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Executives

Jeffrey S. Davis – President and Chief Executive Officer

Paul Martin – Chief Financial Officer

Analysts

Mayank Tandon – Needham & Company, LLC

Brian Kintslinger – Sidoti & Company

Peter J. Heckmann – Avondale Partners LLC

Perficient, Inc. (PRFT) Q3 2013 Earnings Conference Call November 7, 2013 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Three 2013 Perficient Earnings Conference Call. My name is Sue and I’ll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

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

Jeffrey S. Davis

Thank you and good morning everyone. With me today as always is Paul Martin, our CFO. I want to thank you for your time this morning. We have I think some great results to talk about in a couple of minutes. As is typical, we’ve got a few minutes of prepared comments, and then we’ll open the call up for questions. But before we proceed, Paul will you please read the Safe Harbor statements?

Paul Martin

Thanks, Jeff and good morning, everyone. Some of the things we will discuss in today’s call concerning future company performance will be forward-looking statements within the 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.

At times during this call, we will refer to adjusted EPS. Our earnings press release includes 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 and this is posted on our website at www.perficient.com. We have also posted a slide deck, which includes a reconciliation of certain non-GAAP goals to the most directly comparable financial measures prepared in accordance with GAAP on our website under Investor Relations. Jeff?

Jeff Davis

Thanks, Paul. Well we are definitely excited to discuss our third quarter results with you. On previous calls throughout this year we referenced a cautious confidence around the second half of the year and I think the results that we announced this morning combined with our fourth quarter guidance really reflect the realization of our optimism. During the third quarter services revenue was up 14% year-over-year, net income was up 41% and earnings per share on a fully diluted basis were up 44%.

ABR, our average bill rate increased $137 an hour in the North American employees and that’s an all time high which is also up 5% year-over-year. The pricing power of this gross service margins by a 270 basis points to 39.2% and I continue to believe that we have an opportunity to incrementally grow bill rates contain costs and then possibly even drive little more utilization that will help us continue to move toward our long term goal 40% plus services gross margins, so I think we are getting close to that and might see at sometime next year.

We continue to realize solid bookings during the quarter as well more good news there. So closing September particularly strong is a big month for us, bookings in total were up 21% year-over-year and year-to-date remain at 17% year-over-year, so key metric we use some of our businesses are success and booking larger deals, you heard me talk about this before. We closed 25 deals in the quarter that were over $0.5 million they average 1.4 million a piece and that compares to 19 a year ago averaging 1.2 million, so more large deals and larger deals, year to date we booked 82 deals north of $0.5 million that average $1.3 million of each and that compares to a 62 in the prior year at $1.1 million average per deal last year, so delivering larger deals and maintaining larger relationships is a core component of our ongoing strategy and we are really seeing it pay off, you heard me talk before about our land and expand strategy which we are executing now and again we are really seeing dividends from that, it will help us not only drive additional stability into the business while – quite stable but also help us drive those growth numbers to higher level as we discussed in the past.

So we now served 38 unique $2 million plus a year plans and 10 of those plans are actually running annual billings greater than $5 million. The third quarter results of course include no contributions from – acquisitions we announced in October, I will speak more to strategy there and about that acquisition, obviously we are quite excited about the transaction and we are seeing some benefits already again and I will talk more about that in a minute and I will share some more notable details on the quarter and comment on our outlook for Q4 and the rest of the year after Paul shares the financial details for the quarter. Paul?

Paul Martin

Thanks Jeff. Total revenues for the third quarter were $96.8 million and a 11% increase over the year ago quarter. Services revenue for the third quarter of 2013 excluding the interest rate expenses increased 14% to $86.6 million compared to the comparable prior year quarter. Services gross margin for the third quarter 2013 excluding stock compensation and reimbursable expenses increased to 39.2% from 36.5% in the third quarter of 2012.

SG&A expenses increased $20.5 million in the third quarter of 2013 from $17.7 million in the comparable prior year quarter and SG&A as a percentage of revenue increased to 21.2% from 20.3% in the third quarter of 2012.

EBITDA for the third quarter 2013 was $16.2 million or 16.7% of revenues compared to $13.1 million or 14.9% of revenues in the third quarter 2012, the third quarter 2013 included amortization of $2 million compared to $2.3 million in the comparable prior year quarter. Net income increased 41% to $7.2 million for the third quarter 2013 and $5.1 million in the speaking the third quarter of 2012.

