Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

John Lyon - Director of Investor Relations

Peter Altabef - CEO

John Harper - CFO

Analysts

Rod Bourgeois - Bernstein

Joseph Vafi - Jeffreys & Company

George Price - Stifel Nicolaus

James Kissane - Bear Stearns

Anurag Rana - Keybanc Capital

Perot Systems Corp. (PER) Q1 2008 Earnings Call April 29, 2008 10:15 AM ET

Operator

Good morning. Thank you very much for standing by and welcome to the Perot Systems first quarter 2008 Earnings Call. At this time, all participants are in a listen-only mode. And later we will conduct a question-and-answer session with instructions to be given at that time.

During the course of today's call, Perot Systems will be making forward-looking statements that contain risks and uncertainties. These statements are only predictions and actual results may vary materially. Perot Systems disclaims any intention or obligation to update forward-looking statements as a result of new information or otherwise. Please refer to the Perot Systems Form 10-K for the fiscal year ending December 31, 2007 for a listing of risk factors that could cause actual events or results to vary from those contained in the forward-looking statements.

Now I would like to turn the call over to John Lyon. Please go ahead, sir.

John Lyon

Good morning. Welcome to our first quarter earnings conference call. During our call today, Peter Altabef, our CEO, will review the performance of our major units and John Harper, our Chief Financial Officer will provide a review of our financial performance and forecast.

Before we get started, let me remind you that in addition to our press release, we placed a downloadable financial summary for your convenience analyzing our financial results at perotsystems.com. In addition, we will refer to three non-GAAP financial measures today.

The first is free cash flow which is a measure we use to assess the net cash production of our operations, including long-term and short-term capital. It is calculated as operating cash flow less capital expenditures. The second is pro forma revenue growth. This measure adds the first quarter 2007, pre-acquisition revenue for QSS, which we acquired at the end of January 2007. This provides for better year-to-year revenue comparability. And the third is organic revenue growth, a measure of our pre-acquisition revenue growth; it is calculated by taking total revenue growth less the revenue growth contribution from acquisitions completed in the past 12 months and comparing it to our first quarter 2007 pro forma revenue. The information necessary to calculate these measures is available on our earnings press release.

Once again, I want to thank you for joining us. And I'll turn the call over to Peter.

Peter Altabef

Thank you, John, and good morning, everyone. We started 2008 on a positive note. We reported strong year-to-year revenue, earnings and profit margin growth. We produced another solid quarter of contract wins with $399 million of total contract value signed and $1.3 billion of total bookings, including an important contract extension with Harvard Pilgrim Healthcare. And we continue to receive industry recognition for the breadth and quality of our solutions and client relationships.

Despite concerns of a weakening economy and issues in the credit markets, our business continues to perform well. We continue to win new business at a healthy pace and at the same time we are adding revenue, we are increasing the profitability of our existing contracts by delivers on key operating milestones and managing our cost structure. From a market perspective, we continue to see good long-term contract and short-term discretionary project opportunities which supports our cautiously optimistic stance on the market.

Within healthcare, we are seeing interest across our spectrum of services although our prospective clients appear to be very deliberate in their actions. Our community hospital and MEDITECH hosting sales pipelines are progressing. We are seeing a steady pace of revenue cycle outsourcing opportunities. A few opportunities with larger hospitals entered our sales pipeline during the quarter which supports our view that the large hospital market while slowed today holds significant future demand.

An important part of our 2008 revenue advancement will be the pace at which these sales opportunities close and begin to produce revenue. We believe the second half of the year holds the greatest potential for this to occur.

The cornerstone of our first quarter new contract signings is our new 13-year $1 billion contract with Harvard Pilgrim. This new contract extends and expands our prior contract through 2021, secures more of the work we perform for them under backlog and has us consolidating and leveraging functions that will result in approximately $150 million of administrative savings for our client. We're very pleased to have the opportunity to continue working with this premier organization for many years to come.

