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Executives

Jeffrey S. Davis – President, Chief Executive Officer & Director

Paul E. Martin – Chief Financial Officer, Treasurer & Secretary

Analysts

George Price – Stifel Nicolaus

Brian Kintslinger – Sidoti & Co.

John Maietta – Needham & Co.

Jeff Martin – Roth Capital

Perficient, Inc. (PRFT) Q3 2009 Earnings Call November 5, 2009 9:00 AM ET

Operator

Welcome to the third quarter 2009 Perficient earnings conference call. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of the conference. (Operator Instructions) As a reminder, today’s conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Jeff Davis, CEO and President.

Jeffrey S. Davis

This is Jeff Davids, Perficient CEO and President. With me on the phone this morning is Paul Martin our CFO. I’d like to thank you all for your time this morning. We’ve got about 10 to 15 minutes of prepared comments after which we’ll open up the call for questions. Paul, will you please read the Safe Harbor statement.

Paul E. Martin

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 the 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 again, www.Perficient.com under investor relations.

Jeffrey S. Davis

I think Perficient delivered a solid Q3. Revenues and earnings came in above the consensus estimate and our strong sales performance in the quarter has really laid a nice foundation for sequential growth in the fourth quarter. That’s something we haven’t been able to say now since the second quarter of 2008. We continue to generate solid cash flow, build our balance sheet and repurchase shares. We’re increasingly confident that Q3 was in fact the bottom for us and that we’re now in a midst of a recovery.

On last quarter’s call we referenced that Q3 sales started off well with July having been the strongest sales month of the year so far in 2009. I’m pleased to report that September actually exceeded those July figures. Beginning to deliver on those associated projects is already helping our Q4 which is typically slower due to seasonality. In fact, we’re typically down sequentially off the third quarter about 3% to 5% in the fourth quarter.

We’re still need to see continued momentum on the sales front obviously but our Q3 performance was definitely a positive sign and as a further indicator the recent 3.5% GDP number also provides us some confidence that we’ve stabilized. I mentioned before that I thought when GDP began to consistently turn positive, even if it’s only modest, that we’d be well positioned to resume our growth and I think that’s in fact the case.

Our balance sheet remains strong. The company has no debt and more than $28 million in cash at the end of the quarter and that’s after purchasing nearly $6 million of stock during the quarter. So far in 2009 we’ve invested $12.7 million on our share repurchase program and have still be able to build our cash balance by $5.6 million. That strong cash flow generation plus our $50 million credit facility fortunately puts us in a strong position to execute in the best long term interest of the business.

Our repurchase program remains in place and we announced this morning in the release that the board of directors has authorized an additional $10 million for the buyback bringing our total authorization for that to date to $40 million. Also, if you didn’t see the press release this morning, Kathy Henely has been promoted from Vice President Corporation Operations to Chief Operating Officer.

Now, for those of you that know her you’ll understand that this is largely a business as usual move. She and I have both been involved very heavily in the operations of the business for many years. She’s a 10 year Perficient veteran and an excellent leader. I’m pleased to make this announcement this morning. Congratulations to Kathy.

We continue to monitor the cost side of the business as well and have consistently demonstrated that we will adjust as the market dictates to ensure profitability. The adjustments we made in 2009 have us now positioned I think with excellent operating leverage I think both on the delivery side and with SG&A as we move forward in to more of a growth period.

As we discussed on the last call we’re more aggressively examining M&A candidates again and we’ve got a few candidates in the hopper now that we’re looking at but it’s still early in those stages. However, it’s still our goal to close a transaction in the early part of 2010. Of course, that’s assuming the economy doesn’t head backwards again and we continue to see stability in our sector and in our business.

Now, for now we’ll continue to focus on customers and cash flow, continue to build the balance sheet and buy back shares when it makes sense for our company and our shareholders and of course, our long term focus remains to build Perficient towards that $500 million revenue run rate that you’ve heard me speak of often. I’ll turn the call back to Paul now for a detailed discussion of our financial results.

Paul E. Martin

Total revenues for the third quarter of 2009 were $44.5 million, a 24% decrease over the year ago quarter. Services revenue excluding reimbursed expenses were $39.3 million with organic growth of negative 27.8% on a trailing four quarter average annualized basis. The sequential revenue growth in the third quarter of 2009 was -3.6% compared to sequential revenue growth of -9.4% in the second quarter of 2009.