GAAP earnings per share increased $0.22 for the third quarter 2013 from $0.16 in the third quarter of 2012. Adjusted GAAP earnings per share increased to $0.32 for the third quarter of 2013 from $0.26 in the third quarter of 2012. As a reminder – EPS was defined as GAAP earnings per share plus amortization expense, non-cash stock compensation, transaction cost, and fair value adjustments of contingent consideration net of related taxes divided by average diluted shares outstanding for the relevant period.

Our effective tax rate for the third quarter of 2013 was 29.5% compared to 31% for the third quarter of 2012, the decrease in the effective rate is primarily due to a tax reduction for U.S. domestic production activities related to the 2013 tax year and the last tax three tax years which was recorded in the third quarter of 2013.

Our ending billable headcount at September 30, 2013 was 1,751 including 1,571 billable consultants and 180 contractors. Ending SG&A headcount at September 30 was 296.

Now let me turn to the full year results. Revenue for the nine months ended September 30, 2013 were $275.9 million, a 13% increase over the comparable period last year. Year-to-date services revenues for the nine months ended September 30, 2013 excluding reimbursable expenses was $240.5 million, an increase of 12% over the comparable prior year period.

Services gross margin for the nine months ended September 30, 2013 excluding stock compensation reimbursement expenses increased to 37.3% from 35.8% in the prior year period. SG&A expenses increased $57.3 million for the nine months ended September 30, 2013 from $49.1 million in the comparable prior year period. SG&A as a percentage of revenues was 20.8% for the nine months ended September 30, 2013 compared to 20.1% for the nine months ended September 30, 2012 primarily due to increased investments in research and development and sales related costs.

EBITDAS for the nine months ended September 30, 2013 was $41 million or 14.8% of revenues compared to $35.6 million or 14.6% of revenues in the comparable prior year period. 2013 has included $5.8 million of amortization compared to $5.7 million in the comparable prior year period. 2013 has included acquisition costs of $1.4 million primarily related to the acquisitions of TriTek and Clear Task compared to $1.8 million related to the acquisition of PointBridge Solutions and Northridge in 2012.

Net income for the nine months ended September 30, 2013 increased 36% to $15.9 million from $11.7 million for the nine months ended September 30, 2012. Diluted GAAP earnings per share increased to $0.50 a share from $0.38 for the nine months ended September 30, 2012. Adjusted GAAP earnings per share for the nine months ended September 30, 2013 was $0.81, up 18% from $0.69 for 2012.

Our effective tax rate for the nine months ended September 30, 2013 was 30.5% compared to 38.1% for the comparable prior year period; the decrease in effective tax rate is primarily due to the research and development tax credit at 2012 which was recorded in the first quarter when the law was enacted the research and development tax credit for 2013 and a tax reduction for U.S. domestic production activities was 2013 in the last three years which was recorded in the third quarter of 2013.

We ended the third quarter of 2013 with $16 million in outstanding debt and $5.4 million in cash and cash equivalents. Our balance sheet continues to leave us very well positioned to execute against our strategic plans. Our day sales outstanding on accounts receivable were 78 days at the end of the third quarter of 2013 which is down from 81 days at the end of the third quarter of 2012. We will continue to focus on keeping DSOs in the 75 day to 80 day range.

I will now turn the call back over to Jeff for a little more commentary, Jeff?

Jeffrey S. Davis

Thanks, Paul. Part of the mission we are pleased with the quarter. I have been having a live conversations with our leadership team in fact we had our Annual Planning Meeting here just a couple of weeks ago, talking about both the end of this year but also going into next year and I can tell you that this solid confidence in the pipeline on an ongoing basis certainly solid confidence in November and December rounding out or finishing out this year as you see in the guidance.

But I like to also share the unit goal and everyone is communicating a strong sense momentum headed into next year, that’s a important point to make. We’re better positioned than we’ve been in the recent memory, in terms of how we are ending this year and the platform that it represents going into next year and the growth opportunities around that.

