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Perficient, Inc. (NASDAQ:PRFT)

Q4 2009 Earnings Call

March 4, 2010 9:00 am ET

Executives

Jeff Davis – CEO and President

Paul Martin – CFO

Analysts

Brian Kinstlinger – Sidoti and Company

George Price – Stifel Nicolaus

Richard Baldry – Canaccord Adams

Jon Maietta – Needham & Company

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Perficient earnings conference call. My name is Katrina, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this presentation. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Jeff Davis, Chief Executive Officer and President. Please proceed.

Jeff Davis

Thank you. This is Jeff Davis. Good morning, everyone. I’m glad to be with you here this morning on the call. With me is Paul Martin, our CFO. I want to thank you all for your time this morning. And as typical, we’ve got about 10 to 15 minutes of prepared comments, after which we’ll open the call up for questions. I’ll ask Paul to read the Safe Harbor statement now.

Paul Martin

Thanks, Jeff. And good morning to 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.

In addition, our earnings press release included 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. This is posted on our website at www.perficient.com under News and Events. We have also posted a reconciliation of certain non-GAAP goals to the most directly comparable financial measures prepared in accordance with GAAP on our website at www.perficient.com under Investor Relations.

I’ll now turn it back to Jeff. Jeff?

Jeff Davis

Thanks, Paul. Well, again, thanks, everyone, for joining us this morning. Perficient closed a strong – closed 2009 really on a strong note. The fourth quarter saw us return to sequential revenue growth for the first time since 2008 and has really laid a foundation for a solid start in 2010. Revenues and earnings came in above our guidance as well as the analyst consensus estimate. And while we continue to generate solid cash flow, build our balance sheet, and repurchase shares is really the top and bottom line growth, but I think is most notable here.

In spite of the seasonality typically associated with the fourth quarter, and as a reminder, we are typically down 3% to 4% sequentially in the fourth quarter due to the seasonality from holidays et cetera. We actually experienced 5.2% sequential increase or growth organically over the third quarter. So again, a solid quarter and solid end to 2009.

On each of our last two quarterly calls, we indicated a growing optimism that in fact mid-2009 was the revenue bottom for Perficient. And I think our Q4 results and the current quarter guidance for Q1 gave me the confidence to emphatically state that revenue did in fact trough in the middle of last year. Both sales and revenue are now resuming a growth pattern that we’d like to see.

Our balance sheet remained strong. The company has no debt and more than $28 million in cash at the end of the year. That’s $5 million more than a year ago after repurchasing about $18.5 million of stock during the year. Of course, the strong cash flow generation plus our $50 million credit facility puts us in a strong position to continue to execute in the best long-term interest of the business. $12 million [ph] of purchasing power remains authorized under our existing repurchase plan, though I expect you will see us allocate more cash this year toward accretive acquisitions, as I mentioned in the past.

Speaking of that, and we discussed this in the last couple of calls, our goal is to complete an acquisition or two in the first half of this year and possibly another before year’s end. We are into discussions right now with dozens of firms and advanced discussions with a handful. And as before, obviously these deals will be highly disciplined and only execute acquisitions that are immediately accretive our bottom line.

With regards to the bottom line, our 2010 cash earnings per share guidance reflects the operating leverage that we’ve discussed in the past and the fact that we are in an inflection point around that in the business. While the high end of our 2010 revenue guidance range reflects a 10% year-over-year increase in revenues, reaching the high end of our cash earnings per share guidance range will reflect an increase of 67% over 2009, even achieving only the midpoint or even the low end of our 2010 revenue guidance, which still results in substantially increased earnings in 2010. And again, that’s due to the leverage that we’ve discussed in the past calls.

We’ve got solid leverage around SG&A as well as some room to run on the dark cost side through increased margins from ABR as well as utilization. And of course, accretive M&A will only help drive those earnings higher.

I’ll turn the call over to Paul now, our CFO, to discuss the financial details. And then I’ll follow up with a few more comments before we open the call up for Q&A. Paul?

Paul Martin

Thanks, Jeff. Total revenues for the fourth quarter of 2009 were $47.4 million, a 16% decrease over the year-ago quarter. Services revenue for the fourth quarter of 2009, excluding reimbursement expenses, were $41.3 million, with sequential revenue growth, as Jeff mentioned, of 5.2% compared to negative 3.6% in the third quarter of 2009.

Gross margins for services for the fourth quarter of 2009, excluding stock compensation and reimbursable expenses, was 30.6%, which is down from 32.6% in the fourth quarter of 2008. However, it is worth noting that the fourth quarter gross margins of 30.6% showed improvement from the 28.3% in the preceding quarter.

SG&A expense was $9.6 million in the fourth quarter of 2009 compared to $11.9 million in the comparable prior year quarter. Excluding non-cash stock compensation, SG&A expense was $7.8 million compared to $10.2 million in the comparable 2008 quarter. SG&A, excluding stock compensation as a percentage of revenue, were 16.4% in the fourth quarter of 2009 compared to 18% in the fourth quarter of 2008. The decline is primarily driven by higher bad debt expense in the fourth quarter of 2008.

