Good day ladies and gentlemen, and welcome to the first quarter 2010 Perficient earnings conference call. My name is Jasmine, and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)
I would now like to turn the conference over to your host for today, to Mr. Jeff Davis, CEO and President. Mr. Davis you may begin.
Thank you. This is Jeff Davis. With me on the call today is Paul Martin, our CFO. I would like to thank all of you for your time this morning. As typical, we’ll have about 10 or 15 minutes of prepared comments, after which we will open the call up for questions.
Before we begin Paul will you please read the Safe Harbor statements.
Sure. 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 security laws.
Actual results may materially differ from those discussed in these forward-looking statements, and we encourage you to refer to the additional information contained in our SEC filings concerning factors that could cause those results to be different than contemplated in today’s discussion.
In addition, our earnings press release, including the reconciliation of certain non-GAAP financial measures to the most directly comparable financial measures prepared in accordance we Generally Accepted Accounting Principle or GAAP is posted on our website at www.perficient.com under news and events.
We have also posted a reconciliation of certain non-GAAP goals to the most directly comparable financial measures, prepared in accordance with GAAP on our website at www.preficient.com under Investor Relations.
I will now turn the call back over to Jeff. Jeff.
Thanks Paul, and thanks again everyone for joining. We are glad to be with you today. Well, 2010 is off to an excellent start for Preficient. We realized our second consecutive quarter of sequential revenue growth, Q4 of 2009, and the first quarter of this year.
Revenues came in above consensus and cash earnings matched the consensus estimates. We actually met also the GAAP expectation when you account for the one-time charge associated with our acquisition of Kerdock Consulting, an acquisition we are obviously very excited about, and I’ll discuss more a little bit later on the call.
While our performance was very strong in Q1, it’s the sales performance that we are most excited about. We mentioned this in the press release, but the first quarter of 2010 was Preficient’s strongest sales quarter ever in the history of the company. So we are seeing a very nice rebound on the demand side of the business.
We have talked for a couple of quarters about the business bottoming and getting back to growth in 2010, so we are expecting some incremental improvements as the year unfolded, and as we go forward we are expecting the same thing. But the current strength of the recovery is actually facing a little above our expectations to be honest. We are excited about that, and looking for some sustainability there, which we are seeing so far.
The remainder of the deals we signed in Q1 were very large, larger long term deals which enables us to adequately build staff as we support those projects as we ramp them up. It also creates a nice basic backlog as we move through 2010, and gives us a platform for additional growth.
We sold 21 deals north of $500,000 in the first quarter of 2010, which is not only 50% more than we sold in our strongest quarter last year in 2009, which by the way was third quarter with 14 deals above half a million, but it’s also actually more than we sold in the third quarter and the fourth quarter of 2009 combined; those were 20 deals above half a million, so 21 deals in the first quarter of this year. So a very, very strong start again on the sales front, as well as on the delivery side.
Our balance sheet remains strong. The company has no debt and more than $30 million in cash and liquid investments, and that’s after continuing to execute against our repurchase program, and completing the acquisition of Kerdock Consulting during the quarter.
We talked about this every quarter, but our cash and credit facility combined with strong cash flow generation each quarter really provides us a lot of flexibility as we grow the business, and obviously provides us with the cash we need to do additional acquisitions, an important part of our growth plan.
I think it’s fair to say that as we emerge from the great recession, Preficient is stronger than it’s ever been, from both a balance sheet perspective as well as the market competition perspective, so we are again, very excited, very optimistic about where things stand today.
As you know we started our acquisition program this quarter, and our intent as I said before is to execute one to two more deals this year. I said I thought we tried to get two or three done, we’ve gotten one in, so we are looking to do one to two more this year. We are in active discussion with a number of firms, and advanced discussions with a handful.
As before and as always we will of course be disciplined and only execute strategic transactions that are going to possibly impact our bottom line, as well be a strategic fit for the business, and be a bit healthy business going forward.