In addition to this major extension with Harvard Pilgrim, we won new healthcare business in the revenue cycle, physicians, community hospital and payer areas in the first quarter. The provider area of healthcare grew by 12% year-to-year. Keep in mind that the end of the Triad contract and the acquisition of JJWild essentially offset each other. Pressuring our healthcare revenue on year-to-year basis are the areas outside the provider market which decreased by 10%.

Let me provide you some perspective into the market factors behind our healthcare provider results. Within large hospitals, existing client outsourcing revenue continues to expand on increased project work and greater core outsourcing revenue while clinical initiatives have pulled back. Although the growth of this segment of the market is slow right now, the emergence of a few early sales opportunities with larger hospitals is encouraging.

Within the smaller hospital or community market, we are seeing IT outsourcing growth related to both new and existing clients. Clinical system related revenue for the community market grew by 45% year-to-year organically.

Within revenue cycle solutions, long-term outsourcing services are in greater demand today. When we first started this business, our revenue consisted entirely of project work which resulted in a more volatile growth trend. Today, almost one-half of this solution’s revenue comes from long-term engagements which provide our clients a recurring benefit and provide us with a recurring revenue foundation for building this business.

Revenue for our emerging physicians, government and international offerings while still small, is growing at a rapid pace. Our leadership position in the healthcare provider market continues to be reinforced by the rankings and awards we receive. In the 2007 Black Book of Outsourcing Healthcare Industry survey, issued in February 2008, we received the top ranking as the overall service provider, as well as the highest rated overall service provider in the infrastructure and applications outsourcing solution categories.

In addition, we had the top ranking in the following areas, innovation, deployment of best of breed technology, process improvement, trust and client relationships, client adaptability and customer care. This is very important recognition because it is based on input from our clients. As demonstrated by our clients' views, our ability to evolve with market needs, deliver on our commitments and help our clients to advance their business has and will continue to be important contributors to our market success and growth.

Our commercial areas within industry solutions grew by 18% on a year-to-year basis. This revenue expansion is coming from a mix of new sales within the manufacturing, consumer and life insurance industries and from broad based existing account expansion. Among mid-sized industrial and consumer companies there is a need for cost efficiencies and global delivery which has created a steady pace of sales opportunities.

Within life insurance, reducing administrative costs and new product time to market are important factors behind the growth we are producing. We see commercial deal flow continuing to be good over the course of 2008. And within this area, our product engineering group was rated number one engineering support firm and number one mechanical engineering firm in the 2007 Black Book of Outsourcing, again issued in February 2008. We have built a leadership position in this developing market that holds the potential to becoming a more substantial contributor to our growth as demand broadens.

Turing to our consulting and application solutions group, revenue grew by 18% year-to-year. Within this unit, we see three areas of strength. First, ERP related consulting and revenue and related systems integration services grew by 25% year-to-year. This market continues to be robust and looks to have further growth potential.

Second, within our India based applications operations, financial services continues to be a driver of our growth, up 22% year-to-year. We are seeing opportunities to provide an increased level of globally delivered application services to our clients as they work to reduce their cost of IT operations.

And third, the integration of globally delivered consulting and application solutions to our long-term outsourcing contracts continues to advance at a rapid pace, up 37% year-to-year. While application services was our first solution to operate in an onshore/offshore model, all of our solutions now follow this model. Today, approximately one-third of our infrastructure support is performed globally and our BPO services were built on a foundation of global delivery. Approximately 40% of our non-government headcount is located in low cost geographies.

For government services, we entered 2008 with recent contract wins boosting our rate of growth. For the first quarter, government services revenue grew by 41% year-to-year, 16% on a pro forma basis. Our new clients or new contracts with the Department of Education were the primary factor behind our pro forma civilian growth of 9%, while new business under our IHS-II contract vehicle helped our Department of Defense revenue grow by 23% on a pro forma basis.