EBITDAS, which is defined as earnings before interest, taxes, depreciation, amortization and stock compensation, for the fourth quarter was $5.2 million or 11% of revenues, compared to $6.9 million or 12.2% of revenues in the fourth quarter of 2008. EBITDAS margins improved sequentially from 8.1% in the third quarter of 2009 to 11% in the fourth quarter of 2009.

We reported net income of $629,000 for the fourth quarter of 2009 compared to $759,000 for the fourth quarter of 2008. The fourth quarter of 2008 includes a one-time impairment charge of $1.6 million or $0.03 a share. Diluted GAAP earnings per share was $0.02 for the fourth quarter of 2009 compared to earnings of $0.03 for the fourth quarter of 2008.

Non-GAAP earnings per share was down 23% to $0.10 for the fourth quarter of 2009 compared to $0.13 per share in the year-ago quarter, an increase sequentially when compared to the $0.08 per share earned in the third quarter of 2009.

Our effective tax rate for the three months ended December 31, 2009 was 59.4% compared to 53.1% for the comparable prior year period. The increase in the effective rate is due primarily to the magnified effect of certain state taxes, which are generally based on growth receipts instead of income, probably in items such as meals and entertainment and non-deductible executive compensation relative to a smaller income base.

Our average total headcount for the fourth quarter of 2009 was 1,027, which included 866 billable consultants and 161 subcontractors. We have reduced average billable headcount by approximately 12% from the fourth quarter of 2008. Total SG&A headcount for the fourth quarter of 2009 was reduced by 13 full-time employees or 8% compared to the fourth quarter of 2008. We will continue to adjust our cost structure based on changes in our customer demand.

Now let me turn to the full year results. Year-to-date revenues for the year ended December 31, 2009 were $188.2 million, a 19% decrease over last year. Year-to-date services revenue for the year ended December 31, 2009, excluding reimbursable expenses, were $166.4 million, a decrease of 20% over the comparable prior year period. Organic growth was negative 16.4% on a trailing four quarters average annualized basis.

Gross margin for services for the year ended December 31, 2009, excluding stock compensation and reimbursable expenses, was $29.9%, which is down from 35.6% in the comparable prior year period. The decline in gross margins is primarily a result of lower utilization resulting from softness in services demand.

SG&A expense was $40 million for the year ended December 31, 2009 compared to $47.2 million a year ago. Excluding non-cash stock compensation, SG&A expense was $32.9 million compared to $40.8 million in 2009. SG&A, excluding stock compensation as a percentage of revenues, was 17.5% for 2009 compared to 17.6% in 2008.

EBITDAS for the year ended December 31, 2009 was $18.1 million or 9.6% of revenues compared to $35.2 million or 15.2% of revenues in 2008. Net income was $1.5 million for the year ended December 31, 2009 compared to $10 million in 2008. Diluted GAAP earnings per share decreased to $0.05 from $0.33 in 2008. Non-GAAP earnings per share for the year ended December 31, 2009 were $0.36, down 45% from $0.66 earned a year ago.

Our effective tax rate for the year ended December 31, 2009 was 51.4% compared to 42.2% for the comparable prior year period. During the fourth quarter, we spent $5.6 million and repurchased 666,000 shares. And as of December 31, 2009, we have spent $27.5 million on repurchasing 4.5 million shares since the plant’s inception in 2008. We continue to believe that our share repurchases will drive future accretion and shareholder value.

We also continue to generate strong operating cash flow. We had operating cash flow for the year ended December 31, 2009 of $22.6 million compared to $25.1 million in 2008. We ended the year with no debt and $28 million in cash compared to $23 million at December 31, 2008. Our days sales outstanding on accounts receivable was 73 days at the end of the fourth quarter of 2009 compared to 71 days at the end of the fourth quarter of 2008 and 75 days at the end of the third quarter. Our goal is to maintain DSOs in the 70 to 75-day range over time.

With that, I’ll turn it over to Jeff for some additional commentary. Jeff?

Jeff Davis

Thanks, Paul. As I mentioned earlier, I do believe our Q4 performance clearly validated the markets improving and specifically for us. Utilizations hit higher in the United States and we saw substantial rebound in utilization at our GDC facility. I continue to expect that utilization could run as high as the mid-80s in 2010.

I’ve talked about that before, that our comfort zone is that sort of 82% to 84% range. We think that’s sustainable on a long-term basis. Billing rates were also up sequentially, and I expect that will continue as well, as we begin to get some pricing power back and we continue to see a healthier environment in demand creation.

From a sales standpoint, we closed just six deals north of $500,000 in the quarter as compared to 14 in the third quarter. But the good news is that in January of this year we had a very, very strong sales month. In fact, we closed more deals north of $500,000 and we’ve closed so far more deals north of $500,000 in Q1 than we did in all of the third quarter – that 14 in the third quarter. So we are off to a very, very strong start to 2010 from a sales perspective.

And we talk each quarter about the diversity of the business. And that was again the case in Q4. During the quarter, our top five customers combined represented 22% of revenues. Telecom was again our largest industry at 18% of revenues from a vertical standpoint. Healthcare was a close second at 16%, and I think healthcare is going to continue to gain. We are also seeing some gain in financial services. I’ve talked about this before as well. We ended the year at about 10% from financial services after beginning it at 8%. And I think it was actually lower than that in 2008. So again we’re seeing some pickup there as we expect, and I think that will continue as well.