Then finally, it’s notable that our strong Q1 sales performance allowed us to issue Q2 revenue guidance that reflects a third consecutive quarter of sequential revenue growth. As the press release indicated, we are also raising our full year 2010 revenue guidance range and I’ll touch on that later when we talk about Q2 and rest of the year.
So with that I’ll turn the call back to Paul, our CFO, to discuss some of the quarterly financial details, and then I’ll be back with some more color on some of these metrics and some of the events of Q1, and then we’ll open the call up for Q-and-A. Paul.
Thanks Jeff. Total revenues for the first quarter were $48.9 million, a 5% decrease over the year ago. Services revenue for the first quarter, excluding reimbursed expenses were $42.7 million with a sequential revenue growth of 3% compared to the negative 8.6% in the first quarter of 2009. As Jeff mentioned, this is a second consecutive quarter of sequential revenue growth, after five consecutive quarters of revenue contraction.
Gross margin for services for the first quarter, excluding stock compensation reimbursed expenses was 32%, up 1.5 points from 30.5% in the first quarter of 2009. SG&A expense decreased slightly to $10.4 million in the first quarter of 2010 from $10.5 million in the comparable prior year quarter.
Excluding non-cash stock compensation, SG&A expense was $8.5 million, compared to $8.7 million in the comparable 2009 quarter. SG&A excluding stock compensation as a percentage of revenue was 17.4% in the first quarter of 2010, compared to 17% in the first quarter of 2009.
EBITDAS defined as Earnings Before Interests, Taxes, Depreciation, Amortization and Stock comp for the first quarter of 2010 was $5.5 million or 11.3% of revenues, compared to $5.3 million or 10.3% of revenues for the first quarter of 2009. We reported net income of $868,000 for the first quarter of 2010 compared to $915,000 for the first quarter of 2009.
Diluted GAAP earnings per share was flat at $0.03 for the first quarter of 2010 compared to 2009. The first quarter of 2010 however includes a charge of $0.4 million or $0.01 per share of transaction costs related to the Kerdock Consulting acquisition we completed in late March.
Non-GAAP earnings per share increased to $0.12 for the first quarter of 2010 from $0.11 in the first quarter of 2009, and increased sequentially from $0.10 earned in the fourth quarter of 2009. As a reminder, non-GAAP earnings per share is defined as GAAP earnings per share plus amortization expense, non-cash stock compensation and transaction costs, net of related taxes, divided by average fully diluted shares outstanding for the period.
Our effective tax rate for the first quarter was 44.9%, compared to 39.6% for the comparable prior year period. The increase in the effective rate is due primarily to projected non-deductable compensation.
Our average billable headcount for the first quarter of 2010 was 1,010, including 844 billable consultant and 166 subcontractors. We have reduced average global headcount by approximately 6% from the first quarter of 2009.
Total average SG&A headcount for the first quarter of 2010 was 164 full time employees compared to 170 in the first quarter of 2009. We will continue to adjust our cost structure based on changes in customer demand.
During the first quarter we spent $1 million on repurchasing 116,000 shares, and as of March 31, 2010 we have spent $28.5 million on repurchasing 4.7 million shares since the plans inception in 2008. We continue to believe that our share repurchases will drive future accretion and share holder value.
We also continue to generate strong operating cash flow. We had operating cash flow for the first quarter of 2010 of $4.6 million, compared to $4.4 million for the comparable prior year quarter. We entered the quarter with no debt and $30.3 million in cash and liquid investments, compared to $28 million at December 31, 2009.
Our day sales outstanding on accounts receivable was 65 days at the end of first quarter of 2010, compared to 73 days at the end of the first quarter of 2009, and at the end of calendar year 2009. So this is below our goal of 70 to 75 days, and we are confident that we can continue to manage our working capital within this range.
I'll now turn the call back over the Jeff for a little more commentary behind the numbers.
Thanks Paul. Again Q1 was a very strong start for the year on all front really, not just sales and software revenue, but also on some of our key operating metrics as well.
