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Perficient, Inc. (NASDAQ:PRFT)

Q2 2008 Earnings Call

August 7, 2008 9:00 am ET

Executives

Jack McDonald – Chairman and Chief Executive Officer

Paul Martin – Chief Financial Officer

Jeff Davis – President and Chief Operating Officer

Analysts

Colin Gillis – Canaccord Adams Inc.

Peter Jacobson – Brean Murray & Co., Inc

Brian Kintslinger – Sidoti & Company

Tim Brown - Roth Capital Partners, LLC

John Maietta - Needham & Company

Wayne Change - Cannacord Adams Inc.

Operator

Welcome to the second quarter 2008 Perficient earnings conference call. (Operator Instruction) I would now turn the call over to Jack McDonald, Chairman and Chief Executive Officer.

Jack McDonald

With me on the phone today are Jeff Davis, our President and Chief Operating Officer; and Paul Martin, our Chief Financial Officer. I want to thank everybody to their time today. Paul, could you go ahead and read the Safe Harbor Statement?

Paul Martin

Some of the things we will discuss on today’s call concerning future company performance will be forward-looking statements within the meaning of the securities laws. Actual results may materially differ from those discussed in these forward-looking statements and we encourage you to refer to the additional information contained in our SEC filings concerning factors that could cause those results to be different than contemplated in today’s discussion.

In addition, our earnings press release including a reconciliation of certain non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with the general accepted accounting principals or GAAP. This is posted on our website at www.perficient.com under news and events. We have also posted a reconciliation of certain non-GAAP goals to the most directly comparable financial measures prepared in accordance with GAAP on our website at www.perficient.com under investor relations.

Jack McDonald

So with Perficient really logged a very solid Q2 particularly when you look at in the context of the macro economic environment. It is obvious there is slowdown out there, recession or whatever you want to call it. But notwithstanding that, we delivered in line at revenues and earnings and very strong cash flow. A part of that is our diversity across industries, technology platforms, and geographies and solutions areas helps us to mitigate risk and I think has us well positioned growing forward.

We continue to diversify client base and if we look at it, I think in the quarter single largest client was less than 5% of revenues. So, with scale through time the business has become more diversified on every front and that should put us really in an excellent position to re accelerate growth once the general economy recovers. But even in this period of a little of a slowdown we are still logging some very solid at numbers. If you look at the revenues and cash earnings per share were in line with expectations. Cash flows for the quarter were north of $40 million excluding stock comp if you look at it on an annualized basis.

Our balance sheet has never been stronger of $54 million in net current assets including as of today about $18 million in cash at the end of the second quarter about $20 million in cash of today. So, that equates to nearly $2 share in net current asset. You add that to our debt facility of the new debt facility which we put in place which is a $50 million facility when Accordion they expanded up $75 million. And really zero debt across the board here puts us in a very strong position to execute on either M&A or to buy back shares when the time is right. And I stress when. It is critical here for us to be patient, just like we were at the last time we went into an economic downturn.

Again, we do not see this one being anywhere as near as bad as the one that occurred after the dot com crash. But Perficient has proven that we are able to drive in difficult economic environments. This team has been running to business since we had a very few people. And I joined Perficient when we were eight folks. Jeff joined shortly thereafter. So, we know how to grow a business. We know how to manage a business through tough times and really come out in a stronger position.

On the other end of that and there is no reason for us to believe that this time will be in a different sale. We are going to focus on customers, and focus on cash flow, and focus on building a balance sheet. And we will look for smart opportunities that we can exploit. That may include buying back shares and probably will include that in the third quarter. And it may include executing on the rifle shot basis on M&A as we go forward here.

So with that, I am going to let Paul Martin walk through the details on the quarter and then Jeff Davis will have some additional commentary.

Paul Martin

Total revenues for the second quarter of 2008 were $59.1 million a 12% increased over the year ago quarter. Services revenues excluding reimbursable expenses were $53.6 million with organic growth of approximately minus 3% on a trailing four quarters average annualized basis, including businesses owned at least two quarters.

The sequential revenue growth in the second quarter compared to the first quarter was 4%. Gross margins for services excluding stock compensation reimbursed expenses for the second quarter were 38% which is down from 39.5% in the second quarter of 2007. The decline in gross margins is primarily the result of higher non reimbursable project related costs associated with businesses acquired in the second half of 2008 and a generally tougher economic environment. SG&A expenses were $11.6 million in the second quarter including $1.6 million of non cash stock compensation expense, excluding non cash stock compensation SG&A expense was $10 million compared to $8.9 million in the comparable 2007 quarter.