From a solutions perspective, portals and business integration were our strongest disciplines, followed closely by CRM, customer relationship management. So really to summarize, we had strong Q4 performance and gotten off to a very strong start in 2010. Q4 was the first quarterly sequential revenue growth in six quarters despite the seasonality associated with the holidays and vacations. As our guidance indicates, we expect this trend to continue through Q1 of 2010.

As I mentioned, Q1 2010 sales are very strong so far and shaping up to be what I expect will be our strongest quarter in several quarters from a sales perspective and probably revenue as well. M&A diligence is underway, as I’ve mentioned, and our goal remains to get two to three deals done this year, including one in the next few weeks. Our long-term plans to build Perficient into a $500 million firm remain intact. I think that’s still a three to four-year runway from here as long as the economy holds together, and we continue to see the improvement that we are right now.

I’m optimistic that we are beginning to return to the pattern of growth that we displayed in the past, Perficient group from a small startup to a $200 million market leader. We had 18.5% organic compound annual growth rate from 2004 to 2007. I think we are beginning to head into a period that could see substantial growth rates, maybe not that high, but I think there will be substantial as our guidance indicates.

Lastly, I’ll comment on Q1 and the remainder of 2010. The company expects our first quarter 2010 services and software revenue, including reimbursed expenses, to be in the range of $46 million to $49.1 million, comprised of $43.6 million to $46.0 million of revenue from services, including reimbursed expenses, and $2.4 million to $3.1 million of revenue from sales of software.

For the full year 2010, both revenue and cash earnings per share guidance, we expect full year revenues to be in the range of $190 million to $210 million, and full year cash earnings per share to be between $0.50 and $0.60.

And with that, we’ll open the call up for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from the line of Brian Kinstlinger representing Sidoti and Company. Please proceed.

Brian Kinstlinger – Sidoti and Company

Hi, good morning, guys.

Jeff Davis

Hi, Brian.

Paul Martin

Hi, Brian.

Brian Kinstlinger – Sidoti and Company

First – just a couple questions. The first one related to healthcare. I’m wondering about the electronic healthcare records and stimulus. And if that has already called some acceleration in demand for you guys and when you look through the next year or two, is this going to be one of the strongest areas for you, healthcare because of electronic records, or is there more to it?

Jeff Davis

Yes. I think the electronic health records and the health information exchange to the data hubs that are mandated will certainly help us some. And they already have some, we’re working with a couple of states right now on strategy phases for implementing that. We expect to get some more business from that. And certainly anything [ph] legislated is some help. However, I think it’s a healthy industry, remains a healthy industry. There is so much requirement to spend on technology and improve the efficiency within the industry. The way that they serve the patients, there is also this concept of consumerism that’s really gaining momentum within the healthcare industry in sort of a self-governance mechanism where patients actually have more rights and more ability to choose that are forcing again greater efficiencies and transparency. And all of that requires technology. So I think the combination of those things should represent a healthy business for us. That’s right in our sweet spot, and certainly the legislation hasn’t hurt.

Brian Kinstlinger – Sidoti and Company

And then can you touch on financial services and what the IT consolidation following the actual industry consolidation means for you, and maybe what are some of the other drivers to what’s going on in financial services demand for you guys?

Jeff Davis

Yes. I think – you know, a couple of things. One is just that business is healing a bit and that industry healing a bit. And the ability for the industry to begin to take a more strategic and long-term view of their business and make some investments and really let some capital expense projects, and that’s just thing one. I believe they have – to the extent that everybody has been clamped up for a couple of years, they have got to have been the worst just because of the turmoil in the industry. So that’s thing one.

But certainly to your point, Brian, again, right in our sweet spot is integration. And you’ve seen this substantial amount of consolidation that’s occurred in that industry. So you’re bringing people and processes together and try to mash them or integrate them into a single firm. And that’s the business or that’s the work that’s underway now. In some cases, that’s fairly down the path. Some businesses, from what we see, are fairly down the path and some have really just begun to scratch the surface there. But even those that are down the path, they are really still just addressing the people, the organization, the processes, and what will follow that will be the systems work or the IT work. So I believe that there is going to be kind of a watershed opportunity around financial services to help them redesign their systems, redeploy, re-implement systems, and integrate existing systems that they haven’t begun to do yet.

Brian Kinstlinger – Sidoti and Company

Okay. And lastly, on two unrelated questions. First of all, Paul, if you could provide the bill rates. You said they were up. Both metrics from a – with offshore and without offshore. And then finally, maybe can you comment on, over the last couple quarters, we've seen subcontractors be the place where you are adding resources as you need them. Just remind us the economics of that. And do we expect that to sort of stop, now that demand is increasing and you'll be hiring more? Talk about that, please.

Paul Martin

Brian, let me take the bill rate question first. So the ABR for Q4 all-in went from 99 in Q3 up to 102 in Q4. And if you take the rate excluding China, it went from 109 in Q3 to 115 in Q4. So that’s a combination of the impact of, as we’ve talked about, sort of as demand has increased, that’s been able to help us on our pricing as well as there is always some volatility in the quarter-to-quarter comparisons associated with 60 projects, which went pretty well for us in the fourth quarter.