Utilization during the quarter for employees excluding our offshore was 85%, which is actually a little bit above our long term sustainable goal range of 82% to 84%. So I talked about that before, and our intent was to run utilization up a little higher as demand improved, and I continue to do that for a while. So I expect utilization to be roughly in this range, the higher end of our 82% to 84% goal range.
Average bill rate ticked down overall, but the good news there is that that was due mainly due to increase in utilization and headcount of our offshore resources, primarily at our facility in China. Excluding China and subs, the average bill rate actually increased sequentially from a $115 to $116 an hour.
We are confident that we can continue to improve AVR incrementally this year, and we are emphasizing that expectation with our sales team. So we are communicating with the folks that are out in the field, that its time to push rates back up and we've begin that. A lot of the new sales that we closed in fact in the first quarter do yield higher rates than our current rates. So we'll see that come into fruition here in the second, third, fourth quarter this year.
I spoke earliest about the strength of Q1 sales, and the fact that we saw a sharp increase in the number of large deal signings, and we also saw an increase in the number of smaller and medium size deals as compared to a year ago.
It’s one of the strengths I think of Preficient, is that we are able to do deals of all sizes and all ranges, and the smaller deals of course are strategic deals that we think will expand in to something larger, an opportunity to get to the front of the door if you will, but the good news is, I think we are seeing improvement pretty much across the board at all sized deals, and with pretty much mid market through the larger enterprise customers that we serve.
During the quarter our top five customers combined to represent 25% of revenue, so we continue to have good diversity in the customer base. Healthcare was our largest industry at 19% of revenues, and telecom was a close second at 18%.
You may recall that some time ago I talked about the fact that we are making investments and building out some verticals. Two of those key investments where we probably invested the most is with healthcare and telecom. CPG is another and we are seeing that come online as well, but I think this is the result of those investments paying some dividends now.
From a solutions perspective, we are seeing portals, business integration, and customer relationship management as our strongest disciplines in the first quarter. By the way regarding solutions, I want to talk a little about that acquisition of Kerdock. We are obviously very excited to have added enterprise performance management skills to our portfolio in Q1 with the acquisition of Kerdock Consulting.
We have been doing BI work for some time, dash boarding data marts etc, but enterprise performance management was a skill that I had identified for quite some time as an addition we were looking for, and this really nit only strengthens our relevance to Oracle, but gives us an opportunity to move up the food chain in terms of selling to CFO’s. A group obviously of key decision makers that can pull the purse strings in most companies who certainly have a lot of influence that we really haven’t been able to target before.
We are typically more with IT and somewhere along the line of business side. So we’ve got I think more bases now covered in those decision maker offices. While we are seeing cross-selling and joint pursuit activity with existing provision business unit, and the new Kerdock business unit, our EPM business unit. Kerdock by the way was a very well run company and a growing business that we are feeling very good about that investment, and our first step back into the acquisition program.
So with that, I’m going to summarize Q1 and then we’ll move on to looking forward to Q2 in the balance of 2010. Again, I can’t emphasize enough I think that Q1 was a great quarter, a great start to the year. It marked the second quarter of sequential revenue growth for us. It also represented our strongest quarterly sales performance in the history of the company.
We have our acquisition program back under way with the acquisition of Kerdock. Our long-term plan to build a $500 million firm is progressing again, and as a matter of fact, if you look at our run rate level, its getting close to our peak run rate, which is about $240 million back in 2008, and we are about 10% or so away from that now.
So we are recovering nicely. Obviously that includes the Kerdock acquisition, and we’ll anticipate more acquisitions by the end of the year. So again, progressing nicely against that plan, and of course as I said before, we are feeling more confident that 2010 is going to be a great year of growth for Preficient.
So I’ll move on to Q2 outlook as well as the balance of 2010. The company expects second quarter 2010 services, and software revenue, including reimbursed expenses to be in the range of $50.6 million to $54.2 million, comprised of $48.1 million to $50.7 million of revenue from services including reimbursed expenses, and $2.5 million to $3.5 million of revenue from sales of software.
We are also raising our 2010 full-year revenue guidance range to $200 million to $220 million from the previous range of $190 million to $210 million, and additionally the company is reiterating its 2010 full-year cash earnings per share guidance range of $0.50 to $0.60.
So with that, we’ll open the call up for questions. Operator.
(Operator Instructions) Your first question comes from Jon Maietta - Needham & Company.
Jon Maietta – Needham & Co
Jeff I was wondering if you could talk a little bit about sales cycle, specifically if the duration of sales cycle changed at all. Maybe put that in the context with regard to the fact that deal sizes have increased. So I expect as business improves a little bit, sales cycles may shorten, but you are doing larger deals, so maybe net-net they haven’t moved much.
Then if you could also talk about Kerdock, how did those sales cycles, given it’s a little bit of a different sale, compare to what you’ve done historically.
Sure. So its probably a little early to really reflect much on how dramatically or how materially the sales cycles have changed or not, and the reason I say that is, a lot of the deals that we closed in Q1 are deals that we sort of had in the funnel or in pipeline for several months, and if you can get, again, I think it was the pent-up demand, people waiting for budgets to be released.
I think the good news is we certainly saw sales cycles compressed compare to what they were a year or two years ago. Again, some of that is a reflection of budgets getting unleashed, so whether that’s a sustainable change, it remains to be seen. I’m certainly seeing anecdotally, a lot of improvement in the market, much better demand and I think a couple of things I could point out by the way.
So far in April we are sustaining that same level of sales. We booked about $60 million in sales in the first quarter, and we are just under 20 in April at about 18. It’s too early to tell what May and June holds in store, but that’s was good news. I was concerned whether or not we would see this flow through into the second quarter or whether it was going to be kind of a one-time event, and certainly we are seeing it flow through.
Also, we got good news in terms of the pipeline rebuilding. So we are closing these deals, that’s some substantial bookings in that first quarter, the pipeline really didn’t dip much, and in fact now it’s rebuilt to the same level it was when we entered into the quarter.
So on cycles I would say we are seeing some compression, both in fact and anecdotally remains to be seen how sustainable it is, although I’m optimistic it will be, and then again, the pipeline remaining flat or even growing a little bit in the phase of all the bookings we’ve got is very good news.
Then Kerdock, I think had very similar sales cycles. Obviously its a little more of a higher end sale where you are actually doing a lot of management consulting and impacting people’s business, so its a little more involved, maybe even more complicated sale, but the sales cycles themselves are actually about the same as what we are seeing if not a little better.
I can tell you that’s a very hot space right now. So Kerdock is doing very well, as a part of Preficient and our EPM business unit I should say is doing very well right now.
Jon Maietta – Needham & Co
Okay, and just my last question Jeff, just to follow-up. Does the full-year top line guidance assume that this level of pent-up demand sustained itself throughout the year or is this certainly a little conservative, built-in in there?
It’s a good question. I think its right in the middle honestly. I don’t think it’s overtly conservative, I don’t think it’s overtly optimistic. I think at this level it sustains itself, we can certainly be at the higher end of that when we say that.
(Operator Instructions) Your next question comes from George Price - Stifel Nicolaus.
George Price – Stifel Nicolaus
I wanted to just Jeff ask about, for the guidance you are raising 2010 and you got good guidance in the second quarter, but raising 2010 but the cash per share guidance range is still the same, and if you can kind of, given that it seems pricing is coming back a little bit, utilization is good, you’ve talked about SG&A leverage before, and obviously you have quite an optimistic tone. What’s kind of holding back the EPS guidance relative to the revenue?
Sure. Well, keep in mind that a good chunk of that increase comes from Kerdock, and while that deal is accretive, it’s not a material impact to that original $0.50 to $0.60 guidance, okay. So that’s part of it right there, part of the answer, but probably the most material part.
The other reason I think on the cash earnings per share, we are seeing good top line improvement and I want to make sure that that’s sustainable before we get through ahead of ourselves on the earning side.