And I mentioned CoreMatrix earlier; we talked a little bit last quarter about the strategic importance of drawing a saleforce pack as a profession. Obviously every one is aware; cloud computing is big and only getting bigger and virtually every one of our clients are sensing the opportunity in one fashion earlier. Of course, we been delivering cloud base solutions for years with other partners and chiefly Microsoft and others as well and certainly building a lot of cloud architected platforms and solutions for our customers, but by acquiring Clear Task in May and now CoreMatrix.

We’ve quickly become a very capable saleforce consulting partner with comprehensive sale and delivery capacity across the entire county. In our broader sales team, there is still to be able to offer new services to our adjusting client as we had a lot of clients asking specifically about salesforce and now we’ve got that capability. We are already wining deals today at exiting clients that we simply couldn’t have pursued at the beginning of the year. And so Gold has become the top SAP consulting partner in the country much like we’ve done with our partners Microsoft and IBM.

Speaking of IBM, business is booming for us around their entire product stack. We continue to be recognized by that organization for our work, just yesterday, we issued a news release highlighting two awards we received this week at IBM Information on the Needham Conference in Las Vegas. We resolved to step in IBM’s 2013 Worldwide Performance Management Business Partner Award and also received an Enterprise Content Management Award.

Also worth highlighting is our ongoing success with and the growth at our GDCs our Global Development Centers. Our ending of offshore bill to head count for the quarter was 29% year-over-year with our head count in India more than double. We talk about that our position being well positioned regardless of any integration with reform legislation that may occur and we’ll continue to focus on structuring our delivery teams that can provide a comprehensive range of options to our clients.

So before we get to the Q4 outlook and the balance of the 2013, just a quick word to reiterate our plans around M&A. It remains our intend to pursue deals that would had somewhere around $50 million or more in run rate revenues in 2014 and also guarantees of course with the pipeline is full and in fact it’s very robust activity there discussions with several firms right now. So I won’t be surprised if we are able to announce something very early next year, it’s not even on the question we given a deal time this year although more likely early next year.

So finally, commenting on Q4 2013 and the balance of the year Perficient expects its fourth quarter 2013 services and software revenue, including reimbursed expenses to be in the range of $95.6 million to $100.6 million, comprised of $88.3 million to $92.9 million of revenue from services including reimbursed expenses and $7.3 million to $7.7 million of revenue from sales of software. The mid-point of the fourth 2013 services revenue guidance represents growth over about 21% 20.6% to be precise over the fourth quarter of 2012 service revenue.

We are also nearing our full-year 2013 revenue guidance range and moving it up a bit, to a range of $372 million to $377 million and raising 2013 adjusted earning per share guidance to a range of $1.0.8 to $1.12 from the previously provided range of $1.03 to $10.9.

So with that, we can open up the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Mayank Tandon from Needham. Please proceed.

Mayank Tandon – Needham & Company, LLC

Thank you. Good morning, Jeff and Paul. Good job on the quarter.

Paul Martin

Thanks Mayank.

Manyank Tandon – Needham and Company

Wanted to dig into the guidance a little bit more for the fourth quarter, if I look at the midpoint of the new guidance range, it is about $2.5 million higher than what you had provided previously, but I would imagine that the contribution from CoreMatrix would be a little bit more. So maybe you could just walk us through how much is CoreMatrix adding to the fourth quarter? What is organic in 4Q, and then how much of the growth is from the acquisition?

Paul Martin

Yes, so only have a stem for CoreMatrix. It’s about $2.5 million. The organic growth for the quarter, the midpoint of our services guidance is actually 8% year-over-year, just under 8%. I think 7.6% organic.

Jeffrey S. Davis

So that’s obviously we were 4.65% this quarter and flattish in the first half of the year. I mentioned early on that we expected a better second half and certainly we’ve got that momentum moving in the right direction.

Manyank Tandon – Needham and Company

Okay, that makes sense. To be clear, the organic growth guidance for 4Q has not changed, the addition to revenue is really from the CoreMatrix deal?

Paul Martin

That’s right.

Manyank Tandon – Needham and Company

Okay, that makes sense. And I wanted to get a sense from you in terms of what are you hearing for next year from your clients? You mentioned they you are upbeat going into next year, but maybe just some specifics around what are client priorities for 2014. How would that be different from what you saw in 2013 and what that could mean in terms of organic growth trends in 2014 versus 2013?

Jeffrey S. Davis

Well we continue to see I mentioned earlier obviously that a little bit of among Cloud applications some of which as I alluded are custom develop the applications where we to be build an internal Cloud are in fact external. But also sales force obviously more of as 365, so more could initiatives to be sure, more investment being made there. I think we’re well positioned to capture that.

In addition to that we continue to see great opportunities around analytics both kind of standard BI business intelligence reporting, dash boarding, but also enterprise performance management, so financial analytics both on the IBM and Oracle stack. Hyperion and TM1 are both again some defraction. TN1 particularly with IBM gain the traction.

We’re seeing the demand there and like I said across the Board really for BI and primarily around among the retail set a lot of interest in customer applications, customer installment applications, Omni-Channel initiatives that some of our retail customers are watching. We’re seeing some new revenue being driven there and also e-commerce; e-commerce is a foundational component to Omni-Channel. So we’re seeing good both in IBM commerce platform as well as sterling commerce platform.

So I would say generally it’s across the board and the appetite for spend is solid. I wouldn’t say it’s return to what we were enjoying in the industry and to say 2006 or 2007, but still I would say stable continuing steady increase demand and we’re feeling very confident about the year.

Manyank Tandon – Needham and Company

I know you’re not giving specific guidance on organic growth for next year. But is it safe to say that given the momentum you’re seeing that organic growth could continue to accelerate into fiscal 2014 from where you are finishing in fiscal 2013?

Jeffrey S. Davis

That’s certainly what we’re hoping to see. And that’s what we’re hoping to see and that’s what we are driving too, I mentioned the planning being we got a couple weeks ago, and the consensus among the executive team myself, Kathy, Paul as well as our nine vice presidents was that 10% was a very doable number, so that is our goal and that’s the goal that a lot of our variable compensation will be tied to, for a great number of people here.

And I think there is even potential upside to that, but it’s very early to be talking about that but I mentioned earlier and I believe this to be true and I want to reiterate that we are better positioned then we’ve been I would say probably since 2006 or 2007 as we are heading into the next year. So we are very optimistic no guarantee it is still early but bookings as well as anecdotal pipeline total et cetera all indicate we got a good shot at double-digit growth next year.

Mayank Tandon – Needham & Company, LLC

And then finally just some housekeeping items maybe Paul you could give us what the percentage of revenue was from global delivery what the average bill rate was for off shore and also the utilization levels I didn’t see that in the presentation. So I just wanted to get that?

Jeffrey S. Davis

Yeah, so about 4% of revenues is coming from off shore North America employee utilization was 80% in the quarter and on the bill rates give me a second and I can dig out the bill rates here, so…

Paul Martin

Be high 30%...

Jeffrey S. Davis

These around 37%, 38%, 39%...

Mayank Tandon – Needham & Company, LLC

Okay and utilization for global delivery was also like around 70% consistently recent quarters.

Paul Martin

Yes and that’s about, that’s about where we try to maintain it not a lot higher than that it’s a different model right that need to be there ready. So we carry more [Indiscernible] for design.

Mayank Tandon – Needham & Company, LLC

Great, thank you, congrats again.

Paul Martin

Congrats, again.

Jeffrey S. Davis

Thank you.

Operator

Thank you your next question comes from the line of Brian Kintslinger of Sidoti. Please proceed.

Brian Kintslinger – Sidoti & Company

Hi, good morning Jeff and Paul how are you?

Jeffrey S. Davis

I am well Brian how are you?

Brian Kintslinger – Sidoti & Company

Good, so healthcare looks like it’s been a big top line waiver and so the question I like to ask around from here I am wondering if you can just update us some of the statistics Premier maybe the customer totals, revenue contributions and maybe the number of hospitals there in pipeline from that channel if you will?

Jeffrey S. Davis

The revenue contribution remains I’d think steady it really hasn’t changed I mean I view that by the way as quite good news because despite that fact and by the way I should mentioned that a lot of the work that we did and even the assets that we brought from Premier we are actually taken the market another channels primarily with IBM. So I mentioned early on that we were exploring that and we are heading, heading along down that path so we’ll continue to work with Premier but we are also broadening that, that channel in that market.

That said we do still have I want to say looks like about 15 opportunities in that pipeline totaling as of now about $16 million and the pipeline we did close some opportunities I believe we have 11 accounts now so I think we closed one or two more in the quarter, two more in the third quarter.

So we do continue to make progress there that we are pleased with but like I said I think the story is growing beyond Premier.

Brian Kintslinger – Sidoti & Company

Right and that makes sense but I am curious beginning of that relationship when you started working with the hospital they seem to in a year or two and beyond take more services or demanded more service from you so we talk about what an existing customer looks like in your experience so far in year one, year two and maybe even year three?

Jeffrey S. Davis

Yeah, it’s a good point and it does certainly vary by customer and how we are positioned going in some cases I think we’ll probably just implement the solution that we developed around that space and likely be done, but to your point in many cases and this is true, particularly at a larger hospitals what we’re doing the private or on premise flavor in that solution and we do have the opportunity to stay on and some of the clients that we started with about three years ago to your point we’re still working with today and I’m still on million dollar plus run rate.

So some of that customization and continued development around the solution, around the date of the date evolved solution, but some of that also has branched off from out that as we’ve established the relationship and help educate the customer on other service that we can provide, they do expand from there. So I would say it’s difficult to put a number on it, a couple of million dollar a year and a relationship is running well and we’ve got that with a couple of these guys, a couple of three of them – about $2 million a year on average for the first three year and I would say an ongoing opportunity there around that land of expand model I described earlier.

But as we move forward, we’re actually seeing again more opportunity out side of that channel both for the SX as well as for services that we’re – and deals that we’re landing independent completely of premier in some cases by the way even with premier members that’s still independent of Premier and then also on the payer side, our payer experience continues to extend and improve not only among the blues that also now more into what we re-purchase kind of the private sector.

So I’m so excited about that 34% of those bookings by the way which are up 15% organically year-over-year third quarter bookings. I’m pretty sure that’s a record for us drawing close to it and 34% of those bookings were in health care, which continues to be about 24% or so of revenue, but that that delta between revenue and bookings is mostly attributed to the acquisitions that we have done this year and the fact that they’re diluting the health care component not in a bad way of just that they didn’t bring healthcare clients.

Brian Kintslinger – Sidoti & Company

Great and last quarter I think we talked about it before, but a little bit more so we talked about what’s going to be sort of a new offering from this. You’ve developed a software app basically that is much more easily installable at the hospital from these Premier assets. And may be you could update us was there any sales of that software up in the third quarter and if you look at the fourth quarter software guidance it’s going up substantially sequentially, but it’s kind of a seeing year-over-year, just maybe give us your expectations when you all start to see while lumpy some of those sales take place?

Jeffrey S. Davis

You know we’re optimistic and none of that’s reflected in our software numbers. We’re still optimistic that we’ll see some opportunities close this quarter and the fourth quarter, but I still think its probably more next year, the traction is slower just I’d say across the board, clients more sitting on their hands and mulling over these decisions.

The good news I think on the asset front and the healthcare in general for us again is that IBM has keen interest and partnering with us and specifically partnering with us around those assets. And it would have been a began to explore things that’s as far as I can go with it but we’ve been exploring some things with them, but I think we’ll help drive additional demand again both of the assets as well as potentially some services around them.

So I still feel good about the opportunity there. We did have some revenue from those – this quarter but it was pretty de minimis or modest. We actually licensed it in sort of the conference room pilot, the proof of concept stage at a very modest price and then the expectation of course is that that will go well and then we’d be able to sell the assets at full value and more reasonable price.

Brian Kintslinger – Sidoti & Company

And just one last question on the modeling of that, suppose you book a software license, you said some of them could be as much as $500,000 I think last quarter. Maybe I’m remembering incorrectly. But whatever the number is how long – how do you recognize that revenue? Is it a lump sum right away? Does it take a couple of quarters once it is installed to lump it? Just give a sense of how that runs through the P&L.

Jeffrey S. Davis

We’re expecting it will be upfront, that we’ll be able to recognize it upfront, but as you know that will be driven by the specific license agreements that we enter into, which meanwhile vary from customer to customer, but it’s our desire and we believe that’s the appropriate accounting as well and of course, we’ll have to support to the contract that it’s an asset, it stands alone, doesn’t require the services. So we’ll likely recognize an upfront.

