s somewhat subjective. I mean we do drive through stages, like I said if it is just an opportunity identified. You know, we limit the amount of percentage they can put on that, okay. And then as we progress through to that proposed stage there's another bracket that they can go into and in fact, you know, we’ve got it verbal, but it is still not inked. It’s still in pipeline. We don't put anything to back on until we got a signed deal, so then yet – there's yet another bracket. What we tend to find is we were usually working hard to get them to actually increase their percentages, because everybody always wants to hedge their bet, but it is, you know, I'd say it is probably more, little more hard than science but with all the history and the analysis that we do, it has driven more towards the science.

Brian Kintslinger – Sidoti & Company

Well, and then I would (inaudible).

Jeff Davis

Forecast perspective in terms of putting the quarterly number out there, and if you look at the company's history over the past 35, 40 quarters really, you know, I can’t remember, it's been so long now. I can't remember the last time we actually missed. So, you know, we’ve I think proven through time that we have got a fairly conservative and reliable forecasting mechanism. It’s perfect but it is a pretty strong track record.

Brian Kintslinger – Sidoti & Company

Have you guys – in the past you haven't – you've shied away from it, and maybe you still will, but I’m just curious can you quantify, you know the backlog of the pipeline at all. Are you electing to do that?

Jeff Davis

You know, if you look at the midpoint of our guidance range that's about it. That's the combination of the two. I don't want to break them out, but I will tell you the percentage of each that makes that up is the same, it is consistent. So, you know, there is not a situation if you look at Q2 or what I refer to in Q3, where the pipeline component is normally the larger component. It's very consistent.

Brian Kintslinger – Sidoti & Company

And can you talk also on pricing in the US and as well as in any of your offshore locations, just China, I mean India guys (inaudible) usually are seeing some pricing pressures. So give us a sense for your different markets where you may or may not be seeing pricing pressure.

Jeff Davis

You know, we certainly are seeing some. It's not, as I mentioned before it's not wholesale. I would say we are seeing more today than maybe six months ago, but it's not wholesale price pressure. Our rates picked up a little bit in the first quarter that was mainly due to wrapping up some lower rate deals, and is somewhat offset by some pricing pressure. We do go head to head with offshore occasionally. We actually compete with them pretty well.

What we are finding, by the way on offshore it’s a size of projects that we played. (inaudible) engagements not been massive, massive, you know eight figure offshore outsourcing, but what we are seeing there is that even the offshore guys ones that were competing against tend to be cognizant that has a significant US base, and the rates that they use in the US are, you know, easily the same and in some cases higher than ours. So we compete well there, we’re seeing a little pricing pressure, but so far it isn’t dramatic. What we are seeing more of right now is just, am I going to spend this money now or not, and not so much clients are taking advantage of the current climate and driving prices down, but more just, am I going to do this project right now. Again there’s some of that but right now it's not a super factor and how we are pricing in the market.

Brian Kintslinger – Sidoti & Company

(inaudible) I am sorry, what was the average rate for the quarter, the bundled rate?

Jeff Davis

Total including our China resources is 108, when you exclude China it is only teens, is that right Paul.

Paul Martin

That is right and they’re up about 2 bucks from Q4, but further you know reasons Jeff just mentioned.

Brian Kintslinger – Sidoti & Company

Right, and in terms of utilization, you’ve obviously taken some measures last quarter and already in this quarter. Give us a sense, I mean the margin was down to 32%. Where will utilization margin bounce back, if you guys it plays out like you suggest in the second quarter do you think?

Jeff Davis

You know, I think it will be fairly consistent. We hit, as I mentioned we hit 78% in the first quarter. There is little room there that our target in this environment is 80%, our normal target. In a healthy environment it is 82% to 84%, it is right around 83%. So we’re targeting 80%. We hit 78% in the first quarter. We might be able to get to 80% this quarter. I’m pleased actually that we are managing to the high 70s, 78%, 80%. We are pushing to get to that 80% level, major utilization to that level and a contracting climate is very difficult. So you know, again from an outlook or modeling standpoint, there might be some room there, but I think – I think it is going to be probably pretty similar to what our results were in Q1.

Brian Kintslinger – Sidoti & Company

In Q1, about 33% of utilization wasn’t that weak, was that a function of and maybe I have it wrong, it is almost 33%. Do I have that right?

Jeff Davis

Yes, I think that's right. That is stock count Paul, is that correct.

Brian Kintslinger – Sidoti & Company

Yes, and that was the drop and if utilization wasn’t, because you have been so quick to change your employee base. What is the function then of the drop in the margin?

Jeff Davis

Well, actually every about 1% of utilization does affect the margin by about 1.25 or so. So we did – we were at 78% versus 80%. so I think a couple, you know, two of those point deltas there was – maybe we will be at 35% or 36% if we are hitting 80% utilization or 78%. So that's one thing, and then we have had some cost increases relative to some embedded costs in projects. We are making some investments now, and so there's more – some more travel cost. We are actually bringing from China consultants over for training in the US, and some things like that that are driving up costs a little bit. Paul do you have anything that you want to add.