Also the ABR, the utilization and those factors that I talked about are real, but we are very early in the stages of those as well. So again, I think we need to see some sustainability there that we continue to see improvement there.
More revenue without marked improvement in margins isn’t going to drive a lot more earnings outside of that range; it’s a pretty broad range by the way, $0.50 to $0.60. So that’s really the answer. I think we might have an opportunity to increase that later in the year, but we want to see more of these things unfold.
George Price – Stifel Nicolaus
So would it be fair to say I guess that relative to when you gave the range you have relatively more confidence in the EPS range at this point, maybe like in the upper half or something or just…?
Yes, certainly more confidence. I don’t want to get too specific like I said, and get over my skies on saying its going to be $0.55 to $0.60, its still $0.50 to $0.60, but yes definitely more confident.
Clearly, basically all the things that we said are the most optimistic view, say a quarter ago or a few months ago right now are playing out. So right now the stars are all lining, but after what we have been through the last two years, I want to see that continue for a little more than four months before we start ringing the bell too much.
George Price – Stifel Nicolaus
Is some of what’s going on beyond just conservatism; are there costs associated with what you are seeing in terms of the deals, with the increase in revenue that maybe you are trying to take advantage of the high revenue to make some investments or anything else going on there beyond just kind of more conservatism.
Well, there’s nothing we hadn’t already modeled. We are making ongoing investments in the verticals and building out the verticals organically. We are also going to be building out some other practice areas that I don’t want to get into now, and so those are further evolved and the others are already baked in.
Another factor to keep in mind is the bonus plan, the variable compensation for management, and by management I’m talking about our Director level and up in our company, it’s about 150 people. Its profit dependant, so we’ll be funding some of that bonus as we move on here.
Now, the plan is in set up to take all the money, all the additional profit into the bonus, but there is some of it going into that too. Again that was all modeled in from our perspective, and we are moving the guidance up by $10 million. Again, the biggest chunk of that is from Kerdock. Its cash accretive, its not massively cash accretive based on the cost associated with it. It would be more so the next year, but I think those are probably the best answers I can give you on that.
George Price – Stifel Nicolaus
Okay, and how do you see margins progressing through the rest of 2010?
Yes, I would like to see us in the run rate. I think our peak margin, gross margin, our stock comp was about 39% maybe back in ’07, and I don’t know that we’ll see that on a run rate basis this year. I’d like to see it maybe in 12 months.
So we are certainly working hard towards moving those margins north of 35, I would say that on the gross margin side, and likely exiting the year on that level, that sort of sustainable run rate level, and like I said progressing back towards the high 30 where we were a couple of years ago.
Likewise on EBITDAS, EBITDA and other stock comp, the same thing, I’d like to see us progressing towards something on a run rate basis, 15% or north of 15%, and again moving towards from a goal standpoint into the high teens, approaching 20% lets say in 12 months. Again all things just being equal and we continue to see the momentum that we are in now.
George Price – Stifel Nicolaus
Okay and just a last question, a couple things for Paul; if you wouldn’t mind repeating the average billable headcount, and the billable versus subs and then what was the average bill rate owing? Thanks.
So the average headcount or billable headcount was a 1010, and we ended with around 1047. So its up at the end of the quarter and obviously part of that is we added about 29 people from Kerdock right at the end of the quarter. What was the other part of your question?
I think it was 99.
It is 99 down from 102 in Q4 ’09 and again as Jeff mentioned in his prepared comment’s, it’s the increase of mix of the use of China, that’s probably the primary driver.
George Price – Stifel Nicolaus
How many subs?
I believe it is 166.
That’s the ending headcount right?
Yes 166 is the average and the ending result…
(Operator Instructions) At this time there are no further questions. I would turn the call back to Mr. Jeff Davis for closing remarks.
Alright, very good. Thank you all for your time this morning. Like I said, I think it was a great quarter for the company. I think we had a great year ahead, and I’d like to think several years it looks best like that. So, thank you and we’ll talk again in a month or quarter.
Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.
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