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Perficient Inc. (NASDAQ:PRFT)

Q2 2009 Earnings Call

August 5, 2009; 9:00 am ET

Executives

Jack McDonald - Chairman & Chief Executive Officer

Paul Martin - Chief Financial Officer

Jeff Davis - President & Chief Operating Officer

Analysts

John Maietta - Needham & Company

George Price - Stifel Nicolaus

Brian Kintslinger - Sidoti and Company

Rich Baldry - Canaccord Adams

Operator

Good day ladies and gentlemen, and welcome to the second quarter 2009 Perficient earnings conference call. My name is Michelle, 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, Chairman and CEO, Jack McDonald, please proceed.

Jack McDonald

This is Jack McDonald, good morning. With me on the telephone today are Jeff Davis, our President and COO and soon to be our CEO, and Paul Martin, our CFO. So I want to again thank everybody for your time. We’ll have as usual 10 to 15 minutes of prepared comments, after which we will open the call up for questions.

Paul, could you please read the Safe Harbor statement.

Paul Martin

Good morning everyone. Some of the things we will discuss in today’s call concerning future company performance will be forward-looking statements within the meaning of the Securities Laws. Actual results may materially differ from those discussed in these forward-looking statements, and we encourage you to refer to the additional information contained in our SEC filings concerning factors that could cause those results to be different than 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 updated non-GAAP goals to the most directly comparable financial measures prepared in accordance with GAAP on our website at www.perficient.com under our “Investor Relations”. Jack

Jack McDonald

Perficient delivered a solid Q2 in what was admittedly a challenging market. Our revenues came at the higher end of our guidance range, as did cash earnings per share and we are in accordance with the analysts’ consensus estimate. So we are pleased about that.

We continue to generate good cash flow, and build our balance sheet and of course continue to repurchase shares more on that in just a minute. Jeff is also going to talk about this in his comments, but we do believe we are starting to see some signs out there of a potential rebound in the business.

July was our strongest sales month in the entire year of 2009, and significantly stronger. We saw close deals in July, 30% higher than any other month this year. So again we are not talking realized revenue, we are talking sales, which begins to hit revenues over the next few months. So, 30% higher in July than we saw in the next best month in 2009, obviously that’s a trend we need to see continue, but if it does we can be very, very well positioned for a snapback in both at the top and bottom line as we head into 2010.

Our balance sheet has continued to strengthen each quarter. Operating cash flow was increased and from a cash-on-hand standpoint we’ve never been in a better financial position. The company has no debt, more than $31 million in cash-on-hand at the end of Q2 and again that’s after repurchasing $4 million of stock during the second quarter and of course purchasing a total of $18 million of stock under the $30 million stock repurchase plan that we announced at the initial phase of last year.

So, $31 million in cash plus our $50 million credit facility and we’ve got zero drawn on that facility today, puts us in a very strong position to execute as we need to grow the business.

The cost adjustments, we have taken action there as we move through the year, took additional steps in the second quarter to structure operation to meet the current environment, including transitioning some of the business units and eliminating few positions, condensing four regions nationally into three. So we are, as always looking at ways to trim costs in the business. We are also reducing some leasehold expenses in certain markets.

I would say to you though, we do have a core SG&A infrastructure in place as Jeff and I have talked about on some previous calls. There are certain areas, like vertical markets and other areas where we are making investments. We are holding on in that core infrastructure because we believe when sales come back up and we can start to see the beginning of that here in July. We are going to have some significant operating leverage and we want to be in a position to execute well against that.

We continue to be confident in our capacity to manage to any kind of an economic situation. We do have a flexible cost structure, low CapEx requirements and again are positioned on with good operating leverage as we start to see an up tick.

We are again beginning to look more closely at acquisitions, and we are rebuilding that pipeline of deals with focus on early 2010, again we’ll see what happen. We are going to play it by years and we go through here, but our target would be to really start looking at executing acquisitions again early next year, if we continue to see signs of recovering in the market and our currency is in a position to fund accretive deals.

With that I’m going to turn it over to Paul Martin, who will give us some additional detail on the Q2 results. Paul.

Paul Martin

Total revenue for the second quarter of 2009 was $44.9 million, a 24% decrease over the year ago quarter. Services revenue excluding reimbursed expenses where $40.8 million with organic growth of negative 26.5% on the trailing four quarter average annualized basis.