Our analysis with Federal government services market leads us to believe that 2008 sales activity will consist mainly of smaller mission critical task orders rather than large scale programs and contracts. With the revenue we are adding from recent contract signings, a steady task order environment would position us for a good year of growth from this unit.

From a geographic expansion perspective, our acquisition of HighQ-IT for the manufacturing industry adds to our operations in Germany and expands our global SAP consulting capabilities. They are one of nine special expertise partners in the automotive industry to be globally certified by SAP and service both global and local clients, such as Audi, BMW, Daimler, General Motors, Europe/Opel, Glidemaster, OSRAM, Pari Medical and Siemens. With its steady business, strong reputation, high customer satisfaction and long-term relationships, HighQ-IT is a very good addition to our business.

Finally, our business model is positioned to succeed in a wide variety of economic conditions. We have an array of solutions that help clients reduce expense, implement new technologies and transition to new ways of conducting business. And our $8 billion backlog of future contracted business provides a stable foundation for our growth. Having 71% of our revenue coming from less cyclical industries helps protect our business from the volatility of certain economic cycles.

And with that, I would like to thank you for joining us today. And John Harper will now detail our financial performance.

John Harper

Thank you, Peter. Good morning, everyone. I want to thank you for joining us today. We began 2008 on a strong note. To summarize our performance, earnings per share grew by 21% year-to-year and came in at the top end of our range on stronger existing account profit with an industry solutions resulting from increased project work and cost containment.

Revenue increased by 15% year-to-year on a reported basis and 8% on an organic basis. Operating margin expanded by 70 basis points year-to-year to 6.5%. And free cash flow was $108 million on a trailing 12 month basis with quarterly free cash flow of $6 million. Keep in mind the first quarter free cash flow is our seasonally weak quarter because of the timing of annual payments such as incentive compensation and prepaid expenses.

Looking at the details of our financial performance, revenue grew by 15% year-to-year to $680 million. Before I walk you through the factors behind our year-to-year revenue growth, let me normalize our revenue comparisons for the acquisition of QSS.

At the end of January 2007, we acquired QSS. For the first quarter of 2007, we did not recognize the pre-acquisition January revenue which equaled $25 million. If you add this unconsolidated stock period to our first quarter 2007 revenue, you get a pro forma revenue of $615 million which makes for a more meaningful year-to-year revenue comparison. As compared to this pro forma revenue, first quarter 2008 revenue represents an 11% increase year-to-year.

There are four factors behind this growth. First, on a pro forma basis, government services revenue grew by 16% year-to-year, and they added 4 percentage points to our overall growth rate. Second, trailing 12 month new contract signings within industry solutions contributed 3 percentage points of growth. Third, the acquisition of JJWild contributed three points of growth. Fourth, consulting and application solutions grew by 18% year-to-year and contributed a net one point of growth.

With respect to our industry solutions accounts, revenue was essentially flat year-to-year as a result of the end of the Triad contract.

Excluding the effect of Triad termination, our industry solutions existing account revenues grew about 5% year-to-year. This growth primarily comes from expansion of our existing core outsourcing operations and winning new project work.

Very important is that our existing contracts within industry solutions were an important contributor to year-to-year earnings and margin growth. Existing account expansion is a positive sign that, one, our business continues to thrive in the time of economic uncertainty with increasing levels of project work. And two, we are delivering the contact efficiencies that increase earnings and margins.

Turning to a review of earnings and margins, we grew earnings per share about 21% year-to-year and expanded our operating margin by 70 basis point year-to-year we did this with the headwind of rebuilding incentive composition which pressured earnings per share and operating margin by $0.05 and 1.4 percentage points year-to-year respectively.

Our earnings growth and operating margin expansion came from industry solutions and consulting and application solutions. Pretax income for industry solutions grew about 44% year-to-year and the pretax margin increased by 1.4 percentage points. This increase came from contract profit improvements, project growth, new business, increased shared services utilization and cost management.