Gross margins for services excluding stock-compensation and reimbursable expenses for the third quarter were 28.3% which is down from 37.1% in the third quarter of 2008. The decline in gross margins is primarily a result of lower utilizations resulting from softness in services demand and in client average bill rates. Management has and will continue to manage labor costs to match expected demand.

SG&A expense was $9.8 million in the third quarter compared to $13 million in the comparable prior year quarter. Excluding non-cash stock compensation, SG&A expense was $7.9 million compared to $11.5 million in the comparable 2008 quarter. SG&A excluding stock compensation as a percentage of revenue was 17.9% in the third quarter down from 19.6% in the third quarter of 2008. This decline is primarily driven by higher bad debt expense in the third quarter of 2008.

EBITDAS defined as earnings before interest, taxes, depreciation and stock compensation for the third quarter of 2009 was $3.6 million or 8.1% of revenues compared to $8.4 million or 14.4% of revenues for the third quarter of 2008. We reported net income of $115,000 compared to net income of $2.2 million for the third quarter of 2008. Diluted GAAP earnings per share was approximately zero compared to $0.07 a share in the third quarter of 2008.

Non-GAAP earnings per share was down 50% to $0.08 for the third quarter of 2009 compared to $0.16 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 related taxes divided by average fully diluted shares outstanding for the relevant period.

Our tax rate for the three months ended September 30, 2009 was an effective benefit rate of 140% compared to an effective rate of 40.8% for the comparable prior year period. The current quarter benefit included a true up of our provision to our federal, state and foreign tax returns filed in the third quarter of 2009 as well as the effect of the company’s full year projected 2009 tax liability on the current quarter.

Our average billable headcount for the third quarter of 2009 was 1,007 including 870 billable consultants and 137 subcontractors. We have reduced average billable headcount by about 13% from the third quarter of 2008. Total SG&A headcount was reduced by 13.5 full-time equivalents or 8% compared to Q3 2008. Again, we will continue to adjust our cost structure, primarily headcount based on changes in customer demand.

Turning to the full year results, revenues for the nine months ended September 30, 2009 were $140.7 million, a 20% decrease over the comparable period last year. Services revenue excluding reimbursed expenses were $125.1 million for the nine months ended September 30, 2009, a decrease of 21% over the comparable prior year period. Gross margins for services excluding stock compensation and reimbursed expenses for the nine months ended September 30, 2009 was 29.6% which is down from 36.6% in the prior year period. The decline in gross margins, similar to the quarter, is primarily a result of lower utilization resulting from softness in services demand.

SG&A expense was $30.4 million for the nine months ended September 30, 2009 compared to $35.4 million in the comparable prior year period. Excluding non-cash stock compensation expense, SG&A was $25.1 million compared to $30.6 million in the prior year period. SG&A excluding stock compensation expenses as a percentage of revenues was 17.8% for the nine months ended September 30, 2009 compared to 17.5% in the comparable prior year period.

EBITDAS for the nine months ended September 30, 2009 was $12.9 million or 9.2% of revenues compared to $28.3 million or 16.2% of revenues for the comparable prior year period. Net income was $800,000 for the nine months ended September 30, 2009 compared to $9.2 million in the prior year period. Diluted GAAP earnings per share decreased to $0.03 a share from $0.30 a share for the nine months ended September 30, 2008. Non-GAAP earnings per share for the nine months ended September 30, 2009 was down 50% over the year ago period to $0.26. Again, non-GAAP EPS is defined as GAAP earnings per share plus non-cash amortization expense and non-cash stock compensation expense net of related taxes divided by average fully diluted shares outstanding.

Our tax rate for the nine months ended September 30, 2009 was 43% compared to 41% for the comparable prior year period. The slight increase in the effective rate is due primarily 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-deductable executive compensation relative to a smaller income base.

During the third quarter we spent $5.8 million on repurchasing 767,000 shares and as of September 30, 2009 in aggregate we have spent $21.9 million on repurchasing $3.9 million shares since the plan’s inception last year. We continue to believe that current and expected repurchases of our shares will drive future accretion and shareholder value.

We also continue to generate strong operating cash flow, our operating cash flows for the nine months ended September 30, 2009 have increased 41% over the comparable prior year period even with lower EBITDAS. We ended the quarter with no debt and $28.5 million in cash and short term investments on hand, an increase of $5.6 million since December 31, 2008. Our days sales outstanding on accounts receivable was 75 days at the end of the third quarter of both 2009 and 2008, our goal as we’ve stated many times is to maintain our DSOs in the 70 to 75 days over time. We will continue to manage in that direction and we certainly will say that the aging of the accounts greater than 60 days has declined and is in the best position it has been in, in sometime.