Paul Martin

Yes, maybe a component 10% or 15%, that’s made that will be recognized over time, but most of them will be recognized.

Brian Kintslinger – Sidoti & Company

Great, I’ll get back in the queue. Thanks so much.

Jeffrey S. Davis

Thanks, Brian.

Operator

Thank you for your question. (Operator Instructions) Your next question comes from the line of Peter Heckmann of Avondale Partners. Please proceed.

Peter J. Heckmann – Avondale Partners LLC

Good morning, gentlemen. Nice results.

Jeffrey S. Davis

Thanks, Pete. Good morning.

Peter J. Heckmann – Avondale Partners LLC

Good morning. Wanted to follow-up on services gross margins, which looked very, very strong; up significantly year-over-year, can you talk about the components that went into that year-over-year increase, whether it would be mix, domestic versus offshore, bill rates? I don’t see that there was a real significant utilization and certainly – so if you talk about that. But as well your guidance for the fourth quarter seems to suggest that maybe we won’t see quite as much seasonal downturn in services gross margin, or perhaps maybe we see more operating leverage in the fourth quarter? But a little bit about how you see margin shaking out for the fourth quarter as well.

Paul Martin

Yes, sure. So I think it’s actually a combination of those things, I think the right the utilization wasn’t a big factor, which again, I actually see little positive, because there is some room to improve there. But it is a combination really the mix of offshore. Offshore, this past quarter grew 20% to 29% year-over-year. So obviously, the offshore work that we’re delivering is at about 60%, 65% gross margin, so that’s helping to drive that margin up, as well as the bill rate increase. So bill rates are up 5% year-over-year, pretty well ahead actually of our goal around the bill rates.

So where we – and we expected to drive more gross margin from utilization this year, that’s worked out that it will drive more of it through the bill rate increase, than utilization, like I said, I think actually you still see there’s room for improvement on the innovations side. However, we’re not seeing any headwind on increasing bill rates, either, I think the value of what we’re delivering the quality and our reputation stands up against, competitors that are charging still much more than we do based on a brand differential and I think that’s a kind of artificial gap that we can continue to fill.

In terms of gross margins in the fourth quarter overall, yes, thankfully, we don’t see, we don’t expect the seasonal impact that we had last year although we had in the past, and I think that’s mostly attributable to our growth momentum. The fact is we’re able to offset some of what would normally, we would see in a normal seasonality because we’ve got some pretty strong organic growth underlying there.

So that’s offsetting it. We did do some a little bit of modifications for our PTO policy or vacation policy. That might be influencing it, but I think it’s mostly the growth and again, that’s one of the reason that I’m optimistic that we are on that growth curve. We don’t see right now any reason to believe that’s going to stop and so we should be really well positioned going into January and 2014.

Peter Heckmann – Avondale Partners

Okay, that makes sense. Then I missed just the first minute of the call. On software reselling, remind me, was there a change there in terms of the way that you’re recognizing or to the mix, what’s accounting for year-over-year increases – year-over-year decrease besides normal lumpiness, I’m assuming maybe something more given some of the guides you gave to the fourth quarter for that line item.

Jeffrey S. Davis

Yeah, no it’s not honestly it’s the same as – there is no difference in recognition. It is just lumpy that quite definitely. Clients are pretty sadly when it comes to buying software they’ve been well trained by the vendors. And so a lot of them will delay until the end of the year if they can because they know they are trying to make their number. Oracle has an half fiscal year, it’s not even the same as the calendar year. So we see some lumpiness in all that and that’s all I would and even this quarter, this typical fourth quarter experience would be a large software sale I think our number out there could be a little conservative that’s something we would like to run the business as you know and there is slightly upside on the software numbers. It’s when those deals were $2 million software opportunity sort of like a one or zero whether it happens or not and you know mess up your guidance by missing that.

Peter J. Heckmann – Avondale Partners LLC

Fair enough, okay. Then, as regards to the organic hiring outlook with utilization running around 80%, do you anticipate ramping up the net domestic headcount at least in the next couple of quarters?