Pretax income for consulting and application solutions grew by 28% year-to-year, and the margin increased by 1.1 percentage points to 14.9%. Although we face currency pressure, related to our operations in India, new business growth, higher utilization helped to keep profits for this unit advancing at a healthy pace.

Profits government services were down slightly year-to-year as new contracts signs late in 2007 began to ramp causing some initial profit pressure. Traditionally our growth in government services came from professional services task orders with even profit over the life of the contract.

This year, our revenue growth is coming more from outsourcing contracts, consistent with the typical IT outsourcing economic model, these contracts guarantee the client savings on day one which creates profit pressure early in the contract, as cost efficiencies are gained, these should begin to provide an earnings benefit as we move into 2009.

Looking at the second quarter, we expect revenues to range from $680 million to $695 million. We will have sequential contributions to revenue, resulting from new sales within all three lines of business, but this will be partially offset pass through revenue in the first quarter that will not recur.

Earnings per share looks stable at first quarter levels, new sales while providing sequential revenue growth will not result in large movement to earnings immediately. We expect earnings per share to range from $0.22 to $0.24 for a second quarter.

Turning to our financial position, we ended the quarter with $201 million of cash. Please note that our cash is held in money market funds as we have a conservative investment policy and do not invest in auction-rate securities.

Free cash flow which is typically negative in the first quarter was a positive $6 million, and $108 million on a trailing 12-month basis. Capital requirements continue to be low. Capital expenditures as a percentage of revenue were 2.1% for the quarter although expect approximately 3.3% for the three year.

We will see a slight increase in capital expenditures in the second quarter as we expand our global delivery facilities and invest in tools that will help us to continue increasing productivity.

In the first quarter, our major cash investment with the continued repurchase of our stock. In the first quarter, we purchased 1.7 million shares of our Perot stock at an average price of $13.80 cents per share.

With the latest transactions, we have repurchased a total of $5.2 million shares over the past two quarters equal to approximately 4% of our common stock. To help facilitate future buyback activity, we offer as a new $75 million during the first quarter.

Overall, we started 2008 on a positive note. Our first quarter results demonstrate how far our business has advanced over the past year, and provide solid foundation for the future. I want to thank you for joining us today. And we will now answer your questions.

Question-And-Answer Session

Operator

This concludes the formal portion of the conference call a question-and-answer session will now be conducted. To ensure adequate time for all questions, we request that you please ask only one question with a brief follow-up if necessary.

Your first question is from Rod Bourgeois with Bernstein.

Rod Bourgeois - Bernstein

Hey, guys. I wanted to inquire about the margin trajectory for 2008. You made commentary about your margin outlook on the last earnings conference call, and I wondered if you could give us an update, and the specific question I have is, are you ahead or behind your internal plan for the 2008 margin progression, and if you can just re-explain what type of margin progression you are expecting throughout the year that would be helpful.

John Harper

Yeah. Thank you, Rod. We are right on plan, we standby the statement we made last quarter that we see operating margin improvement of 50 to 100 basis points of 2007 which puts 2008 in a 6.6 to 7.1 operating rate.

We expected to be ahead of 6.5 in the first quarter. We were at 6.5, we had to pass through revenue in the quarter that we noted in the formal remarks that actually ticked us down by about 10 basis points on margin. So we would have been right at 66 in the first quarter had it not been for that. We think we have the opportunity to increase margin sequentially as we move first quarter to second quarter, and I think we are right on plan.

Rod Bourgeois - Bernstein

Okay. Are you feeling equally comfortable with the low end of the 6.6 to 7.1, as you are with the high end of that range?

John Harper

Yeah. I won't give any color around that just to say that we feel comfortable that we will be within that range.

Rod Bourgeois - Bernstein

Okay. Alright. And Peter, I guess I wanted to ask you. You mentioned strong progress against contractual milestones and various award that Perot has won. And I guess what I wanted to inquire about is, does this suggest that you're very pleased with Perot's overall customer satisfaction and contract performance?

