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Perficient, Inc. (NASDAQ:PRFT)

Q3 2012 Earnings Conference Call

November 1, 2012 10:00 a.m. ET

Executives

Jeffrey Davis – President & CEO

Paul Martin – CFO

Analysts

Peter Heckmann – Avondale Partners

George Price – BB&T Capital Markets

Brian Kinstlinger – Sidoti & Company

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Perficient Earnings Conference Call. My name is Lisa and I’ll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Jeffrey Davis, President and Chief Executive Officer. Please proceed, sir.

Jeffrey Davis

Thank you. Good morning, everyone. With me today is Paul Martin, our CFO. I want to thank you for your time today. As is typical, we’ve got about 10 to 15 minutes of prepared comments, after which we’ll open the call up for questions. Before we proceed, Paul, would you please read the Safe Harbor statement?

Paul Martin

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

At times during this call, we will refer to adjusted EPS. Our earnings press release, including 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 website at, www.perficient.com. We have also posted a slide deck, which includes a reconciliation of certain non-GAAP goals to the most directly comparable financial measures prepared in accordance with GAAP on our website at, www.perficient.com under Investor Relations. Jeff?

Jeffrey Davis

Well, thanks, Paul and again good morning and thanks, everyone for joining, we appreciate your participation on the call. And by the way, I want to mention that I know that many of you on the call or listening to the replay were impacted by the recent storms, tremendous storms in the East Coast and somewhere and other and I want to thank you for taking the time to join us. If you are on live and I certainly want to wish all of you a quick recovery from those events.

We’re actually excited to share our third quarter 2012 results with you since – as we mentioned in the news release, it was another very solid quarter for the company. In fact, it represents the sixth consecutive revenue record quarter with top line growth of 25% year over year. Net income increased 48% and GAAP EPS, as well as adjusted EPS were records as well. ABR for North American employees increased to $130 an hour which is the highest we’ve realized in the company’s history and we believe opportunity remains to continue to increase the bill rates as I’ve mentioned in the past.

We’re not seeing downward pressure on rates, it’s more a matter of whether clients are spending or not and that’s been pretty positive lately as well. Utilization for those employees was at 81% which is at the lower end of our sustainable range, so there might be some room there for upside also.

We spoke about our continued success and progress in the healthcare vertical on our last call, the Q2 call. Our momentum there remains strong and intact and in fact, our visibility and recognition in the market continues to grow. Last quarter, we talked about Microsoft recognizing Perficient as the Healthcare Provider Partner of the Year. And last week, we were recognized by IBM as well specifically for our work with Premier Healthcare with their 2012 Integration Excellence and Business Analytics Partner Achievement Award. The healthcare pipeline is strong. In fact, our current opportunities in that vertical represent roughly three times the pipeline of the next largest industry which is financial services.

Our services bookings during the quarter in total were up 16% sequentially and are up 33% year to date through September. We closed 19 deals during the quarter over $0.5 million, that averaged $1.2 million each and that compares to 15 in the second quarter that averaged $885,000 and 13 in the third quarter of 2011 that averaged $1.4 million. So on a year-over-year basis, six more deals with the average being down slightly.

Q4 bookings started out well in October and we’re anxious to close out 2012 strongly. The pipeline is strong, the weighted pipeline is strong and we expect another nice bookings quarter here in the fourth quarter and preliminary glimpses of the first quarter look to be another significant opportunity to close business there as well similar to what we had this year.

After Paul shares financial details for the quarter, I’ll be back to share some more insight into our performance in the third quarter and our outlook for the fourth quarter. Paul?

Paul Martin

Thanks, Jeff. Total revenues for the third quarter of 2012 were $87.5 million, which represents a 25% increase over the year ago quarter. Services revenue for the third quarter of 2012, excluding reimbursable expenses, increased 22% to $75.9 million compared to the comparable prior-year period. Quarterly year-over-year organic growth was 5%. Services gross margin for the third quarter of 2012, excluding stock compensation and reimbursable expenses, increased to 36.5% from 35.9% in the third quarter of 2011, which continues our trend of year-over-year margin improvement.

SG&A expense increased to $17.7 million in the third quarter of 2012 from $13.8 million in the comparable prior-year quarter. SG&A as a percentage of revenue was 20.3% for the third quarter of 2012 compared to 19.7% for the third quarter of 2011 driven primarily by higher bonus expense, partially offset by improved economies of scales and other cost.