Paul Martin

We’ve got some movement on utilization, but not a lot actually and of course 100 basis points there to make huge difference in margins, but one thing I say you’re trying to drive that number up some. But I do expect this to be ramping up next year again if my optimism based on some tax obviously, comes to fruition and we are seeing the kind of growth numbers and growth expectations that I shared, I think we’ll be doing some significant ramp up in the U.S. on hiring as we are well positioned to do that.

The recruiting team is running very nicely Talent acquisition I should say, we rebranded that and made a lot of efforts around unique types of recruiting where you can really find the people that are not necessarily looking for a job which are often the ones you want most. So we’ve got no concerns about being able to do it but we do expect some ramp up, but I would expect some ramp into the kind of growth there currently we have been talking about.

Peter J. Heckmann – Avondale Partners LLC

Great. I appreciate it.

Operator

Thank you. Your next question comes from the line of Brian Kintslinger from Sidoti. Please proceed.

Jeffrey S. Davis

Brian. The operator, we seem to have maybe a technical issue with Brian.

Operator

I’ll just try it again for you sorry.

Jeffrey S. Davis

It’s okay, thank you. Okay well, we think we lost Brian at least temporarily, I think maybe – back in queue.

Brian Kintslinger – Sidoti & Company

Hello.

Jeffrey S. Davis

Oh Brian.

Operator

Brian is now in the call. Thank you.

Brian Kintslinger – Sidoti & Company

And I’m finally heard. Thanks.

Jeffrey S. Davis

Sometimes it’s the one you have to work most for that may affect the most.

Brian Kintslinger – Sidoti & Company

One of the things we haven’t talked about a lot for you is international in Europe and maybe you can update us on how much revenue comes from international customers and obviously your divisions from international customers. What we’ve been hearing a lot from most of the system integrators reporting is Europe is picking up substantially. So I’m wondering if you are thinking about in any way, shape or form improving your market position to take advantage of that or is there enough opportunity in the U.S. that will remain your core focus?

Jeffrey S. Davis

I think for the time being the U.S. does remain our core focus. Even at $400 million, we are really relatively small in what’s an $80 billion market here. So I think there is plenty of opportunity for us to continue to play here. I think the Forrester calling for a 7%, 8% increase in spending this year in IT services and along the way I think we can gain share as well. So we got the opportunity of general growth plus the opportunity to continue to gain share and with our goal of double-digit growth I think you can realize that in the U.S. and not take on the additional major risk of necessarily expanding outside the U.S. right now. Reluctant to say that we’re not discussing that and looking at other opportunities be at Europe, Latin America or Asia and we’ll probably be addressing that in the not too distant future, but there’s nothing eminent on the doorstep right now.

Brian Kintslinger – Sidoti & Company

Two more questions. First, on acquisitions, have you at all changed your plan of how you will pay for them in terms of the composition of cash versus stock? I think recently it’s changed a little bit. So I’m just curious maybe you could articulate where you are right now with that?

Jeffrey S. Davis

Sure. It’s generally now, but your observation is correct in the last two deals really, and particularly these last larger sales force deal. We did use a higher cash component on the upfront piece. That was to be competitive. Frankly sales force shots are hard to come by and it’s typically competitive environment to do those acquisitions. So we believe right now by the way that we’re satisfied with this platform for growing our SFDC practice going forward. So as of right now and never say never, but as of right now we don’t have any immediate plans to go out and acquire the sales force shop.

I think that phenomenon, my point is unique to sales force right now. Maybe if you went and bought a Workday shop you’d find the same thing. But for the most part we’ll stick to our living in a typical model of about 60% cash, 40% stock.

Paul Martin

One thing I’d add. Even in these deals, as Jeff mentioned, there is more cash upfront, but in year now, so it’s probably a bigger proportion of that stock. So over the term of the deal the full earn out, it’s really consistent with our overall structure.

Brian Kintslinger – Sidoti & Company

And before you made that acquisition for the Salesforce stop, did you have any Salesforce revenue or what percentage was it?

Jeffrey S. Davis

Very small. We’ve had two Salesforce acquisition this year, one in May and one in October. Prior to the one in May we did have a small Salesforce capability, but it was small, have a dozen, 10 people. So minimal revenue, a few hundred thousand dollars.

Brian Kintslinger – Sidoti & Company

I guess another way to ask, when you end the year and you have all these businesses integrated what percentage of revenue is Salesforce 3%? Is it 5%?