You won a number of large healthcare-related deals in recent years, and are you pleased with the customer satisfaction and performance on those contracts in aggregate at this point in time?

Peter Altabef

Thanks, Rod, and I appreciate your questions. You know customer satisfaction, it's hard to overstate how much we are now focused on that. And to say that I'm pleased with it, I have to tell you since we've got associates listening on the call, they are never going to hear me say I'm pleased with customer satisfaction, because there is something that we hit hard every single day, and I spend a lot of time with our clients actually asking them one-on-one about our client satisfaction.

So it's a work in progress. It's a work in progress for our entire industry. I think with respect to our industry, we do a good job on client satisfaction and we are focused on it. But it's an everyday effort, and I think in particular as you look at some of those awards and recognition that we received just in the last quarter, you see things that you don't normally associate with outsourcing companies, such as a focus on innovation, and I think that's something that ultimately will really inure to our benefit as we continue to increase client satisfaction.

Operator

The next question is from Joseph Vafi with Jeffreys & Company.

Joseph Vafi - Jeffreys & Company

Hi, gentlemen. Good morning, good results here today, maybe you could start just maybe a little bit more color on the Harvard Pilgrim renewal and expansion. As you look at that piece of business, is there any material kind of start up cost associated with that contract on the renewal or is it more of a just kind of business as usual there and keep the contract moving forward?

Peter Altabef

Thanks for the question. You know, Harvard Pilgrim is a long chapter in the Perot Systems' history books. It is a client that we are very, very proud of. And as you may remember, Joe, back in, I think late 2004, early 2005, we actually announced that we thought that overtime that account was going to go away because at that time there had been a decision by Harvard Pilgrim to make a strategic change in the way they were providing some of their services. We never left the field, always had a great relationship with them, which we kind of continued to provide guidance on, on these calls. And we kept saying, we are doing great work with these folks, we've got a great relationship, but they've made a decision on how to move forward.

Overtime, we kept slugging it and slugging it and slugging it, and I think overtime this kind of show the best of Perot Systems, because that relationship stays. And so now we have kind of regained that with a new 13-year $1 billion contract. So it's a testament to our team to go back to the client satisfaction question, from Rod earlier, client satisfaction and Harvard Pilgrim has always been high, and it has kept us there and allowed us to move forward along with the value proposition that really shows dramatic cost savings for them going forward.

With the new relationship there is some short-term investment that we are making with Harvard Pilgrim, but it is must. But it does exist and it is one of the things that we put on the table with Harvard pilgrim. I'll let John follow-up on that.

John Harper

No. That’s right. Peter hit a run on me. It's a internal terms large contract, it's a modest up front investment and it's a great contract with good profitability and we are very excited about the renewal and just solidifying that relationship.

Joseph Vafi - Jeffreys & Company

Okay. And then maybe a follow-up on the healthcare market. I know in your commentary you stated that the provider side grew 12% but on the other piece of the healthcare market contracted a little bit, maybe a little color as to what was going on and what kind of trend we might expect in those segment of the healthcare business?

John Harper

Right. In that side, contraction was really in the payer business, and it was really with respect to specific project work, that just wound down on payer projects. And I think we feel actually pretty good on the payer business going forward. It was really something that frankly was not a surprise but something that those were just projects that were winding down. The sales pipeline in our payer business looks okay.

Operator

Your next question comes from George Price with Stifel Nicolaus.

George Price - Stifel Nicolaus

Hi. Thanks very much. Some good numbers. Just wanted to dig into the second quarter revenue guidance, which looks a little bit late versus what I was expecting, what consensus was expecting, puts it up at the top end of that range. If you could comment on a couple of things related to that. One, what is driving, what will visually be the year-over-year deceleration and then specifically, what kind of government growth would you expect to see in the second quarter and what kind of implications does that have for the, how the commercial businesses will grow next quarter?