Now, I’ll turn the call back over to Jeff Davis for a little more commentary behind the metrics.

Jeffrey S. Davis

As I mentioned earlier, I believe our Q3 performance in terms of revenue, earnings and sales is the first step on the road to resuming growth. Utilization was flat with Q1 and Q2 and again, slightly below our target range of 80% plus. We were at 78% including subcontractors but I think given the economic challenges we faced this year that’s really a relatively healthy number and I think it’s also indicative to our commitment to fiscal discipline.

As demand stabilizes and begins to increase, I anticipate that we’ll be able to pretty quickly be able to move back to the utilization target range. As a matter of fact, and I mentioned this on the last call, I expect that it’s quite possible if not likely that utilization could run in to the mid 80s in the full swing of a recovery. I don’t know that that is sustainable long term but I think there could be a pretty prolonged period again in the midst of the recovery we could run at that level. Obviously, that would correlate to improved top line growth but really more substantial bottom line improvements.

From a sales standpoint we closed 14 deals north of $500,000 in the quarter compared to 10 in the second quarter and several multimillion dollar plus deals with existing and new clients. From a pure numbers standpoint we closed 24% more deals in the third quarter than in the second quarter and those improvements were across the board. More small deals all the way up to more large deals as I mentioned earlier.

In the press release we highlighted that our Q3 book sales were 54% higher than in the second quarter and that improvement is a reflection of course of a very challenging second quarter sales environment that we had but I think it’s worth noting that if you annualize the third quarter numbers for sales it would be a significant improvement over our current revenue run rate, hence the growth that we’re seeing.

During the quarter our top five customers combined to represent just 22% of revenues and our largest industry which was telecom this quarter accounted for 17% of revenues. I think that speaks well to our diversity both in client size and lack of concentration there as well as from a vertical standpoint. As a matter of fact, it’s worth noting that every quarter this year we’ve had a different vertical represent our largest industry and I think that speaks to our ability to plot horizontally across multiple industries.

With regards to verticals we continue to have high expectations around healthcare in the next several years based on a few recent wins as well as the political landscape. As an example the [inaudible] Act calls for $685 million to be allocated for state and local agencies to plan, design, build and implement health information exchanges. We’ve already won a couple of different opportunities there at the state level.

We also expect to win additional work based on mandated requirements surrounding electronic health records. A meaningful opportunity exists for Perficient to enable health systems to be compliant around patient and consumer exchange of medical information but also the analytics around the measurement and results and the use of an HR solution.

To summarize Q3, evidence that we’ve seen the bottom continues to build. Q3 sales were much improved, the quarterly revenue sequential decline was the lowest in a year and maybe most importantly, our revenue per billable day has increased for four consecutive months including October. In fact, as we look forward to Q4, the company expects our fourth quarter 2009 services and software revenue including reimbursed expenses to be in the range of $43.4 to $46.7 million comprised of $41 million to $43.3 million of revenue from services including reimbursed expenses and $2.4 million to $3.4 million of revenue from sales of software.

We remain confident by the way, with our previously stated full year revenue and cash earnings per share guidance. With that, I’ll open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from George Price – Stifel Nicolaus.

George Price – Stifel Nicolaus

First question, if I look at the fourth quarter revenue guidance, the $180 to $200 million looks more like roughly $184 to $187 million so sort of in the low to mid area of the $180 to $200 million range. You reiterated the $.30 to $0.40, should we assume that the same thing should be implied for that EPS range, more in kind of the upper 30s, kind of EPS is really the implied range?

Jeffrey S. Davis

I think the implied range, to your point, would be more in the midpoint, more on the middle. Right, if it correlates to revenue. Now, there’s potentially some upside in revenue probably from software. Q4 is always a big software quarter for us and we actually think we might have some upside on the services piece as well. When we put ranges out our intention is always to hit the midpoint with some surety and obviously shoot for the higher end.

George Price – Stifel Nicolaus

Just to follow up on your point, the software component of the guide relative to I think prior fourth quarters did seem a little bit lower. I guess what are you seeing out there in terms of client indications for potential flush at the end of the year?