Jeff Davis

So yes, on the headcount side, Brian, you’re right. We did increase the subcontractor headcount in the fourth quarter to address some of the additional demand that we had there. Long-term, we intend to shift that to the employee base. Obviously that’s our presence. But until we’ve got some stability and certainty, which I think we’re getting to that point now, you want to make sure that you are not caught in a situation where you're having to do lay-offs again. So with regards to this quarter or 2010 in general, if we are able to hit the higher end of that range, we will certainly be doing some hiring this year.

And in fact, I think we will be doing some hiring again here at the end of this quarter. We are hiring now. We’re sort of hiring all the time, as we’ve talked before, from a skill standpoint. And you’re always sort of right-sizing or matching the skills to the demand, and of course we’ve got voluntary attrition there as well. But incremental hiring, I believe, we will see a pickup here near the end of the quarter. But as I mentioned before, our first plan there is to get that utilization, and we’re doing that. You’re going to see that, I think, this quarter well into the 80s. So for the employee base alone, our goal – and again excluding China, our goal is about 82% to 84%. Call it 83%. And we’re going to drive utilization into that range before we do any substantial hiring. But again I think that will happen pretty quickly.

Brian Kinstlinger – Sidoti and Company

All right. What’s the difference in the economics for subcontractors versus your own consultants? Is it significantly better margin for you to have your own consultants?

Jeff Davis

It’s a fairly complicated answer because it depends on the utilization. Right? You’ve got employees. You are covering that bench time. You are paying for that bench time while some do not. So if we can – when we are running utilization at that sustainable level of 82% to 84%, yes, the economics are substantially materially better to have employees doing that work. When we are in a contracting mode, sometimes it can actually be a little closer to and even breakeven between the two, using subs. But again, I’m optimistic we’re heading into that growth mode and we’re going to want to rely more on employees and subcontractors going forward.

Brian Kinstlinger – Sidoti and Company

Thanks, guys.

Jeff Davis

Thank you.

Operator

Your next question comes from the line of George Price representing Stifel Nicolaus. Please proceed.

George Price – Stifel Nicolaus

Thanks very much. Good morning, everyone. Nice job, nice numbers.

Jeff Davis

Thanks, George.

George Price – Stifel Nicolaus

Just the first thing, I just wanted to make sure I heard you correctly. So while the deal size – or the deals in 4Q was a little lighter in quarter-over-quarter. So in January, you've already got more, did I hear, than 3Q – than the 14 in 3Q? Did I hear that right?

Jeff Davis

That’s right. Yes, we’re so far – actually January, it’s really – I'd say, year-to-date we’ve got more of those large deals closed than we had in the entire quarter in the third quarter. I don’t want to get into specifics on the current quarter because I don’t want to get into the habit of doing that. And the thing two I would caution about is fourth quarter. Fourth quarter is always kind of a low quarter from sales standpoint. Literally, our customers sort of check out going vacation around Thanksgiving. And we don’t close a lot of business in December that’s typical for the industry. I think if you look at the entire second half of ’09, it’s a pretty healthy – it was pretty healthy sales sort of leading into what we’re seeing now in the growth of the revenue. A total of $78 million closed there in the second half of the year.

And keep in mind that not every single deal runs through our sales system. We’ve got relationships with a couple of major clients, such as IBM that we don’t run every single deal through our Siebel system. So $78 million plus some extensions that don’t get reflected there was actually pretty healthy step forward for the second half of the year. But we’re definitely seeing a different trend. I think this is really relevant as you all try to look at the information we’re providing you and to assess what we are.

In the first quarter of both ’08 and ’09, it was dry as dust from a sales standpoint. Customers were not buying much, and it was really, really tough to find these deals. Now, I’m not saying it’s easy now, but it’s we’ve definitely seen a shift. Like I said, people were really holding on to budgets at the beginning of the year, waiting to see how the year unfolded. And thankfully, we are not seeing that right now. Right now, we’re seeing a return to a much more normal cycle of – here is our plan for the year. We are beginning now what’s established these programs and projects that are going to go on for 12, 18, 24 months, and here is the contract today.

George Price – Stifel Nicolaus

So I guess just – are you – how would you characterize the deals that you saw, particularly – maybe also in the fourth quarter, but particularly what you’ve seen year-to-date in terms of their size relative to whatever you’d consider a normalized demand environment and in terms of maybe how far clients are thinking out, or how much they are willing to make some investments now that maybe take a little while to come to fruition. Our clients still like just ultra-focused on the stuff. It’s going to pay back in a boom. Very quickly are they starting to maybe think out a little bit more?

Jeff Davis

Yes. It’s definitely the latter. With regard to the fourth quarter, again, the fourth quarter is never a big strategic spend in the quarter. It typically isn’t in the industry, because people tend to have a fiscal calendar year so they tend to kick off their projects in January. Like I said, we had seen it last year. We are seeing it now. And to your point, exactly the kind of projects that we are winning now, that we’re signing up now here in the first quarter, which by the way have been in the works for several months, I mean, again, we’re working on getting these deals lined up and working with these clients for the last half of last year knowing that they are going to kick them off at the beginning of the fiscal year, beginning of calendar year and ink [ph] them. And that’s thankfully coming to fruition. So – but the effects of deals, to your question, are, yes, much more strategic, longer term, larger commitments than we’ve seen in the past. I wouldn’t say we are back to “normal” from 2.5 years ago or 3 years ago, but much much better and a very marked improvement over what we saw a year or two ago.