The sequential revenue growth in the second quarter of 2009 compared to the first quarter of 2009 was minus 9.4%. Gross margin for services, excluding stock compensation and reimbursed expenses for the second quarter was 30%, which is down from 38% in the second quarter of 2008.

The decline in gross margins is primarily a result of lower utilizations resulting from softness in service demand and a slight decline in average bill rates. Management has and will continue to manage our labor cost to match expected demand. SG&A expense was $10.1 million for the second quarter, compared to $11.6 million in the comparable prior year quarter.

Excluding non-cash stock compensation, SG&A was $8.4 million compared to $10 million in the comparable 2008 quarter. SG&A excluding stock compensation as a percentage of revenue was 19% in the second quarter of 2009 compared to 17% in the second quarter of 2008.

EBITDAS, defined as earnings before interest, taxes, depreciation, amortization and stock compensation for the second quarter of 2009 was $4 million or 9% of revenues compared to $10.8 million or 18% of revenues in the second quarter of 2008. We reported a moderate net loss of 196,000 compared to net income of $4 million for the second quarter of 2008.

Diluted GAAP earnings per share was a loss of $0.01 compared to earnings of $0.13 for the second quarter of 2008. Non-GAAP earnings per share was down 60% to $0.08 for the second quarter of 2009 compared to $0.20 in the year-ago quarter.

Our tax rate for the three months ended June 30, 2009 was 186% compared to 41.3% for the comparable prior year quarter, primarily due to the magnified effect of certain state taxes, which are generally based on gross receipts instead of income, permanent items such as meals and entertainment and non-deductible executive compensation relative to a smaller income base.

Our average billable headcount for the second quarter was 998, including 892 billable consultants and 106 subcontractors. In addition to the billable headcount at June 30, 2009 we had an average of a 164 full time equivalent SG&A personnel which results in a total average colleague headcount of 1162 at June 30, 2009.

We have reduced our average billable U.S. head count from 1035 in Q4 2009 to 866 in Q2 2009, a reduction of 16%. We will continue to adjust our cost structure, primarily headcount based on changes in customer demand. As part of our ongoing cost reduction initiatives in the recent revenue contraction, we are planning to vacate several office space leases in the third quarter. This will result in a one-time third quarter charge and a decrease in future lease expense.

Turning now to the six months results; year-to-date revenues for the six months ended June 30, 2009 were $96.2 million, a 17% decrease over the comparable period last year. Year-to-date services revenue excluding reimbursed expenses were $85.7 million for the six months ended June 30, 2009, a decrease of 19% over the comparable prior year period.

Gross margin for services, excluding stock compensation and reimbursable expenses for the six months ended June 30, 2009 was 30.2%, which is down from 36.4% in the prior year period, again the decline in gross margins is primarily a result of lower utilization resulting from softness in services demand.

SG&A expense was $20.7 million for the six months ended June 30, 2009 compared to $22.3 million in the comparable prior year period. Excluding non-cash stock compensation, SG&A expense was $17.2 million compared to $19.1 million in the comparable prior year period. SG&A excluding stock compensation as a percentage of revenue was 18% for the six months ended June 30, 2009 compared to 16% in the comparable prior year period.

EBITDAS for the six months ended June 30, 2009 was $9.3 million, or 10% of revenues compared to $19.9 million, or 17% of revenues for the comparable prior year period. Net income was $700,000 for the six months ended June 30, 2009 compared to $7.1 million in the prior year period. Diluted GAAP earnings per share decreased to $0.02 a share from $0.23 a share in 2008.

Non-GAAP earnings per share for the six months was down 51% over the year ago period to $0.18. Our tax rate for the six months ended June 30, 2009 was 58.8% compared to 41.1% for the comparable prior year period, again primarily due to magnified effect of certain state taxes which are generally based on growth receipts and set of income permanent items such as meals and entertainment and non-deductible executive compensation relative to a smaller income base.

During the second quarter, we spent $4.2 million and repurchased 639,000 shares and as of June 30, 2009 we’ve spent $16.2 million on repurchasing 3.1 million shares since the plan’s inception last year, and we are up to 18 million in total spending through the current date. We continue to believe our shares are undervalued and that repurchases will drive future accretion and shareholder value.