Jeffrey S. Davis

If you look at our historical guidance relative to our actual it’s going to tend to look conservative in the fourth quarter and the reason for that is software deals materialize and close literally in the last few weeks of the quarter so we don’t have good visibility in to that. I think actually this guidance is probably relatively strong to some prior fourth quarters even though as I said I do expect there to be some upside. We’re seeing good signs from clients on spend, both on services and software and certainly as I said I think we’ll see some deals materializing particularly around some budgets that need to get used probably in the late November/December time frames. So again, I think there’s upside to that we just don’t have that visibility right now.

George Price – Stifel Nicolaus

How much do you think July and September is going to catch up from under spending earlier in the year versus new incremental spending? I guess the surge that we’re seeing and we’re seeing with other companies too coming in to the third quarter and then the fourth quarter, how much of that can we think of as maybe continuing in to next year versus just happens that people under spend earlier in the year?

Jeffrey S. Davis

That’s the $50,000 questions. I wish I has a crisp answer on it. We have some optimism that it’s more than that though but you’re exactly right I think we won’t know until early next year how much that momentum carries forward. I do believe that this is just a small piece, maybe not quite the tip of the iceberg but a small kind of scratching the surface on the pent up demand that is out there so I think you’re right, I think we enjoyed some of that being released in the second half of the year where there was some holdback in the first half. I’m optimistic that that cycle won’t repeat in 2010 based on what we’re seeing right now, even sales in October.

Also, this isn’t really across the board and across all our business units and products but we’re also seeing some pockets of improvement where clients are taking bigger steps forward and buying some larger new license projects and larger projects. Our average project size of those projects are sales above $500,000 was about $1.4 million, that compares to about $900,000 in the second quarter.

Again, that momentum is carrying forward in Q4, it’s too early to tell how it ends up but we’re hearing both from our clients anecdotally and some other outside analysts such as Gartner is that the appetite to spend is going to carry forward in to 2010. How much remains to be seen. It could be that even more of that pent up demand gets released and 2010 could be a good year but at a minimum we’re optimistic that we’re going to see continued improvement.

George Price – Stifel Nicolaus

I’m sorry Jeff you started to say something about sales in October, if you had some comments on the call on that I apologize I missed it but what did you see in October relative to September?

Jeffrey S. Davis

We won’t provide the specifics on that but again, it’s more good pipeline – you know, when we closed all those deals in July and September one of the things that happens of course is you pull your pipeline down, the gross pipeline number comes down as you sell out. We were able to quickly replace that pipeline, rebuild the pipeline back to the near highest level of the year and had good sales results in October.

George Price – Stifel Nicolaus

I guess let me ask one more questions, margins I guess given the changes in the cost structure that you’ve made this year can you give us a sense maybe of what revenue level you need to be back at at this point to achieve something at or close to a low double digit 10% GAAP EBIT margin. I know you guys historically on the up cycle have been materially above that but a GAAP operating margin?

Jeffrey S. Davis

I think with any given quarter a 5% sequential increase over the prior quarter could get us there. So, it’s fairly modest. Again, we’ve got a lot of leverage right now but our infrastructure is solid, we won’t have to add back to that for quite some time. So something as low as possibly even 4% or 5%. We won’t have to add a lot of additional cost to deliver that so it should drop straight to the bottom line.

Paul E. Martin

One thing I’d add on that George is from an infrastructure standpoint and a back office standpoint, as we’ve made the necessarily reductions here as the business has gone down, we feel like we’re not going to have to add that back so therefore the operating leverage will be there. As the revenues pick up a lot of that will drop right through to the EBITDA line.

George Price – Stifel Nicolaus

Last thing Paul, do you have the utilization excluding subcontractors? Also, maybe some of the bill rate metrics that you typically give?

Paul E. Martin

The utilization for the third quarter excluding some contractors was 74% compared to 76%, in the second quarter excuse me. The rate, the all-in rate was $99 which is down from about $104 in Q2.

George Price – Stifel Nicolaus

What would you attribute that drop to?

Paul E. Martin

There’s a couple of factors there. Our fixed fee projects in the quarter had a lower rate that we think will snap back in Q4, we’ll continue to see some pressure on our overall rate because of additional use of offshoring and I think Jeff can probably give a little more color on this but I think there was some general pricing pressure. Although frankly, in September and October we started to see our ABR trend back up.