SG&A excluding stock compensation as a percentage of revenue was flat of 16.9% compared to 2007. EBITDA increased to $8.6 million compared to $8.2 million over the second quarter of 2007 with the current year absorbing $800,000 more of non cash stock compensation expense compared to the second quarter of 2007. EBITDA excluding stock compensation was $10.8 million, up 11.7% over the comparable prior year quarter. EBITDA margins excluding stock compensation were essentially flat at 18.3%.

Net income remained flat of $4 million for the second quarter of 2008 and 2007. This is our 28th consecutive quarter of positive net income. Diluted GAAP earnings per share remain the same at $0.13 a share. Non GAAP earnings per share was up 5% over the year ago quarter to $0.20 a share. Non GAAP EPS is defined as GAAP earnings per share plus non cash amortization expense in non cash stock compensation net of related taxes divided by average fully diluted shares of standing for the period.

For the full year of revenues were $116.4 million, a 13% increased over the comparable period last year. Year-to-date services revenues were $105.7 million for the six months ended June 30, 2008, an increase of 18% over the comparable prior year period. Services gross margin excluding reimburse expenses in stock compensation was 36.4% in the six months ended June 30, 2008 compared to 39.1% in the prior year.

The lower margins are primarily the result of lower utilization range in the first quarter that we discussed on the last call, higher non reimbursable project related costs primarily associated with businesses acquired in the second half of 2008, and a generally tougher economic environment.

SG&A expense was $22.3 million for the six months ended June 30, 2008 including $3.2 million of non cash stock compensation expense. Excluding non cash stock compensation, SG&A expenses were $19.1 million compared to $18 million in the comparable prior year period. SG&A excluding stock compensation has a percentage of revenue decrease a 16.4% compared to 17.5% in the comparable 2007 period. This decrease is primarily associated with the production and bonus related costs.

Net income was $7.1 million the six months ended June 30, 2008 with fully diluted earnings per share of $0.23, down $0.01 from the prior year. Non GAAP earnings per share in the first six months was up 6% over the year ago quarter to $0.37.

Our average billable headcount for the second quarter of 2008 was 1,150 including 1,007 billable consultants, and 143 subcontractors. In addition to the billable headcount, we currently have 173 SG&A personnel which results in a total colleague headcount of 1,323 as of June 30, 2008.

During the quarter, we completed a new $50 million credit facility with an Accordion feature that allows us to increase the facility to $75 million. The combination of this facility and cash on hand has the company well positioned to execute against our plans for acquisition and other necessary investments in delivering organic growth. We continue to generate strong operating cash flow that we are using to fund both internal growth and growth from acquisitions.

Our operating cash flows improve substantially over the comparable prior year period with resulted in ending the quarter with $18.3 million in cash and zero debt. Our day sales outstanding on accounts receivable was 75 days at the end of the quarter compared to 73 days at the end of the year. Our goal is to maintain DSOs between 70 and 75 days over time. We will continue our efforts in 2008 to maintain this metric within our stated goal.

And now, I will turn the call over to Jeff Davis for a little more commentary behind this metrics.

Jeff Davis

Well, as Jack mentioned earlier we do feel pretty good about the quarter’s results particularly in light of the overall sort of economic condition that we are working in. And while several industries are struggling our diversification continues to serve as well. In a couple of our key verticals, healthcare and energy remain strong and we believe poised for years of growth.

We also see opportunity in Telecom which I will talk about in a couple of minutes. As we anticipated on the Q1 call we were able to substantially improve utilization in the quarter. At 80% excluding subcontractors, we are right in the range that I consider ideal and sustainable. And I am optimistic in fact that we will sustain levels in excess of 80% through the remainder of the year.

We did not experience any meaningful deterioration in bill rates during the quarter and I am confident that will be able to maintain or modestly improve those rates throughout the rest of 2008. In addition to the diversity we have across industries, geographies and solutions areas, I think it is important to note that while we are continue to deepen all of our vendor relationships we are also broadening the revenue base for the platform perspective.

Our largest platform partner accounted for less than one quarter of revenues during the second quarter as compare to 41% last year. So, while our work around all platforms continues to grow in absolute dollars we have taken steps to broaden our capabilities.

