Perficient's (PRFT) CEO Jeff Davis on Q1 2014 Results - Earnings Call Transcript

May. 8.14 | About: Perficient, Inc. (PRFT)

Call Start: 10:00

Call End: 10:29

Perficient, Inc (NASDAQ:PRFT)

Q1 2014 Earnings Conference Call

May 8, 2014 10:00 ET

Executives

Jeff Davis - President & CEO

Paul Martin - CFO

Analysts

Mayank Tandon - Needham & Company

Peter Heckmann - Avondale Partners

Brian Kintslinger - Sidoti & Company

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2014 Perficient’s Earnings Conference Call. My name is Denise and I will be the operator for today. (Operator Instructions). I would now like to turn the conference over to Mr. Jeff Davis, President and CEO. Please proceed.

Jeff Davis

Thank you. Good morning, this Jeff Davis, with me today is Paul Martin our CFO. I want to thank you for your time today. As the usual we got about 10 to 15 minutes of prepared comments after which we’ll open the call up for questions. Be before we proceed Paul will now read the Safe Harbor statement. Paul?

Paul Martin

Thanks Jeff. 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 it's 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 the accordance with GAAP on our website under Investor Relations. Jeff?

Jeff Davis

Thanks Paul. Well again thank you all for joining us this morning. We’re pleased to share with you our first quarter results and recent progress. First quarter got 2014 off to a solid start for Perficient. Services revenues were up 20% in the quarter and EBITDA net of stock comp was up 36%. And we have talked in several quarters about our belief that we can continue to incrementally increase our bill rates, drive margin expansion and during the quarter ABR reached an all-time high of $143 an hour for North America employees, that’s an increase of almost $4 sequentially and more than 8% year-over-year. So our ability to raise rates has been aided by a growing brand awareness and reputation but also by strategic decisions we could discuss prior, that we made around our services mix as well as in types of plans we’re focused on servicing.

We will continue to move up market with our portfolio and our enterprise relationships and we expect to continue to be able to raise rates going forward. We have talked about -- for the fact that there is a meaningful gap between our rates and the rates of our largest competitors and that we’re able to command an increase to close that gap and quite frankly really our skills and our folks we believe are more qualified to do a better job than our competitors. Again that is underscored by the win rates that we shared prior.

On the year-end call we talked about the fact that in 2013 we had served 74 clients in $1 million plus relationships with 37 of those clients being $2 million plus, annualizing our first quarter results, have this on page to serve $91 million plus client this year and 46 of those tracking to $2 million plus and by the way those results excluded any contributions from our two most recent acquisitions.

As we indicated in the new release Perficient has a lot of momentum as 2014 gets underway, the market continues to strengthen, clients are demonstrating an increased propensity to consider and commit to larger and longer term projects with us and it's been reflected in our pipeline and bookings. On a rolling six months basis our book to bill ratio exceeds 1.2. We continue to focus on staying in that metric north of 1 and the outlook is quite stronger.

We sold 35 deals north of $500,000 during the first quarter that averaged $1.4 million each that compares to 23 in the fourth quarter averaging $1.7 million each and 35 in the first quarter of 2013 that also averaged 1.4 million.

After Paul shares financial details for the quarter and the year, I will be back to share more insight into our performance in Q1 as well as our outlook for Q2 and beyond and touch on this morning’s acquisition and announcement and our M&A plans for the remainder of the year. Paul?

Paul Martin

Thanks again Jeff. Total revenues for the first quarter of 2014 were 97.2 million which represents a 14% increase over the year ago quarter. Services revenue for the first quarter of 2014 excluding reimbursement expenses increased 20% to 88.5 million. Services gross margin for the first quarter of 2014 excluding stock compensation and reimbursable expenses increased to 36.2% from 35% in the first quarter of 2013, with increased average bill rates continuing to drive year-over-year margin improvement.

SG&A expense increased to 20.7 million in the first quarter of 2014 from 17.9 million in the comparable prior year quarter. SG&A as a percentage of revenues increased slightly to 21.3% from 21% in the first quarter of 2013.

EBITDAS for the first quarter of 2014 was 14 million or 14.4% of revenues compared to 10.3 million or 12.1% of revenues in the first quarter of 2013. The first quarter of 2014 included amortization expense of 2.7 million compared to 1.8 million in the comparable prior year quarter. This increase is associated with the acquisitions completed in 2013 and 2014.

