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Perficient Inc. (NASDAQ:PRFT)

Q4 2010 Earnings Conference Call

March 3, 2011, 11:00 am ET

Executives

Jeff Davis – CEO & President

Paul Martin – CFO

Analysts

Brian Kintslinger – Sidoti & Co.

John Maietta – Needham & Co.

Peter Heckmann – Avondale Partners

George Price – BB&T Capital Markets

Matt McCormack – BGB Securities

Ryan Hunter – Wedge Partners

Brian Gaines – Springhouse Capital

Edwin Fowler – SmallCap Report

Operator

Good day, ladies and gentlemen, and welcome to the Fourth-Quarter 2010 Perficient Earnings Conference Call. My name is Lacy and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session towards the end of the prepared remarks. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the presentation over to your host for today’s call, Mr. Jeff Davis, CEO and President. Please proceed.

Jeff Davis

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

Paul Martin

Sure. Thanks, Jeff, and good morning, everyone. Some of the things we’ll 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 included a reconciliation of certain non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with Generally Accepted Accounting Principles or GAAP is posted on our Web site at www.perficient.com under ‘News and Events.’

We’ve also posted a reconciliation of certain non-GAAP goals to the most directly comparable financial measures prepared in accordance with GAAP on our Web site, again at www.perficient.com under ‘Investor Relations.’ Jeff?

Jeff Davis

All right. Thanks, Paul. Well, thanks again everyone for joining. Obviously, pleased to be with you here this morning and sharing our results for 2010 and our guidance for 2010. Perficient finished 2010 pretty strong I feel with the solid fourth-quarter performance.

Revenues for the fourth-quarter were up 18% year-over-year, and similar to last quarter Q3 margin expansion resulted in impressive gains and EBITDA net of stock comp up 59% year-over-year as well as cash EPS or the non-GAAP EPS that we refer to often, up 70% year-over-year, so nice expansion on the margins.

As we mentioned before, we expect this trend to continue. As we’re able to grow the revenues over the next several years, I believe both EBITDAS and cash EPS will grow at even faster pace than the top-line revenue. You’ll see that reflected by the way in our 2011 cash earnings per share guidance, which we’ll discuss a little later.

So services revenue near the high-end of our guidance range coupled with the very strong quarter for software sales, as we sometimes see in the fourth-quarter, I think, is a good indicator overall for the market health as we head forward, help us beat the consensus quarterly estimates on both revenue and earnings lines for the quarter.

Two other important developments in the fourth-quarter were the expansion of our Board of Directors. We added a couple of excellent tenured folks to the board. I’m sure you saw as well as our December acquisition of speakTECH and the speakTECH acquisition closed near the end of the year. So top-line contributions from that were pretty minimal in the fourth-quarter numbers.

Of course, our Q1 2011 guidance bakes in a full quarter’s contribution from that business, which not only expanded our portfolio, but really added to our geographic footprint, establishing a presence in Southern California, and expanding a presence in Austin, and also strengthened the key partnership with Microsoft as well.

Also in the fourth-quarter, billing rates for US employees increased slightly to $120 an hour, up from $119. And while utilization is always impacted in the fourth-quarter due to seasonality around holidays, vacations, etc., we had 79%, which was consistent with Q4 2009, and we expect and are already in fact seeing that rebound in the first quarter back towards the mid-80s again.

In addition to the solid delivery performance, bookings during the fourth-quarter I think were particularly exciting and really that’s continued year-to-date in 2011, very, very strong. We sold 17 deals north of $0.5 million during the quarter. And to provide a little perspective on where the market is relative to a year ago and the recovery that I mentioned a second ago that compares with only six deals north of $0.5 million during the fourth-quarter of 2009. So I think it’s attributable to the fact that we saw clients far more willing to commit to larger longer-term deal, longer-term projects before year’s end in 2010 compared to in 2009, so we had a lot of things in backlog and signed up by the end of the year.

While we don’t provide specific numbers on bookings, but I do want to mention that December 2010 was much stronger than December 2009 and the momentum has helped us get off to a solid start in 2011, bookings as well as I mentioned I’ll touch on that a little bit more later.

Another thing I think is worth notable is that the last three months from December to the end of February of this year, so from December 2010 through February 2011, 25% of the projects we booked came from new clients. So we’re seeing again more indications of health returning to our industry and we’re able to sign up new bookings from new clients.

Those represented by the way about 12% of the booked revenue in total for that period. Again, those are healthy numbers, and I think are an indicator of what I expect to be driving some organic growth for us this year, I believe stronger than last year.

And when we engage with new clients, we typically start with a relatively small project, deliver value, execute well against those, prove our capabilities and then earn the trust of that client to win larger engagements and expand the relationship. That’s why I think that what we’re seeing there in the new client additions, which is unique for this year over the last couple of years is a good indicator again of a return to stronger organic growth.

We exited the year with plenty of cash and no debt. I’m going to talk a little bit about our plans around stock repurchase and M&A after Paul’s comments.

I definitely look at 2010 as a very meaningful year for Perficient in many ways. We officially moved our headquarters to Saint Louis and having persevered through the recession, like many companies, we were able again to return to solid growth.

We reignited our M&A program and made meaningful progress in some key focus areas, some areas I’m going to do a little deeper dive on later, with some exciting developments including the introduction of maintenance and support offerings, leveraging our China GDC, that’s going to help us establish more recurring revenue than we’ve today. It’s been very well received and we’re starting to get early on solid traction with that offering. Of course, I’ve talked about this before, but really substantial success with the healthcare vertical.

I think it’s also notable that we exited 2010 with a revenue run rate that exceeded the full-year results we posted in 2008, which was the strongest top-line performance in the company’s history.

Again, we’re going to talk about 2011 a little bit in a few minutes, but we expect it’s going to be the first of several consecutive years where revenue and earnings will climb substantially. We’re excited in general of the outlook and I’ll touch on that in a minute.

Before I do that, I’m going to turn the call back over to Paul to discuss the quarterly financial details.

Paul Martin

Thanks, Jeff. Total revenues for the fourth-quarter of 2010 were $55.9 million, an 18% increase over the year-ago quarter. Services revenue for the fourth-quarter of 2010 excluding reimbursable expenses increased 13% to $46.8 million over the comparable prior-year period. Sequential organic services revenue growth was minus 3.5% in the fourth-quarter following the expected seasonal trend.

Services gross margin for the fourth-quarter of 2010, excluding stock compensation and reimbursable expenses, increased to 33.4% compared to 30.6% in the fourth-quarter of 2009 continuing our trend of year-over-year margin improvement.

SG&A expense increased to $10.9 million in the fourth-quarter of 2010 from $9.6 million in the comparable prior year quarter. Excluding non-cash stock compensation, SG&A expense was $8.2 million compared to $7.8 million in the fourth-quarter of 2009.

SG&A excluding stock compensation as a percentage of revenue was 14.6% in the fourth-quarter of 2010 compared to 16.4% in the fourth-quarter of 2009. Stock compensation expense was $2.7 million in the fourth-quarter of 2010 compared to $1.8 million in the fourth-quarter of 2009.

The fourth-quarter of 2010 stock compensation was impacted by non-recurring charge of 800,000 associated with our former Chairman Separation Agreement.

EBITDAS defined as earnings before interest, taxes, depreciation, amortization and stock compensation for the fourth-quarter of 2010 was $8.3 million or 14.8% of revenues compared to $5.2 million or 11% of revenues for the fourth-quarter of 2009.

We reported net income of $1.3 million for the fourth-quarter of 2010 compared to $600,000 for the fourth-quarter of 2009.

Diluted GAAP earnings per share increased to $0.05 a share for the fourth-quarter of 2010, from $0.02 a share for the fourth-quarter of 2009. This is in spite of the fourth-quarter of 2010 including non-recurring charges for transaction cost and incremental stock compensation associated with the former Chairman Separation Agreement.

Non-GAAP earnings per share increased to $0.17 a share for the fourth-quarter of 2010 from $0.10 for the fourth-quarter of 2009. Our effective tax rate for the fourth-quarter of 2010 was 60% compared to 59.4% for the fourth-quarter of 2009.

Our ending billable headcount for 2010 was approximately 1,200 including roughly 1,000 billable consultants and 200 subcontractors. Ending SG&A headcount for 2010 was 174, which includes 10 SG&A employees related to our recently acquired speakTECH business.

Now, let me turn to the full-year results. For the full-year-ended December 31, 2010 revenues were $215 million, a 14% increase over the comparable period last year.

Year-to-date services revenue for the year-ended December 31, 2010 excluding reimbursable expenses were $185.2 million an increase of 11% over the comparable prior year period. Organic services revenue growth was 6% on a trailing four quarter’s basis.

Services gross margin for the year-ended December 31, 2010 excluding stock compensation and reimbursable expenses increased to 33.8% from 29.9% in the prior year. Higher domestic average billing rates and improved utilization of our workforce helped drive the year-to-date improvement.

SG&A expense for the year-ended December 31, 2010, was $45.5 million compared to $40 million on a comparable prior year period. Excluding non-cash stock compensation, SG&A expense was $36.8 million compared to $32.9 million in the comparable prior year period.

The increase in SG&A was primarily driven by higher bonus, stock compensation and recruiting expense. SG&A excluding stock compensation as a percentage of revenues was 17.1% for the year-ended December 31, 2010, compared to 17.5% for the year-ended December 31, 2009.

EBITDAS for 2010 was $28.1 million or 13.1% of revenues compared to $18.1 million or 9.6% of revenues in 2009. Net income for 2010 was $6.5 million, compared to $1.5 million for 2009.

Diluted GAAP earnings per share increased to $0.23 from $0.05 a share for the year-ended December 31, 2009. Non-GAAP earnings per share for the year-ended December 31, 2010, were $0.59 a share, up 64% from the $0.36 per share reported in 2009.

Our effective tax rate for the year-ended December 31, 2010, was 44.8% compared to 51.4% for the comparable prior year period. The decrease in the effective tax rate was due primarily to the effective state income taxes and permanent items over a larger income base and a larger benefit from certain non-taxable foreign income, which was partially offset by an impact of non-deductible transaction costs and the limitation on the deductibility of certain compensation cost.

During the fourth-quarter, we spent $1.4 million and repurchased 120,000 shares under our share repurchase program. Since inception, we’ve spent $42.2 million on repurchasing 6.1 million shares. We continue to believe that our share repurchases will drive future accretion and shareholder value.

We also continue to generate strong operating cash flow. For the year-ended December 31, 2010, we had operating cash flow of $18.7 million compared to $22.6 million for the prior year. The decrease is primarily the result of an increase in accounts receivable associated with funding our growth.

We ended the quarter with no debt and $26.3 million in cash, cash equivalents and investments, which was down slightly compared to 2009 as a result of spending $14.7 million during 2010 on share repurchase and around $5 million for the cash portion of our acquisitions.

Our Day Sales Outstanding, or DSOs for the fourth-quarter was 73 days and that is consistent and within our stated goal of 70 days to 75 days.

I’ll now turn the call back over to Jeff for a little more commentary behind the metric, Jeff?

Jeff Davis

Thanks, Paul. Again, from our perspective, really solid quarter and year for 2010. Perficient’s diversity from a solutions technology platform and client perspective continued in the fourth-quarter. We’ve always enjoyed nice diversity and the fourth-quarter was no exception.

Our top five customers combined represent just 25% of revenues. I referenced our success in the healthcare vertical earlier and that accounted for 25% of our revenues during the quarter, the fourth-quarter and that compares to only 16% in the fourth-quarter of 2009, so really strong headway there in that vertical. It was followed in the quarter by telecom at 14%, energy at 9%.

Based on the success that we’ve enjoyed with a dedicated healthcare industry practice, we’re planning to make more investments, as I believe I’ve mentioned in the past, in the vertical practices in 2011.

On the top of our list is financial services which is an area we expect to see a lot of opportunity in moving forward. So we’re targeting that industry for our next dedicated vertical practice this year. Again, I think that will be the first one and hopefully we’ll establish a second one before the end of the year.

From solutions perspective, portals, business integration, CRM remained our strongest disciplines with enterprise performance management as our fastest growing new solution area, very, very solid space and an area that we really entered into in a big way with the Kerdock acquisition that we did in the early part of 2010.

I referenced the balance sheet earlier and our success restarting M&A in 2010. In 2011 we’ll be looking to execute three to four acquisitions that could add as much as $50 million run rate revenues, perhaps beyond this year. By the way, that’s a number that we achieved slightly higher than actually in 2007. Of course, those plans are subject to finding the right deals at the right price.

As always I think we’ve demonstrated good discipline around that. That’s really the reason that we only executed two transactions last year, but the market is really improved on the M&A front.

We’re seeing a lot more healthy businesses out there that are available and interested in joining Perficient. So we got a nice pipeline on the front there and really that combined with the improving industry that I referred to before really think it’s key timing right now to capitalize on those opportunities and really drive the growth going forward.

So to summarize, solid quarter and year 2010, we’ve really got back to what we expect. We’ll now be several years of annual growth where we’re shooting for double-digit comp on annual growth organic and an active M&A program. So 6% last year, I think the midpoint of our guidance, this year is about 8% organic and we’re actually shooting for more than that from a kind of a bonusable goal standpoint.

We actually have internal targets that are higher than that. But all comes together, we’re targeting $500 million annual revenue run rate by the end of 2013. You’ve heard me mention that before. I do think we’re on track to hit that. A lot of things have to fall in place obviously for that to occur, but we took Perficient from just under $57 million from revenues in 2004 to more than $230 million in 2008 over four years quadrupled the business. I’m confident with the determination and discipline we’ve demonstrated over time that we can achieve that level of growth again and perhaps beyond.

So lastly, commenting on the first quarter of 2011 and the full-year, the company expects first quarter services and software revenue including reimbursed expenses to be in the range of $55 million to $59 million, comprised of $51.5 million to $54 million of revenue from services including reimbursed expenses and $3.5 million to $5 million of revenue from sales of software.

The midpoint of the first quarter guidance represents about 17% growth over the first-quarter 2010 revenue. The company is issuing full-year revenue guidance range of $235 million to $255 million and cash earnings per share for the year of $0.70 to $0.80.

So with that we’ll open the call up for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) The first question will come from the line of Brian Kintslinger with Sidoti & Co. Please proceed.

Brian Kintslinger - Sidoti & Co.

Hi, guys, how are you? I had a couple of questions on demand. First, I’m going to look backwards at the fourth-quarter. I think on the last call, and I think you’ve been clear that you thought that in the fourth-quarter you could buck the trend and probably be flat to maybe up if you got lucky in the December quarter on services which wasn’t the case. What kind of materialize in the December quarter? Was it slower bookings in the beginning of the quarter that caused you to have the normal seasonality that you thought maybe you could buck the trend for?

Jeff Davis

We’re going to have analysis on that of course Brian. I think it was really the kind of software bookings that we talked about in the third-quarter. Actually, that sort of set in a little bigger way than we thought they would or anticipated they would in the fourth-quarter and some of that’s actually carried over a little bit to the first quarter, although given the backlog that I talked about before, the bookings that we’ve had this year.

We’re really very optimistic actually about the outlook going forward, but I’d say that’s the primary reason for fourth-quarter, of course, seasonality, we had been up pretty substantially for three of the prior four quarters, so we had a pretty good vacation hit and things like that, but it was primarily I think the software bookings that we saw in the third-quarter and that trend shifted by the way by about midway to the fourth-quarter.

Brian Kintslinger - Sidoti & Co.

I think there’s a little bit of disconnect. You mentioned really strong bookings in December quarter and you’ve started off really strong through February. If I back out the acquisitions and I obviously only have assumptions on acquisitions and what they’re going to provide, but you’ve talked about the combined revenues, I don’t think they are declining. It seems that the services revenue is flat December to March and now you’ve more billing days I’d think, so I guess I’m curious why with all the strong bookings and the strong demand trends you’re talking about, organically, you’re really looking for revenue that’s pretty similar to December quarter?

Jeff Davis

Yes, that’s right. And again, I think it’s the Q3 bookings. Our revenue tends to lag bookings rather about four months roughly, and, of course, for each soft month you have you’ve got to burn that off, so we’re seeing revenue pick up pretty substantially here in March, and as I’ve kind of alluded to Q2 looks to be quite a substantial quarter for us from where we sit right now, so you’re exactly right.

I think it’s not so much of disconnect as it is the benefit of those big bookings will be more in the second-quarter than we’re realizing yet in the first quarter. But as you can tell by the full-year guidance, both on top-line and cash earnings per share, I don’t think that’s something that we won’t be able to recover from. So little slower first quarter, but I think overall we expect a very strong second-quarter and strong remainder of the year.

Paul Martin

I think one thing I’d add to that, Brian, is as Jeff mentioned earlier, the number of large deals are up, and I think, we saw in some cases some of those were a little bit slow to get started here in Q1, but, I think the good news related to that those bookings are in place, and they very well set the table for us heading into Q2.

Brian Kintslinger - Sidoti & Co.

With all that said, the last question on demand as I look forward, now I’ve assumed and I’m sure it may be right or wrong, but $16 million of revenue from your new acquisition, your newest one and maybe a modest increase from the other one that’s organic, so speakTECH and Kerdock, if I back those out, you’ve got about 2% to 11% organic revenue growth, and I guess I’m interested because last quarter you talked about managing 2011 to double-digit growth, and you’re talking about a lot of strong bookings. So I guess I’m wondering why it seems a little bit lower maybe than I’d have thought. Has anything changed in the last couple of months to may be temper your positioning for the year?

Jeff Davis

No, I think, the only thing that’s changed, like I said, is a little slower start on revenue than we like at the beginning of the year. By the way, the organic number is 4 to 14 for the year that’s the range. I mentioned before our midpoint sitting right around 9, and I’m still pushing very hard for double-digit, that’s what we’d like to get to, so marketwise anecdotally as well as the bookings that we’re seeing very, very strong, I do think we had this patch that was a carryover from the third-quarter last year, but we’re coming out of that now and we don’t see anything that would indicate that we’re going to see that again this year.

I think that was genuinely a factor of concerns about the economy in the middle year last year we saw pull back on the part of our clients. We don’t see that happening again this year. We’re having much more long-term conversations with our clients, a lot more budget to spend this year than prior.

It’s a matter of, I think, timing and lining all up and again, we’re starting to see that now. And I think you’ll see that in our Q2 results as well. Also what Paul mentioned, a lot of the engagements that we’ve signed are larger more complex engagements and they do take a little more time to get ramped up and running at sort of full speed.

One quick comment too. You mentioned the billable days, seasonality aside to taking vacations out of it, in actuality; we’ve one less billable day in the first quarter than we did in the fourth-quarter.

Brian Kintslinger - Sidoti & Co.

Sorry, I meant the vacation days. You’re right. The last question I had was did you guys mention the metrics on the average deal sizes and numbers? Did I miss that?

Jeff Davis

Yes, I think we talked about just deals over $0.5 million.

Brian Kintslinger - Sidoti & Co.

I think at some points you’ve given how many deals and the average size or is there something you’ve given every quarter?

Jeff Davis

I don’t give it every quarter, but –

Paul Martin

No, we’ve it here. So the average deal size in Q4 and some of these have all the phases and it looks like 358 sales with deal size of 130K versus the third-quarter it was 105K. So as we mentioned there were 17 deals over 500K in the fourth-quarter versus (inaudible) in the third-quarter, so it all drives up that average.

Brian Kintslinger - Sidoti & Co.

Okay, thanks, guys.

Jeff Davis

Thanks, Brian.

Operator

And our next question will come from the line of John Maietta with Needham & Co. Please proceed.

John Maietta - Needham & Co.

Hi, thanks very much. Jeff, I was wondering if you could talk a little bit about Kerdock and whether or not you’re happy in terms of how that’s tracking with growth to cross-sell activity. The same deal for speakTECH, maybe if you could just speak to kind of the plans for cross-sell with that business grant that you picked up a bunch of new skills sets of that acquisition, so maybe not as leverageable across the base?

Jeff Davis

Yes, no, absolutely. The Kerdock acquisition has been fantastic. The organic growth within that business unit has been very good. Cross-sell has been great. These two acquisitions really even speakTECH, even though it’s early on, have really integrated very quickly and I was trying to measure integration strategically not by how quickly we cut over email and things like of course. It’s a matter of how quickly these guys are being leveraged and cross selling exactly to your question.

We’ve been very, very happy with both so far, and of course as you probably know we were national systems integrator with Microsoft, speakTECH was as well. I think our respective rankings were 10 and 14 and combined we’ve got to be somewhere in the top five, so it really helps us with the visibility with Microsoft as well. It’s a great share point shot. Share point 10. I think is going be a strong area of demand and we’re well positioned for that and we’re already leveraging substantially in cross-sell the skills of laboring to the tailor.

John Maietta - Needham & Co.

Got it. Okay. With regard to the M&A pipeline, it sounds like you feel better about the targets that you’re looking at. And are those targets concentrated in any one area as far as industry vertical, specialty et cetera geography?

Jeff Davis

I’d say we are seeing good portfolio or good opportunity pipeline around across the board for the most part. As I mentioned before financial services, we green fielded the healthcare practice. We’re in the process of doing the same thing for financial services. We’re also looking for acquisitions in that space and we’ve actually identified a couple of potentials there. We’ve also identified a couple of other good opportunities.

So I’d say right now we are really encouraged about the M&A pipeline and what’s out there. We talked about last year, the challenge being particularly in the first half of the year finding businesses that had a decent track record of health because if you go back 12 months, obviously you get into 2009 which is a rough time for the industry.

So by the end of the year, we had identified a lot of businesses that recovered nicely, demonstrated good health for 12 or more months run rate and then put those in our pipeline. We’ve got things underway right now. I mentioned three deals to four deals. I’m very confident that we’ll have three deals this year and we’re not going to be too aggressive like we always say. You’ve got to integrate these businesses and make sure that you’re getting the value that you’re paying, but I’d be surprised if we can’t three deals done this year, the pipeline is that strong at least.

John Maietta - Needham & Co.

In terms of the Greenfield investment on the financial services side, is the pace of that investment going to be front-end loaded in the year or be kind of spread across the full-year?

Jeff Davis

I think it will be spread across full-year, that’s similar to what we did with healthcare. There were few lessons learned, I think we are smarter now in terms of green fielding needs. As I mentioned before, we couldn’t have asked I think for better success and a better return on the investment, but it is pretty spread out. You don’t go out and hire 20 people day one and you’ve got number of them sitting around, so we’ll be spreading it out throughout the year.

John Maietta - Needham & Co.

Good, that’s okay, thank you.

Operator

And our next question will come from the line of Peter Heckmann with Avondale Partners. Please proceed.

Peter Heckmann - Avondale Partners

Good morning, guys. Nice quarter. When you look at employment [ph] market, are there any areas where you’re having difficulty hiring qualified people? Is it on a regional basis? What are you seeing in terms of compensation expectations?

Jeff Davis

I’ll start by answering this the way I always do and that is that even through the recession hiring good people was always hard. This industry, while it took a hit to some degree, there are always places I think for qualified IT people, particularly with specialty skills.

So my answer to your question is, it’s always tougher and today is no exception to hire people with those specific skills that you want and good experience in that specific technology. By the way as a result of that, right now we’re doing a lot of training. We had great success by bringing in a class of folks that we’ve trained on IBM Commerce as an example that we brought in essentially as college grads and initially even as interns and now have turned about I want to say 8 or 10 FTEs into Commerce ready people by training them through IBM. So we’re doing more of that sort of thing.

In terms of your question about compensation, I think it’s a good one. I am glad to highlight this. The reality is for the turnover, both voluntary and involuntary that we had last year, the people that we replaced, the new hires coming in, were coming in below the compensation for the people that were moving out.

So we actually managed to bring overall base compensation for the delivery folks down last year along with actually giving merit increases. So we’re optimistic that that’s going to continue. We’re able to expand the bottom of our pyramid more. We’ve got larger engagements that have roles for less experienced resources. I think it’s going to help us bring that cost down.

Peter Heckmann - Avondale Partners

As regards the mix to H1B and offshore, how do you see that shaking out in ‘11?

Jeff Davis

I think the H1B, I believe on a relative basis will continue to decline. There are less H1B folks available. We’re also still enjoying, as I said before, maybe less of a need for them as we’re able to fill out the pyramid with less experienced US base resources. We’re still, by the way, leveraging H1Bs. We’ve actually got a couple of L1 programs now that we’re leveraging as well as a method of mitigating the H1B constraints.

And then offshore, I certainly expect will grow on a relative basis and outpace everything else. Each quarter goes by, more and more of our revenue involves offshore. So while offshore itself is I want to say less than 5% or right around 5% of our total revenue, the reality is something on the order of 30% or better of our revenue is leveraging offshore resources. We don’t pursue the offshore model. We’ve got a hybrid model that actually works very well for us. It allows us to get a lot better margins actually than the pure offshore for those offshore resources, $35 an hour or 60% plus gross margin, but the other fact there is that our leverage isn’t one to 10 or one to 20. It’s more of one to one or maybe one to two.

Peter Heckmann - Avondale Partners

That’s helpful. And then last question; are you seeing any more shifts to fixed price contracts?

Jeff Davis

Actually, no. Our fixed price percentage of revenue has come down, declined and we are seeing that trend to continue. It’s still going to be a factor and we’ve always said 15% or less and it’s actually down around 11% or so now. It seems that as budgets have recovered, clients are little more willing to engage on a time materials basis than they are in fixed fee because they’ve got more budget flexibility.

And the reality is we work really hard to educate our customers that the fixed fee arrangement is not really as beneficial as they might think. It really limits and constraints flexibility for them and we always work very, very hard to meet our client’s budget requirements anyway. So we’d rather have the flexibility to adjust scope and adjust some of the factors to help meet their budgets than be boxed in on a fixed fee, so we do a lot in educating them on the sales process to avoid that because we don’t think it’s good for them.

Peter Heckmann - Avondale Partners

Got it. All right, thanks, appreciate it.

Operator

And our next question will come from the line of George Price with BB&T Capital Markets. Please proceed.

George Price - BB&T Capital Markets

Hi, thanks very much, guys. Good morning.

Jeff Davis

Good morning.

George Price - BB&T Capital Markets

The first thing is just wonder if I could get some assumptions around the 2011 guidance, maybe from the margin side what kind of EBITDAS margin you’re expecting if you have GAAP operating margin assumption that kind of underlines it as well?

Jeff Davis

Sure. Paul is going to find that for you. Just to kind of set the stage for that, it’s our goal as I mentioned before, I alluded to obviously we’re bonused [ph] on poor performance of the business and our internal goals are to actually to add 200 to 300 basis points to both gross margin on services net of stock comp as well as EBITDA net of stock comp this year, so we are looking to get to 36% plus, 37% perhaps for the year and in on a higher run rate on gross margin and then 15% to 16% again on EBITDAS with ending the year on a higher run rate than that, that’s what our bonuses are built around. But, Paul, do you want to just?

Paul Martin

Yes. From a GAAP perspective in our GAAP guidance, the difference between cash EPS and GAAP EPS range is $0.30 to $0.32, which I think the delta in 2010 was $0.38, so that gap will compress a combination of factors, some of the one-time costs and stock compensation that we talked about in my earlier remarks as well as the transaction cost that we had in 2010 and the assumptions that we’ve done with no acquisitions don’t repeat.

George Price - BB&T Capital Markets

Paul, I am sorry if I missed this. So the GAAP was $0.30 to $0.32 for ‘11?

Paul Martin

Yes, so in our guidance of $0.70 to $0.80, you take $0.30 to $0.32 off to get back to GAAP EPS. I’m comparing that to that difference in 2010 was $0.38.

Jeff Davis

That’s roughly $0.40 to $0.50.

George Price - BB&T Capital Markets

How about tax rate? And just do you have a number for stock comp expense that you’d anticipate in 2011?

Paul Martin

So as far as the tax, the tax rate should be around 40%. So, I think that’s a pretty 40%, 41% on the tax rate. The stock compensation as we talked about there was a one-time cost in the fourth-quarter, so it should be fairly comparable and actually slightly lower than the third-quarter run rate from 2010.

George Price - BB&T Capital Markets

Okay. I think I missed part of that. So that $800,000 you said was of stock comp in fourth-quarter, was Chairman separation?

Paul Martin

Yes, so we had stock comp and I believe this made through the SG&A number but $3.3 million in Q4 versus $2.466 million in the previous quarter, so sort of $800,000 of that is one-time. So it should be similar to that third-quarter run rate, may be slightly lower.

George Price - BB&T Capital Markets

Okay. I realize that you’re looking at the margin and looking at running the business on an ex-dotcom basis, but I guess as growth in margins kind of normalize and when you look at more comparable figures, when you’re looking at other IT consulting companies, it’s really most other companies in this industry are ultimately focusing on GAAP operating margins, a theory that especially in higher-end people based business, right, if you’re not paying in stock, you’ll have to pay in cash. Is that shift something that you’ve thought about and that you’d consider?

Paul Martin

Yes, so certainly when we put in our new stock compensation plan back in I guess it was in 2009, the number of shares available in that plan certainly are lower than what we had previously and as a result of that the grants have been lower than they were prior to that date, and you will certainly see as we’ve five-year vesting on our stock comp, so that runs offs over a five-year period. So as we see some of the other stock comp drop off from grants done back in the ‘05-’06 timeframe, we expect to see that continue to decline over time.

Jeff Davis

Certainly, as a percentage of revenue, as we grow of course, stock comp is part of our comp philosophy, so, as we expand the business, you can expect some offset of the overhang due to the new brands. We’re actually working on a new plan there too. We maybe actually shortening the vesting on those and issuing less shares as a result of that as well to help on some of the overhang there.

George Price - BB&T Capital Markets

Just you mentioned the maintenance and support work that you’re starting up out of China, I might have missed it, but did you mention what percent of revenue that is and if you could talk maybe the economics of that kind of business versus your more core project-based business and what kind of impact it might have on results going forward?

Jeff Davis

I think it will be a while before you see a material impact right now. We literally just kicked it off this year, so the revenue is quite low. We’re targeting by the end of the year somewhere between $4 billion and $6 billion. Now, this is a Greenfield-ed [ph] effort. So we believe that’s going to help drive some of that organic growth. There’s a couple of points of organic growth there, but again the big picture, that’s not going to have a huge impact on margins.

However, to answer your question, let me give you couple of facts about that. We’ve a lot of recurring revenue that isn’t necessarily contracted as recurring revenue, but we do tend to sign a lot of contracts with customers on an annual basis and essentially renew those contracts every year, and they get adjusted every year. So it’s not a five-year contract, so it’s not quite the reliability of some other recurring revenue, but this will be more along those lines. So one of the benefits, of course, there’s some recurring revenue and I do believe it’s going to continue to grow, the reception has been fantastic so far.

In terms of the metrics on it, gross margins right now we are projecting north of 50%, so it should be a very profitable business. It gives us a lot of flexibility in terms of how we deploy the resources, which will allow us to manage to a substantial gross margin level on it.

George Price - BB&T Capital Markets

I guess the GAAP tax rate in the quarter was higher, why, I apologize I missed that?

Paul Martin

So there’s a couple drivers of that, George. The first is when we did the acquisition to speakTECH, there is transaction cost and based on the structure of the transaction, those costs aren’t deductible. So that drove six points to seven points in the rate. And then there is also in the GAAP rate, the impact of certain compensation principal related to stock grants that isn’t fully deductible and the amount of that is driven and that’s why the stock price went this up that’s and investments that occurred in December were at a higher price and so that drove the GAAP on the quarter I believe it was about 10 points associated with that.

George Price - BB&T Capital Markets

Have you kind of factored that in when you’re talking about the 40% for the year?

Paul Martin

40% for 2011?

George Price - BB&T Capital Markets

Yes, sir.

Paul Martin

Yes. So part of that was associated with our former Chairman. So the impact of that in 2011 will be less.

George Price - BB&T Capital Markets

Last question, I don’t think you mentioned how much as a percent of revenue financials were, if you could repeat it?

Jeff Davis

I don’t think I did mention it, but it’s actually picked up a lot. It’s double digits for us now. It’s 12% in the fourth-quarter. So again that’s one of the reasons we’re focused on that. We’re certainly seeing a return to growth there for us. What’s happened in the financial services industry and why believe it’s still really just scrape in the surface for the kind of work that we do, obviously over the last couple of years massive consolidation and a lot of back-office heavy lifting work that’s been done by larger firms putting in back-office systems etc.,

One of the things that we believe is happening now and we validated as opposed to some of the companies we’ve talked to in the acquisition process as well as our own sort of anecdotal and empirical evidence is that as that work is wrapping up, these customers are now moving on to more high touch portal collaboration, integration business intelligence projects that we built on top of those platforms. So we believe that will be a nice opportunity for us moving forward.

George Price - BB&T Capital Markets

Great, thank you for taking the questions.

Operator

And our next question will come from the line of Matt McCormack with BGB Securities. Please proceed.

Matt McCormack - BGB Securities

Hi, good morning. In terms of your guidance, I guess could you talk about what’s implied in terms of pricing throughout the year as well as headcount growth and utilization of those employees?

Jeff Davis

I’m sorry Matt, can you repeat that?

Matt McCormack - BGB Securities

In terms of your guidance, what’s implied in terms of pricing as well as headcount growth and utilizations?

Jeff Davis

I believe we can influence pricing again this year. We’re working hard to do that, not only pricing but of course the profitability, but I think we can get probably 100 and 200 basis points of pricing improvement. So of that 8% midpoint growth, I do believe 100 to 200 basis points of that can come from ABR for the year.

Matt McCormack - BGB Securities

And then I guess headcount, should we expect that to grow roughly that midpoint at organic or should we expect utilization to increase and have that headcount growth lower?

Jeff Davis

I’d say yes that it’s probably the midpoint minus that 1% to 2% roughly. However, we’ve done a little bit of hiring ahead based on what we’re seeing in the outlook over the last couple of quarters. So there is I think an opportunity to squeeze a little more out of utilization. So if we’re tracking to that 8%, let’s say, we’re probably increasing headcount maybe five to six, if our ADR expectations and utilization expectations come to fruition.

Matt McCormack - BGB Securities

In terms of the 17 deals, I guess could you talk about which verticals they fill in, if it was roughly in line with your vertical mix as a percentage of revenue? And then additionally the strength in those new signings is that you think related to the economy or do you think that is related to the investments you’ve been making in your sales force?

Jeff Davis

I’ll start at the end. I think it’s a combination of the two. Certainly, we’re seeing some improvement. Honestly, things certainly look better now from what we can see. You have to have a crystal ball to predict what it’s going to look like in six months. As we sit here today, it looks better than it did a year ago and obviously substantially better than it did two or three years ago.

So certainly, some of it is due to the economy and industry improving, but I certainly believe again in particular in the area of healthcare that those investments are paying off as well. We’re working with three of the Blue Cross Blue Shield three states on expanding leverage in the work that we’re doing there, to expand those relationships to other states.

We’re working with one-off where I believe actually the largest group buying organization in healthcare in the country. They’ve introduced us to their group members, so we’re working with them and substantial work there as well as expanding to their members.

So those things are definitely a result of the investments we’ve made around healthcare, and again we’ve got a model that’s proven, it’s working there, and got us bullish about investing more in the verticals as I mentioned earlier. So it’s a combination I think of the two.

In terms of the breakdown of the 17 deals north of $0.5 million, I don’t know if we break that down by industry or not, but I am going to tell you I am confident that it’s going to be pretty much along the lines that we break down our industry. We’re not seeing huge shifts of one industry versus the other, other than what I said before.

We see healthcare growing a little faster pace than others I think because of those investments, and we’re starting to see financial services pickup relatively faster than some other industries, and I think that’s primarily actually more recovery. As I said before, then moving on to the work that we do now as the consolidations have concluded and the work there has concluded.

Matt McCormack - BGB Securities

Just a quick housekeeping. Could you review the headcount statistics for the fourth-quarter, one more time please?

Paul Martin

Sure, the total billable headcount, including the speakTECH acquisition that we completed in December, was approximately 1,200 and that’s about 1,000 employees and 200 subcontractors.

Matt McCormack - BGB Securities

Okay, great, thank you.

Operator

And our next question will come from the line of Ryan Hunter with Wedge Partners. Please proceed.

Ryan Hunter - Wedge Partners

Good morning gentlemen. Thanks for taking my question. Wanted to ask you, I didn’t hear and may be you did mention, I apologize, utilization rate number for the fourth-quarter?

Jeff Davis

79% for US-based employees, which is the majority of our staff and what we tend to track most closely.

Ryan Hunter - Wedge Partners

So little bit lower than normal. Is that basically due to the fewer projects that happened in the quarter?

Jeff Davis

I think it’s more seasonality. It’s pretty much consistent with what we had in Q4 ‘09 and we typically see utilization fall to about 80% or a little below in the fourth-quarter of every year, primarily due to the holidays, Thanksgiving, Christmas and vacations associated with those.

Ryan Hunter - Wedge Partners

Still expecting about getting back to that 85% target range for 2011?

Jeff Davis

82% to 84% is kind of our advertised sustainable range, but we are going to push through to run it as high in that range as we can, while still investing in the business of course. We need to be building as we move ahead as we see again a big opportunity or a nice opportunity here to grow the business.

Ryan Hunter - Wedge Partners

You did mention that new accounts over the last three months had comprised about 25% of projects. Looking out into the pipeline for what you can see right now, obviously, for 2011, does that rate hold stable or does it expand?

Jeff Davis

Yes. I’d say it probably does hold stable. That’s one of things that I was trying to highlight there about the pipeline as we see it now relative to a year ago is many more new client opportunities in that pipeline, which again I think is a validation of continued recovery for the industry and more clients entering the buying cycle and being willing to spend.

During the recession, one of the things that’s always challenging is everybody kind of hunkers down and sticks with the vendors that they are familiar with. It’s hard to break into new accounts during a contracting period. As that’s getting behind us now, we’re seeing more opportunities to open up new accounts, which, as I said before, I think should drive some substantial organic growth opportunities for us.

Ryan Hunter - Wedge Partners

I know that’s been a core target for your strategy for this year. Do you think that that 25% over the long term is about the right mix? I think I remember, it used to be at about 15% historically with 85% of revenues coming from your existing clientele?

Jeff Davis

Yes. So keep in mind the 25% of deals and it was the about 12% of revenue. Although, I don’t think it will be as high as 25%, but honestly, I’d like to see it at 20% or better. We’re going to continue to get that recurring revenue because of the excellent work we do with our existing clients, so we’re going to continue to maintain those relationships.

Obviously, the higher we can drive that 15%, that you correctly identified, to 20% or 25%, that’s just all the more growth that we’re having by really taking share and expanding our market on top of the fact that that existing recurring client base I believe is going to have more budget and continue to spend more money. So it’s kind of two pronged opportunity there for organic growth.

Ryan Hunter - Wedge Partners

Thanks for the color there. And then I guess last question I had for you is back to around the speakTECH acquisition. One of the things I noted, I guess this is what you had in the press release, that they had some additional capabilities around whatever term you want to use, but enterprise social computing seems to be the more popular one these days. Can you talk a little bit about the capabilities there and then the opportunity you see from that skill set?

Jeff Davis

Thanks for bringing it up. Actually it’s one of the things about that acquisition that we’re particularly excited about. So these guys did work directly for Myspace, as an example, on that product and continue to maintain a relationship there. So collaboration, social media is definitely a focus of theirs among as I mentioned just SharePoint in general. Of course of that a lot of that is on Microsoft technology, so the two go together.

Another area that they are working on and have good experience and are working with a large client right now on, is actually Facebook for commerce. If you follow Facebook, that’s a big part of their strategy moving forward, is actually using their engine as a commerce engine. These guys were when we acquired them and still are right in the middle of a substantial engagement with a Fortune 100 company that I can’t mention, and we’re excited about that. I think that could really open up a lot of opportunity for us there.

So great skills there. Aaron Sloman, the guy who founded and runs that business and now is one of our general managers, managing that business with us, is an ex-Microsoft guy, very, very connected and just a great thought leader and cutting edge guy along with his team. So we’re excited about the social media aspect of it.

Ryan Hunter - Wedge Partners

How does that particular skill set align with your vertical market strategy in terms of the enterprise social computing? To me it doesn’t seem like it’s that great of a fit for healthcare, but I could be wrong there.

Jeff Davis

I think that would be real early for healthcare, I think healthcare is just trying to catch up to the 20%, so I do think however one of the things that you’re seeing a rapid adoption to is a demand for transparency in healthcare, and consumerism in healthcare, and really focusing on the end consumer, and social media may well emerge as a strong play there. So right now, we don’t necessarily see it as tie to any specific vertical, other than probably consumer.

That retail thing that I mentioned I think is going to be sort of the next wave of social media, social media as commerce. So that’s one. Obviously, if you want to look at it in the consumer products and retail space, it’s probably going to be pretty strong, but I could see it play in healthcare a little bit down the road as well, but right now, I guess I think healthcare is working on kind of crawling before they walk.

Ryan Hunter - Wedge Partners

All right. That’s helpful. Thanks guys and congrats on the year.

Operator

And our next question will come from the line of Brian Gaines with Springhouse Capital. Please proceed.

Brian Gaines - Springhouse Capital

Hey, guys. Just following on something earlier that you talked about. You talked about bookings being up strongly. Can you give any kind of percentage increase, either sequentially or year-over-year of what happened in the fourth-quarter and maybe some year-to-date color?

Jeff Davis

Yes, I think we look at it on a rolling or trailing 90 days basis. So Paul is going to get you that specific stat. I actually wanted to come back before we get that to a question that Brian had asked and point something also that I think you will find interesting. So for the fourth-quarter of 2010 bookings, just if you are going back to the fourth-quarter, not the trailing 90 days but the fourth-quarter, we had 38 deals that were north of $360,000. So 55% of our bookings in the fourth-quarter came from those larger deals. That compares with only 39% in the fourth-quarter of ‘09.

So just from a contrast standpoint, we had 39% of our total revenue booked in ‘09 from deals north of $350,000 versus 55% in the fourth-quarter of last year. So again a testament to I think the recovery of the larger deals that we’re able to sign now, etcetera. I think Paul you’ve got the year over year – ?

Paul Martin

We look at it on a trailing year-over-year 90 day basis, so in the fourth-quarter we were up 50% plus over the trailing 90 day comparable period in the prior year, and as you fast forward that through February, it’s on a trailing 90 day basis, it’s up about 11%.

Brian Gaines - Springhouse Capital

Okay, thanks.

Operator

And our next question comes from the line of Edwin Fowler with SmallCap Report. Please proceed.

Edwin Fowler - SmallCap Report

Good morning, gentlemen. That was a great report. Nice to see the services growth here picking up. Getting back to the medical side, we’re seeing a trend of doctors joining hospitals and could you give me a little color on what you are doing for the hospitals and what your penetration is in this particular market?

Jeff Davis

We certainly do a lot of work on the provider side as well as the payor side. Payor side for us is a larger percentage for sure of revenue in our healthcare space right now, but as I mentioned, we are penetrating the provider side. I can’t give you a specific breakdown simply because I don’t have it, but we are working with the number of hospital organizations.

To your point, you’re exactly right, you’re seeing doctors consolidating into hospitals and hospitals consolidating into hospital systems, combining with one another and running systems, so that they can, I think, lower their cost as investment and a lot of these of kinds of things as well as the buying capabilities etc., is much better as they being together and we are working with the number of hospital systems right now.

Again, primarily around electronic medical records requirements, health information exchange requirements, these legislative requirements that that honestly a lot of these guys were simply not ready for. As I look at the deadlines that are out there now, it kind of reminds me a little bit of Sarbanes-Oxley, I suspect that some of those may end up having to slip put simply because the providers and even payors may not be able to comply, but that to us amounts to a number of years of opportunity for us, I think it’s going to continue.

Edwin Fowler - SmallCap Report

In that same regard, from what I mean a lot of the hospitals having trouble integrating their older workers into these new systems, particularly in the new Cerner systems. Do you work with Cerner in anyway?

Jeff Davis

We do a lot of integration with Cerner and EPIC as well. So what we do primarily is the integration of those older, if you will, medical ERP type systems and actually pull that data out, normalize the data so it will comply to as an example to get in fact 5010 standard, which is a big leap forward from the old 4010 standard, so that’s exactly the kind of work that we’re doing.

So we are not implementing those products, of course from those part already been implemented. What people need to do now obviously is get that data out of them and make it useful and be able to exchange it through these exchanges and through EDI et cetera.

Edwin Fowler - SmallCap Report

Hospitals have more than there are funds to do all this new integration in light of what’s going on in Washington?

Jeff Davis

I hope so. I can tell you this. As we’ve seen it with the states and the Blue Cross experience as an example and even with some of these hospitals and there were some stimulus dollars done at this, I don’t think that was honestly very material. This legislation was passed some time ago, was not part of Obama care, so this is going forward I think kind of no matter what happens with that.

What we’ve seen again with the Blues and some other experience we’ve is that they’ll pretty much stop spending money everywhere else and focus on this because it’s been legislative, they don’t have a choice and what’s more is that because of this legislation, some of the systems are there, some of the systems have the funds readily available, some of the more has occurred, so it’s going to create a competition as well especially when you look at the lot of the healthcare choices, especially, on the payor side are driven by the companies that pay the benefit for the employees.

So one of the things that companies are going to be looking for is a qualification criteria for their providers is, are you complaint with these requirements? So there is a competition. I view it as they should be spending less than they have on this, so they’re going to be out of business.

Edwin Fowler - SmallCap Report

How do you respond to, I mean your excellent stock buybacks and your nice growth on your cash flow. This was very strategic, but what are you doing to grow your cash flow?

Jeff Davis

I am going to let Paul really comment on this. This is a strong cash flow business. So as we expand top line other than funding some AR we’re going to see, and that’s a short-term effect, we’re going to see cash flow expand dramatically. I’ll let Paul comment on that in a second, but I want to mention also on the buyback.

We’ve got about $6 million or so left on the authorization on that. So we’re still active on the buyback. However, of course, as we are getting more aggressive on the M&A front, we’ll be applying some more of the cash investing in that direction, but Paul, you want to comment more on cash flow generation?

Paul Martin

I think Jeff covered it fairly well. One nice thing obviously about the services business is that your EBITDA, so to speak, pretty much drops through the bottom line, you don’t have many other cash costs besides that. I think CapEx runs 1% of revenues or less and other than that impact there really aren’t any other cash costs. So we’ll continue to generate cash as we’ve done over the last three or four years and we’ll reinvest that a couple different ways.

As Jeff said, we’re planning to be more aggressive with our M&A program, but we’ll still strategic and opportunistically buy back our shares and we see that has and will continue to generate further accretion.

Edwin Fowler - SmallCap Report

And one last question, I haven’t received my Annual Report and Proxy yet, but when have you set the date for the Annual Meeting?

Paul Martin

Yes, first week of June for sure.

Jeff Davis

And the proxy will be out in April. We’ll be announcing those dates. When Paul? In the next few weeks.

Paul Martin

In the next two weeks or three weeks.

Edwin Fowler - SmallCap Report

Thank you very much, Paul.

Operator

And our next question is a follow-up question from the line of Brian Kintslinger with Sidoti & Company.

Brian Kintslinger - Sidoti & Co.

Thanks. One follow-up, when I look at the telecom vertical, in two quarters it’s down 25% of run rate, and come down each in the last two quarters. Maybe if you could talk about what’s driving that? Is that going to continue? Is that just one customer? Is that either left or ended development projects? Any color would be helpful.

Jeff Davis

There’s going to be some lumpiness there I guess is the best way I’d describe it. We went from 18 to 14 from the first quarter to the tenth quarter. By the way, I think it’s less a function of it contracting in absolute dollars as much as maybe some of the other verticals picking up some steam around it, so that’s part of the effect there, but there’s also some lumpiness, and we’re renewing contracts right now with a couple of our major customers there and actually still in talks with those. So we think it’s going to continue to be a pretty healthy vertical for us. It’s a fairly underserved vertical, so that’s one of the things we like about it. I think it’s going to remain that way. We’re positioned pretty well in it.

Brian Kintslinger - Sidoti & Co.

So the $3 million drop was when you say lumpiness, is the result of just contracts ending and new works having to be found at customers and is that generally what you’re saying?

Jeff Davis

Yes, I think that’s right. I think with any of these industries, you’re going to see that from time to time where you’re exactly right, we’ve a couple of three large accounts in there. While we might have a dozen customers in that industry that typically a lot of the revenue is going to come from three or four large ones. Certainly, it’s cyclic in terms of their budgets. We certainly saw some budgets fall off near the end of the year that we understand right now. Some have already renewed, and the others we’re being told will this year.

Brian Kintslinger - Sidoti & Co.

One last question. I don’t know if you’re going to provide this, because I don’t know what size customer it is, but is Blue Cross Blue Shield collectively now a 10% customer? I guess I’m just trying to figure out. I think you mentioned you were in three different states, and so I’m just trying to get a sense for how much if you keep adding that those states we could add potentially?

Jeff Davis

We don’t look at it collectively. We look at them separately because they are in fact managed separately and fund it separately, but I’ll estimate for you, I’m certain that the three combined right now are not 10% and I don’t think they are going to grow to that level just because that I don’t think any one of them individually and even in aggregate, I mean I could I suppose if we end up with 10 of them, which is not impossible. The aggregate could end being 10% it’s possible.

Brian Kintslinger - Sidoti & Co.

Great, thanks so much.

Operator

And our next question is a follow-up question from the line of George Price with BB&T Capital Markets. Please proceed.

George Price - BB&T Capital Markets

Most of the questions have come out, but just had a couple. First, just obviously you’re sticking with China as your offshore platform, I was curious if you had thought to consider any India-based resources anymore depending on what the market is as kind of looking for and maybe comment a little bit on client comfort levels with China, I know pertaining some cases that there is sometimes less comfort with China than say with India. Just curious how you guys view that, what you are hearing?

Jeff Davis

So I’ll come back to the kind of China versus India comfort level thing, but so the answer is yes. We’re I think always looking at opportunities to expand and honestly hedge our offshore a little bit. We’re real happy with the results there. Wage inflation has been low. Attrition has been very good. We’ve got a good loyalty base there, particularly among our senior managers and senior leaders there. It’s been rock solid. It’s a great experience there. However, you’ve always got to keep an eye towards hedging everything I think if you can.

So I think it would be very interesting for us and I think quite a positive if we can get into India through an acquisition. We’re doing a little bit of work there now. We used to have just a recruiting office. I think we’ve got about 8 FTEs there. Now, that we’re doing a little bit offshore and of course that’s quite small in the big picture. We’re going to continue to build on that. I don’t think it’s going to be very material for us from the green fielding standpoint anytime soon, but yes, we’re looking at opportunities to acquire, much like we got the China offshore capability with the acquisition of the company called BoldTech that we did in the fourth-quarter or third-quarter of 2007 and we would do that again if we saw that opportunity.

But in terms of the comfort level for our customers, we are seeing, actually I’d say improvement there. Occasionally, some sort of a media hype around the at risk IP, which frankly I don’t think is any better in India than it is in China or anywhere else where you don’t have the legal reach. So, we’re seeing I think some easing of that (inaudible) concerned about it, particularly as we proven it more and have or building more and more references that we can leverage.

George Price - BB&T Capital Markets

I guess do you anticipate any material impact from any increased investments either in China or India to build those up excluding the impact obviously of an acquisition?

Jeff Davis

I don’t think so beyond what we did last year. We’ve maintained a pretty healthy pace of investment really since I want to say the end of ‘07 though ‘08, ‘09 and particularly if you look at it as a percent of revenue. So I don’t think you’re going to see much change. Our investment in healthcare is very self funding now. So we didn’t call it investment. I’d call it an up and running business unit that we’re just growing. So we’ll pick up where we dropped off investment there with financial services and some of these other areas. So as a percent of revenue I don’t see any big changes.

Paul Martin

One thing I’ll add on that. We’re going to do some capital investment associated with building out a bigger facility in China, but it’s $100 million and it’s CapEx, so it’s not a huge number.

George Price - BB&T Capital Markets

Just going back to the middle of last year, there was a little bit of a heightened concern around the economy that made the bookings a little sluggish, declines a little concerned on the outlook. Any impact or any sense that you’re getting from your client base now related to the (inaudible) leased and the higher oil price is resulting from that, is that something that’s weighing on anybody to any extent?

Jeff Davis

I think it’s early for us to know that. Honestly, I haven’t heard any of that, but that doesn’t mean there is no discussion of it. One thing I’ll tell you is, I can definitely state that we’ve observed over the last three years is that as each one of these scares comes about and there is some impact or not impact or it’s not dramatic or that the earth doesn’t stop spinning, I think like all the rest of us our clients get more and more adjusted to that, I guess, or immune to it.

So I think they are blocking out the noise more now than they were may be a year ago. That isn’t to say that there is no concern, I’m sure there is. We should all be concerned to some degree in terms of the impact on recovery. But we’re not seeing it yet. I have some optimism that we won’t at least like we did last year.

George Price - BB&T Capital Markets

And then just finally, did you give the average bill rate in the quarter and turnover? If you did I apologize, but if you could repeat them?

Jeff Davis

Build rate was 120 for US based employees. Paul, what was the total?

Paul Martin

The total was 104 up from 102 in the third-quarter.

Jeff Davis

And then attrition or turnover.

Paul Martin

The voluntary attrition was in the mid-20, so we saw some pick up this year as the economy picked backup, but we see that going down into 2011.

George Price - BB&T Capital Markets

I mean that’s a trend that we’ve seen that a number of companies, particularly, the offshore companies, have you been able to pick out any trends in terms of where the attrition is more of a problem, is it purely wage issue, is wage inflation something that you’ve factored into your profitability assumptions going forward?

Jeff Davis

So from an offshore standpoint, our attrition rates have been actually quite positive and better than in the US, so wage inflation is something that we’ve factored in for offshore. For the US, I am optimistic that we’ll be able to more than offset that by building out the pyramids, as I mentioned before.

One of the things that I think is important to understand about the attrition we’re seeing right now is that we had extremely low, abnormally low attrition in ‘08 and ‘09 in particular and the first part of last year. So I’d say much like our clients saw the pent-up demand. I think we had some pent-up desire to move on or change careers and change jobs that there we no opportunities to do so during the recession or less opportunities, so we’re seeing a pickup of that now that there are more opportunities. Honestly the folks where we’ve seen that mostly are not sort of our key employees.

I’ll say it that way, so we’re not terribly concerned about it. I think it’s a temporary effect. I think it’s actually literally cyclic and it has calmed down now as we’ve sort shed that pent-up desire and we’re seeing some evidence of that already this quarter. So I am not overly concerned about it, and I don’t think it’s really as much wage driven as it is time for a change. These are largely a young employee base. Attrition in this industry tends to run fairly high normally. I think Accenture’s normal voluntary efficient rate during healthy environment is about 25% and that’s a kind of what we’re seeing now, which is high for us, but would be about normal for them.

George Price - BB&T Capital Markets

Okay, great, thanks for taking the question.

Operator

Ladies and gentlemen this concludes the Q&A portion of the call. I’ll now turn the call back over to Mr. Jeff Davis for any closing remarks.

Jeff Davis

Thank you all for your time today. As you can tell, we are excited about the outlook for 2011 and beyond. I think Perficient is well on track to getting back to the performance we’re producing pre-recession, and we’ll look forward to speaking with all of you at the end of the quarter. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day, everyone.

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