Paul Martin

George, one kind of interesting statistics on that is that in the year-to-date sales, we track them by deal size as we actually have more closed deals over 500,000 sort of year-to-date than we had in any quarter in 2009. So I think that sort of says, directionally this will take a different year than we saw in 2009.

George Price – Stifel Nicolaus

Okay. That sort of sets up my next question, which is the 1Q guide looks good. But given the talk around deals and given what you are looking for, for revenue in the first quarter, not to be too picky, but certainly the lower half of the 2010 guidance is pretty darn conservative if you think about things on a quarter-over-quarter basis. I guess if you could comment a little bit on that, how conservative would you say you are being, what are your macro and demand assumptions, are you anticipating any hiccups in the second half, just around that would be helpful.

Jeff Davis

I think it is – for those of you have followed us for a while know that we are pretty conservative, but I think especially now I think that’s the right call to make. There is just too much uncertainty out there. You hear people talking about W shape recoveries and double-dip recessions still. We’re very optimistic based on what we see. I do – based on that, I would say, sure, I think our guidance is a little conservative. And keep in mind though that 10% year-over-year is actually substantial growth when you look at on a sequential basis. We ended the year down from where we started the year. And we’re guiding a 10% year-over-year, you are talking about substantial – sequential basis.

When you look at the trailing four-quarter sequential growth that we’re going to have to post for the year 2010 to get 10% year-over-year because we ended on a low, it’s going to be pretty substantial. It’s going to be in the 15% to 20% range. So I don’t think it’s quite maybe as conservative as it was on the face of it when you compare the four-quarter sequential to the year-over-year. However, I do think it’s – based on what we are seeing right now, I’d say it’s conservative. For the first time in a long time, we began to look into Q2 and focus on the Q2 forecast much sooner than we’ve been able to in the last couple of years. So those are all very good signs. I’d say that right now we’re still a little nervous and still a little gun-shy just based on what the economy has done and the tricks it has played, frankly, over the last couple of years. The cycles have changed and they are less predictable and have been less predictable for a couple of years, so we don’t want to get ahead of ourselves. However, I’d say if you can’t tell by my tone, I’m extremely optimistic that good things are coming.

George Price – Stifel Nicolaus

Okay. Last question if I could, just kind of on a margin perspective, I guess two parts. First, for 1Q, I know you don’t give earnings guidance, but could you – Jeff and Paul, could you guys maybe give us a quick kind of puts and takes on the cost structure that you see in the first quarter, because obviously there are some seasonal factors, but then there are some other factors given how the demand environments change. And then the second part of my question on margin is, do you see any reason why your business, given the market and demand environment that you see now and how you set up the business, do you see any reason why Perficient wouldn’t be able to return to at least a low-double digit operating margin on a GAAP basis, assuming you continue to see revenue rebound? Is there anything in pricing or competition or anything like that that would make you hesitate in agreeing with that? Thank you very much.

Jeff Davis

I’ll take that last one first, George, and then I’ll let Paul take your first question around margins in general. The short answer is no. The question is timing. We’ve got – our average project or program is going to run nine to 18 months, somewhere in that range. And so we’ve got rates locked in for the deals that we were able to close last year thankfully. It will be sometime before we can push those rates up. And I think that’s going to be the key factors for us. We’ve, I think, demonstrated that we can operate very well. We’ll utilization back to sustainably high levels very, very quickly. It’s going to be more the timing around getting the ABR back up. I do think we can move that up pretty quickly.

We’ve already shown, I think, somewhat the results of improved demand environment, an ABR improvement in the fourth quarter. I think we’ll see more of that down the road, particularly for the US base. As we increase, by the way, the China component of our revenues, it’s going to have some overall effect on rates. But from the US base perspective, I do think we’ll be driving those up, and once we do, yes, I don’t see any reason that Perficient, over some period of time – and if I would hazard a guess, I think it’s probably 12 to 24 months that we could get GAAP EBITDA back into low-double digits, and with that, probably have EBITDAS into the high-double digits. And again I think that’s probably 12 to 24 months. It could be more or less based on that demand environment.

Paul Martin

Yes. Back to your question on sort of puts and takes on Q1 margins, as you’ve alluded to, certainly there is about a one or two-point impact of sort of the seasonality of payroll taxes that hit harder in the first quarter. That being said, we’re anticipating higher utilization in Q1. Bill rates probably flat to up a little bit. So the combination of those, we’re anticipating sequential improvement in the gross margin in Q1 compared to Q4.

George Price – Stifel Nicolaus

Great. Thanks very much, guys.

Jeff Davis

Thank you.

Operator

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

Richard Baldry – Canaccord Adams

Thanks. Your G&A has continued to sort of incrementally come down a little quarter-to-quarter. Your headcount is noted to still continue to slowly come down. With the revenue starting to turn up, could you talk about whether you feel like you’re really starting to get into a baseline figure for the G&A line?

