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Perficient Inc. (NASDAQ:PRFT)

Q3 2010 Earnings Call

November 04, 2010 10:00 am ET

Executives

Jeff Davis - President and CEO

Paul Martin - CFO

Analysts

Brian Kintslinger - Sidoti & Company

Matt McCormack - BGB Securities

Peter Heckmann - Avondale Partners

Jon Maietta - Needham & Company

Colin Geller - UCD Financial

Ryan Hunter - Wedge Partners

Operator

Good day ladies and gentlemen and welcome to the third quarter 2010 Perficient’s earnings conference call. My name is Katie and I will be your coordinator for today. At this time, all participants will be in a listen-only mode. We will be conducting a question-and-answer session towards the end of the call. (Operator Instruction).

I would like to now hand the call over to your host for today, Jeff Davis, CEO and President. Mr. Davis, please proceed.

Jeff Davis

Thank you very much. This is Jeff Davis. I thank you all for your time this morning. With me on the call is Paul Martin, our CFO. As usual we’ve got about 10-15 minutes of prepared comments after which we will put up the call for questions. Before we begin, Paul, would you please read the Safe Harbor statement?

Paul Martin

Thanks Jeff and good morning everyone. Some of the things we will discuss in today’s call concerning future company performance will be forward-looking statements within the meanings 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 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. 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 will now turn the call back over to Jeff. Jeff?

Jeff Davis

Thanks Paul, and thanks again everyone for joining. We are certainly glad to be with you this morning. I am pleased to say that our momentum from our really strong start to the first half of 2010 carried into third quarter and helped us deliver another set of results we feel really good about.

Revenues were up 23% year-over-year, coupled with margin expansion of 600 basis points drove significant increases in both EBITDAS, that’s EBITDA, net of stock comp and cash earnings per share, both up 100% year-over-year.

In addition to the very solid services revenue, we had our third straight quarter of strong software sales as well. Our strong Q3 performance and the visibility we now have into Q4 affords us the ability to adjust, as I’m sure you saw in the press release, our full year revenue and cash earnings per share guidance. As we indicated in the release, we are tightening full year revenue guidance from a range of 220 million to the new range of 210 to 214, and our full year cash earnings per share guidance from a range of $0.50 to $0.60 to the new range of $0.58 to $0.60.

As I said before, while the recovery remains choppy, I remain confident that Perficient’s next wave of growth is already underway. We are performing well in an economic atmosphere that’s still infused with a fair amount of uncertainty. We just posted four quarter sequential organic revenue growth of 14.7% in an environment of very modest GDP growth and high unemployment.

When the broader economy really starts to demonstrate consistent strength, I have no doubt Perficient will shine. I certainly think double-digit CAGR is possible organic only, in fact that’s what we are modeling internally and establishing our goals around going forward.

During the third quarter, we were able to maintain billing rates for US employees, nearly $120 an hour which was consistent with Q2, and up about $10 year-over-year. Utilization ticked slightly lower, but at 86% it’s still very healthy and actually a little above the high end of our target range as we’ve spoken before, 82 to 84, even 85 is where we’d like to be.

So we sold 11 deals over $500,000 million during the quarter, compared to 10 in the previous quarter. We are optimistic that many of our Q4 sales opportunities, a very, very strong pipeline right now and a very strong weighted pipeline. We’ll come to close as year end budgets are flushed and early 2011 commitments are made.

We are seeing a similar cycle that we saw last year, with improved bookings in December last year followed by record bookings in the first quarter of this year, and I think we are going to see a similar cycle as we move forward.

Our balance sheet remains strong. The company remains debt free and we have $28 million in cash on hand, that’s down a little bit sequentially, but that’s really due primarily to the more aggressive stock buyback during the third quarter where we would purchase $7.2 million worth of our stock.

The balance sheet strength obviously allows us to simultaneously invest for growth, repurchase those shares and continue our M&A exploration. As I’ve said before, our goal is actually still to complete one more deal by the end of the year or very early in 2011. I’ve said at the beginning of this year, where I tried to do two to three deals, M&As moved a little slower this year as we’ve been cautious about what we found and some of the companies need a little more history to re-strengthen their income statements, but I’m optimistic that that pace is going to pick up moving into next year. And obviously M&A remains a substantial piece of our plan over the course of the next few years, and we’ll be executing the deal that makes sense for the company that are both strategic and healthy.

And finally, I wanted to briefly comment, on the press release we provided earlier this week, announcing the resignation Jack McDonald as Board Chairman. And that’s a transition that’s been planned for quite some time. I think I may have mentioned that for some of you and Jack himself has in the past. Before my appointment as CEO, really, that was in the works. And I just wanted to reiterate that we don’t expect any material impact on the business as a result of that.

In fact, our search for additional directors was underway prior to the announcement. And I expect we’ll be sharing news on that subject before year end.

With that, I’m going to turn the call back over to Paul to discuss the quarterly financial details, and then I’ll follow back up with some more color on quarter before we open up for Q&A. Paul?

Paul Martin

Thanks Jeff. Total revenues for the third quarter of 2010 were 54.6 million, which represents a 23% increase over the year ago quarter. Services revenue for the third quarter of 2010, excluding reimbursable expenses increased 21% to 47.7 million over the comparable prior year period.

Sequential organic services revenue growth was essentially flat at minus 0.2% in the third quarter. Services gross margin for the third quarter of 2010 excluding stock compensation and reimbursable expenses was 34.3%, up 6 points from 28.3% in the third quarter of 2009. Improved utilization and higher domestic billing rates helped drive this improvement.

SG&A expense increased to 11.7 million in the third quarter of 2010 from 9.8 million in the comparable prior year quarter. Excluding non-cash stock compensation SG&A expense was 9.7 million, compared to 7.9 million in the third quarter of 2009. The increase in SG&A expense was primarily driven by higher bonus and sales related costs. SG&A excluding stock compensation as a percentage of revenue was 17.8% in the third quarter of 2010, compared to 17.9% in the third quarter of 2009.

EBITDAS, which is defined as earnings before interest, taxes, depreciation, amortization and stock comp for the third quarter of 2010 was 7.2 million or 13.2% of revenues compared to 3.6 million or 8.1% of revenues for the third quarter of 2009. We’ve reported net income of 2.3 million for the third quarter 2010 compared to only 100,000 for the third quarter of 2009.

Diluted GAAP earnings per share increased to $0.08 a share for the third quarter of 2010, from zero for the third quarter of 2009. Non-GAAP earnings per share increased to $0.16 for the third quarter 2010, from $0.08 for the third quarter of 2009, and increased sequentially from $0.15 earned in the second quarter of 2010.

Our effective tax rate for the third quarter of 2010 was 37.4%, compared to an effective tax rate of 140.8% for the third quarter of 2009. Our average billable headcount for the third quarter of 2010 was 1084, which includes 907 billable consultants, and 177 subcontractors. Total average SG&A headcount for the third quarter of 2010 was 167. We will continue to adjust our cost structure based on changes in our customer demand.

Now turning to the nine month results. Revenues for the nine months ended September 30, 2010, were 159, a 13% increase over the comparable period last year. Year-to-date services revenue for the nine months ended September 30, 2010 excluding reimbursable expenses, were 138.3 million, an increase of 11% over the comparable prior year period.

As Jeff mentioned, organic services revenue growth was 14.7% on a trailing four quarters average annualized basis. Services gross margin for the nine months ended September 30, 2010 excluding stock comp and reimbursable expenses, increased to 33.9% from 29.6% in the comparable prior year period. Again, improved utilization and higher domestic average billing rates helped drive the year-to-date improvement.

SG&A expense for the nine months ended September 30, 2010, was 34.5 million, compared to 30.4 million in the comparable prior year period. Excluding non-cash stock compensation, SG&A expenses were 28.7 million, compared to 25.1 million in the comparable prior year period. The increase in SG&A was primarily driven by higher bonus, sales related costs and recruiting expenses. SG&A excluding stock compensation as a percentage of revenue was 18% for the nine months ended September 30, 2010, compared to 17.8% for the nine months September 30, 2009.

EBITDAS for the nine months ended September 30, 2010 was 19.8 million or 12.5% of revenues compared to 12.9 million or 9.2% of revenues for the comparable prior year period. Net income for the nine months ended September 30, 2010 was 5.2 million, compared to 800,000 for the nine months ended September 30, 2009.

Diluted GAAP earnings per share increased to $0.18 from $0.03 for the nine months ended September 30, 2009. Non-GAAP earnings per share for the nine months ended September 30, 2010 was $0.42, up 62% from the $0.26 we delivered in 2009. Our effective tax rate for the nine months ended September 30, 2010, was 39%, compared to 43% for the comparable prior year period. The decrease in the effective tax rate is due primarily to a larger benefit from certain non-taxable foreign income and the effective state taxes and permanent items over a larger income base.

As Jeff mentioned, during the third quarter we spent 7.3 million, and we repurchased 842,000 shares, and as of September 30, 2010, we have spent 40.8 million on repurchasing 6 million shares since the plan’s inception in 2008. We continue to believe that our share repurchases will drive future accretion in shareholder value. We also continue to generate strong operating cash flows for the nine months ended September 30, 2010. We had operating cash flow of 14.8 million, compared to 17.8 million for the nine months ended September 30, 2009. The decrease is primarily a result of an increase in accounts receivable associated with our growth.

We ended the quarter with no debt and 28.1 million in cash and cash equivalents, which was essentially flat with year end 2009. Finally, our day sales outstanding on accounts receivable was 73 days at the end of the third quarter, compared to 75 days at the end of the third quarter 2009, and 73 days at the end of the fourth quarter of 2009. As we stated in the past, our goal is to maintain DSOs between 70 and 75 days overtime. Managing our DSOs within this range will be a key ongoing initiative as we move forward.

I will now turn the call back over to Jeff. Jeff?

Jeff Davis

Thanks Paul. Again, as Paul detailed a very solid financial quarter. Perficient’s diversity from a solutions, technology platform and client perspective remains a strong suit. During the quarter, our top five customers again combined represent just 23% of revenues. Healthcare was our largest industry at 22% of revenues.

Telecom remained at close to second at 16%. And from a solutions perspective, portals, business integration and CRM were again our strongest disciplines. And as we head into 2011 and prepare for the extended period of growth that we’ve really already entered, a key internal initiative I want to share is focused toward orienting the entire organization around the sales process and driving a further sales centric culture within provision. And we are further aligning incentives and developing programs to ensure that all colleagues here at Perficient are playing a role in the sales support effort and as well as driving sales.

Sales obviously aren’t everyone’s primary role, but everyone is going to understand it going forward. Winning new businesses is as important as delivering excellent value and satisfaction to our current clients. We’ve got a great repeat business rate, 85 plus percent each year, meaning that each year our revenue comes from clients we serve in the prior year, 85% of it does. We’d like to see that shrink a little, not because, obviously we don’t want to lose any of those clients, and I’m sure we won’t. We are going to expand the new client horizon as well. So that’s really what this is driven to do, and I believe that moving our culture in this direction is what’s going to really help drive the organic growth component of getting our company in the $500 million run rate over the next three years or by the end of 2013 as I mentioned before is our goal.

So to summarize, Q3 was an excellent quarter for Perficient. 23% revenue growth year-over-year margin expansion, expansion driving strong bottom line results, which is a trend that we expect to continue as we’ve mentioned before. As we scale the business, we’ve got still a lot of leverage left. M&A diligence and activity remains ongoing. I believe next year will be a more productive year from an M&A standpoint, a lot of the businesses that we’ve talked to in the early part of 2010 have gotten healthier and have a better income statement now. We are revisiting a lot of those where there was mutual interest, and I think again we’ll have a more productive year next year in closing some M&A deals. Our long-term plan as I just mentioned to build a $500 million firm remains intact, and we’ve raised the lower end of course as you know of our full year revenue and earnings guidance.

So just commenting on the fourth quarter here for 2010, the company expects fourth quarter 2010 services and software revenue, including reimbursed expenses to be in the range of 51.3 million to 55 million, comprised of 47.6 million to 50 million of revenue from services, including reimbursed expenses, and 3.7 to 5.0 million of revenue from software sales.

The mid-point of the fourth quarter 2010 guidance represents growth of 12% over the fourth quarter of 2009 revenue. I think there’s probably some upside there, but we always try to shoot for a reasonable achievable number and then try to beat that. So, with that operator, would you please open the call for questions?

Question-and-Answer Session

Operator

(Operator Instruction). Your first question is going to come from the line of Brian Kintslinger from Sidoti & Company.

Brian Kintslinger - Sidoti & Company

First question I wanted to ask, well actually of course I didn't miss it. Did you say how much financial services and healthcare were? I think you did.

Jeff Davis

I got that. We didn’t mention it, but healthcare was 22% of revenues.

Paul Martin

Yes Brian, so healthcare was 22% for the quarter; financial services was 12, up from 11 in Q2; and telecom was actually our second largest at 16. Energy was up at 10%.

Brian Kintslinger - Sidoti & Company

And quickly, if I see any fluctuation, especially downward such as telecom in terms of revenue dollars, is that just a timing of projects coming off before the new ones come back on?

Jeff Davis

Yes, absolutely. We’ve seen some recent nice bookings in telecom, in fact, in the early part of this quarter. So, you’re always going to have some fluctuation.

Brian Kintslinger - Sidoti & Company

Okay. And then, in the bookings, I think last quarter you said the first half of the year bookings were up 44%. I know you won’t give an exact number, but can you give us, maybe what percentage they were up or down in the third quarter and maybe also for the first nine months year-over-year?

Jeff Davis

Yes. For the quarter, I think they were down year-over-year. I don’t have an exact number, but I can tell you year-to-date we are just over 20% above last year, so for the nine months just over 20%.

Paul Martin

And bookings were roughly flat Brian, between Q2 and Q3.

Brian Kintslinger - Sidoti & Company

And how do you see, right now the fourth quarter started off relatively strong or relatively weaker than the third quarter?

Jeff Davis

I would say stronger, and I alluded to this on the call, I expect it will be stronger year-over-year as well. Our fourth quarter last year really didn’t start to pick up steam until December, and then we had kind of a huge record first quarter, and we are seeing a similar pattern here. Certainly we began, we are engaged with clients much earlier than we were last year, in talking about 2011 planning and budgeting and some large projects that they are ticking off, and we expect a significant number of those will close actually in this calendar year, which really didn’t happen as much last year, so I expect we’ll have pretty strong bookings fourth quarter as my expectation and probably a pretty strong start at least to the first quarter from a bookings standpoint.

Paul Martin

Yes, if I just clarified that, the third quarter was actually down slightly from the second quarter but we are seeing improvement here in October compared to last year.

Brian Kintslinger - Sidoti & Company

The gross margin I wanted to talk about, you had direct labor increase, it looks like you got raised, that some subcontractors bid out of direct labor, then your utilization came down that caused 100 basis points roughly of gross margin contraction on the services line. It sounds like when they continue both of those trends you are going to come down a little bit on utilization. And my guess is, you're going to keep increasing direct labor with visibility. So, can you talk about what those two factors will do to the margins as we look to next year on the services line? Is there room for growth on the gross margin or will that start to contract a little bit?

Jeff Davis

I think we are stable here. I don’t think we are going to go backwards from here, so I don’t think we’ll see contraction. In fact I think we’ll see continued expansion. We are doing a couple of things that are going to drive that. One, I don’t believe we are anywhere near stalled out on rates, so I believe we’ll continue to drive higher rates going forward. I do believe we’ve got room there to run. But I think more on another impact, may not as immediate, but as we are experiencing some attrition, both voluntary and involuntary with folks that we are hiring to replace the people who are leaving, are coming in at lower costs. So we are actually offsetting some of the things that are creating some cost increase on the direct labor side, and actually overall bringing direct labor costs down on a relative basis.

Brian Kintslinger - Sidoti & Company

Okay. And then, finally, can you talk about maybe that push on the headcount?

Jeff Davis

And just a quick follow-up to that, it’s still our goal, we achieved about 40% net of stock comp gross margins from 2007. I believe it was in the third or second quarter of 2007. It’s still our goal to get back to those levels. We don’t see any reason why we can’t as the economy continues to improve, and I am sorry, what was your next question?

Brian Kintslinger - Sidoti & Company

So my last question and then I'll get in the queue, can you just talk about maybe your direct labor headcount plans to add people?

Jeff Davis

Yes, I mean we are going to continue to add as you mentioned before, I pointed out correctly that our utilization is about at the level we want to run it. So we are going to continue to add people as we see demand increases. And I mentioned during the scripted part of the call that we are anticipating double-digit growth, we are modeling that for next year. So, call it 10%. I would expect us to add 10% in labor next year. I think that number could be a little lower domestically, I mean literally not much, maybe nine and higher frankly in China. I think we are going to continue to see accelerating growth there.

Operator

Your next question comes from the line of Matt McCormack from BGB Securities. Please proceed.

Matt McCormack - BGB Securities

So, you mentioned 11 deals north of $500,000, could you just talk about the trend of average deal sizes and obviously there is a lot of room that can go a lot higher than if it's just above $500,000, but could you just kind of talk about generally. As you look at the pipeline and as you bring in new deals, are you seeing a trend to higher average deal sizes?

Jeff Davis

Yes, absolutely. Yes, we are. Keep in mind too when we described deals, those are really single sort of statements of working contracts. So, a lot of those deals are part of a larger engagement. Many of those are initial deals that will end up being multi-million dollar engagements and some of those might be midstream, but typically the initial deals are smaller and then they grow from there in subsequent phases of their team engagement. So, that’s one sort of phenomenon that keeps that number a little lower than if you look at our engagement basis, I am sure it would be quite higher.

And the other part of your question is that we’ve seen that trend continue, and the answer is yes. In fact, I mentioned or I alluded to earlier the large pipeline we’ve got now as we win those planning cycle with a lot of our clients for 2011. Those are substantial size deals. My expectation, no guarantees, but my expectation is when we talk about our bookings for the fourth quarter and part of the first quarter, again I think there’s going to be some overlap here where we began a little earlier than last year. Most of it was in the first quarter last year, this year I think we’ll see more in the fourth quarter, perhaps a little less in the first quarter, but a lot in the early part of the first quarter.

So when we look at those bookings over the next say, four or five months, I expect we are going to see there is an increase in the number of yields over 0.5 million and an increase in the size of those deals as well.

Matt McCormack - BGB Securities

Okay. And then, in terms of the acquisition strategy, you mentioned maybe one by the end of the year and that you are kind of holding off to seeing stabilization of those possible targets. Couldn't you get a cheaper price, if you kind of pull the trigger now versus wait until we continue to see improvement?

Jeff Davis

Yes, I think that’s a fair point. And in fact, we did our first earn out with the first deal we did this year to go ahead and assume some of that risk but mitigate it through the earn out structure. And that’s by the way turned out pretty well. Excellent addition, great group of folks and performance has been phenomenal from a financial standpoint. But I think the challenge with that is you’ve got a, you’re still sort of taking a risk. And we want to make sure that anything we are taking a risk on is mitigated to a bet as we can make, so we don’t buy kind of fixer-uppers and we wanted to see some more than history.

I can tell you, we probably would have gotten a little more aggressive, had we known with some of those deals earlier on. Had we known that, that we are getting into a process with one that we had to cancel. So, I think the situation has changed a lot now, I think that’s sort of a holding period that I referred to is mostly behind us, and we’ve got a very I think robust pipeline of companies we believe have those healthy income statements now in their healthy history that we will be aggressively pursuing if we roll into next year. So, in hindsight, we‘ve got more aggressive perhaps. You never want to inherit a business that’s headed down, though. And so I think we’ve done the right thing by shareholders by holding off on some of those and we will kick it up now.

Matt McCormack - BGB Securities

Okay. And then, just the pipeline, just to go back to that, is it broad-based across verticals or are there a few key verticals that's kind of driving your optimism into next year?

Jeff Davis

I’d say its broad based, which makes me more optimistic obviously, it’s not pockets, but we certainly have our blueprint if you will in the shopping list of things that were a higher priorities for us. Those are the areas that we are focused on and I am pleased that we are finding things in those areas. The things that we want to be pursuing, we are finding available and actually again seeing some good health restored in those businesses.

Operator

Your next question comes from the line of Peter Heckmann from Avondale Partners.

Peter Heckmann - Avondale Partners

I was pleased with the sequential headcount adds. Can you talk a little about what disciplines, which disciplines you're hiring in, in kind of the split there between offshore and domestic resources?

Jeff Davis

I’ll speak to you about the disciplines and I’ll let Paul give you the specifics on the numbers between offshore, China specifically and here. Disciplines, from a technology standpoint, certainly doing a lot of hiring in the IBM space, and really a lot of across the board too, but IBM has performed extremely well for us. IBM business group, which is now gashed 40 or $45 million business and it’s on its own, has done extremely well with BPM Systems, BI and Portal. A number of disciplines are around IBM. So we are doing a lot of hiring from a technical standpoint in that phase, but also I would say across the board.

The other area that we are doing a fair amount of hiring is in the healthcare sector. We are growing that vertical and have expanded that a fair amount and have a number of [erection] opportunities out for that space as it’s continued to grow well for us. But again, beyond that I would say more across the board which I think is the most encouraging sign is that we are seeing tight sort of lifting although its for the most part.

Paul Martin

So the growth broken down, geographically we are up about nine people on average in the US, and we are up about 13 people in China this quarter. And I think we'll continue to see those road patterns as Jeff described, and we are up from about 40 people in China year-to-date as that piece continues to grow.

Peter Heckmann - Avondale Partners

And as regards to healthcare, is that vertical still leading to the bookings growth?

Jeff Davis

It's back. I think we saw a little bit of a shift, from month to month obviously it's going to be lumpy, but some really solid bookings in October around healthcare, so it's back in the front. And then I am sure they are going forward. I am aware of, I mentioned anecdotally all the planning that we are doing with clients and the budgets that we are discussing, a lot of it is in the healthcare space. So, I think healthcare is going to continue to be a front runner overtime on the bookings side.

Paul Martin

And Peter if you look at healthcare in Q4 of last year it was 16% of revenues, 19 in Q1, 20 in Q2, now 22 in Q3, so you can see that that’s been a big engine for us.

Peter Heckmann - Avondale Partners

And then just one additional question and basically I can back into it given your annual guidance. But typically we see utilization fall off a bit in the fourth quarter seasonally, and based on your guidance it appears that you expect kind of above trend utilization this fourth quarter similar to last year?

Jeff Davis

Yes, I think so. Last year was I think more of an anomaly because the third quarter was so poor. We had so much contraction in the third quarter, so it was a really easy comp on a sequential basis, but the mid-point of our services range is actually down about 2.5% sequentially. Historically, that number would be more around 4% down, because utilization is your point. So, I think what that says is we are continuing to see enough improvement in growth to kind of swim upstream against the down utilization. So, 2.5% versus 4$ I think is encouraging. And as I mentioned before, I am optimistic as always that there could be some upside to that as well.

Operator

Your next question comes from the line of Jon Maietta from Needham & Company.

Jon Maietta - Needham & Company

I just wanted to touch on, Jeff, you had mentioned kind of a focus on new client wins, and does that imply you're sort of satisfied in terms of the guys farming the existing accounts?

Jeff Davis

Yes, I think we do an excellent job there. And I am satisfied overall with the 15% fourth quarter sequential organic in a 2% GDP environment. I think we’ve done an excellent job. But I guess I’d say, on the flip side is I am never satisfied. I think we can always do better. We can always drive more growth. And honestly, Jon, one of the things I know I’ve spoken about before that’s really kind of inspired this shift and this focuses our win rate against our competition. When we go up against Accenture, Infosys, Cognis and IBM Global Business Services, we beat those guys, when we get to the proposal stage, the opportunity to propose against them, better than 65% of the time. We need to get to the table more often and continue to take more share, and I am convinced that we are doing that now. 15% growth is above I am sure what our industry is grown at. So we are obviously taking some share. I believe we can do a lot more of that and that’s really the motivation behind driving more focus around getting us to the table more.

In terms of the existing accounts, our teams do a great job, the repeat business rate is huge, we get like a 97% quality grading rate in terms of whether our clients would refer us to their colleagues, 97% of them would. So we are doing a great job on delivery. We just need to get our folks to the table more and take more share and drive that growth number even higher.

Jon Maietta - Needham & Company

Okay. Then, just last question from me. Kerdock, how is that tracking versus your initial plan?

Jeff Davis

Very well actually. They will have achieved the earn out target already with the early part of this quarter. And of course that’s the financial side of it, but as I alluded to earlier, strategically, great folks, great additions to the team and I think great positioning in terms of, we had this gap there where we weren’t serving the financial analytics demand and weren’t so much in the CFO office than a lot of our clients. And obviously that’s where the birth strings are controlled in many companies. This gave us the opportunity to establish that customer, that CFO customer and I think we are going to see more work, we are already seeing more work being driven just by that.

That’s a hot area by the way, but I think Pete asked about hiring, in the area we are hiring and that’s an area where we are doing a lot of hiring right now. We could use as many people as we can get in that space. It’s doing very, very well. That’s the Oracle Enterprise performance management.

Paul Martin

And just to add one thing to that is, that earn out target was a 12 month target and in essence they achieved that in about two quarters.

Operator

Your next question comes from the line of Colin Geller from UCD Financial.

Colin Geller - UCD Financial

Is there a lot of like both mid-size and tuck-in acquisitions among your solution partners? Do you think the landscape is starting to overlap a bit? Could you just talk a little bit about what the demand is for the various solutions and then what technologies do you think you're going to have the hot hand looking forward?

Jeff Davis

I think BPM is probably going to be the hottest space, and that’s where I think you are seeing a lot of those tuck-ins and mid-sized acquisitions. Obviously, the Oracle acquisition of ATG was interesting. There wasn’t a lot of new license going on with ATG that I could see, but they have continued to enhance the product. I think there is a lot of replacement or upgrades going on in that space. So I assume that’s part of the reason it was interesting. I think Oracle really needed a more formidable commerce platform to compete with IBM.

So commerce has heated up a lot over the last two or three years. It was a technology that I would have thought was going to be more commoditized, but they really pumped a lot of enhancements into those products all the way around: ATG, IBM, and Microsoft. And so that’s really back and we are doing a fair amount of work there. We were doing none say three years ago. We’ve actually got a strong commerce team that’s growing as well. So that’s a good spot. But I think BPM, Business Process Management, business process management systems are going to be kind of the hotspot, you saw that Accenture acquisition of the firm that does back-end systems implementation. And I think that’s going to be a hotspot for sometime to come. Obviously, that’s why we are doing a lot of work now, a lot of IBM businesses fuel by that. We are branching out more into Oracle along those lines and doing a lot of our own hiring in that same space.

Colin Geller - UCD Financial

So when you are looking out and talking to your clients, is sort of the lower cost to capital situation that we are in right now, is that something that helps drive their spending decision, I mean even with so much cash on the balance sheet or is it really that the technology needs?

Jeff Davis

I think that it should, but I don’t think we are seeing that come to fruition. I think people are still, there’s still enough uncertainty and enough just cautious atmosphere where we are not seeing that as a driver. If you did, we certainly are seeing some pent-up demand as a driver and some of that being released, and even just to return, I would say we are not even back to return to sort of normalcy. There’s part of it there, just getting back to a normal environment, then you’ve got pent-up demand on top of it, and you would think that cost of capital would play in there somewhere. I wouldn’t say it’s the key driver, I am sure it’s a consideration.

Colin Geller - UCD Financial

And then, do you see as the US dollar whips around, that probably doesn't really impact you, but it does it impact your competitors and how they are bidding for some of these jobs?

Jeff Davis

I don’t think so right now. As I mentioned before, I think we’ve got room to run as I mentioned right now. The competitors that we see most often and probably for the highest dollar projects are those that I mentioned, the Accentures, et cetera. And we are seeing them to be pretty aggressive. But we are beating them as much as I mentioned 65% better the time and it’s not always on price. So that weighs into it at some degree, but it’s usually not on price, it’s usually on credibility references quality, and that’s why I think, as I said before, we’ve got room to move our rates up.

Operator

Your next question comes from the line of Ryan Hunter from Wedge Partners.

Ryan Hunter - Wedge Partners

I think most of my questions have already been answered. A couple of things here through, I was wondering if you could comment on the average billing rates for the quarter and where you see that trending?

Jeff Davis

Yes, 120 domestic US is the one we focus most on. We’ll kind of strip out the offshore and subcontractor, and of course they all work together and they are all turning the same direction, but I think we were at about 120 back in 2007 pre-recession for the same metric this US domestic employee, and headed north. And I believe that that’s the direction we are headed in now. I don’t see any reason why as we continue to scale this business, build a stronger brand, deliver more, successful engagements and build more references. We can’t get that rate to north of $130 an hour, say in the next 24 months, maybe even north of that. I’m not satisfied at 120, I think the quality of our folks and the quality of the work that we are doing and the value isn’t reflected at 120. I think it needs to be higher.

Ryan Hunter - Wedge Partners

And then maybe just to go back to one your comments on Colin's question there at the end around the surface of demand in the industry. It seems like a lot of what we saw so far in 2010 was based on some pent-up demand, but in the conversations that you're having going forward, the types of projects that you're looking at, do these seem like projects that have been pilling up, or are you starting to see, I guess what's the mix between net new projects or projects that have been on the back burner going into 2011 here?

Jeff Davis

It’s an excellent question, and obviously it’s impossible to give a really definitive number on that. I gave you my best estimate based on what we are hearing, and honestly I think it’s encouraging. I really think that it’s fairly low on the pent-up demand side. I still think there’s a ton of pent-up demand out there. A lot of the firms or companies would be clients that put those things off, frankly still haven’t stepped up to the table on them. Again, there’s still a lot of cautiousness and uncertainty out there, and a lot of the firms haven’t been to the board on moving off the dime on a lot of those projects.

What we are seeing more of right now, I think is a little bit more of a return to normalcy and some other drivers. And we talk about healthcare, obviously, in the healthcare mandates, nothing to do with Obamacare, but the healthcare mandates they were legislated prior to that around electronic medical records and health information exchanges is driving a fair amount of this spend in the healthcare industry, and by the way in an industry notorious for underspending for years. So we are seeing that pick up and that’s a driver, but I actually think there’s a lot of pent-up demand still out there. I don’t think we’ve seen much of that come to fruition yet. What we are seeing is just more kind of a return as I said to a little bit more of a normal spend, and I think they are still underspending.

Operator

(Operator Instruction). At this time, we show we have no further questions. I’d like to hand the call back over to Jeff Davis for closing remarks.

Jeff Davis

Well, excellent. Thank you all again very much for your interest and your time today. We look forward to speaking to you on our year-end call. Take care.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference call, you may now disconnect. Have a wonderful day.

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