We incurred 1.5 million of acquisition cost in the first quarter of 2014 primarily related to the acquisition of the ForwardThink Group and BioPharm Systems. Acquisition cost were immaterial during the first quarter of 2013.

Net income increased 26% to 3 million for the first quarter of 2014 from 4.1 million in the first quarter of 2013 primarily due to acquisition cost and increase in our effective tax rate.

Diluted GAAP earnings per share decreased to $0.09 a share for the first quarter of 2014 from $0.13 in first quarter of 2013. Adjusted GAAP earnings per share increased to $0.25 a share for the first quarter of 2014 from $0.22 a share in the first quarter of 2013. As a reminder, adjusted GAAP EPS is 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 period.

Our effective tax rate for the first quarter of 2014 was 22.3% compared to 21.5% in the first quarter of 2013. The increase in the effective rate is primarily due to the exploration of the research and development tax credit which has not been reacted by Congress for 2014. The first quarter of 2013 included the benefit for the full year of 2012 and part of 2013 as the research and development tax credit for 2012 and 2013 was enacted in the first quarter of 2013.

Our ending billable headcount at March 31, 2014 was 1821 including 1639 billable consultants and 182 subcontractors. Ending SG&A headcount at March 31 was 321.

We ended the first quarter of 2014 with 50 million in outstanding debt and 4.7 million in cash and cash equivalents, our balance sheet continues to leave us well-positioned to execute our strategic plan.

Our days sales outstanding on accounts receivable decreased were 79 days at the end of the first quarter of 2014 which is up from 79 in the first quarter of 2013. We will continue to focus on keeping DSO in the 70 to 75 day range. Jeff?

Jeff Davis

Thanks Paul. As I mentioned earlier we’re pleased with our performance and the consistent double digit growth of our services business. Software resell was down year-over-year but that’s lumpy lower margin business that we always expected a degree of unpredictability with.

It is however an important differentiator for us with both our clients and our partners who are going to continue to provide that service but keep in mind that software resell is not a key operating metric; services growth and margins are what we define as the health of the business. And again things are going very well on that front.

Healthcare and financial services verticals continue to perform very well, we talked in the last call about our acquisition of ForwardThink Group and that’s really accelerated our progress in the financial services industry. Also the two acquisitions we completed since our last bringing additional deep industry and technology expertise, take clients who are willing to pay a premium for. BioPharm which we acquired at the beginning of Q2 brought us deep domain expertise in the life sciences industry. Their focus primarily on clinical trial management and clinical data management and safety and pharmacovigilance solutions. Also very well-lined business, great bill rates and margins and growth trajectory.

And this morning we announced the acquisition of the commerce team from Trifecta Technologies which is a group of about 40 professionals focused exclusively on IBM Commerce Solutions, run by a former IBM Executive and a team with a solid reputation with IBM and the market. They also bring in intellectual property that will accelerate our growth around commercial solutions. Obviously those solutions stay in industries but there is slightly a nice concentration of clients in the consumer packaged goods and retail space in the area that have been bullish on for some time and I think once the industry moves past the recent events are on security and shift their focus back to growing their business and implementing new technologies, we’re going to see a nice pick up there. We’re well-positioned for that now.

The IP that they bring also fits nicely into our larger plan to continue to build our portfolio of solution accelerators and industry tools and market as key differentiators. We have spoken quite a lot about that and I think as you all that’s a key part of our strategy going forward. So that’s three acquisitions in the first five months of 2014 each of which we’re very excited about.

We will continue to pursue M&A throughout the year though certainly I would expect that the pace will moderate a bit. Maybe we will execute another deal or two before year-end most likely early fourth quarter. That plus our organic growth we will have us approaching or achieving our goal of reaching $500 million revenue run-rate before year-end and again along the way we expect further margin expansion and profitability growth.

So with that commenting on Q2, 2014 and beyond, Perficient expects it's second quarter 2014 services and software revenue including the reimbursed expenses to be in the range of $108.1 million to $117.5 million comprised of $103.1 million to $108.5 million of revenue from services including reimbursed expenses and 5 million to 9 million of revenue from sales of software.

The midpoint of the second quarter 2014 services revenue guidance represents growth of 25% over the second quarter of 2013 services revenue. The company is raising it's full year 2014 revenue guidance to a range of $444 million to $464 million from the previously provided range of $430 million to $450 million and raising 2014 adjusted earnings per share guidance to a range of a $1.27 to a $1.37 from the previously provided range of a $1.26 to a $1.36.

With that operator we can open the call for questions please.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Mayank Tandon with Needham & Company. Please proceed.

Mayank Tandon - Needham & Company

Jeff, just looking at 1Q revenue, it seems a little bit on the light side in services. Just wanted to see if there was any soft spots this quarter that you saw or they are just purely seasonality in 1Q, that would have caused the services to come in a little bit on the lighter side of the expectations.

Jeff Davis

Yes it's a little bit lighter than our midpoint as well, I think about a percent or so. And yes we definitely saw a little bit of an impact. I think you know normally don’t hear me attribute much to this kind of thing. I think actually the weather had a bit of an impact as much I’m getting people where they need to be as maybe even on bookings in the middle of the quarter and not booking so much of a sales cycle is extending in February. Literally I think the logistics around some of the travel involved et cetera in getting deals closed both on the client side and on our side. That said those cycles contracted immediately again in March and we turned in strong bookings for March and ended up finishing pretty strongly with revenue per day up pretty nicely in March. So I think that those things associated with seasonality maybe the weather are behind us now and we have got basically reiterated our guidance for the year.

If we look at what we did there and we have always talked about the year like last year being kind of back end loaded year mostly due to kind of the new seasonal trend that we have seen for 2 or 3 years now. So again we basically reiterated the guidance that we put out there initially for the year. What we did is we added to it the stubs from the acquisitions minus the actuals versus midpoint in Q1. So we still feel good about the year I think we’re through that now, but your observation is correct it was a little lighter than we expected.

Mayank Tandon - Needham & Company

Okay, you also answered my second question around the guidance. You think mostly that is coming from the contribution of the acquisitions but organically you’re bringing your numbers out a little bit just to reflect the 1Q impact, is that right?

Jeff Davis

Yes, just the 1Q, that’s exactly right. The midpoint is still 6%.

Mayank Tandon - Needham & Company

6 to 7 in terms of organic growth for the year?

Jeff Davis

Yes.

Mayank Tandon - Needham & Company

And then one more question and then I will jump back in queue, on the healthcare side we have heard from let’s say large peers talk about some delays related to the regulatory side, also some management changes at large healthcare companies. Any impact of that in terms of your business?

Jeff Davis

Yes healthcare was one of the sectors that was off to a slower start from a revenue perspective in the first quarter, although it has picked up a nice set of steam now and from a pipeline perspective I can tell you it's stronger than ever and is there in fact it made a 37% of our bookings in the first quarter. So overall I think we did see a slower start than perhaps last year or prior. But really not dramatic and again we see it picking up even as we speak right now and expect a strong year for healthcare.

Operator

Our next question comes from Peter Heckmann with Avondale Partners. Please proceed.

Peter Heckmann - Avondale Partners

I had a follow-up to Mayank’s question on the healthcare and the regulatory outlook. Can you talk about how some of the deadlines, whether or not they specifically affected your business? Whether some of those deadlines may have been distracting buyers or some of the mandates may have been distracting buyers and can you talk about how you see some deadline whether it's ACA or ICD-10, meaningful use, how you see those unfolding over the next year or two in terms of benefits versus distraction?

Jeff Davis

I think it's probably neutral for us, benefit versus distraction because we do certainly get some revenue from those mandates but I would tell you that the majority of our revenue is really rooted in the transformation really of the industry. Most of the work that we’re doing for these businesses is bill payer and provider is really around data analytics. Some of that’s mandated but a lot of is running on it's steam now because of the competitive nature of the industry or we’re moving into a more competitive nature. So again it helps us to have mandates out there that drive reporting requirements and things like that because someone’s got to do that work and we have an opportunity and of course have done some of that and continue to do that. However to your point, our business -- what we really see is the big opportunity with the long tail is helping these guys transform their businesses to what you compare to say retail today or any other well-run industry where businesses are highly competitive and they are managing to effectively deliver quality services at an effective cost.

There is a lot of work to be done in the industry to get from where we’re today to that point. So, to your point it can also be a distraction. Like I said, I would kind of call it neutral. I will tell you not surprisingly the government has lost a lot of credibility in terms of people taking the deadline seriously as many times as they have moved in and continue to.

Peter Heckmann - Avondale Partners

And then how about on the BFSI, what trends do you see in there? I mean I guess what I’m seeing overall is it seems like banks, securities firms are spending very selectively, regulatory demands continue to be a big driver there as well but can you talk about some of the success you’re having in financial and if there is any trends that you can extract from that?

Jeff Davis

Yes. And I agree with what you said, it is selective and that’s where us acquiring ForwardThink positioned us extremely well. This is a high end firm with people with very deep expertise in specific areas within financial services including regulatory as well as even just business process and competitive services within the industry. So we’re seeing good growth there already with that acquisition, of course we combine our existing financial services with them and in fact the team collective is already driving cost through sales of technology. If you recall that’s primarily -- its a consulting business and our intent was and we read neutrally along with the founders there, that was a great opportunity for them to drive that kind of revenue. And we’re already seeing that so I think we have got a unique situation with us in terms of the strength these guys bring and the specific skills that they have, they have the knowledge, they have the domain expertise combined with our technical capability. I think it's going to continue to build traction and like I said it's fairly unusual to see it happen within the first six weeks of an acquisition but in fact we closed our first technical opportunity that they brought to -- or brought Perficient into, legacy Perficient into within six weeks. So we feel good about the space and particularly because of the ForwardThink.

Operator

Our next question comes from Brian Kintslinger with Sidoti & Company. Please proceed.

Brian Kintslinger - Sidoti & Company

Can you highlight the progress you’re making on with your software assets on the healthcare space? Maybe did you recognize any license revenue during the quarter, how you’re going to market with the proprietary products and maybe expectations for the year?

Jeff Davis

Sure. We’re stepping up actually our marketing efforts there, so to answer your first quarter we did not book any revenue in Q1 from those asset sales. We have our verbal now for -- of $250,000 deal that will go forward. They have already signed the services piece. So there will be no point in doing that if they weren’t committed to the software. We expect that will close here in short order and we have got about $2.3 million in gross pipeline just for the asset and deals that could close this year. The weighted pipeline, the weighting -- when you apply the weighting or the odds to that is about $900,000.

So we feel pretty good about our opportunity close 4 or 5 of those deals this year, add 200,000 plus each, so about a 1 million or so. None of that is in our guidance right now.

Brian Kintslinger - Sidoti & Company

And when you say 900 is that the software license piece, nothing services related? Is that what you’re intending?

Jeff Davis

That’s right. That’s just the license for our product, for our assets.

Brian Kintslinger - Sidoti & Company

And then Jeff, today’s acquisition was quite small. So I’m wondering if there was something more strategic behind this deal related to these software assets?

Jeff Davis

It was. The software assets are certainly a plus as I mentioned earlier and we talked about before it's more and more of our growing component of our strategy to build a bigger and bigger portfolio of these kinds of assets that can either be sold more in some cases, simple use this accelerators or bundled in with services say on a fixed fee arrangement that will yield very high gross margin and in fact that’s exactly what Trifecta has done.

So it's a very, well it is smaller but it's a great space. IBM Commerce is doing very well in the market in general, so it's in good demand. We already had a practice around it so we’re very familiar with it, had all the ties into IBM. But again what these guys bring to table our assets and they have been able to successfully use those assets bundled in deals and driving a substantially high gross margins in many cases north of 50%.

So that was the attraction and we feel like we can scale that.

Brian Kintslinger - Sidoti & Company

And you’ve touched on this I think but you have consistently posted bill rate increases and you’ve highlighted your discounts the large multi-nationals those companies as well as to Indian outsourcers have touched on pricing pressure thing, it been more pronounced. So I guess I’m wondering do you expect this to be a factor anytime soon in your ability to increase prices and then on the other side are you seeing better win-rates over these large competitors given your lower rates than theirs.

Jeff Davis

Our win-rates remain consistent. It's about 65% in aggregate against those big guys. It varies from name to name but roughly 65%. It's been consistent; it hasn’t gone down as we have increased rates. So that tells me we still got room, that’s an area that we’re sensitive to because we have been pretty aggressively increasing rates as you know but as we have -- we collect win-loss data and whether we win or lose a deal and one of the things that I recently analyzed in fact was losses due to pricing and it hasn’t increased at all.

Over the course of last two years that remain pretty consistent, so it tells me that we’re not pricing ourselves out of deals at all, really we’re not seeing any increase to that. That said I do think that there is a point we close that gap enough that we will begin to see some headwind. I also meant what I said earlier, I do think that we’re better at what we do than our competitors are. So it isn't just pricing that helps us win.

But I think eventually like I say we will see that begin to -- the growth in rates, the increase in rates begin to slow but not for the foreseeable future. We feel pretty good about, I mean basically this year we have -- with Q1 and once we go backwards which by the way could happen in a quarter or so or in any give quarter but overall for the year I think we have already hit our goal and it seems very likely that we will exceed it.

Brian Kintslinger - Sidoti & Company

And with the 8% increase in bill rates sometimes it's unclear how much is acquisition related in your organic business. So maybe giving through all of that, what do you suggest about volume trends year-over-year in the March quarter?

Jeff Davis

So that number by the way that increase I talked about is actually organic. If you add, it's about 8% with or without the acquisitions actually. So the acquisitions on average were already at the rates that we’re at if that makes sense. So they are kind of neutral impact there.

I’m sorry what was your other question?

Brian Kintslinger - Sidoti & Company

What does that mean about volumes if bill rates were up 8%, what are you seeing organically without the 8% volumes?

Jeff Davis

I think volumes are down some in billed hours, not as much as it might appear because we continue to ship more business offshore that that makes up some of that gap. But you know as I think I’ve mentioned before and I think this is going to continue for a while but I think it's starting to turn even now. But as we transform the business, we are moving away from being tremendously opportunistic and being more strategic and focusing on those accounts where we can have long lasting relationships with meaningful revenue and along the way I’m sure that has sacrificed some volume in the business but it has also gained those rates. So it's kind of a trade-off between the two, if we stay in big market we wouldn’t be getting this rate expansion, our cost would remain the same, our margins will be lower, our growth will be higher in terms of volume.

So we consciously have chosen the former and I think it was the right decision and actually I think we’re going to see even organic volumes begin to pick-up here particularly in the second half of the year.

Brian Kintslinger - Sidoti & Company

Last question, just a quick number. Thanks for all your answers. I just missed the book to bill number; I was writing too quick and missed it. So if you can -- I think you provided, I wonder if you can give that again.

Jeff Davis

Yes it was north of 1.2.

Operator

We now have a follow-up question from Mayank Tandon. Please proceed.

Mayank Tandon - Needham & Company

Just a pickup of last comments that you made around pricing. So when we look at the organic growth for 2014 the 6% to 7%, how does that break down between further price increases versus hiring and any potential for utilization improvement?

Jeff Davis

We do expect some utilization improvement by the way and we also do expect some net new hiring as well. That said, we have already driven rates up sequentially quarter-over-quarter, Q1 over Q4 by 4%, that’s not going to continue. We’re not going to drive rates up 4% every quarter but if that yields say 8% for the year if we are able to maintain that 8% year-over-year and every quarter going forward. I expect that our organic growth would be more towards the higher end of our range because I still expect that volumes again will increase in the second half. So it's a combination of all those things, we will do some net new hire but we will also be driving utilization higher probably about 100 basis points or maybe 2.

Mayank Tandon - Needham & Company

And then final question, just in terms of buyback versus further M&A. You touched on maybe a potential acquisition or two later this year. How are you thinking about it in terms of maybe share buybacks versus future M&A?

Jeff Davis

We’re going to continue -- so we have got as I have mentioned before probably a break year of the better part of two quarters on M&A primarily so that we can ensure that we have effectively integrated the deals that we have done by the way all of that’s going very well. So far again we have done some rapid succession here so we’re going to take a little pause for that reason.

During that period of time, we will continue to buyback both programmatically through a 10b-5 as well as opportunistically in the market as windows open for us. So we’re a big lever in buyback. We have always talked about balancing the use of cash between buyback and acquisitions and yes right now while we stepped up acquisitions we will probably be a little less aggressive on buyback but I still have a goal of exhausting our current authorization before the end of the year. We got about 8 million left on that Paul?

Paul Martin

Yes.

Jeff Davis

Yes.

Operator

We have no further time for question. I will now turn the call back over to management for closing remarks. Please proceed.

Jeff Davis

Okay. Well thank you all again for your time today. As you can see, I think we’re off to a strong start and very bullish about the rest of the year and going forward. Take care.

Operator

This concludes today’s conference. You may now disconnect. Have a great day.

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