EBITDAS which is defined as earnings before interest, taxes, depreciation amortization and stock compensation for the third quarter of 2012 was $13.1 million or 14.9% of revenues compared to $11 million or 15.6% of revenues for the third quarter of 2011. The reduction as a percentage of revenue is driven by higher bonus expense. The third quarter of 2012 included amortization expense of $2.3 million compared to $2 million in the comparable prior-year quarter. This increase was associated with acquisitions completed in 2011 and 2012.

Net income increased 48% to $5.1 million for the third quarter of 2012 from $3.5 million in the third quarter of 2011. Diluted GAAP earnings per share increased to $0.16 a share for the third quarter of 2012 from $0.12 in the third quarter of 2011. Adjusted GAAP earnings per share increased to $0.26 a share for the third quarter of 2012 from $0.22 in the third quarter of 2011. As a reminder, adjusted GAAP EPS is defined as GAAP earnings per share plus amortization expense, non-cash stock compensation expense, transaction cost and fair value adjustments to contingent consideration net of related taxes divided by average fully diluted shares outstanding for the period.

Our effective tax for the third quarter of 2012 was 31% compared to 39.5% for the third quarter of 2011. During the third quarter and in conjunction with completion of the 2011 federal and state tax returns, the company and its advisors completed a research and development tax credit study for 2011.

As a result of the study, the company generated tax credits that were taken on its 2011 return. This tax credit is the primary driver of the reduction in the third quarter effective tax rate. The research and development tax credit expired on December 31, 2011. Congress has not passed legislation in 2012 to extend this tax credit. If such legislation becomes law and creates a tax benefit for 2012, the company will estimate and accrue the benefit of the research and development tax credit in the quarter it becomes law.

Our ending billable head count at September 30, 2012 was 1,575, including 1,364 billable consultants and 211 subcontractors. This includes the addition of 62 billable consultants and four subcontractors acquired as part of the Northridge acquisition which closed on July 1. Ending SG&A head count at September 30, 2012, was 288 which includes six employees added with the Northridge acquisition.

Now turning to the nine-month results, revenue for the nine months ended September 30, 2012 were $244 million, a 27% increase over the comparable period last year. Year to date services revenues for the nine months ended September 30, 2012, excluding reimbursable expenses, increased 25% to $214.8 million. This represents 8% year over year organic growth for the nine-month period.

Services gross margin for the nine months ended September 30, 2012, excluding stock compensation and reimbursable expenses, increased to 35.8% from 35% in the comparable prior-year period. SG&A expense increased to $49.1 million for the nine months ended September 30, 2012 from $38.3 million in the comparable prior-year period. SG&A as a percentage of revenue was 20.1% for the nine months ended September 30, 2012 compared to 19.9% for the nine months ended September 30, 2011. EBITDAS for the nine months ended September 30, 2012 was $35.6 million, or 14.6% of revenues compared to $28.3 million or 14.8% of revenues in the comparable prior-year period.

2012’s included amortization expense of $5.7 million compared to $4.7 million last year. This increase was associated with the 2011 and 2012 acquisitions. 2012’s included acquisition cost of $1.8 million related to the acquisitions of PointBridge, Nascent and Northridge compared to $1.2 million related to the acquisitions of Exervio and JCB in 2011. Net income for the nine months ended September 30, 2012 increased 46% to $11.7 million from $8 million in the nine months ended September 30, 2011. Diluted GAAP earnings per share increased to $0.38 from $0.28 in the prior-year period.

Adjusted GAAP earnings per share for the nine months ended September 30, 2012 was $0.69 a share which is up 21% from $0.57 in 2011. Our effective tax rate for the nine months September 30, 2012 was 38.1% compared to 41.2% for the comparable prior-year period. The decrease in the effective rate is primarily due to the research and development credit taken during the third quarter of 2012 which I discussed earlier.

We ended the quarter with $11.5 million in outstanding debt and $3.5 million in cash and cash equivalents. Our balance sheet continues to leave us well positioned to execute our strategic plan, including acquisitions and share repurchase. Our day sales outstanding on accounts receivable are 81 days at the end of the third quarter, which is consistent with the third quarter of 2011. We’re continuing our focus on reducing DSOs.