As Jack mentioned we also continue to generate strong operating cash flow. Our operating cash flow for the six months ended June 30, 2009 increased 46% over the comparable prior year period even with lower EBITDAS. We ended the quarter with no debt and $31.3 million in cash on hand, an increase of $6.4 million during the quarter and $8.4 million since December 31, 2008.

Our day sales outstanding on accounts receivable was 72 days at the end of the second quarter compared to 75 days at the end of the comparable period last year. As we’ve always stated our goal is to maintain our DSOs between 70 and 75 days over the time.

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

Jeffrey Davis

Thanks Paul. As Jack mentioned earlier Q2 was challenging, but it was some thing we had anticipated and planned for. Utilization was flat with Q1 and again slightly below our target range of 80 plus percentage at 78% including subcontractors, but given the top line challenges in the quarter that’s a relatively healthy number and indicative of the adjustments we made.

As demand stabilizes and begins to grow, I’m confident we’ll have little problem in ramping the utilization backup, in fact we’ve demonstrated this in the past. We can run utilization in the 83% to 85% range which will translate to top line increase of about 9% and that would largely drop to the bottom line due to that leverage that Jack mentioned earlier.

From a sales standpoint, we closed 10 deals and also 500,000 in the quarter compared to 11 in the first quarter and a few multi million dollar deals at existing and new clients this quarter. Our revenue and sales remain well diversified across technology platform, solution areas, industries and geographies and obviously benefits us in any economy, but particularly important in a weaker climate.

During the quarter, our top five customers combined to represent about 23% of revenues in our largest industry, Energy which is still a very strong sector for us and expanding structure for us accounted for about 17% of revenues.

On our last call we mentioned that we believe that this market environment represented an opportunity for growth this year in our China facility, and we are seeing a lot of traction there right now.

While our total revenues were down for the company in the quarter on a sequential basis, our global development center revenue contribution increased in the quarter by 15% on a relative basis. So that’s the amount of contribution from offshore, went up by 15% relative to the rest of the company.

Again, this isn’t a situation where it’s impacting our existing revenues. This capability is helping us compete for and win deals we wouldn’t otherwise win. So, we are not cannibalizing here in the business and the gross margins are very, very strong out at that facility, about 60% even over 60% in most cases.

In fact we have now 17 clients that we’re serving out of the GDC. I think we were at about 12 in the last, so that’s strong evidence of our broadening traction there. I also mentioned in the last call that we had introduced and supported maintenance offerings that we were getting some traction and that’s going pretty well.

We’ve also made investments in developing application testing services. We’re beginning to see some very solid traction in that area as well even as a standalone service in addition to a complementary service to our development efforts.

Also in the last call, I referenced some cautious optimism for the third quarter and second half of this year, and while it’s still pretty early I do think we may have seen a bottoming process completing in Q2 and carrying into Q3, and the supporting evidence of that is the fact that as Jack mentioned, July was our strongest sales month year-to-date for the year.

The quarterly revenue sequential decline obviously has slowed. It’s not while we are still guiding down that guidance has improved over the last three quarters. Revenue per billable date, and I think this is the most important fact here.

Revenue per billable date for all three months in the third quarter is projected to be flat with June. So if in fact that sustains, we may be seeing a bottom right here June, July, August, September and in fact I actually think we’ve got some upside in the back half of the quarter or the back third of the quarter at least.

This month of September forecast is the strongest third month forecast we’ve had in a given quarter in the last four or five quarters. So I think these are all good signs, nock on wood no guarantees, but we are encouraged at least by those things. Again we have to see how August and September play out, but our pipeline continues to grow.

Anecdotally the client feedback supports the thesis that we are starting to see some incremental increase in client confidence here in the second half of the year. Again it’s early in the second half, we are beginning to see something loosening up or marking some dollars and moving forward on some planned projects.

I also think last week’s GDP number is a healthy sign. As I mentioned previously, I believe that when GDP come to a positive, Perficient would be in a great position to capitalize and resume on our path to sustain top line and bottom line growth.

As you may recall, we talked about this before coming out of the last downturn, we really emerge at an accelerated pace even within our industry and expect that the same thing is likely to happen again.

Of course our long term goal of reaching $500 million in revenue remains intact. When the market normalizes, we are going to look to supplement our work to drive organic growth with accretive acquisitions as Jack mentioned, and I mentioned this on our last call as well as and Jack touched on it earlier, we’re targeting early 2010 and I’m intent on getting out of the market and really getting serious about acquisitions again later this year, with an intent of closing something in the first half of 2010.

Obviously as Jack mentioned that’s very depended upon the overall environment, macroeconomic environment as well as our own business stability, and the stability in our sector. All in all, I remain more optimistic than ever about our future and I’m pleased to report these findings. Jack back to you.

Jack McDonald

In terms of outlook for Q3 and the rest of the year, first we are reiterating our full year revenue guidance of 180 million to 200 million. We are adjusting our cash earnings per share guidance for the full year to $0.30 to $0.40 and that was really already reflected in the analyst consensus number which has been in the mid 30s. So, no huge news there from a market standpoint.

In terms of the third quarter, we are looking at revenues in the range of $42 million to $45 million and comprised of $40 million to $42.3 million of services and $1.9 million to $2.4 million of sales from software. Again those are the numbers, and as Jeff has pointed out and I referenced earlier, we think we are seeing a bottoming process here. We are optimistic for the second half of the year and those July sales numbers were very strong.

I also want to talk about the CEO transition. This is really, not new news. We had disclosed sometime back in March that our succession plan had Jeff moving up to the well deserved appointment to CEO and we are setting the date on that now as September 1 of this year.

I’m going to remain as Chairman and I’m very, very happy to announce Jeff’s appointment, he and I worked together as partners to build this business for basically eight years now, and Jeff has been running the business day to day for several years as President and CEO and as I said in the press release I mean it, I mean the guy knows the business inside and out.

I know that investors and folks have got to know him and hear him on these calls and meet him in person and see him at the conferences know that and he is just going to be a terrific leader for this business.

He has done an exceptional job and we could not have gotten where we are today and the growth that we’ve had without Jeff and he has my full confidence. He has a full trust of our colleagues and our clients and our board, and I know that he is going just an exceptional CEO and be proficient into an era of continued strong growth. So Jeff congratulations and would you like to say a couple of words on it?

Jeff Davis

Sure. Thanks Jack, and thanks and also for the very kind words. I really appreciate it. I’m obviously really proud of what we’ve accomplished together, what Perficient has become and obviously I’m looking forward to your continued leadership as Chairman on the board and what is a new chapter I guess really for each others in the company. I’m of course excited about the challenge and welcome it.

As I’ve already mentioned, I’m as optimistic as ever about Perficient, I fully believe Perficient’s best days for our colleagues, clients and shareholders truly remain ahead. So I’m looking forward to our next chapter and again thank you very much.

Jack McDonald

All right well with that let’s open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Maietta -Needham & Company.

John Maietta – Needham & Company

Jeff, you had talked about potentially bottoming here, and then that activity has picked up somewhat in the month of July and as we move to the summer. Is that pickup been pretty broad-based or is it more concentrated in healthcare, energy any particular vertical or type of work?

Jeffrey Davis

No it’s pretty broad-based I think, consistent. The breakdown across sectors is consistent, where there is some differences sort of geography. We are actually up, flatter up in this forecast and 80% of our business units. It is really only four that are in a down cycle.

It’s interesting and those four went into this down cycle later. So I think they are just cycling through at a little later stage. The rest of the business is really like as I said 80% of business is actually, seems to be on demand and like I said forecasting flatter up for the quarter.

John Maietta – Needham & Company

Then a follow-up question to that; Paul made a remark and Paul I’m not sure if you meant down year-over-year or down sequentially, but on the bill rates. Is the bill rates, are they pretty much stable or--?

Paul Martin

Yes, the bill rates are down about $3 from the first to second quarter, so Jeff can give a little more color, but we’re seeing I guess some modest pricing pressure. Jeff, do you want add something on that?

Jeffrey Davis

Yes, I know I think that’s exactly right. We talked about pricing pressure for sometime now and I think modest is the right word, but it’s there and I think I mentioned that in our last call. So I think we are seeing the effect of that now on the revenue side.

So when we report bill rates, of course it’s based on booked revenue not sales. So where we had some pricing pressure for a while, we are starting to see that reveal more on the revenue side.

It’s not dramatic and but I’ll tell you the mantra that I repeat to our GMs and our sales folks that we don’t want to lose any deals based on price in this climate. So we are getting very competitive on pricing where we need to.

We are also still enjoying good rates in a lot of areas of the business, as you know we’ve got a lot of niche skills very, very deep skills that just aren’t duplicated in another firms. So we still got some good pricing power, but there is an impact there.

John Maietta – Needham & Company

Some of that downtick would also be, trying to pick up sequentially.

Jeffrey Davis

That’s exactly right. There is some effect of China, we are still down though. You round it up to $3, like $2.5 even netting China out.

John Maietta – Needham & Company

Then just a last question from me; mixes is fixed price versus standard material. Did that change much on a sequential basis?

Jeffrey Davis

We are consistent on a sequential basis, bit down considerably to about 42%.

Paul Martin

It’s basically flat on a sequential basis, but it is down compared to second quarter of last year.

Operator

Your next question comes from George Price - Stifel Nicolaus.

George Price – Stifel Nicolaus

First thing I want to ask is, services in the quarter were below guidance hardware and software came in at a little bit ahead. Can you give me some color on what happened to these components in the quarter relative to your original expectations from the --?

Jeffrey Davis

Paul, help me out there. I don’t believe this is below guidance. We were within the guidance range for all numbers.

Paul Martin

That’s right. I’m just pulling up the numbers here. Yes, the guidance range on services was $41.8 million to $43.9 million and we were at $43.1 million.

George Price – Stifel Nicolaus

Okay sorry, I missed that all.

Jeffrey Davis

That’s okay. So we are actually, the way we do guidance is, the midpoint of guidance reflects our forecast and then we put a buffer on either side of it. So on services we actually came in a little lower the midpoint.

George Price – Stifel Nicolaus

Okay services revenue wasn’t 40.8?

Paul Martin

So the guidance number is the services including reimbursed expenses.

George Price – Stifel Nicolaus

That’s the. That’s net.

Paul Martin

That’s right.

George Price – Stifel Nicolaus

Second question is, with business booked in July being so high why is the third quarter revenue guidance then basically down quarter-to-quarter.

Jeffrey Davis

Well there is about a 60 to 90-day lag between sales and delivered revenue and even that is imperfect, because a lot of these deals, especially these deals north of $500,000 or north of $1 million dollars are six-month deals. So we won’t realize that the benefit of July will be spread over the next six months in reality.

Now again, the key thing there is can we sustain close deals or book sales month to month that’s higher than our current revenue run rate, then again we’re going to see that translate into growth and so it’s only one month and as we mentioned we are very cautious to say that we are out of the woods, but I think it’s a good sign and better than we’ve seen so far this year.

George Price – Stifel Nicolaus

Your comment on the market recovery in the press release to be incremental rather than immediate, can you kind of flush out exactly what you meant by that and if your expectations, and how you are going to come out of this, how they have changed or if they changed?

Jeffrey Davis

Yes, I think the bottom lasts longer. When we modeled this year and we provided guidance for the year, we had kind of a U shape to our model on the revenue.

I think we’re going to see that, but I think the two things, the bottom of that U has shifted right in time, right so its really more I think, we are hoping was going to be a strata of second and third quarters probably getting a little more in the third quarter than our original model that has shown or planned. It remains to be seen how steep that the second leg on that U is going to be.

I believe it’s there and I’m optimistic actually as I said that barring seasonality, fourth quarter by the way is always historically down about 4% sequentially after third quarter, just due to seasonality with the holidays, vacations et cetera, but barring seasonality I’ve got some optimism that we might see some improvement in the fourth quarter.

I think it has shifted a little bit right in time and might be a little less steep of a second leg than we had originally modeled, and that model was done nine months ago. So that’s what I was referring to.

George Price – Stifel Nicolaus

Just a couple of housekeeping items, could you give utilization excluding the subs in China and average bill rate?

Paul Martin

Excluding China, the bill rate is down $3 as we said from 118 to 115 and the rate, I’m sorry what did you say, including or excluding?

George Price – Stifel Nicolaus

Excluding the contractors in China

Paul Martin

Yes, that went from 75% to 76%, so up a tick.

George Price – Stifel Nicolaus

Then finally could you give cash from Ops and CapEx? Actually you just filed the Q, so …

Paul Martin

Yes, the Q is on file.

Operator

Your next question comes from Brian Kintslinger - Sidoti and Company.