Oracle related works, for example, over the last year this grown from 8% to 18% of revenues. It is healthy that Perficient now has the competency around most of the leading technology platforms and it is no longer disproportionally dependent on any one single vendor’s products. Our clients demand an agnostic partner who can work on their behalf to implement the most effective and relative technologies whatever they may be. I think over the course of the last few years that is what been able to assembly here Perficient and build.

We continue to presume win larger deals. During the second quarter, we sold 23 deals with expected services billings of over $500,000 each. That compares to 21 deals of that size in the first quarter and just eight in the fourth quarter. So again, we are feeling pretty good about the business despite the broader economic concerns.

As we talked about before, though, budgets and projects are still there but we are seeing them extended a bit. So the sales cycle is extended. Decision making processes are slower than they have been in the past. One of the things we discussed on the last call was our plan to begin making incremental investments into some key industry specific practices.

We spoke about our information of the business unit to specifically target opportunities in the healthcare industry. And healthcare is already our leading verticals we mentioned on the last call and it accounted for 20% of our revenues in the second quarter. Very diverse within that industry, but 20% of the total. Our healthcare team made solid progress in Q2 hiring additional subject matter experts and delivery personnel and working to establish internal goals over the short and long term.

I expect that we will begin seeing meaningful results of these initial efforts by the end of the year as the team continues to grow. As I eluded earlier another industry we are poised to make additional investment in is Telecom. We have already begun to establish a team focused on that vertical. During a second quarter, it was our third largest vertical at 12% revenues and we see considerable opportunity over the course of the next several years in that space.

In the intense competition for customers in that industry and the bundling of services internet, phone, television, rolled into one, not to mention the dynamic wireless side of that business is something we can really capitalize on. We have served three of the five top cable firms in the country over the last couple of years and have served more than 30 clients in the Telecom industry as a whole. That business is all about finding customers, serving them more efficiently than your competitors and retaining them by delivering better experiences. Those are areas where we have significant solutions expertise.

So we are hiring senior leaders in that space with industry experience. Salespeople with relationships, Big 5 delivery leaders and consultants, et cetera. Again, I expect we are going to see meaningful return on these investments going in the next year.

So in summary I think the key takeaway is that Perficient is an extremely well positioned business and that will remain the case regardless of external circumstances. That strength allows us to continue to plan for the long term and the best interest of business.

With that, I will turn it back over to Jack.

Jack McDonald

I want to talk a little bit about guidance for Q3 and then a few other comments and we will open it up for questions. In terms that the outlook as the press release indicated we currently expect third quarter revenue this includes services and software revenue and reimbursed expenses, of course as well to be in the range of approximately $56 million to $61 million. That will be comprised of roughly $55 million to $58 million of revenue from services including reimbursed expenses and $1.2 to $2.5 of revenue from sale to software.

So that guidance range of services revenue including reimbursed expenses represents services revenue growth of between 7% and 13% on a quarter-over-quarter basis in other words over the third quarter of 2007. Now, looked at sequentially that is basically a flat Q2 to Q3 sequential number. But again in this kind of environment with the top end on our revenue range at about $61 million. So, in this kind of environment I think it is a pretty good outlook.

We are still generating a ton of cash and I would note that it is a conservative we think a reasonable guidance range but backlog, for example, is meaningfully higher today than it was 90 days ago when you look at how that guidance is put together. So, I think that if you look at the business as Jeff talked about, more diversity bigger deals, steady bill rates, well positioned in key growth industries with a real world vertical strategy that I think is going to put us really in a great spot in terms of accelerating growth once the economy begins to recover a little bit here.

I think Perficient is very well positioned. And during any kind of slow down here again, still generating strong cash flow, focused on customers, building that balance sheet and as we did last time looking for good opportunities to deploy capital whether that is M&A or buy backs. On the buyback front before we get to the Q&A, I just want to address that for a minute. We announced a buyback back in March. The stock was at around $7.50 a share, give or take. Stock is obviously up significantly since then. We have been unable to buy during the last quarter due to blackouts around earnings and around M&A, but we do fully intend the execute against that in the third quarter. We have a $10 million authorization. We have room to buy it. We are not going to chase the stock, but we are going to look for good opportunities to buy when the price is right.

So, that concludes the formal part of our call this morning. And with that, I would like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question will come from Colin Gillis - Canaccord Adams Inc.

Colin Gillis – Canaccord Adams Inc.

Can you give us some color about what you are seeing in terms of the project’s size themselves? Larger deals are still getting broken free. Are you seeing fewer of the smaller one off type projects?