John Harper

Okay. In terms of the second quarter guidance, keep in mind that we were a little ahead of plan on the first quarter, some of that were related to some of the pass through revenues that we talked about. We think we are going to make nice progress going in to the second quarter. We plan to add about 17 million of new sales as we move in to the second quarter. But we don't see material increases. But we think that we are off to a very good start in the first quarter and that's driving, that's why some of the sequential movement from Q1 to Q2 doesn't look as large, that coupled with the fact that we did have some pass through revenue in the first quarter that won’t occur. What was the second part of your question?

George Price - Stifel Nicolaus

Well, I wasn't so much looking at it as a quarter-over-quarter, but more of a year-over-year in comparison. What do you expect in terms of government growth in the second quarter? As Department of Education and other business that you’ve signed, is that going to ramp? I would imagine with the pass throughs, we are not going to see quite the same growth in second quarter as first but what do you expect?

John Harper

There will be added revenue from the ramp. We are going to add $4 million of revenue from the ramp of the Department of Education contract but that will be roughly offset by some of the loss of the pass through. So, I think that on a sequential basis it will be relatively flat.

George Price - Stifel Nicolaus

Okay. But on a year-over-year basis, are we going to see double digit internal growth again on the government side?

John Harper

I think I wouldn't go double digit but I do think it will be a nice year of growth for us year-over-year. But I don't think, I mean I'm not ready to talk about double digit growth and I don’t want to give full year guidance certainly. We would want to try and stick to the second quarter. But it will be a good year of growth for us, some of the light stuff that we did in 2007 sets that up. As Peter noted in his remarks, 2008 sales will be more about mission critical task orders as opposed to large program movement like we saw late in 2007.

George Price - Stifel Nicolaus

Last thing at the end of 2008, I think you gave an indication of expecting a run rate of $2.9 billion by the end of ‘08, just to Peter's comments in terms of the progression through the year, are you still comfortable with that?

John Harper

Well, keep in mind what we did at the start of the year was just try to frame what the year will look like. Remember, we talked about 2008, I think we were pretty clear that our biggest challenge in 2008 would be revenue with the loss of Triad. If you look at Triad, we had roughly $134 million of revenue in 2007 that will recur. If you look at the midpoint of our Q2 guidance, we are adding about $30 million additional revenue, past Q2, the level of revenue expansion is really driven by new sale. As Peter noted, we do have good opportunities in the pipeline and again, I don't want to give full year guidance. We will try to give you good visibility in to the second quarter but I hope that helps.

Peter Altabef

This is Peter. I guess what you're seeing from us, in my discussion about the growth in the pipeline, as I look at our current pipeline, both in healthcare and really across the board, I think we have as many deals in the works as I can ever remember. And the pipeline is as full of deals as I can remember but they are uniformly in the small to medium size rank. They are not the very large contracts that you would have expected in the marketplace in, have one or two really big deals out there. Now interestingly, in the healthcare space, you’ve got a couple of deals with larger hospital systems starting up relatively early stage, still at a modest size but with the larger hospitals. So I think what you're sensing from John and I is going out in to the second half of the year and that new sales pipeline, there are a lot of deals there. We feel very confident we are going to win our fair share. The question will be at the end of the year when you add them all up without having in the strong pipeline a mega deal, it's harder to be really bullish that you're going to get that strong injection of a revenue boost sometime in the back half of the year. And that's what we will have to see. But in terms of the number of deals and the quality of deals, I'm very happy with that. But I wish I saw a few of those really big deals out there and right now I don't see them.

Operator

The next question is from James Kissane with Bear Stearns.

James Kissane - Bear Stearns

Yeah. Hey there, just following up on that. What’s driving some of the larger hospitals now consider outsourcing or maybe shifting from the provider that they have today. Because it seem like over the past few conference calls you seem more excited about the smaller hospitals and now you are seeing maybe some pick up on the pipeline with bigger hospitals.