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

Jeffrey Davis

Thanks, Paul. Well, again a solid quarter and we’re really expecting another one in the fourth quarter. Obviously, the fourth quarter is one that’s traditionally impacted by seasonality which means that our guidance midpoint is down sequentially, but up year over year, and despite that, we’re actually looking at a strong Q4 and actually quite nice momentum headed into next year we believe. Anecdotal feedback from client checks as well as external data have us pretty optimistic right about 2013. Obviously, we have some unknowns out there, such as inputs or impacts from the political elections, fiscal policy decisions et cetera, but the broader IT spending climate from our perspective seems to be continuing to improve.

In fact, Morgan Stanley, a couple weeks ago, issued some findings from a survey of 150 CIOs, 100 in the U.S. and 50 in Europe that was quite bullish on the environment for 2013 IT services spend in the U.S. They projected more than 5% growth for U.S. IT budget spending pointing to above average optimism and a continued shift in CIO mindsets from cost cutting toward investing for growth, with analytics and big data, areas where we obviously have a lot of expertise really right in our wheelhouse as being key CIO focus areas and spending drivers. So that’s pointing to over 5% growth for next year from a study that pointed to about 3.5 or so percent growth for 2012, so they’re looking for what about a 30% – 20%, 30% improvement to IT spend in the United States for 2013.

Regarding M&A, it’s possible we could still execute one more deal this year as I mentioned on the last call, but given this late date, it’s more likely that will be early next year. We do have something in the works, but again, the actual close may slip into the early part of 2013. Above and beyond that, it’s still our intention and our goal to close another or add another $50 million of run rate revenue through acquisitions in 2013, again, that’s above and beyond the deal I am referring to right now. So obviously, we remain in active discussions with several firms.

And just to kind of wrap up where we are right now, again, top and bottom lines continue to grow nicely. We’re pleased with our progress and remain optimistic about the business going forward. And specifically regarding the fourth quarter and the full year, Perficient expect its fourth quarter 2012 services and software revenue, including reimbursed expenses, to be in the range of $81 million to $85 million comprised of $75.7 million to $79.3 million of revenue from services including reimbursed expenses and $5.3 million to $5.7 million of revenue from sales of software.

The midpoint of fourth quarter 2012 services revenue guidance represents growth of 18% over the fourth quarter of 2011 services revenue and the company is also nearing its full year 2012 revenue guidance to a range of $325 million to $329 million from the previously provided range of $317 million to $332 million. The company is also narrowing its full year adjusted GAAP earnings per share guidance to a range of $0.91 to $0.95 from the previously provided range of $0.90 to $0.96. So you can see the midpoint for overall revenue up slightly in this adjustment and the adjusted earnings per share consistent on the midpoint, the midpoint staying the same at $0.93.

So with that, operator, we’ll open the call for questions please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Peter Heckmann with Avondale Partners. Please proceed.

Peter Heckmann – Avondale Partners

Good morning, guys, good quarter.

Jeffrey Davis

Thanks, Pete.

Paul Martin

Thanks, Pete.

Peter Heckmann – Avondale Partners

When I look at kind of revenue by platform, pretty dramatic increase in work done with Microsoft year over year. Can you talk about how you’d characterize that, whether it’s specific to your SharePoint portal work or one specific vertical or is it just kind of how the quarter shook out?

Jeffrey Davis

Well, of course, a lot of that comes from the acquisitions we did which were focused in that area, but it’s really – in terms of the technology, it’s really two primary areas, one is definitely SharePoint which has been well received and there is lot of activity out there. We continue to see clients moving more and more, or leveraging more and more of that platform along with others. It’s interesting you actually see that coexisting with a lot of other maybe competing products now. But also actually we’re starting to see some nice traction with Office 365 and the cloud. So we’re one of the few partners that are leading the way with Microsoft on rolling that out and that’s certainly contributing to some of that improvement as well, but most of it is SharePoint.

Peter Heckmann – Avondale Partners

Okay. And could you go over those bookings numbers again, it’s – and just – I heard it late, it sounded like bookings in the third quarter were up 16%, was that year over year or was it...?

Jeffrey Davis

Yes, that’s year-over-year, and no, I am sorry, that’s sequential. I am sorry. And then year over year, what do we have, Paul?

Paul Martin

It’s up 33% year to date.

Jeffrey Davis

Yes. So we have year to date through September up 33% for the year. So as you recall, bookings were slightly down actually and even both sequentially and year over year in the second quarter, but they’ve rebounded back.