Jeff Davis

Yes, I’ll comment on that and I’ll let Paul add to as well. From a G&A headcount standpoint and spend, there is a bonus factor in there that I’m going to let Paul address anything else he wants to add. But I think I’ve mentioned this before. I’ve talked lot about our leverage. I think we’ve got in terms of the general structure, organization structure, if you will, the main players and the main cost elements of not just G&A, but actually SG&A. We’ve not shrunk SG&A as much as we have direct costs, and neither of those as much as demand has over the last couple of years. Hence the numbers.

But in doing that, we preserve the key players and the key organization structure that we needed to take the company back up again. I think we can get the company back to 220 – $200 million – $230 million without making a major sort of structural investments or changes from an SG&A standpoint. There will be some incremental cost increases there, as I mentioned. And I actually think from a sales standpoint not too much. We held on to our sales folks, and in fact, we may have actually increased in headcount the sales people we have while anticipate moving into a better demand environment is actually that the sales productivity is going to increase. So aside from additional commissions, I think a lot of the fixed costs around sales, if you will, are going to be fairly flat. So good leverage there. But there are some cost incremental around G&A. We’ll have to add back some people. And like I said, there is a bonus factor. I’ll let Paul speak to some of that.

Paul Martin

Yes. Rich, I think in general, there has been a lot of focus in 2009. We’ve closed a handful of offices and sort of walking that delicate balance of getting that G&A, fixed cost down as low as possible, but also being mindful that as we’re going to grow this business in 2010 and beyond, balancing, not cutting into the bone, so to speak, on that. So I think we feel pretty good about where we are on that balance. So I think we’ve got the fixed costs sort of where we want them. And as Jeff said, we can get a lot of leverage as we go from $190 million to $220 million without making much in additional investments.

The only two sort of exceptions to that would be, as Jeff mentioned as well, bonus – there hasn’t been a – basically there hasn’t been a bonus in the last two years. So as we improve, there could be some incremental bonus expense. And then the other one is, from a bad debt perspective, we’ve had – we have a very good year in 2010. We’ve managed those accounts. It’s possible like in any business, an account could go bad. But I think we feel like we have good process to manage and keep a close eye on that and minimize that risk.

Jeff Davis

Yes. I think in the bonus and commissions combined are, what, maybe 4%, 5% of revenue – 4% to 6% of revenue. So a lot of leverage there and a lot of incremental margin on those last dollars coming in on the top line.

Richard Baldry – Canaccord Adams

Thanks. As you move back probably toward a more active M&A strategy, could you maybe flesh that – how that's worked in the past out in terms of sort of the size of the companies you've gone after, the deal terms, or structures you've preferred, typically? And then maybe talk about things like the valuations that you're starting to see in the private market, whether you think they're rational, noting that in a down economy, probably some people feel that their businesses should be valued higher than maybe they are, whether you think that that has been a factor in the people's minds yet. And then maybe a refresher on the resources you can bring to bear in M&A. I believe you've got a pretty substantial line of credit that's untapped, et cetera. Thanks.

Jeff Davis

Sure. Yes, I’ll talk to some of that and let Paul speak as well. In terms of the types of deals that we’re going after and the deal structure, and we talked about this on previous calls, I’d like to move up in terms of the typical deal size. Our last deal or one of our last deals was the largest deal we’ve ever done, about $25 million, was also one of our best deals; an excellent company and it’s added a ton of value to Perficient. We like to do more of those. However, I think right now it’s prudent to start smaller. We are quite adept at doing deals.

I think we’ve proven – we've got a real proven model and proven success around it. So the ranges in my mind is, gosh, you know, $10 million to $30 million. And I think that moves up again in fairly short order here in 12 months. I might be seeing 20 to 50 if you can find those companies in that range. But $10 million to $30 million now, and again I think the prudent thing to be to first to start a little smaller on that. Structure is going to 50/50 cash and stock. And so our typical deal, and we’ve rarely ever waver from that, maybe 60/40. But typically about half-and-half stock and cash, with the stock locked up over a three-year period for a retention of those principles. And by the end of that three years, we've either got a succession plan in place or we've got a principal that sees Perficient as a career that's going to stick around.

We've got a good track record on that by the way. About 70% of the folks that we got through acquisition are still with us, and those that aren’t were really by our choice. So we’ve got an excellent track record with regards to that. Multiples – honestly, not a ton of change. We were getting into the 5 to 7 range and higher into that range when we put the program on hiatus at the end of ’07. And I think for a healthy business, the range isn’t going to come down a lot. It’s maybe 4 to 6 now versus 5 to 7. You can find cheaper businesses out there in fire sales and such, but that’s not our model. We want to do deals that add value to the business right away. They are accretive right away, and they are solid. So we are finding companies that have been healthy and in some cases, even thrived during this downturn, which I think is a testament to both their services and offerings as well as their management ability. And that’s what we feel too. And again, maybe there is a 15% savings right now in a 4 to 6 range versus a 5 to 7, but I expect it to be somewhere in that range.

Paul Martin

I think the other thing I would add, obviously we are in a great position from an ability to finance these deals. The combination of doing 50% of the consideration in cash, and – we have $28 million in cash and $50 million line and continue to generate cash. We’re well positioned to finance basically as big a deal as we can absorb. So I think probably the metering and gating item on the growth in acquisitions is just our ability to identify and find these deals and get them closed and integrated.

Richard Baldry – Canaccord Adams

Thanks.

Jeff Davis

Thank you.

Operator

The next question comes from the line of Jon Maietta representing Needham & Company. Please proceed.

Jon Maietta – Needham & Company

Hey, guys, how are you?

Jeff Davis

Good. How are you?

Paul Martin

Good.

Jon Maietta – Needham & Company

Very well, thank you. Just had a few quick ones here. Paul, maybe we can start with just a couple of things to flesh out the model. 2010 tax rate, should we just kind of run the rate that you've been running the past year or so or –?

Paul Martin

I think as we are looking at that and planning that, I think from a cash EPS, the rate should be around 40, and from a GAAP EPS with some of these other items, it will be kind of in the high-40s.

Jon Maietta – Needham & Company

Okay. And revenue breakdown by industry vertical, Jeff provided telecom and healthcare, I was wondering if you could provide the other –?

Paul Martin

Sure. Yes, so – energy – just to recap, 18% in the quarter on telecom; 16% on healthcare, as Jeff mentioned; 10% on energy; 10% on financial services; 10% on consumer products; 7% on pharmaceuticals are kind of I guess the top six.

Jon Maietta – Needham & Company

Okay. And then utilization in the quarter? I missed it.

Paul Martin

So all-in utilization on the quarter was 79% compared to 78% in the third quarter.

Jon Maietta – Needham & Company

Got you. Okay. And then, Jeff, with regard to kind of the business, it sounds like more activity in the pipeline. It sounds like bigger deals in the pipeline. Everybody I talk to, it sounds like there is still the same level of scrutiny being applied to deals in the pipeline. So I guess my question is, have you seen – have the margin sales cycle duration shortened at all? Or is it still kind of the same there?

Jeff Davis

Yes. I think the sales cycle is probably about the same. There might have been a little bit of contraction. But I even think that's somewhat cyclic. Again, we’ve seen sort of a big surge here at the beginning of the year. Thankfully, more typical. But those deals have been in the works for quite a while. What we are seeing though are larger deals. So, for our sales guys – I mean, I agree with this – but for a similar amount of effort, you’re getting a larger deal in the backend. So we’re getting some productivity gains on the sales effort side. But there is still a lot of scrutiny – ROI, a lot of our ROI analysis going into these projects and we’re helping customers with that. And the good news is, that’s going on. What the customers are doing a year ago was keeping projects so small that they are kind of below that radar. Now they are taking on these larger, more strategic initiatives, and they are inviting us to help them do that ROI analysis and help justify that in some cases. So that’s an improvement for sure that we’ve seen over, say, a year ago.

Jon Maietta – Needham & Company

Got it. Okay, that's helpful. Thanks very much, guys.

Jeff Davis

Thank you.

Paul Martin

Thanks, Jon.

Operator

The next question comes from the line of Paul Summers [ph] representing Nations [ph]. Please proceed.

Jeff Davis

Did we lose him? Paul? Operator, we may want to move on.

Operator

The next question comes as a follow-up from the line of Brian Kinstlinger representing Sidoti and Company. Please proceed.

Brian Kinstlinger – Sidoti and Company

Great. Two quick ones. First of all – I missed it. Did you guys repurchase shares already in the first quarter? Or have you not done so and you're saving that, obviously, monies for acquisitions?

Paul Martin

Yes. We have done some share repurchase in the first quarter. We don’t – we really don’t provide specifics on that until the quarter is completed. I will say that it’s probably slowed down, and as Jeff mentioned, sort of saving some of that (inaudible) move in the acquisition direction.

Brian Kinstlinger – Sidoti and Company

Okay. And can you just provide the revenue by platform, such as Oracle, IBM –?

Paul Martin

Sure. So IBM was the top at 27%, same as last quarter. Oracle was 17%, up from 16% in Q3. TIBCO was 14% compared to 15% in Q3. And Microsoft was 13%.

Brian Kinstlinger – Sidoti and Company

Okay. Thank you. That’s all.

Paul Martin

Thanks, Brian.

Operator

Your next question comes as a follow-up from the line of George Price representing Stifel Nicolaus. Please proceed.

George Price – Stifel Nicolaus

Hi. Thanks very much, guys. First of all, I want to ask just a kind of broad statement on offshore. So, we continue to hear that it's even more important going forward. There is more and more work that clients are looking at to push through a global delivery kind of model, even things that a year or two ago, they might not have considered as much – continue to focus on cost. So with that in mind, I wondered if maybe you could give us a little more color on your thoughts about the offshore and global delivery strategy in 2010. Is China going to remain the primary focus? Are you thinking of doing anything in India? Do you have any targets about how much in terms of capacity you'd like to have offshore maybe by the end of the year? That sort of thing.

Jeff Davis

Sure. We’ve got about, I want to say, 14% or so of our employees are offshore now. And actually the utilization there – we try to run actually utilization lower, say, in the 60% range because we bring folks in and run them through training programs. We are doing more – we are doing a lot of hiring in China right now thankfully, doing a little more experienced hiring because of the demand that we have there. So in short, the answer is, we expect China to grow quite a lot through the course of this year. I wouldn’t be surprised if it’s on a headcount basis, it was double the size that it is by the end of the year or maybe between 50% and 100% increase between now and the end of the year. And hopefully, again, maybe a 100%.