Jeffrey S. Davis

Yes, I think it’s far less pricing pressure to your point than it was a couple of these fixed fee engagements that didn’t produce the realized rates that we typically shoot for. Those by the way, are behind us and as Paul mentioned, the rates have already begun to snap back. They did in September to some degree and certainly October they snapped back nicely. So, as of right now for this quarter we’re sort of running back to the Q2 average, or getting close to that. I think the Q3, I think that dip was largely kind of a onetime event. We may not get back to exactly that number but I think we’ll be within $1 or so of it.

Operator

Your next question comes from Brian Kintslinger – Sidoti & Co.

Brian Kintslinger – Sidoti & Co.

Just Paul, you mentioned the $99 can you do the ex offshore rate as well versus last quarter?

Paul E. Martin

Yes. Excluding offshore we’ve got a number of different ways that we look at this but the rate excluding offshore was down about $4 to $5.

Brian Kintslinger – Sidoti & Co.

For some reason I don’t have last quarter’s so can you provide this one?

Paul E. Martin

I apologize, I’m looking at a monthly schedule here but it looks like I believe we’re at $109 versus $104. Keep going and I’ll confirm that number.

Brian Kintslinger – Sidoti & Co.

You guys mentioned that each quarter has gotten a little better in terms of sales activity I think. Could you maybe somehow quantify September versus October so we can sort of see how that trajectory is moving?

Jeffrey S. Davis

Like I said we don’t do monthly detail. We closed about roughly $50 million in book sales in the third quarter and the reason I won’t give you the monthly is because it’s too choppy. Like I said, we had a solid sales month in October and are seeing good results now and good anecdotal evidence that that is going to continue but we don’t provide the monthly detail.

Brian Kintslinger – Sidoti & Co.

Then maybe speak to sales cycles have been lengthening for a while, are they improving, are they just kind of stable where they’ve been, is there still a bit of reluctance?

Jeffrey S. Davis

It’s certainly not back to what we would consider a healthy environment but I think we have seen some modest improvement in the sales cycle. Companies are a little more willing to pull the trigger than they were six to nine months ago. Again, I think importantly from what we’re hearing as I mentioned before, I referenced Gartner and the like, as well as our own interaction with the executives that we work with is that right now they’re expecting large budgets and an ability to let projects from those budgets throughout the year next year not a wait and see mode like they were in the past two years.

Paul E. Martin

Brian back on the rates, the way we normally reference that is the employees excluding China and that rate went from $115 to $110.

Brian Kintslinger – Sidoti & Co.

In the last two quarters you mean?

Paul E. Martin

Yes. $115 in Q2, $110 in Q3.

Brian Kintslinger – Sidoti & Co.

Back to sort of the sales what was going on there, would you say that customers are still starting with smaller projects than they have traditionally? Do you think that has been the trend obviously given the recession or are they moving more towards larger projects now?

Jeffrey S. Davis

They are definitely moving towards larger projects now. Whether that sustains or not isn’t exactly clear although we think there’s a good chance it will. So, as I mentioned before, we closed 14 deals above $500,000 compared to only 10 in Q2 and even 14 if you go back three quarters that’s still the largest number that we’ve had in the past 12 months. So, 14 deals and beyond that again, the average deal size there was $1.4 million and that’s also the largest that we’ve had in the last four quarters. So, definitely moving towards the larger projects and again I think some of that is probably related to this pent up demand. The good news is I don’t think the pent up demand ends in one quarter.

Brian Kintslinger – Sidoti & Co.

You mentioned that you guys would constantly adjust your headcount as demand required. Did you guys cut more in the third quarter? What I mean was is that 1,007 employees is that an average or a quarter end?

Paul E. Martin

That’s an average.

Brian Kintslinger – Sidoti & Co.

And where were you at quarter end or where are you right now?

Paul E. Martin

At quarter end we were about flat with the end of Q2 and I’d say we’re fairly close to that at the current point.

Brian Kintslinger – Sidoti & Co.

So as of right now given that you are seeing demand improve a little bit you are not expecting to cut more?

Jeffrey S. Davis

Not in net. We always deal with skills match but not in net. If you look at our headcount graph you’d see it dip in the early part of Q3 and then we did actually do some incremental hiring near the end of Q3 to meet this demand that I’ve been talking about September and forward.

Brian Kintslinger – Sidoti & Co.

How about SG&A personnel? Is the plan to hold tight there as well or will there be changes made?

Paul E. Martin

In general I think we’ve made most of the changes that we think that we need to based on where the business was from a revenue standpoint to this point. We also have put some of the people in the back office on shortened work weeks, some of the hourly people so we have the ability to flex it up at a fairly modest incremental cost.

Brian Kintslinger – Sidoti & Co.

Did you guys mention cash flow from operations and cap ex? I missed it if you did, I’m sorry.

Paul E. Martin

Yes. The cash flow from operating activities was $17.8 million, I think it was up about 40% from $12.6 million last year and cap ex I just have the nine month number here is about $570,000.

Brian Kintslinger – Sidoti & Co.

The last question I had was, and this is nit picking so I’m going to apologize beforehand but you guys have bought back a lot of stock this year and from the first quarter your share count has only come down about $300,000. Could you speak to that?

Paul E. Martin

There are a number of factors that go in to the fully diluted share outstanding count and one of which is the common stock equivalents on outstanding options and restrictive stock which is based on where the stock is. So, as the stock has increased from in the twos in Q1 to in the eights today, we’ve had an increase in what they call the common stock equivalency. As a result, that has offset some of the impact of the restricted stock. So, depending upon your view of where the stock is going to go from here that number could help the share count or hurt the share count just depending on where the stock goes.

Brian Kintslinger – Sidoti & Co.

This is sort of a related question, how many options do you guys generally get? For example, this year outside of the stock moving, how many new options have been given out this year? Do you know a rough number?

Paul E. Martin

So all of that is included in the Q and there were no options given out but there was a restrictive stock grant I think in April to non-executives and it looks like there was about 900,000 shares that have been granted year to date.

Operator

Your next question comes from John Maietta – Needham & Co.

John Maietta – Needham & Co.

Jeff, give your comments around pricing, would you expect to see services gross margins to pick up sequentially in Q4?

Jeffrey S. Davis

Yes. The only factor in Q4 to keep in mind is that we’ll have some seasonal impact on utilization in primarily December. But yes, I think the rates will pick up in October and November and should produce a pretty substantial improvement in margin over Q3.

John Maietta – Needham & Co.

Then I don’t know if it’s too early to tell but as you look in to next year at the beginning of the year particularly in Q1, would you expect to see kind of the typical seasonal pattern where the Q1 revenues fall off a little bit sequentially? Or, given that we’re at such depressed levels this year, do you think it’s potentially a scenario where you could grow revenue sequentially in to Q1?

Jeffrey S. Davis

I think it’s the latter. We’re seeing it now with the fourth quarter, I’m pretty optimistic that this momentum is going to carry forward and that we’ll see some sequential growth. That’s certainly what our plan is calling for in the first quarter.

John Maietta – Needham & Co.

Paul, with regard to the tax rate, how should we think about that?

Paul E. Martin

On a go forward basis, our full year basis I think the GAAP rate will probably be 42% to 43% and the cash EPS rate will be 38% to 39%. There has certainly been some choppiness in the quarter but the full rate should be in those ranges.

John Maietta – Needham & Co.

Paul, do you have the industry vertical breakdown?

Paul E. Martin

Telcom this quarter was our largest at 17%, healthcare 15%, energy and utilities 13%, financial services 10% and consumer products 8% are the largest categories.

John Maietta – Needham & Co.

Then just last question, Jeff based on the commentary on this call it sounds like sort of a broad based modest uptick in demand. Is that accurate or did you see a couple of verticals maybe bounce back a little bit stronger than others?

Jeffrey S. Davis

The good news is its broad based. It’s really across the board both from a technology stand point and a vertical sector standpoint. I would put a little bit more than modest. I think again, if you look at a typical fourth quarter for us, we’re down 3% to 5%. I think the midpoint of our guidance has us up 2% so on a relative basis, keep in mind, that’s about a 5% or 7% sequential uptick for us sort of normalized for Q4 relative to Q3. Again, we’re optimistic that’s going to carry forward. From what we’ve seen the last several quarters I would describe it more as a pretty robust snap back so long as it continues. We need to see it continue.

Operator

Your next question comes from Jeff Martin – Roth Capital.

Jeff Martin – Roth Capital

Could you give us what the fixed fee percentage of business was in the quarter and what you expect that going forward?

Jeffrey S. Davis

I’ll let Paul find the specific number, I think it’s about 11% or 12%, historically it has run around 15%. Interestingly enough it’s declined during this downturn so I expect that it will come back but probably not get above that historical 15% run rate. We’re a little below that now but I think we’ll get back to that as things get normalized again. That tends to be an arrangement more around large engagements or larger engagements so as we see more of those coming our way we’ll probably see that number going up.