Brian Kintslinger - Sidoti and Company

The first question I had just a follow-up of George’s last question. What was the actual average blended rate with China, did you say that? You just said that one ex-China I think.

Paul Martin

I’m sorry your question is the all in rate is including China it went from 108 to 105. The rate excluding China went from 118 to 115.

Brian Kintslinger – Sidoti and Company

Paul you had mentioned a one-time charge in the second quarter. How big is that and is that included in the cash earnings guidance or is that not the cash charge?

Paul Martin

We’ve certainly accounted for that in the cash earnings guidance. We are still in the midst of the real estate portfolio review, but we expect it to be rough estimate is $0.01 to $0.02.

Brian Kintslinger – Sidoti and Company

Now I’m curious without a change in the revenue guidance for you guys, what was the factor that drove you to reduce your cash EPS. Is it lower bill rate, is it lower utilization than you might have expected? Just give us a sense of what change GAAP-EPS?

Paul Martin

Yes, it’s primarily a function of the fact that we were trending a little towards the lower end of that range. The $20 million range that we had out there. Had we been at the higher end of it, I think we would have exceeded the 55 at the high end of the original cash earnings range.

It looks like we are coming now more in the 180 to 190. So the 45 to 55 was dealt around the midpoint of 190 and it looks like the services, component as going to come in a little below that midpoint.

Brian Kintslinger – Sidoti and Company

I’m curious, as you obviously reduced head counts. Did a lot of that happened towards the end of the quarter or the beginning and what yours sense for the second half of the year? You’d mentioned 83, 85% utilization you are comfortable with, is that from that something you are expecting to happen in the second half of the year. Is that a just level you have, you are trying to tell us that you can pull if you need to.

Paul Martin

It is not a little we will pull. We need, what I mentioned was that we need stabilize demand and growth to get certainly to get to 85% level. The reductions occur really on an ongoing basis. So we are consistently evaluating what our needs are primarily on skills, but also in geography and making adjustments.

So we’ve actually done a fair amount of hiring in some business units and others unfortunately we had to let some folks go. It’s an ongoing process and we’ll continue to do that in the third quarter as we need to.

It’s my hope that we were stabilizing we’ll be doing a lot less there and begin to do more hiring. So, 83 to 85% again is in a healthy climate in a growth climate that could be as early as the fourth quarter, it could be the first quarter.

Again no guaranties, but just based on the trend that we’re seeing I think out expectations at the beginning of the year are actually panning out to be more or less right. I think the severity of the dip that was a little more than our mid point that was still within our expectation, and as I said before a little shifted further in time.

So little more prolonged then we do originally have hoped for, but I do think there is going to be a recovery here. Obviously there will be, it’s a matter when and I think it could be in the next two to three quarters and then I think you will start to see utilization very healthy back into the low to mid 80s.

Brian Kintslinger – Sidoti and Company

Then you talked about lot of your business units are up 80% of units were down. Can you give us a sense of what’s down and also give us a sense I think you mentioned energy, what’s up and may be some of the drivers behind some of the key points or both?

Paul Martin

I’m not going to give specifics on that, but I will tell you that one of them is a specific to a one particular vendor area that we work with, and they happen to be kind of big ticket items. In our conversation, there are a Fortune 1000 clients that are just holding off on those investments.

Again that’s part of the pent-up demand we’ve talked a lot about and that’s very real. That vendor sees it, we see it as well and then the others are geographic. More probably in the south than the rest and again the south is shared very well to this downturn for us and I think it’s cyclically sort of their return to take a little bit of a hit, to put it short of crudely. But by and large that’s not even across the board there, that’s just in a couple of specific business units, couple of specific cities.

Brian Kintslinger – Sidoti and Company

Did you mention what revenue by vendor was for the quarter did you mention?

Jeffery Davis

Paul, you want to break that out? I think we can do it by percentage.

Paul Martin

We’ll do by percentage. So for the second quarter IBM was 23%, Oracle 19%, TIPCO 16 and Microsoft 12 are the top four.

Brian Kintslinger – Sidoti and Company

In terms of placing, you just talked about a second ago. We you said a backward view, guess some serious when you look to the second half of the year, do you assume that prices will be a little bit lower either on a blended rate or for China, when you break them out versus domestic. Is that what you are hearing in you discussions in your early sales in July or is it more stabilized do you think?

Jeffery Davis

I expected that there continued to be rate pressure for the next couple of quarters until things stabilize. The interesting thing about this business is that, at soon as the demand picks up pricing power begins to return. It’s not necessarily the flip of a switch, but sort to close to that.

We are not seeing demand pickup yet, I think we are on the cusp of it. So until it does, I would expect to concede to see pricing pressure and some I think modest reduction in rates. That’s not a definitive either. As I said, we’re still feeling pretty well in the rates that we are getting. We still get some good pricing power and allow the offerings that we have.

So I think we are going to see something that might be within one or 2% where we are now and then I think actually pricing point of returns again within that two quarter timeframe.

Brian Kintslinger – Sidoti and Company

The last question I have, talking about M&A early next year potentially. I guess some interested last change, so what would you are we looking for. Are we looking for a little more scale in these acquisitions to get you back up to what you could be, are you looking for geographies, are you looking for certain vendor relationship that you may or may not have to build. Gives us a sense for what some of the main key areas you would look for.

Jeffery Davis

It’s probably large scale, its more broadening our portfolio, adding new skills and some cases adding some scale and some of the skills we already have. We are pretty keen on moving more towards the business end of technology consulting.

I want to be really clear, we are a technology consulting firm, we are going stay that, but I’m talking about things like performance management wrapped around business intelligence and business process management around SOHO and EAI platforms.

So that’s probably our most keen interest, I’d be more interested in natural firms with natural building capability, then geographic based just because is got more flexibility and more leverage. That said if we find the right one, we are still looking to expand our geographic footprint as well.

Operator

Your next question comes from Rich Baldry - Canaccord Adams.

Rich Baldry – Canaccord Adams

Can you talk a little bit more about the strength in July sales, whether it was kind of up-broader or number wins in a quarter. Or if deal sizes may be were claiming. Then if there is a way to think about may be other lead times or durations of the deals. How quickly they typically ramp after you sign them to go a feel for one that might have an impact on the P&L, thanks.

Jeffery Davis

Sure. I think the good news is it was pretty diverse. There was one very large deal in there, I say very large, large for us couple of million dollars, but the most part it was across the board. We sign a lot of deals in July.

The nice thing about it is, you sort of hit the nail on the head, a lot o f these deals start small it’s a Phase I or a planning face or a initial stage and then obviously develop into more prolonged engagement and broader engagement.

So I think will see the benefits of those July sales. Again those have to sustain and if we go from bad to a big interaction again in August and that might have been just a bluff, but if it does sustain it will begin the see the benefits of those.

I think, I mentioned earlier probably in the next 60 to 90 days so moving into Q4, we got to sustain that sales. We are moving into Q4 we could see begin to see some growth back in the top line again.

Again that has a sustainable, I would be very careful about that, but it is across the board, the interesting thing about is the durations of those large deals are longer than they were in the second quarter. So the good news is we are going to have a nice backlog as a result of that moving into the fourth quarter and even in the first quarter of next year that we can build on at a time where I’m anticipating demand is going to be increasing.

As I said before, there is no guarantee, but there is a good chance that we could see some nice acceleration for us on the recovery that what we’ve experienced in the past and I think the reason that we believe we may see something similar here. Again I’ll comeback to it in the two to three quarter and borrowing any major like down in the economy.

Rich Baldry – Canaccord Adams

If you look at the balance sheet, even as you were buying back stock your cash has really doubled in the last nine months. Sort of wondering if you can talk about any of the scale of on going buyback that you might see over the next six, 12, 18 months and whether one of the reasons you are allowing the cash to accumulate, maybe quicker than I might have thought.

Otherwise is it because the acquisition pipeline opening up, you think that there will be more of a cash component to help people who have been stressed through this time period that may want more of a cash component as a way to get out of the situation here in when you are acquiring them.

Jeffery Davis

Well we use cash in acquisitions we do about 50 – 50 typical deal cash to stock. We wouldn’t change that model, because it’s a very important that these guys are aligned, there is principle to stay on are aligned with our interest which means there is stockholders and that stock in fact is locked up over typically a three-year period.

So we wouldn’t go out and offer a lot of cash. Those are bad deals we’ve seen that a past and they simply don’t work, we not done that and I don’t think we would do that.