For the work that we do, a lot of highly – a lot of the business integration type work we do and even some of the CRM work we do, there is not a ton of pressure to do offshore. We think it makes sense, and we certainly encourage clients to explore it where it does for their benefit. But competitively we are seeing that more in other areas of the business. I would say, offshore, from our perspective, just opens up more opportunity for us that maybe we wouldn’t have had before. I still think we would have had a healthy business before, but I think this makes it healthier. And keep in mind, of course, our offshore margins.

Project based gross margins are 65%. Now at 65% on a smaller basis, but we’re realizing about $35 an hour for our China offshore resources versus those pure offshore firms that are doing staff augmentation et cetera, and China may be getting 25. Yes, we are interested in India and exploring, I would say more talk right now exploring the possibility of expanding there as well. We’re very, very happy though with our China facility. The quality is excellent. The team there we have is excellent, and very, very happy with that at the moment. The only reason I think we'd expand into India would just be to give us a little more diversity from a client facing standpoint.

George Price – Stifel Nicolaus

Right. And then just quickly on a stat, did you give utilization excluding subcontractors in China? I think that's the stat you guys gave.

Paul Martin

Yes. So that was – so we have – it was 79% including subcontractors, excluding – we have too many numbers here – excluding subcontractors, 75%.

George Price – Stifel Nicolaus

Okay. And if I could, just a couple of questions on the acquisition side. First of all, when you were talking about the 5 to 7 range for acquisitions, you were talking about EBITDA, right? 5 to 7 and then 4 to 6?

Paul Martin

Yes.

George Price – Stifel Nicolaus

Okay. I just want to make sure I –

Jeff Davis

Just a clarification on that utilization, US-based employees only 79%, down from 81% in the third quarter, which is all due to the seasonality, the holidays in December. But it was actually up from 78% year-over-year. So employees only including China, and again we run utilization by definition, by design lower in China, 75% up from 74%. So you can see that the China – even though US-based employees were down overall, with China, it was up, because (inaudible) up in China.

George Price – Stifel Nicolaus

Right. Yes, I got you. I got you. And then on the acquisitions, you're saying immediately accretive, on what basis? Is that a cash EPS basis, GAAP EPS basis?

Paul Martin

That’s a cash EPS basis. Typically we acquire some intangibles in these deals, and some of those are amortized – like the backlog, for example, is amortized over typically, let’s say, a three to six-month period. They would typically turn sort of GAAP EPS positive, let’s say, within a couple quarters.

George Price – Stifel Nicolaus

Okay. Last question on just the M&A environment in general, I think you've talked a lot about certainly what you are looking for. I was wondering if you would comment at all, even very generally, on what you're seeing maybe out in the market in terms of the – some of the larger firms out there, what they are looking for; if you think that some of the consolidation trends that we've seen – you know, we had Perot, we have ACS, we have other larger companies and even some smaller ones. Do you think those consolidation trends are going to continue? Thank you.

Jeff Davis

Yes, it’s hard to say. I think when those occurred, I would have thought things were heating up just sort of at that time. I haven’t seen that so much. It's kind of cooled off a little bit from what I can see. I do think that’s inevitable. And I think as the industry heats back up, it’s still a highly fragmented industry. And I think there is a lot of consolidation opportunity. And then you’ve seen some – is it KPMG that’s done some – actually acquired some of BearingPoint back out of the –

Paul Martin

And PWC –

Jeff Davis

PWC did some thesis as well. I think we’ll see more consolidation going forward. I don’t anticipate even when there is sort of a fever pinch on consolidation before, we saw a little bit of competition for the M&A program we were running, but it wasn’t a tremendous factor. There is – again, it’s such a fragmented industry. There is so many opportunities out there, so many targets out there. And I’m actually pretty pleased to see that we’ve got a pretty good reputation. Therefore a lot of those firms that are looking to – that are interested in maybe doing a deal later this year and that have reached out to us as an acquirer because they have heard good things about us in the program we run. So – I'm not terribly concerned about it from that standpoint.

George Price – Stifel Nicolaus

If I can sneak one more quick one in, the deal size is picking up a little bit in terms of size, complexity. When did you see that start, Jeff?

Jeff Davis

I would say, from a sales cycle standpoint, the guidance we have been working on them for months, like I said, maybe even in the – probably in the second half of last year. We saw a turning point. We had a great quarter, $48 million sold in the third quarter. And along with that were a lot more strategic discussions and improved relationships. We are – you just saw the confidence coming back, I would say, in the executive offices of our clients and their willingness to not only let some projects then, which was a nice quarter for us, but also begin discussing what is our program going to be for 2010. And so we saw things beginning to turn anecdotally then. And again, we are encouraged, but the proof is in the pudding, as they say. And so right now, it looks like some of that’s coming to fruition.

George Price – Stifel Nicolaus

Got you. Great. Thanks for the time.

Jeff Davis

Great. Thank you.

Operator

With no further questions in queue, I would now like to turn the call back to Mr. Jeff Davis for closing remarks.

Jeff Davis

Okay. That’s really it. Again, we appreciate your time and your interest today. We remain optimistic and more confident than ever about our future. And here is to a great 2010. Thank you all.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.

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Source: Perficient, Inc. Q4 2009 Earnings Call Transcript
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