Jack McDonald

I would say that if you look at what we are seeing generally in terms of the market environment. It is really less a reduction of existing work. You are seeing some slower decision making cycles, and that is what is causing it to basically be more flattish here as opposed to growing. But as Jeff indicated and you still see some hot areas out there, healthcare, energy, and telecom are the ones, obviously, that he mentioned. And also, demand trends are going to be prone to a little bit of volatility in this kind of environment and if macro conditions were to worsen, obviously it would reflect that. If they, improve well, same thing. They should reflect it. I look at the business as Jeff indicated with the 23 deals above 500,000 in the second quarter up from 21 or so in the first quarter, up from eight in the fourth quarter.

So, you are seeing larger deals. You are continuing to see strong repeat revenue. You are seeing improving utilization here, so the business is being managed tightly and efficiently. And you are not seeing any deterioration in bill rates. And again, remember we have got this capacity now in China that is now gone level 5 certified as well as the European capacity. So, this is an environment where we should be able to deploy our offshore resources to good effect.

Colin Gillis – Canaccord Adams Inc.

What are your customers telling you in terms of their budgets for the full year? Are they just holding on to them tighter or are they getting cut?

Jack McDonald

No, I think and I will let Jeff give you his take on this, but again it is I had say holding on a little bit tighter. As I was just saying it is more a slower decision making cycle as oppose to a real reduction of existing work. And that is why you are seeing a flattening as opposed to a decline in revenues at least these in terms of what we are seeing right now. That is also why you are not seeing the kind of sequential growth that we would like to have. Jeff, you want to give your take on that.

Jeff Davis

Yes, I think that is right. You hit the nail on the head really. We are not seeing projects that are underway being canceled. We actually had more of that last year. Of course, that was M&A driven. But, we are not seeing that. We are seeing just as Jack said and I mentioned earlier. The decision cycles being dragged out of it. We have seen some budgets, I think reduce, some plans that some of our clients had to put in place that they are actually back away from and put on hold. But for the most part, that is not canceled outright. It is just more a matter of timing and I think the economy is going to drive a lot of that and I actually think that the economy does in fact stabilize or begin to improve and if you can give us some insight there, Collin, I had love to hear it. I actually think some of the stuff will be unleashed.

So, I think this is temporary, obviously and once there are signs of stability or improvement I actually think we will see a lot of opportunity.

Colin Gillis – Canaccord Adams Inc.

Is there a price level which you are ideally buying back stock or a cap price at which you would no longer be interested?

Jack McDonald

You know, we have gotten an authorization from the Board up to a certain price level which would not disclose. But, I see clearly where we are now. And frankly, even a good chunk higher than that. It is accretive and that is ultimately what we look at. We are not going to do a buyback to chase stock price or try the impact the stock price. It is about is this a good use to capital. Is it more accretive to buy back stock given the risk calculus? Is it more accretive to buy back stock then it is to do M&A? It clearly is here, and even at a decent premium from where we are here.

Operator

Your next question comes from Peter Jacobson - Brean Murray & Co. Inc.

Peter Jacobson – Brean Murray & Co., Inc.

Can you tell me what the financial services was as a percentage of total revenue?

Jack McDonald

Yes, that ran at about, I think, 9% in the second quarter and that is down from 18%.

Paul Martin

That is right from a year ago. It was 18%, so that has trended down, but we have seen as we talked about strength in healthcare, telecom, and energy have kind of picked up that slack.

Peter Jacobson – Brean Murray & Co., Inc.

Energy, was that the second largest? What share was that?

Paul Martin

The largest is healthcare at 20%; energy was about 13%; and telecom about 12%. Those are the top three.

Peter Jacobson – Brean Murray & Co., Inc.

And in terms of the delayed decisions, do you experience healthcare is being relatively recession resistant where you do not see the slowdowns as much? And also are the slowdowns some or have we concentrated in financial services or are they spread across your various sectors?

Jack McDonald

I think the answer in healthcare, I would say yes. And in my opinion and what we have seen is that it is much more insulated from the general economy. And certainly, a lot of the work that we are doing is legislated. That is a very dynamic fluid environment as you know. The legislation changed. Each state legislates their own. We work with a lot of companies that do a lot of state level, Medicare, Medicaid administration, things like that.