Paul Martin

No, I think those are the big drivers. You know, I guess you have the mix, a little bit on you know, we have our billable bonus, and we have probably a little higher proportion of our cost reductions or headcount reductions have come in the local business units. So that sort of brings up the blended travel cost.

Brian Kintslinger – Sidoti & Company

(inaudible).

Jeff Davis

That’s right.

Brian Kintslinger – Sidoti & Company

One more question and I will get back in the queue is, have you guys planned on giving salary increases this quarter, and if so on a blended rate, you know, what do you think you will pull up?

Jeff Davis

We’re only doing merit increases on a very exceptional basis right now. So I don’t think it’ll be – I don’t think you will see a material change there.

Brian Kintslinger – Sidoti & Company

Thanks.

Operator

Your next question comes from the line of Richard Baldry with Canaccord Adams. Please proceed.

Richard Baldry – Canaccord Adams

I think last quarter you said that roughly 20% of your deliverables were from offshore. So I’m wondering if the – your mix stayed roughly the same. Maybe, where do you see that heading over the balance of the year in the long term?

Jeff Davis

Right now the mix is about the same. It’s about 20% of our delivery capacity is in offshore. Obviously that is because of the rate differential in revenue that’s substantially lower, you know somewhere in the mid-single digits there. I expect that that will increase. You know in this climate, with contraction et cetera, I don’t think that we will see a dramatic difference there. As I mentioned before, we have got a lot of levers in place, and it is an area that we are really focusing on driving more business. So, I think over time, and perhaps even by the end of the year, we would see a relative increase to that. I don’t know if that it will be dramatic, you know, maybe it goes from 20 to somewhere 20 and 25 by the end of the year, but we are certainly working in that direction.

Richard Baldry – Canaccord Adams

I think in the last call you said that it could come in somewhere in the upper end of your guidance, closer to the $200 million range that year – what is the potential to do something around $25 million in EBITDAS. I am just wondering if the second half does start to turn out if you are seeing some early signs. Do you think that is still an achievable range?

Jeff Davis

Yes, I think that is still in our model. Paul do you want to comment on that?

Paul Martin

Yes, it is absolutely, if we see that turn up in the second half, I think it is possible that is definitely a doable number.

Richard Baldry – Canaccord Adams

Then can you just quickly touch on quality of receivables, it looks like DSOs have actually been very good. So it doesn't seem like you have a problem, but how tough that has been scrubbed lately? Thanks.

Jeff Davis

Yes, so as we talked about goal of 70 to 75 days, I think certainly we have been keeping a nervous eye on this early since even more so than normal starting about third quarter of last year, and put some additional process improvement. So I think we feel pretty good about it. We actively manage it and that being said, there is always a possibility some accounts will go bad, but there is not a lot of old stuff, and we're looking at credit quality and we feel pretty good about it at this point.

Jack McDonald

One thing I would add is we went through the process both in the third and fourth quarter of doing a whole scrub of our accounts receivable, and pushing as hard as we could with the auditors to reserve any issues, and it was a relatively small number, though, we have really just gone through a full scrub process. So (inaudible).

Richard Baldry – Canaccord Adams

And I think you also said last quarter that while the revenues were down year-over-year, you still actually serviced only one last customer has a total unit number. So slightly smaller deal sizes on average. Can you maybe talk qualitatively about that in Q1 as well, whether that is really still the same trend that your seeing, that the breath of customers still holding up, maybe simply slightly smaller projects as people try to hold out for a rebound in the macro. Thanks.

Jeff Davis

Yes, that is accurate. Our customer account has gone down some as we have wrapped up projects of some existing accounts relationships, and by the way we got great referenceable relationships. We expected that there will be other projects in some of those accounts I am referring to. But certainly we have completed some projects there, so those customers fall out of the customer, current active customer account, and we have added new customers, but the pace of adding new customers in this climate isn't enough, and isn’t what it typically would be isn't enough to keep the overall customer account from dropping a bit. However, the diversity from an industry standpoint and from a solution, the work that we are doing for on the services standpoint is still quite good, and we've got really a very strong customer base, certainly doing smaller projects.

Richard Baldry – Canaccord Adams

Thanks.

Jeff Davis

Sure.

Operator

The next question comes from the line of Colin Gillis [ph] with Brigantine Advisors [ph]. Please proceed.

Colin Gillis – Brigantine Advisors

Hi everybody.

Jeff Davis

Hi Colin.

Paul Martin

Hi Colin.

Colin Gillis – Brigantine Advisors

Just talk about, what are customers telling you about their budgets for the full year. Obviously, a lot of these projects need to be done, but are they going to get slotted for 2009 or does it sound like there is the potential for things to get pushed out into ’10?