John Harper

Right. And as you can see from our data on the smaller hospital side our revenue grew year-to-year 45%. So I think you are seeing that. We really shifted focus about two years ago now, in terms of looking at our healthcare business and saying that look, that large provider business has always been our bread and butter. We are the undisputed leader in the business, we’ve got the largest market share. But at the same time, how many more deals were we looking at going in to the future. And there is a question mark. So we spent a lot of time in the last two years building up our community business, our revenue cycle business, our physicians business, now our international business. And so we have a lot more legs to the stool if you will than we had before, all of those other legs are growing at a nice pace. So we are very excited about our mix of business right now.

The larges system provider is the one area where over the past year you’ve seen me being hesitant and the sales are hesitant and I think they are going to continue to be hesitant for a while. Is that because of the election year cycle? I am not sure. The one interesting thing as I look at our existing large hospital companies for insight into that, is that the project work that we have across the board is actually growing inside our existing large projects. So I think, there is still a lot of work to be done but specifically around the clinical part of that business where you see a lot of clinical business growing in the community hospital right now. You are seeing a slowdown in that clinical side of the big hospitals. And I think to some extent, they are a bit cash crunched, and I think that they are holding off right now.

And so it will be interesting to see how that market develops. But it's, as I said earlier, an interesting market, I have no doubt that we are extraordinarily competitive at that marketplace. This is not a question of us losing deals to other companies. It is simply a question of when do those deals mature. And I think it's still a little while before they mature.

James Kissane - Bear Stearns

And just a question on the acquisition pipeline and maybe your appetite to do deal term in this environment?

Peter Altabef

Jim, as you know, we announced the small German deal so we are pleased with that, we are pleased with that on two fronts. One is that it expands our European footprint and two, puts us in a very, it bolsters our position at very hot SAP space. You will see us within a relatively short time frame talk about another European acquisition. We're not ready to announce anything yet but we are looking at that. We continue to look at the healthcare market very aggressively. So we continue to have an appetite for M&A and we will continue to scan the market for great transactions that bolster us strategically.

James Kissane - Bear Stearns

And John, I am not sure if you mentioned the FX impact related to Rupee. Could you give that?

John Harper

Yes. Year-over-year, it was about, a little over two million of pressures, sequentially, a relatively immaterial impact.

James Kissane - Bear Stearns

Thank you.

John Harper

Thank you.

Operator

The next question is from Anurag Rana with Keybanc Capital.

Anurag Rana - Keybanc Capital

Good morning, everyone. Good job on the margins. Just wanted to get an idea, we saw no sequential growth in the consulting and application solutions during the quarter. Last year this growth was around 6%. Could you please give us some idea about discretionary spending in your customer base and any comments regarding project delays or slowdown from your customers at this point? Thank you.

John Harper

Thank you for the question. They did grow, as we noted they grew 18 % year-over-year. That business model has changed a lot over the last four years since we bought that JV. When we bought it, it was a lot about general application services and staff augmentation, and that portion of that business has continued to decline. Now the majority of that revenue comes from differentiated solutions and it’s growing nicely. In terms of sequential growth, they had a very much stronger than expected fourth quarter, and I think the first quarter was pretty much in line with the fourth quarter but still very nice growth year-over-year.

Peter Altabef

And our low cost, if you will, teams which obviously include the applications teams as well as the BPO and others, continue to progress. As in my remarks, one of the things I mentioned was that if you exclude the team and the company that is dedicated to U.S. government services, outside of that team, our low cost geography team now represents 40% of our total head count. And so, I think we’ve actually made a lot of progress there. But as John mentions, the mix is changing. The less differentiated services, the more staff supplementation services is really more of an older model, and the growth you're seeing from us is really a switching out towards more differentiated services and a more differentiated model.

Anurag Rana - Keybanc Capital

Great, thanks. And could you also give us the total head count, offshore head count and the government head count, please?