However we do use cash for acquisitions and obviously it’s nice to self funds those rather than have to borrow the money. In terms of the buyback, Paul do you want to cover what our latest authorization is on that and to the extent that you can, kind of where we are in.

Paul Martin

Sure. As you can see, we’ve announced that we have a total of a $30 million buyback, we’ve bought $60 million through the end of June and we are up to $80 million today. I think will continue to buy on roughly similar pace to what we did in July.

I would also add on the cash bill, certainly those revenues are contracted here we have been collecting that marginal receivable based and that may not having much of reimbursement new receivable. So I think the growth in the cash, will probably slowdown some year in the second half.

Rich Baldry – Canaccord Adams

Lastly, in the first quarter you talked about the top five accounts being about 20% or else the top 10 may be 30%. Can you talk a little that still sort of consistent in terms of breadth of number of companies you are doing business what versus concentration? Thanks.

Jeffery Davis

Yes, Paul you want to take that?

Paul Martin

Basically the top accounts of state roughly the same. Our top five accounts are about 21%; our top 10 accounts are a little over 30%. So that’s fairly comparable what we’ve been in the last few quarters.

Operator

Your next question comes from Michael Martin - SmallCap Report.

Michael Martin – SmallCap Report

Good morning and congratulations Jeff. Just a couple of questions can you give us little more color on what your customers are saying these days?

Jeffery Davis

I think probably not much beyond what I mentioned before. If you go back about two quarters we talked about maybe in the Q4 call, we talked about a lot of clients talking about cash.

I’ve got a budget, but I’m not comfortable spending it or I’m not have been allowed yet and it would probably the second half of ’09 and maybe even 2010 before I really know. I think the best color I can offer is that the preliminary results from the second half here and I think that’s this is the sort of the explanation behind July.

Again we are going to see the sustainability there, and we have heard this from a lot of the clients all these deals that we closed in July we have been talking to clients about 90 and some cases even 180 days.

So what we are seeing is that they are beginning that in the half way through that year and they can see have some visibility in the second half of the year that those budgets have largely in some cases, not all had remained intact and they are now releasing some of those budgets and letting some of these contracts.

Michael Martin –SmallCap Report

Is there anything else besides GDP in terms of economic indicators that you would focus on and then trying to sense where the business is going?

Jeffery Davis

Honestly its look at our peers, and what they are saying. I think the bigger guys probably have a little better visibility than us, so we tend to look at what they are seeing and really just looking at our own business I think is the best aside from just general GDP.

Of course we track Gartner and Forbes reports and look at how they are interpreting the market, what their predictions are as well as specific for the industry.

Operator

(Operator Instructions) Your final question comes from George Price - Stifel Nicolaus.

George Price - Stifel Nicolaus

Thanks just had couple last ones. If you gave it, I apologize I didn’t hear that, China employees.

Jeffery Davis

I think we are 135 global in China. I’m confident we are I should say and that’s up from 87 roughly year ago.

George Price - Stifel Nicolaus

That flat quarter over quarter the rank.

Jeffery Davis

Yes. We send our hiring classes there. We had a lot of interns that we converted to employees, so you do lot of your hiring in the first half of the year.

George Price - Stifel Nicolaus

Can you go through your vertical mix, I guess just in the higher level key vertical groups?

Paul Martin

Sure. So this quarter our largest was we can talk about energy and tell this was about 17%, healthcare about 15%, telecom 15% and financial services about 10% and some of product 8% out of the top five.

George Price - Stifel Nicolaus

I guess lastly. I think just wanted to follow up on the charge in the third quarter. So is that one that you said rough estimate I understand, just to kind of get beyond the vagaries of tax rate and so forth. Do you have a rough pre tax number, Paul?

Paul Martin

We give guidance kind of at that level of granularity, so we’ve given the general guidance and also GAAP and…

Jeffery Davis

I think George you are asking for the pre tax charge?

George Price - Stifel Nicolaus

Yes.

Jeffery Davis

It’s a broad range, but let’s say 400,000 to 800,000.

George Price - Stifel Nicolaus

Again just be clear, you will be anticipating excluding that or not excluding from your cash EPS?

Paul Martin

That would be included.

Operator

There are no more questions in the queue at this time. Now I will turn the call back over to Mr. Jack McDonald.

Jack McDonald

Thank you for your time this morning, and we look forward to getting back together with you next quarter. So thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a good day.

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