Paul E. Martin

It was a little bit below 10% in the quarter and peaked as Jeff mentioned, a little over 15% in the first half of ’08 and has been on a decline since the middle of ’08.

Jeff Martin – Roth Capital

Then if you had to rank the factors that impacted the average bill rate, how would you rank them?

Jeffrey S. Davis

Fixed fee was the top. I think fixed fee made up probably about 60% of it and again, that’s gone now.

Jeff Martin – Roth Capital

Could you just add a little bit to the acquisitions, what kind of valuation expectations are out there, if they’re in line with your historical purchase prices, if they’re better, what their receptivity of people?

Jeffrey S. Davis

Receptivity is excellent. I think they’re going to be slightly better, our historic range is five to seven times EBITDA and I think we’ll see things at the lower end of that range but probably not much outside it. We’re really only looking at businesses that are healthy. We’re not looking to do a fix up so those [healthy] businesses out there are still looking for a reasonable valuation I would describe it. Again, we’re optimistic that we can be at the lower end of that range but it remains to be seen.

Jeff Martin – Roth Capital

In terms of the type of work, if you just classify them in two categories, cost savings initiatives versus growth initiatives, would you say that the majority of the work now is cost savings related or are you seeing a shift more in growth initiatives?

Jeffrey S. Davis

I think we’re seeing a shift. A lot of the projects that we won recently, especially these larger engagements are definitely more strategic and more forward-looking, more growth, more leveraging proprietary processes, things like that.

Jeff Martin – Roth Capital

The last question, what was the quarter end basic share count?

Paul E. Martin

The quarter end fully diluted share count?

Jeffrey S. Davis

The basic.

Paul E. Martin

You want basic?

Jeff Martin – Roth Capital

Please.

Paul E. Martin

The basic number I think is about 27 million.

Jeff Martin – Roth Capital

I can get it off the Q.

Jeff Martin – Roth Capital

The Q was filed this morning and that number is in there.

Operator

Your next question comes from George Price – Stifel Nicolaus.

George Price – Stifel Nicolaus

I wondered, you mentioned in the press release you think you should see some substantial improvement in 2010. Do you care to give kind of any color on that commentary?

Jeffrey S. Davis

I think I’ve eluded to it a couple of times. Again, we’re seeing anecdotal evidence, it’s too soon to have that visibility, that crisp visibility but anecdotally it looks like this increased demand that we’ve seen in those sales months in Q3 that will materialize in revenue in Q4 and beyond looks to be continuing. There are preliminary forecasts which are very preliminary at this point, for Q1 are pointing to a positive as well. As I said before, a 10% improvement, 15% improvement in demand for Perficient would have a tremendous impact on the bottom line.

I don’t think those kinds of numbers from the base that we’re operating from are unreasonable at all. Of course, there’s a dependency there on general health in the economy and the willingness to spend in those executives suites. Right now, again it’s our sense and some external evidence as I referenced Gartner before, that in fact is going to be the case which I think will be a nice improvement for Preficient. We tend to do very, very well even in modest increase spend environments.

George Price – Stifel Nicolaus

The timing of budgets and spend and in particular the kinds of areas you guys tend to focus, higher end software [inaudible] and integration, what are clients saying about their budgeting process? Is it going to be more normalized this year, when are budgets going to be finalized in your view and any senses? I guess your preliminary 1Q view would be that things are going to continue to ramp in 1Q so it sounds like the timing of the spend will be a little bit more normalized but just when do you think they’ll finalize the budgets?

Jeffrey S. Davis

I think that’s occurring now as these plans are coming together. We’ll certainly know more in December, we’ll know a lot in January. During the holiday season things tend to slowdown to not much activity at all and then in a healthy year we see a pretty rapid snap back in sales in the first part of January so that’s going to be I think the telltale sign as to what 2010 is going to be. But, what we’re hearing again, anecdotally is that it’s going to be more of a normal cycle where they’re going to take the whole year – one of the things that I think these CIOs right now are frustrated by is that they’re behind.

The demand for the business are still there and yet they’re behind on meeting those demands because they were shutdown on budgets in the first half of 2009 and for the better part of 2008 entirely. There’s a lot of frustration there and what we’re hearing is that they’re going to be allowed to utilize those budgets. They’ve got more normal budgets and then 2010 will be a more normal year where they kick off projects at the beginning of the year as well as throughout.