So, fortunately, we are still seeing a lot of opportunity there and see really far less signs of a slowdown. I would not say there is no indication but it is very different environment than the broader market. Financial service is certainly in areas slowdown. Retail, I think a bit. We do a little bit of work in retail and you are seeing some impact there. But I think, the other industries as we mentioned before, we are seeing extensions but just not a dramatic difference. Clearly, if there were no difference at all I think we had be still on our 15% organic growth rate, if not better. So, it is broader than just one or two segments but clearly financial services and things related to the whole housing meltdown as I mentioned retail to some degree are impacted by from what we can see.

Peter Jacobson – Brean Murray & Co., Inc.

You talked about the Oracle platform as a share of revenue, is the largest platform IBM? And if so, what percentage does that contribute?

Jack McDonald

It is IBM and it is just about 24% of revenue for the second quarter, again, in absolute dollars it is very similar to what it was a year ago and maybe even grown a little bit. But, about 24% of the total revenue for the second quarter.

Peter Jacobson – Brean Murray & Co., Inc.

Okay. And just to clarify, you talked about, I believe stabled bill rates but I thought in the former remarks you had indicated the bill rates did deteriorate in the quarter, can you clarify that?

Jack McDonald

I think we had considered it to be about flat. I think it was down $1 from 118 to 117 per employees. Paul?

Paul Martin

Yes, that is right. For all employees including China, it was down a dollar from 108 to 107 and excluding China, if one from 118 to 117. So, essentially flat down $1 or so.

Jack McDonald

At the same time just to provide some more context behind that, on a relative basis, we are doing about the same amount of fixed fee work that we have done now for a number of years. But the fixed fee work in the second quarter is up from the first quarter. The way to calculate bill rates using the fixed fee revenue is we calculate total hours against those projects into the revenue for that project. So the bill rate will sometimes be lower on fixed fee as people working overtime et cetera. Often in a timed material basis we do not necessarily bill for overtime. So, we kind of punish ourselves, I think, in that regard and that alone can drive a dollar or two variability in that rate. But in terms of client’s palette and willingness to pay, we are not just seeing enough of a shrinkage of demand, if you will, or a glut on supply where we are being impacted from a rate standpoint.

Peter Jacobson – Brean Murray & Co., Inc.

And then finally, you mentioned the 10 to 15% organic growth target. Is there some form of guidance or target for organic growth for 2008 on the table at this point?

Jack McDonald

Well, I think, we believe over the long haul that the business can grow 10 to 15% organically, obviously, we are in a recessionary environment or slowdown or whatever you want to call it. So, this is not the year we are going to be able to achieve that. What did we do $218 million last year and this includes impact of M&A and the numbers will approach $250 this year. So that is obviously not hitting that sort of organic growth target, but that is because we have got a recession going on out there and as Jeff indicated before with you, this is temporary we are focus on strengthening customer relationships building cash flow, building that balance sheet and we will be positioned to re accelerate growth as the economy recovers. And again, I really want to stress here, this is not a recently hired management team. We have grown this business from a startup. We grew it through one of the worse meltdown in tech and tech services in recorded human history post the dot com crash.

We know how to grow a business in a difficult environment. We know how to expand customer relationships. We know how to use that kind of an environment to do smart deals which brings us out much stronger on the other side and we will do that again here.

Operator

Your next question comes from Brian Kintslinger - Sidoti & Company.

Brian Kintslinger – Sidoti & Company

The first question I had was regarding the length of deals. You signed 23. Is that average length of the deal longer or shorter than maybe a year ago?

Jack McDonald

Brian, I think it is actually a little longer given that we are doing larger deals now. And they are inherently a little bit longer than a year ago, although, I would not say they are materially different. Again, if we look at the overall climate that we are operating again, in what I would say to you is, gosh, it is not hugely different. Again, if it was perfectly healthy like last year, we would probably be growing 10% to 15% as I mentioned before, but the big difference, again is just extended sales cycles. So, the nature of the deals, the deals themselves, the projects our clients are taking on are very similar with there doing last year, they are just taking longer to commit to them.

Brian Kintslinger - Sidoti & Company

It is a 23 deals. Is that more than last year because I am trying to reconcile delays with your signing more clients in each of the last two quarters? Or is it that those deals that are actually signing are taking longer to start and ramp up?

Jeff Davis

Paul, do you have those metrics? I will say this, maybe Paul while you research that. We are larger company than we were last year. So we are talking an absolute deal and number of deals. You would expect that we would be doing more of those than we did a year ago because we have a larger company to feed. There can be some difference just in that. But Paul, do we have the breakdown of the number of deals over $500,000 this year compared to the last year?

Paul Martin

Yes, actually on the historical when we were smaller we did it on deals over $100,000 and we have more probably 50% more deals over $100,000 this year than we did in to comparable quarter last year again as Jeff said a big piece of it is attributed to the acquisitions and the size we are today.

Brian Kintslinger - Sidoti & Company

Can you sort of take us through the revenue trends in Tier 1, Boltech and EPR was your last three acquisitions. Are they generally in line with the revenue rate you bought them or have they been deteriorating?

Jeff Davis

I would say they are in line to growing. Boltech is probably a little flatter but the Oracle space as we mentioned before has grown from 8% to 18% part of that is because of the acquisitions, but that business is an area where we continue to see demand really across all industries. Oracle and Siebel particularly in doing well for us. Tier 1 and EPR being Siebel focused are definitely flat and I would Boltech more flat but not deteriorating.

Brian Kintslinger - Sidoti & Company

You mentioned prudent investments in G&A and it sounds like that is telecom and some other industries. Can you talk about the magnitude in dollars that is going to take maybe in the back half of the year?

Jeff Davis

Yes, I think, I will not disclose the dollars because I do not have firm numbers. We are certainly making some investments there. And, if we did not do that we might be able to squeeze out another couple pennies of EPS this year. However, with Jack’s concurrence I firmly believe that it is an investment that is critical for our business. I think we are at a size now. We had a lot of questions about verticals in the past and I just do not think $150 million company, unless you are going to focus on one or two verticals and do that only and I really made sense for us. But now that we are approaching that $250 million level, we have got a wealth of expertise that we can really draw from in the number of industries and that is what we are doing. So yes, there is an investment there and again I cannot give you a total exact dollar amounts, but it is not insignificant. At the same time, I am confident it will pay off. And by the way, the way we have always built this business and our philosophy around making those kinds of investment is it is not build it and they will come. Okay. The guys that were hiring and bringing in the door right now are closing deals now and/or are billing deals now. So, we are not building a team and then we are going to send them out and launch them. As they come in the door they are working. So, the incremental side of that I think begins and again, as I said before we will see material incremental revenue I think from those more toward the end of this year. The beginning of nest year, but those folks are not sitting around now. They are delivering on the business today.

Brian Kintslinger – Sidoti & Company

Did you suggest G&A then in total dollar terms will be picking up in the second half of the year compared to where you were in the second quarter?

Jeff Davis

No, I do not expect that. Not from this. These are not all G&A rolls. It is a blend of G&A and delivery cost of sales, and I expect that is it going to be pretty well in line with our current mix today. Not to mention as I said we build these things incrementally. We are not going to go out and hire 50 people tomorrow. So, I think the materiality of those pulling on G&A or cost of sales is not going to be that great. I do not think you will see a significant difference because of that.

Brian Kintslinger - Sidoti & Company

Last question I have, you have discussed the economy. How does this change your acquisition strategy? What I mean by that is do you focus more on national presence firm versus local given the raising price side of what you were able to do in the past might be more difficult or do you need to focus more on offshore? Just give us a sense of what you will be looking at right now in your pipeline.

Jack McDonald

Yes, I think you do focus more on national practices than you do on local in this kind of environment. You focus on those areas that are still growing well even in a flatter economy. And you also bring an extra dose of caution to it and you do not rush it. And you make sure that you are getting a multiple that make sense. You may look at using a little bit more equity, maybe not. It depends, a little bit more skin in the game. You dial terms towards lower multiple more skin in the game. And again focus on national, focus on those areas that still look good in a flattish economy.

We have said this before. Our usual target is three to four deals a year; obviously, we are off that right now. It is going to be more rifle shot and we are not going to rush it. We are going to wait until there are good opportunities. I am not sure that pricing the private market has yet adjusted to a level that is attractive given the overall environment that we are in. And we said this multiple times before as you know, there is a log between public market evaluation adjustments in private market. And there is no reason to get ahead of that. You have got to wait for it to adjust and then you exploit that.

Operator

Your next question comes from Tim Brown - Roth Capital Partners, LLC.

Tim Brown – Roth Capital Partners, LLC

Jack, you made a comment that the backlog was actually higher today than it was 90 days ago. That the guidance here is basically for a flat quarter in Q3, and then I guess to me that suggests the activity that you are seen in a pipeline starting to weaken. Can you just give us a little bit of color there?