Jeff Davis

You know we're seeing a – it is a mixed bag. We're hearing both things. I kind of alluded to on this call. We got some customers that are saying hey the budget is there but on hold, and the specialty line of business, folks are pushing to go ahead and move forward some of these engagements. We have had some deals come that were on hold, and we thought were going to stay on hold probably till 2010, and actually got started up this year, or will be starting up. So we are seeing some of that. I would say it is a mixed bag but probably the predominance is more towards the end of this year or really more 2010. We're hearing a lot of 2010, and so as I mentioned on the call a mixed bag thing, and there is a good chance we could see some very nice pickup, either late this year or early next year and again we are seeing maybe potential for some modest pickup even as early as the third quarter.

Colin Gillis – Brigantine Advisors

Focusing on the type of work that (inaudible), there's got to be a certain degree of build of pent-up demand that is going to get unleashed once the CIO has comfort in spending the budget.

Jeff Davis

Yes, I feel that is absolutely true. That is why I said before that I think that the possibility in my mind more of a likelihood of double-digit organic growth on the yields of this. The question is, what are those yields. So in 2010 or late 2009 as some of that begins to get released, what is the pace that it is being released. But what you're saying is exactly right, that is exactly what we are hearing from our customers. It is not that they are finding other ways to do these projects. They are just living without them for now, but we will be doing them somewhere down the road. And I think that the demand gets more and more pent-up, and the line of business gets more and more frustrated, you know, that is going to have to break loose at some point. I'm optimistic that it will be sooner rather than later, but it could still be as late as, as we talked about is late as later this year or late this year or early next. And even then I think it'll be kind of a bell curve.

Colin Gillis – Brigantine Advisors

What about – what you see specifically on the pricing trends from the regional product competitors, are we getting more fear-based pricing happening at that level?

Jeff Davis

You know, we are not – to be honest we are not seeing a lot of those guys right now. Some of them have actually gone by the wayside already, and we are not seeing a lot of competition with them right now. Those that we are competing with are such niche oriented firms around BI or Oracle CRM solutions like that. We're not seeing a tremendous amount of pricing pressure, price change there, fear-based pricing. There is some though. There is, I want to re-emphasize that we are seeing pricing pressure over all in the market. I will say that I'm a bit surprised that it is not more traumatic than it is, but it is having an impact.

Colin Gillis – Brigantine Advisors

And then give a little bit color on the sequential trends, for the months in the quarter and then also for April? Walk us through that process again, how did January, February and March stock up versus April, and when do you see –

Jeff Davis

I don't know that I'm going to get into more detail than I already provided, but certainly we did see a downtrend more actually in March. January and February was pretty solid, and March trended down a bit. April, May – April flattish with March and May right now is actually showing a slight up-tick. And June, as I said I think it is really too soon to know, although I've got some optimism that we may see some upside there, but again that optimism is very cautious.

Colin Gillis – Brigantine Advisors

Just one last one. Are you leading with the offshore facility for maintenance work, with some new customers versus or it is mostly adjunct for existing clients?

Jeff Davis

Yes, it is mostly – it is mostly new clients, but total solutions. So it is actually something we are pushing hardest, I would say, with new clients in the total solution delivery development through management support. However, we certainly are going back to existing clients as well, existing customers as well, and offering that and pushing that through them as well. And that is actually where we have had some good success early on is with a couple of existing accounts that I mentioned before. We have actually locked in some long-term (inaudible) recurring revenue deals around application maintenance and support.

Colin Gillis – Brigantine Advisors

(inaudible) and I guess, did you say that is also one of the drivers and the ability to chase down some of these multiple (inaudible)?

Jeff Davis

Yes, I think that is right. That is why I'm excited about building that capability and having some early success with it. And this isn’t going to happen overnight, but I think over time it does really improve our ability to go compete even more with the bigger guys then we already are, and so we are to a great degree now have a great win rate now, but I think this just really improves that capability, now we've got the sort of one-stop shop capability that some of those guys have.

Colin Gillis – Brigantine Advisors

Thanks for taking my questions.

Jeff Davis

Thank you.

Operator

(Operator instructions) Your next question is a follow up from the line of Brian Kintslinger with Sidoti & Company. Please proceed.

Brian Kintslinger – Sidoti & Company

Thanks, and I may have missed if you said it, because I joined late, can you just provide the revenue by industry and by platform?

Jeff Davis

We didn’t give that out, but Paul has got it.

Paul Martin

So, largest is our healthcare at about 18%, energy is 16%, telecom 13%, are the largest three on the industry. From a platform perspective IBM is about 21%, Oracle 20%, and TIPCO 15% are the top three.

Brian Kintslinger – Sidoti & Company

And what about financial services and maybe insurance?

Paul Martin

Financial services and insurance together are about 8%, down from 9% last quarter.

Brian Kintslinger – Sidoti & Company

Great thanks.

Operator

At this time there are no additional questions. I would now like to turn the call back over to Jack McDonald for closing remarks.

Jack McDonald

Okay, well thanks very much. I appreciate your time this morning, and we look forward to meeting you again next quarter. Thank you.

Operator

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a good day.

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