George Price – Stifel Nicolaus

Any thoughts on the M&A environment? You guys have talked a little bit, and when I mean M&A I mean beyond I think you’ve already commented on looking for targets yourself but obviously we’ve had a couple of big deals announced in the space, more on the outsourcing side but I’m just curious on your thoughts there and in particular do you see or kind of feel any of these larger firms have done some consolidation or are they starting to show any indications of looking maybe to add more consulting oriented businesses now that they’ve kind of stepped up on the outsourcing platform?

Jeffrey S. Davis

I think that’s a natural gap. What they’re going to find is to your point there’s a gap between consulting and outsourcing. It’s going to be hard to sell outsourcing to people who buy hardware. They’ll have some success with that but you need that consulting gap in there that can address the business side as well in my opinion. So, yes I think consulting oriented firms will become more attractive target, to some degree already are but I think that’s a gap that exists and particularly in the middle ware space there’s a gap there. Of course, we’re focused on operating this business day-to-day and long term without a lot of thought to that relative to Perficient. But, I do think it’s likely that that consolidation is going to continue to occur and there’s a gap in those businesses that I think strategically they’re going to want to fill.

George Price – Stifel Nicolaus

Lastly, any comments maybe on some of your sales channel partnerships? I know IBM has done some, it sounds like, some consolidating of their services channel partners which as I understood it would probably be net/net beneficial to you guys. But, given where the environment is now, what could you tell us about how those partnerships are working out, particularly IBM and ORACLE?

Jeffrey S. Davis

Very well. Our IBM relationship is I would say better than ever. We’ve done well with IBM this year, that’s one area that has grown for us throughout the year, not just on a relative basis but on a real dollar basis so we’ve done well there. The partnership is very strong. You’re right they’re actually consolidating out a lot of these sort of non-value added resellers so that will definitely be a benefit to the value added resellers like ourselves. Right now, I believe we can claim that we’re one of, if not, IBM’s top partner in that field. That’s excellent.

ORACLE also is a very strong relationship. We’re a go to partner for a lot of things with ORACLE including Siebel on demand now. In addition to the Siebel on premise, we’re very, very strong on CPG. We had a couple of large wins, those were some of the things I was just referring to in a couple of these larges deals where we’re seeing clients coming back and being willing to spend more on the on premise license arrangement that these larger companies need SOD or Siebel on demand is going to be focused more at the mid and down markets.

A good relationship, a go to partner there for ORACLE in that space. We’re working to expand that relationship. On the technology side, we do have some good capability there now but we’re looking to enhance that both sort of from a Greenfield standpoint but that’s also on our acquisition list.

George Price – Stifel Nicolaus

Is there any sense of given the pressure that we’ve seen on software sales in general, do you feel any sense of increasing competition from the internal services arms of these companies?

Jeffrey S. Davis

No, certainly not with IBM. IBM software services group is different from GBS. We compete with GBS frequently, we work in partnership with the software services group and as I said we’ve actually grown this year there. IBM’s view on that is they’re enablement, they’re not there to compete with their partners so that’s an excellent relationship and they have an excellent view of that and I don’t think we have any concerns there.

ORACLE really the same way, our relationship with all of these partners are more on the software sales side and even where these software sales folks might have some incentive to sell services that’s a difficult task for them. Their many incentives are around software. The reality is the rate differential just erodes the budget that they’re trying to sell software in to so they embrace partners very much in the field and I don’t see that changing any time soon. In fact, if anything I see them probably getting more partner friendly as they move forward.

Leveraging our sales capacity and resources and presales resources saves them a bunch of money and what we’ve seen all these guys do is actually cut back in that space and rely more on partners like us.

Operator

Your next question comes from Brian Kintslinger – Sidoti & Co.

Brian Kintslinger – Sidoti & Co.

Talking about all your partners, can you sort of split out what percent of revenue they each make up?

Paul E. Martin

In the quarter IBM was 27%, up a little bit. As Jeff said the business was strong there. 16% with ORACLE, about 15% with TIBCO and 14% with Microsoft are the big four.

Jeffrey S. Davis

I want to make sure we’re clear on that, that is a percent revenue break down of services work done on those platforms. That’s not business we’re getting from them.

Operator

This concludes the question and answer session for today’s program. I would now like to turn the presentation over to Mr. Jeff Davis for any closing remarks.

Jeffrey S. Davis

That’s it. Thank you all very much for your time today. We look forward to talk to you again in the quarter.

Operator

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

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Source: Perficient, Inc. Q3 2009 Earnings Call Transcript
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