Jack McDonald

No, I would not say that it is starting to weaken, but at any give point in time when you take a snapshot for purposes of producing a forecast you have got a certain amount of that forecast that is in backlog and a certain amount in pipeline. And, you look at the way we have manage this business for eight/nine years here. It is always stronger when more of your forecast is in backlog than in pipeline. So, that is my point here. It is not an indication that pipeline is weakening. Repeat what we talked about earlier which is that slower economic environment or recession area economic environment, or whatever you want to call it. So, we are looking at a flattish situation as opposed to growth which is the reality that we are all living in.

Tim Brown – Roth Capital Partners, LLC

You could make an argument that then there is upside, but I do not think we are comfortable doing that. I think we have always tried to be conservative and so that we can hit expectations, set appropriate expectations and we are doing that here. It is as Jack said a function of those extended sales cycles that has us more conservative on the pipeline side. The pipeline and gross is large. Again, it is just a matter of certainty around the closing of those deals and the timing. Sorry, Jack.

Jack McDonald

I am sorry. I think that is absolutely right. It really depends on how you want to look at this. It is clear that we have got some kind of an economic slowdown going on out there, and now we are not falling out of bed. We are talking about a quarter that is flat, but hey, net expectations in the second quarter. And look, if you look at the top end of our guidance range it is basically where our consensus is or just shy of it for Q3. Great cash flows, record balance sheet, this is not, at least for us. This is not a 90 day game. Is not a 180 day game, we are in this for the long haul. We have been in it a long time. We are going to grow $500 million business here as we talked about. This is the company’s pretty well positioned. We will strike and exploit in a good market opportunities on the acquisition front. Any kind of slowdown you always have the advantage of squeezing out some of the weaker players. You are going to be building up some pent up demand and we will be off for the races here as things recover. In the meanwhile, you can count on us to be conservative in our outlook and make sure that we are delivering what we say we are going to deliver and to run the business in a prudent manner. Build that balance sheet, build those cash flows, but also make the right investments that you need to make to be well positioned for growth going forward.

Tim Brown – Roth Capital Partners, LLC

Okay, I do not know if I missed it but did you reiterate the $0.75 to $0.80 full year guidance.

Paul Martin

We did not specifically do that but yes, we are still got the $0.75 to $0.80 cash EPS guidance after which we are standing by as for the year.

Tim Brown - Roth Capital Partners, LLC

Okay and then just lastly, in terms of hiring, is that something where you are basically going through a hiring increase here, maybe you could just talk about the outlook for the second half and then maybe such on attrition as well.

Jeff Davis

No, there is not a hiring freeze. Obviously, we are hiring on an ongoing basis like you are balancing that against attrition to keep headcount at the appropriate level for market demand. I just mentioned earlier that we brought utilization up significantly in the second quarter and he and the team has a great job on that that is utilization are remained more than 80% for the rest of year. So, obviously we know how to do that. We are going to balance headcount versus demand that will mean that we are hiring and that you are also retreating out people both on a voluntary and in involuntary basis.

Attrition in the second quarter run and touched about 20% which we try to target 15% to 20% attrition. We have a little bit of attrition earlier in the second quarter frankly, because we have some headcount reductions in Q1. We get a little bit of a knock out on that in terms of voluntary attrition but I would say to you that that peak out in April and as you look at May and June and July, the attrition is now running back and that is 15% to 20% normal kind of target range that we shoot for. So, again that is the middle of the fairway for where we want to be bill rates, utilization, you look at the business across the board, it is where it should be with the obviously glaring exception of the growth side of it and that is being impacted by macroeconomic environment but it will come back.

Operator

Your next question comes from John Maietta of Needham & Company.

John Maietta - Needham & Company

Jack, as you build up these industry groups and telco and healthcare and wherever you may choose to build up a group in the future, could you talk about the hiring practices around that, just recruiting focuses. One of the things I can personally hear from public companies and private companies is that it is especially difficult to find good people today and if you can talk about how you are approaching this?

Jack McDonald

Yes, it is funny I think I wish I had tell you it is hard to find good people. We had good success though. There are a number of folks and I will tell where we are getting them from is the big guys and there are a number of folks and we have got good networks in place. We have not gone up the verticals before so there are people that we knew however new out there many of us in our past associations and experiences that now, we finally have the opportunity to bring over. But I think we offer a refreshing environment and culture honestly for a lot of these folks that are in the big five environment then whose challenges are to go sell $15 million outsourcing deals every year and that is not something we are on interested but that is not the game here and again, I think we are pretty attractive alternative.

Right now, we got more interest than résumés than we have opening for the verticals. And I mean these are long time industry focus, veterans, accentor type of or other big consulting folks with some industry background that we are really excited about. So far right now we are not seeing that issue.

John Maietta - Needham & Company

Okay, and then the second question I have was around Boltech. Have you been hiring some folks over there who has been able to throw more work? They allocate more work that the organization or just kind of status cope with March.

Jack McDonald

No, in China we have actually grown quite a lot. That is another thing were actually dollars do not necessary tell the whole story. While we have, as Jeff mentioned, we have leveled some of the staffing here. The US have actually expanded China from the time we did the acquisition by about 20% or 25% so I think we have had around 90, maybe 80 or 90 available folks there. Now, we have got about 110 and we are doing some training programs over there and in training those folks on some of the other technology platforms that we work with that they were not trained on before.

So, we are definitely making some investments there again incrementally like we do everything as I explained before. But certainly in China, we see a lot of current opportunity. We have got more projects in there now than they have when we did the acquisition and we still see obviously significant growth opportunity around that offering and like I said, there actually dollars do not necessarily always tell that expect. We will realize more benefits from that in the margins and again, I think there will be more towards the end of the year assuming we have some stability here in the economy.

Operator

Your next question comes from Wayne Chang - Cannacord Adams Inc.

Wayne Change - Cannacord Adams Inc.

Would you mind running through the utilization rate and just couple of the numbers you cited before for billable headcounts? So, I just can confirm it?

Paul Martin

Yes, so the utilization of 86% including subcontractors in Q2 up from 80% for the first quarter and with respect to headcounts, let me find those again here. Oh, yes, so we have 1150 total billable headcounts, 1,007 of those internal and a 143 subcontractors and a 173 SG&A personnel that come up to a total headcount of 1323.

Wayne Change - Cannacord Adams Inc.

Paul, you want to get the utilization ex subs?

Paul Martin

Yes, ex subs it was 84% in Q2 up from 77% in Q1.

Jack McDonald

Alright, so 84 ex subs which is the number we if normally told about 86 ex subs

Operator

Your next question is a follow-up from Brian Kintslinger - Sidoti & Company.

Brian Kintslinger - Sidoti & Company & Company

How many job openings do you have right now? You mentioned 50 last quarter so I am just curious if that is about the same or does it change at all?

Jeff Davis

Yes, we have got I would say about the same number. I do not have the absolute number in front of me Brian but the hiring front has not really changed. In fact, we maybe actually, we may have more openings than we have last quarter as we try to bring this back in line and we have done that now. So, we probably have more openings literally than we had at this time last quarter.

Brian Kintslinger - Sidoti & Company & Company

The final question, are you feeling comfortable with the utilization? What I mean temporarily, would you be thinking about increasing utilization while demand remains a little bit soft and then higher more just in time?

Jeff Davis

No, I do not think so Brian. I think as I mentioned before, that 83% to 85% and so we are right at 84 for this is employee only utilization is we are comfortable. I think that is sustainable. I think that is the right number. I think we could as I kind of alluded before, I think we did really pull back and try to maximize earnings and the result of that might be a couple of extra pennies this year but honestly, I think that is not the long term thing to do. I think we have got to, yes I will tell you that in terms of hiring and staffing right now, we are obviously focused on strategic hiring.

Those hires around these verticals more senior level leaders in the organization and we will keep the organization well rounded of course. We do not want to get top heavy but we are taking this opportunity to be more selective and hire probably more key resources versus maybe some of the folks here that more on the commodity onto the scale but honestly we are not looking to just squeeze every time we can out of the company at the potential detriment into future. So, I think we are doing the right things. They were balancing that well, that 84% is where I like to see it stay. I do not necessarily want to drive it up there more end risk, losing the opportunity to bring some key people in.

Operator

There are no further questions at this time.

Jack McDonald

Okay, well thank you everyone for your time this morning and again, we think the company is well positioned doing and really delivering solid results in this kind of an economic environment, making the right investments for future growth and strengthening that balance sheet and putting us in a position to exploit good opportunities on the buyback or the M&A side as when they arrive so again thank you very much for your time and we look forward to getting back together with you next quarter. Thank you.

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Source: Perficient, Inc. Q2 2008 Earnings Call Transcript
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