Peter Altabef

The total offshore head count or lower cost head count, year on year from went from roughly 6,600, to 7,800, or a 14% growth. On government head count, we now have about 3,300 folks.

Operator

Your last question comes from George Price with Stifel Nicolaus.

John Harper

How are you doing?

George Price - Stifel Nicolaus

Thanks for letting me sneak in one or two more. If maybe you could comment on what you expect the acquisitions to contribute in the second quarter and for the year?

Peter Altabef

And I could speak a bit before John gives you the more quantitative analysis. From a strategic stand point our acquisition profile is pretty consistent. We are looking for deals in the health care space on a global basis that will strengthen our team as we continue to be a market leader both in North America and now expect to be a market leader on a global basis in healthcare. And then secondly, I would like to see us begin to increase our non North American revenue strength. But we do not expect to do that by an acquisition or series of acquisitions that we don't feel would be easy to integrate or assimilate into the company. And so we are being very deliberate, very careful about that and I would say that the acquisitions that you are seeing from us, such as the HighQ-IT, German company are kind of in the mold of what we are doing.

These are high quality, but relatively small acquisitions we think will integrate with our existing, in that case European and German teams, and we think that will continue to bolster our revenue from offshore. But that's going to be, these are, seize is the wrong word, but these are not large acquisitions. We expect them to take those acquisitions and to combine those with our existing teams and enhance our organic growth in terms of our offshore team. That's really what is going on here. We do have another acquisition that we are in late stage discussions. We have not yet signed a definitive agreement with it. So it's not over until it's over. We are hopeful that that will happen in the next several weeks. But again it's going to be a similar mold to the German acquisition, relatively small, very high quality.

John Harper

In terms of the size, the German acquisition is, HighQ-IT is roughly $25 million annual run rate that will close sometime in May, so you can do the math on that one. The other European acquisition we are talking about is slightly smaller than that. And it should, it won’t have a material impact on the second quarter but it should close within the second quarter.

Peter Altabef

And from a profitability standpoint we expect the HighQ-IT to be not material in 2008 and modestly accretive in 2009. Which is another thing I want to focus on as we do these acquisitions we are being careful that we are doing these acquisitions we think on a compelling financial basis as well.

George Price - Stifel Nicolaus

What about JJWild? Two questions on JJWild. One the revenue declined quarter-over-quarter, is that a seasonal trend and then what should we expect going forward or at least in the second quarter?

Peter Altabef

A couple of things on JJWild. First of all, it is a piece now of a bigger puzzle for us. So that it is now embedding into that community sales effort and it is doing things that it did not do before. So there is a substantial part of that pipeline now that is coming from community hospitals and those leads are coming in large part from the JJWild relationships but that will ultimately result in revenue that is more outsourcing, infrastructure than they did before which was not infrastructure based.

And the second issue around JJWild, I’ll let John speak to this is, there was a pretty sizeable element of simply hardware sales in there and hardware implementation and that is fairly variable and I don't know if seasonable is the right word but I would say that it's fairly variable. And then, I will let John answer the specific issue around the numbers.

John Harper

Yeah. And I think Peter hit it. The downturn was a little bit of timing around some of the hardware and configuration business. The good news is that’s by far the lowest margin piece of that business. The consulting area of that business which is by far most profitable, grew by 38%. So we still feel very good about it. As Peter said, it's really the linchpin for our community market, which is doing very well and we are very pleased.

Operator

This ends the Q&A portion of the call. Peter Altabef will now make his closing remarks.

Peter Altabef

I would like to thank everyone for attending the call. As always, we want to be responsive to you. I’d recommend to everyone who has not already done it to please take a look at our investor relations web site where we have, I hope a very helpful two page downloadable there that will provide some additional information for you and look forward to speaking with everyone on our next call. Thank you very much.

Operator

Ladies and Gentlemen, thank you for participating in today’s Perot Systems first quarter 2008 conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Perot Systems Corp. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts