Perficient's (PRFT) CEO Jeff Davis on Q2 2014 Results - Earnings Call Transcript

Aug. 3.14 | About: Perficient, Inc. (PRFT)

Perficient, Inc. (NASDAQ:PRFT)

Q2 2014 Earnings Conference Call

July 31, 2014 10:00 a.m. ET


Jeff Davis - President & CEO

Paul Martin - CFO


Mayank Tandon-Needham & Company

Peter Heckmann - Avondale Partners


Good morning ladies and gentlemen and welcome for the Q2 2014 Perficient’s Earnings Conference Call hosted by Jeff David, President and CEO. My name is Benny and I’ll be your event manager this morning. (Operator Instructions). And now I would like to hand over to Jeff Davis. Please go ahead.

Jeff Davis

Well thank you all for joining this morning. This is Jeff. With me today is Paul Martin, our CFO. We’ve got as typical 10 to 15 minutes of prepared comments after which we’ll of course open the call up for questions. Before we move on, 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 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 --our press release includes a reconciliation of certain non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with generally accepted accounting principles or GAAP and this is posted on our website at

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 good morning everyone. Thank you for joining. We appreciate your participation in the call today.

Second quarter capped a great first half of 2014 for Perficient. It also represented a bit of a milestone for the company. Our first $100 million plus quarter, which of course was anticipated but as you can see from the top-line results, revenues in the quarter surpassed our expectations.

Services revenue were up 22% in the quarter year-over-year with expanding margins contributing to EBITDA net of stock comp, up 36%, and GAAP earnings per share up 30%. We’re scaling the business and growing profitably. That’s one of the nice things about the model that we have here and the fiscal discipline we enforce. Our operating philosophy is to ensure that the bottom-line scales with the top-line, linearly at a minimum, but as we’ve been demonstrating and discussing, our goal continues to be to manage the business to deliver profit growth in excess of revenue growth as margins continue to expand.

One of the ways we’re driving that performance and we talked about this before, in fact over the last several quarters, is by closing the gap between our bill rates and those of our larger competitors. So during the quarter ABR reached an all time high of $146 per hour for North American employees, which is nearly a 10% increase year-over-year. By the way 7% of that was organic and the rest of that lift came from acquisitions we’ve done over the last year or so.

Going forward we intend to continue to increase rates, with a focus, doing so incrementally, probably more in line actually with cost of living and a little bit on top of that to ensure it doesn’t sacrifice volume. Another opportunity for us to drive profit growth is through our asset sales, and we’ve talked for several quarters about our continued focus on developing and marketing professional and IP to our clients.

During the second quarter I’m pleased to say that we had about $500,000 worth of asset sales and we expect to gain additional traction with that portfolio over time. Again we talked about this for some time and we’re finally beginning to see some traction and have a nice pipeline built as well.

We’ll talk a bit more about the second half of the year after Paul provides details about the quarter. But we’re confident in the full year projections for both revenue and earnings we’ve provided to date. We’re seeing a pattern similar to last year play out with a very strong booking starting early in the year and things normalizing a bit as the summer gets underway. And the primary indicator we’ve been talking about is of late, where we track the strength of the business is the book-to-bill ratio and that remains quite healthy. On a trailing six-month basis that number stands at 1.18.

We sold 29 deals, larger than $500,000 in the second quarter and they averaged $1.1 million each. That compares to 35 in the first quarter at $1.4 million and 22 in the second quarter last year in 2013. That averaged $1.1 million. So again good year-over-year growth in terms of large bookings. I think our land and expand model are paying off there.

With that I’ll turn things over to Paul for the Q2 recap.

Paul Martin

Thanks again Jeff. Total revenues for the second quarter of 2014 were $116.7 million, a 24% increase over the year ago quarter. Services revenue were $98.3 million for the second quarter of 2013, excluding reimbursable expenses, an increase of 22% over the last year.

Services gross margin for the second quarter of 2014, excluding stock compensation and reimbursable expenses, increased to 38.2% from 37.3% in the second quarter of 2013 with increased average bill rates continuing to drive year-over-year margin improvement.

SG&A expense increased to $22.4 million in the second quarter of 2014 from $18.9 million in the comparable prior year quarter. SG&A as a percentage of revenue decreased to 17.4% from 17.9% in the second quarter of 2013.

EBITDAS for the second quarter of 2014 was $18.8 million or 16.1% of revenues compared to $14.5 million or 15.4% of revenues in the second quarter of 2013. The second quarter of 2014 included amortization expense of $3.7 million compared to $2 million in the comparable prior year quarter. The increase is associated with the 2013 and 2014 acquisitions completed to date.

We incurred $1.1 million of acquisition costs in the second quarter of 2014 related to the acquisitions of BioPharm Systems and TriTek Technologies. Acquisition costs were $1.4 million during the second quarter of 2013.

The second quarter includes an adjustments of fair value contingent consideration of $1.7 million related to changes in estimates associated with earn-outs included in acquisition transactions that were completed in 2013. We are not anticipating any future fair value contingent consideration adjustments.

Net income increased 40% to $6.4 million for the second quarter 2014 from $4.6 million in the second quarter of 2013.

Diluted GAAP earnings per share increased to $0.19 a share for the second quarter of 2014 from $0.14 in the second quarter of 2013. Adjusted GAAP earnings per share increased to $0.33 a share for the second quarter of 2013 from $0.28 a share in comparable quarter in 2013. Adjusted GAAP EPS is defined as GAAP earnings per share plus amortization expense, non-cash stock compensation transaction costs and fair value adjustments of contingent consideration, net of related taxes divided by average fully diluted shares outstanding for the period.

Our effective tax rate for the first quarter of 2014 was 42.1%compared to 38.4% in the second quarter of 2013. The increase in the effective rate is primarily due to the expiration of the research and development tax credit which has not been re-enacted by Congress for 2014. Second quarter 2013 included the benefit of the research and development tax credit.

Our ending billable headcount at June 30, 2014 was 1898, including 1743 billable consultants and 155 sub-contractors. Ending SG&A headcount at June 30, 2014 was 333.

I’ll now turn to the six month results. Revenue for the six months ended June 30, 2014 was $213.9 million, a 19% increase over the comparable period last year. Services revenue for the six months ended June 30, 2014, excluding reimbursable expenses, was $186.8 million, an increase of 21% over the comparable prior year period.

Services gross margin for the six months ended June 30, 2014, excluding stock compensation reimbursable expenses, increased to 37.3% from 36.2%. SG&A expense increased to $43.1 million for the six months ended June 30, 2014, from $36.7 million in the comparable prior year period. SG&A as a percentage of revenue was 20.2% for the six months ended June 30, 2014, down from 20.5% for the six months ended June 30, 2013.

EBITDAS for the six months ended June 30, 2014 was $32.8 million, or 15.3% of revenues compared to $24.8 million or 13.8% of revenues for the comparable prior year period. 2014 does include a $6.5 million compared to $3.8 million in amortization expense.

2014 includes acquisition costs of $2.6 million, primarily related to the acquisitions ForwardThink, BioPharm, and CoreMatrix compared to $1.4 million related to the acquisition TriTek and Clear Task in 2013.

Net income for the six months ended June 30, 2014, increased 9% to $9.4 million from $8.7 million for the six months ended June 30, 2014.

Diluted GAAP earnings per share increased to $0.29 from $0.27 in the six months ended June 30, 2013. Adjusted GAAP earnings per share for the six months ended June 30, 2014 was $0.57 a share, up 14% from $0.50 in 2013.

Our effective tax rate for the six months ended June 30, 2014, was 42.2% compared to 31.3% for the comparable prior year period. The increase in the effective rate was primarily due to the expiration of the research and development tax credit which has not been re-enacted by Congress for 2014. Our effective tax rate for the six months ended June 30, 2013, included the impact of the research and development credit for 2012-2013 which was enacted in January of 2013.

We ended the second quarter with $71 million in outstanding debt and $6.6 million in cash and cash equivalents. Our balance sheet continues to leave us well positioned to execute on our strategic plan.

Our days sales outstanding on accounts receivable were 79 days at the end of the second quarter, which is down from 80 days at the end of the second quarter of 2013. I’d also like to add that July was our largest cash collection month in history as we continue to focus on bringing down our days sales outstanding.

I’ll now turn the call over to Jeff for little more commentary. Jeff?

Jeff Davis

Thanks, Paul. Well as I mentioned earlier we are pleased with our second quarter and first half performance. We talked in the first quarter about software resell being a lumpy business and the fact that things were down year-over-year in the first quarter.

As you can see in the release, this time the results were to the upside with results exceeding even our most optimistic initial projections. And again it’s an important role we can play for our clients, that is reselling software as well as our partners and [indiscernible] also influence services work. We’re really there to win the services business and the resell of the software is more of an opportunistic transaction. A really great performance from our team, though, during the quarter around the software resell.

The healthcare and financial services verticals continue to perform very well. We’re also assembling a great team around consumer products and retail and have meaningful expectations and that’s based going forward. Healthcare bookings began to re-accelerate as Q2 came to a close and our team is pretty bullish that will continue in the second half of the year. We’re well positioned there with our industry reputation, our partnerships and our assets.

Having the versatility to implement solutions across many of the leading platforms is a real advantage for us. Obviously we’ve done a lot of work with IBM on the healthcare front and we expect that to continue. We’ve also gained traction during the first half of the year with Oracle. In fact, we won our first $1 million plus Oracle Enterprise Healthcare Analytics opportunity at the University of Colorado during the quarter.

So generally things are going very well. We feel very good about the first half of the year and expecting a solid second half as well. Things in Q3 may not accelerate quite as quickly as we’d originally anticipated. But we still feel very good about the full year which is evidenced by the reiteration of our full year earnings and revenue guidance and we’re also still focussed of course on M&A and expect we’ll execute at least one additional deal this year.

So now commenting on Q3, Perficient expects its third quarter 2014 services and software revenue, including reimbursed expenses, to be in the range of $111.2 million to $120.6 million comprised of $104.7 million to $110.1 million of revenue from services, including reimbursed expenses and $6.5 million to $10.5 million of revenue from sales of software. The mid-point of the third quarter 2014 services revenue guidance represents growth of 18% over the third quarter 2013 services revenue.

With that we can open the call for your questions. Operator?

Question-and-Answer Session


(Operator Instructions) Okay we have a question. It comes from Mayank Tandon from Needham & Company. Please go ahead.

Mayank Tandon-Needham & Company

Thank you, good morning, Jeff and Paul. Jeff just to kick things off on your organic growth front. Could you remind us what was the organic growth on the services side in the second quarter and what is embedded in your expectations for the back half of the year?

Jeff Davis

So this -- on services for the second quarter was just below 5%. It was 4.9. The midpoint of guidance for Q3 is about 3%, so down a little. Tougher comp against last year, but as I said earlier the pickup in Q3 not quite we expected. Still feel pretty good about the end of the year. So for total year I would – the midpoint of our guidance is about 7% on services and I expect this to be in that range. I think we’re -- I think the total range is 5 to 9 and it will be in that obviously as we’ve reiterated.

Mayank Tandon-Needham & Company

Okay, what is driving the organic growth to that level because one would have expected organic growth to pick up given some of the drivers we’ve seen in the healthcare sector and the financial services sector, what is causing it to actually come in a little bit lighter than one would have maybe anticipated at the start of the year?

Jeff Davis

It’s a slower -- I think it’s a slower sales cycle primarily. The opportunities are out there, the pipeline is solid and it’s just been more a matter of extended sales cycles I think. The pickup in healthcare came up a little later than we anticipated at the end of Q2. However it is strong now. So we do expect to see some impact of that still this year or from that. But again it’s more extended sales cycles I would say, kind of across the board and particularly in healthcare moving a little slower than we’d anticipated.

Mayank Tandon-Needham & Company

Okay, and then just to drill down a little bit further in the verticals, could you remind us the type of work you are focussed on within the healthcare segment and within the financial services given that they’re your two largest verticals?

Jeff Davis

Yeah sure, absolutely. So healthcare, it’s primarily business analytics. We’re helping a lot of both providers and payers, prepare themselves or continue to prepare themselves for a more competitive environment. Some of this is driven by mandates, some dating back to the stimulus package. Some are related more to the Affordable Care Act. But really it’s more driven by, which is why we’re excited about it, and feels it’s got a long tail. It’s really more driven by the transition and the paradigm shift really in the industry, to a more competitive, more transparent industry. So we’re helping those clients, again prepare for that by getting their own arm -- their arms around their own businesses and doing a lot of analytics work there.

Within financial services, actually the group that we acquired at the beginning of the year this year ForwardThink, is primarily management consulting. So these guys help with the process work, efficiency, laying out strategies, a lot of which by the say does drive technology. We’ve already managed to see a cross- sell of business from that acquisition into our more traditional technology base business of a few million dollars so far year-to-date. That’s bookings not necessarily realized revenue but that will continue to come. So with financial services I would say it’s much more around the efficiency gains. And also the new products and services within that industry as it struggles to continue to, or throws [ph] to increase its own margins as they’ve been kind of hammered back over the last few years. Does that answer your question?

Mayank Tandon-Needham & Company

That’s very helpful. And then Jeff, I’m just wondering given that you’ve become bigger which of course is a good thing. You’ve got more scale and more capabilities. Does that also mean you’re running into some of the larger players on these competitive situations which could be in a way effecting your organic growth?

Jeff Davis

Yeah, I think there’s some truth to that. Certainly we’re seeing the big guys more often. We’re still enjoying – like on a trailing 12 month basis, our win rates remain north of 60% against that group collective. But, yeah I mentioned earlier about our focus being more on volume now as we move forward into the second half of the year and slowing down probably the rate increase. Again, I don’t want you to think that that means our margin expansion, doesn’t continue, I think it does and in fact I believe you’ll see in the second half, some of the economies we’re going to be getting on SG&A and seeing some nice returns there below the operating margin and below the gross margin. So that will continue, but it’s going to be through other avenues, increased utilization and economies of scale in the business. Again we’re going to continue to increase rates because we still think there is a gap. But we are in fact going to focus more on driving more volume as we move into the second half of this year and into next year.

Mayank Tandon-Needham & Company

Okay, and then just a final question, well on margins actually. So when I look at the guidance, is it fair to say that, I hope I’m doing the maths right. At the mid-point of your guidance you’re looking for at least over 100 basis points of margin expansion on the gross line and then similar amount on the EBITDA line?

Jeff Davis

Yeah, I think that’s right. I guess that’s probably heavier on the EBITDA line. I think we’re modelling maybe a 150.

Mayank Tandon-Needham & Company

In the back half of the year?

Jeff Davis

Yeah, well for the total year also.

Mayank Tandon-Needham & Company

Okay. Great that’s very helpful. I’ll jump back in queue if I have anything else, thank you.

Jeff Davis

Thanks Mayank.


Thank you. Next question comes from Peter Heckmann from Avondale Partners.

Peter Heckmann - Avondale Partners

Hey, good morning gentlemen.

Jeff Davis

Good morning.

Peter Heckmann - Avondale Partners

Wanted to – I am sorry if I missed it. I had a distraction there for a moment during the last question. But on software reselling revenue for the quarter, can you talk about -- was there one unusually large deal in there or how did that break down and then as regards your guidance for the full year, you continue to feel that, that software reselling revenue is going to have pretty good growth in the back half year-over-year?

Jeff Davis

Yeah, we continue to see better and better traction around resell. As I mentioned before while it’s transactionally opportunistic, it is becoming more strategic part of the overall picture, particularly in our relationships with those partners. But no, actually the makeup of the deal -- there’s a couple of larger deals in there. But there was not one single large deal. What I would tell you is and I think we talked about this on the Q1 call, that a lot of the software that we closed in the second quarter was things that kind of shifted over, or spilled over from the first quarter, that we never close to closing, would normally maybe have closed in the first quarter. That’s probably an indicator of some of the more extended sales cycles that I mentioned earlier. But we had quite a lot of transactions closed in the very early part of Q2 and then more of kind of a normal Q2 after that for a total accumulation of substantial resell quarter.

And yeah, in terms of the back half again, I do think we’re going to continue to see more traction there. So we feel pretty good about where that’s going to be and again strategically it’s important with our partners and we do make money on that of course. This is the standard margin on that. It’s probably about 11%, 12%. But there are some other incentives as well that we participate in.

Peter Heckmann - Avondale Partners

Great, that’s helpful. And then again I apologize if it’s already been asked but on the financial vertical, a big increase year-over-year, there was one acquisition that had a financials focus, but could you point out any other trends that might be helping that? I know you’ve been investing in the vertical itself in trying to build out your sales capabilities is an evidence, that that’s working for you, or are there other industry drivers that’s causing a rebound in spending in financial services?

Jeff Davis

I think for the work that we do, the financial services industry is pretty healthy and by the way, yes, if you look at the total numbers year-over-year, a lot of that growth is driven by the acquisition of ForwardThink, which is about $30 million we closed in February. So we’ve got a chunk of revenue in there on a year-over-year basis in organic. However the organic growth in financial services actually has been pretty strong as well. Even if we exclude that acquisition, it’s still been over 20%. So we see it as healthy and when I refer to the work that we do I’m talking about again driving efficiencies into the business. What I like to call fine tuning, building some applications that help you get that last 10% as well as the business analytics etc., I think lend themselves very well to what’s going on in the industry right now. But can’t under emphasize the importance of the additional team that we added at the beginning of the year.

Peter Heckmann - Avondale Partners

Okay, great and then it did appear that you had pretty good control on the SG&A line especially given the closing of two acquisitions. Were there any other initiatives that were going on there that may have contributed to that as a percent of revenue that number looks really good, and I guess inferring from some of your guidance commentary, it sounds like that should continue in the back half?

Jeff Davis

Yeah, I think it will continue in the back half for sure. In fact, I think it might even improve some as we modeled it. And there have not been specific initiatives. As you know, we have always tried to manage the bottom line carefully and as I’ve said -- well I think really a lot of it is just we’re really beginning to realize the benefit of the scale to your point or maybe Mayank mentioned it. But, I said we’ve always tried to manage that carefully and there’s no exception now. But the part of that I think will continue to scale with revenue, pretty closely to it and some peaks and valleys maybe a little ahead, maybe a little behind, but it’s both sales and marketing. We’re going to continue investing in those areas. But the G&A again is substantial enough and fixed enough such that -- we’ve got a scale here now, I think we talked about putting a new organization in place at the beginning of last year. So I think again while we’re kind of burdened with that additional costs last year, that’s behind us now and we’re seeing really the benefits of it and it’s an organization that I think allows us to scale well beyond our $5 million goal.

Peter Heckmann - Avondale Partners

Got it. All right, I appreciate it. I’ll get back in the queue.

Jeff Davis

Thank you.


(Operator Instructions)

Jeff Davis

Okay, sounds like we don’t have any more. Thank you all for your time today. We look forward to talking to you in a quarter. Thank you.

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