Jeffrey S. Davis

Probably 5% or 6% is what we expect.

Brian Kintslinger – Sidoti & Company

That’s great. And then the last question I’ve got, I think I ask this every quarter just to be sure. The fourth quarter guidance, pure services excluding reimbursable, just wanted to get a sense of maybe how much reimbursable is included in that number?

Jeffrey S. Davis

I think it’s just about $4.25 million

Brian Kintslinger – Sidoti & Company

Of reimbursables?

Jeffrey S. Davis

Yes. And then like I said, you will get while the map on that I mentioned earlier is 7.6% organic on the net services.

Brian Kintslinger – Sidoti & Company

Great, thank you so much guys

Paul Martin

Thank you.

Operator

Thank you. Your next question comes from the line of Manyank Tandon with Needham, please proceed.

Mayank Tandon – Needham & Company, LLC

Thank, Jeff, just a few follow-up, so on the margins as you look into next year, is it still plan to extend gross margins, 100 to 200 basis points and then we should get about 50 to 100 basis points in EBITDA margin expansion over the course of the year receiving that the environment stages are fairly resilient?

Jeffrey S. Davis

Yes, I think those are reasonable expectations and those are exactly what I have in mind. We would be running closer about 100 bps on EBITDA right now, if not through the investment – the investment we made in the assets that we have talked about early in the year. So net of that, that new investment this year it’s about close to that 100 bps improvement. I do expect similar results next year, by the way I’ll say that if we are able to achieve the double-digit growth that we are shooting for, I think that – there is upside to that, and gross margins always expand more rapidly and margin extension is easier when you are growing had a good cliff say, 8% to 10% organic. And that environment utilization will definitely pick up even if you tried to keep it down and that all means like I said gross margins has already even beyond I think the levels we are talking about.

Mayank Tandon – Needham & Company, LLC

And did I hear right on the call earlier, that you don’t expect the usual seasonality in the fourth quarter this year, and then maybe that also crafted into next year where there will be more, the growth will be more even spread across the year.

Paul Martin

Yeah, I think this year in particular what I said was that growth momentum or again our growth momentum we have or had and still had coming into the fourth quarter is offsetting. So if we were going to same pace we were in the first half of this year, perhaps it’s slightly up. I think you can see more impacting the seasonality, I think we are offsetting some of that seasonal impact given the accelerated growth curve that we are right now. Will they repeat next year that remain to be seen so it is so far off, but I will be optimistic that we can maintain those percent time-to-time.

Mayank Tandon – Needham & Company, LLC

Okay, and a two more quick ones; the tax rate Paul, did you say the tax rate hold that 36%? Much I heard any comments around that just wanted to be clear?

Paul Martin

Yes, so the tax rate there was some one time stuffing here for this domestic production credit in the third quarter we are looking at roughly adjusted tax rate and allowing 37% in Q4.

Mayank Tandon – Needham & Company, LLC

37% okay, and in terms of share buybacks, has that slowdown now that you’d probably afford to doing another deal as you mentioned later this year, early next year, what should we expect the continued share buy backs?

Jeffrey S. Davis

We’re going to continue to be pretty aggressive on it in dollars, I think you are spot on as cash applied to acquisitions takes off. We’ll probably back off a little bit but acquisitions are lumpy, so we’ll get more aggressive in between them. We’ve got about 12 million left in the authorization, and that authorization goes thorough next year.

It’s my expectation actually to absorb that and potentially go back more afterwards although stock is obviously turning into little more fair value although it’s a bargain, but we need to continue to buyback I think to offset the shares of ratio in through acquisitions and to help with the accretion there and as well the restricted stock and the warrants we issued to management.

Mayank Tandon – Needham & Company, LLC

Great. Thank you for the color.

Jeffrey S. Davis

Thank you

Operator

Thank you. Thank you for you questions ladies and gentlemen. I would now like to turn the call over to Jeff Davis for closing statements.

Jeffrey S. Davis

Well, thank you all again for joining today. You can see things are very well on-track and we’re optimistic about Perficient today and in the future. And we look forward to talking again to deliver our year-end results and our 2014 guidance in a few months. Thank you.

Operator

Thank your for you participation in today’s conference. That concludes the presentation. You may now disconnect. Good day.

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