Paul Martin

It looks like they are up about 15% sequentially.

Jeffrey Davis

Okay 15%, not 16%.

Peter Heckmann – Avondale Partners

Okay, that’s great. And can you characterize across the verticals how that might have shifted out? You’ve seen a fair amount of discussion among some of the healthcare IT vendors about a little bit of a pause in decision-making, are you seeing the same thing in your healthcare practices and if so, it sounds like there is something else that’s more than offsetting it, and if you could talk about that as well?

Jeffrey Davis

Yes, yes and actually, we have seen that also but all the evidence and in fact, we’re close to those clients and we’re close to all of our clients, but specifically there we’ve got some consortiums that we work with and that’s – we’re seeing that but it’s temporary. And then, Paul, do you have what were some of the other moving forward verticals?

Paul Martin

Yes. So we saw growth in financial services, retail, computer electronics and high-tech and we actually, Pete, have a deck out on the – on our Investor Relations site that lays out the top 10 verticals by quarter.

Jeffrey Davis

Let me reiterate on the healthcare, like I said, while it’s slowed a little bit, the pipeline is really pretty incredible. We’ve closed around the – just the Premier relationship, we booked about $13 million in business year to date around that relationship and we’ve got about $29 million in pipe for 2013 that we have a lot of optimism a good chunk of that will close. And then year to date with Blue Cross Blue Shield, we’re up about 10% roughly year over year there as well. So healthcare remained strong, but I think it’s a little bit of a pause here, I suspect, somewhat related to the elections and somewhat related to just budgetary cycles. I mentioned this before where our first half, second half phenomenon seems to exist and I think it contributed to sort of slower bookings in the second quarter and then a rebound back here in the third quarter and again, we anticipate nice bookings in the fourth quarter.

Paul Martin

And Pete, when you look at our percentage of revenues by quarter, we did the Northridge acquisition at the beginning of Q3 which really didn’t have much out there, so that also contributed to healthcare going down as a percentage of our total.

Peter Heckmann – Avondale Partners

Okay. And just one clarification, if I have the numbers correctly, it looks like your head count, offshore head count is down year to date, is that a reallocation of priorities, a retention or just kind of that’s how the numbers shook out?

Jeffrey Davis

Yes – no, it’s not retention, it is actually a little bit of a shift of focus to India, but the down trend that you’re seeing is actually from a class of interns that we have – we do have an internship program in China, so we had a significant class of interns there, many of whom we didn’t – we elected not to keep on and actually drive our utilization a little higher in China, again, as we’re kind of focusing on building out India. So, the result of that is actually we have more revenue in China, so the utilization is actually up into the 80s, which is a little higher than we typically want to run there, but it was a conscious decision.

Peter Heckmann – Avondale Partners

Okay, that’s fair. I’ll get back in the queue. Thanks.

Jeffrey Davis

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of George Price with BB&T Capital Markets. Please proceed.

George Price – BB&T Capital Markets

Hi, good morning, guys and nice job. Just wanted to focus on one thing in terms of the margins, below – I think we were expecting in a couple of cases down a bit quarter over quarter and I think if I look back, Jeff, last year, it was more, they were kind of flattish, fairly comparable but gross margin seemed to drop a bit more on a quarter-over-quarter basis and took EBITDAS down on a quarter-over-quarter basis and I was wondering if you could kind of maybe go into a little bit more detail around what was driving that?

Jeffrey Davis

Yes, it’s actually, there is actually a really straightforward answer for that. So, our bonus plan is tied to adjusted earnings per share, which we actually manage to squeeze out a little more than we even anticipated, but it’s due to the tax rate effect that Paul covered in his script. So, taxes were down dramatically, that drove adjusted earnings per share up which caused us to take a much larger bonus accrual than normal. Overall, for the year, by the way, the bonus accrual isn’t enormous. I think we accrued about 40% here, a three fourths of the way through the year, but that’s really what drove that. If we had not had that effect in there, we probably would have taken, I think the effect was about $600,000 of additional bonus, a couple 100,000 of that was up in, up above the line and some of that was SG&A. So it affected both gross margin as well as EBITDAS.

George Price – BB&T Capital Markets

Okay. And from a bonus standpoint, is adjusted EPS the primary weighting, the only weighting, is there any weighting to organic services revenue growth for example or margin, one of the margin components?

Jeffrey Davis

Well, we allocate the bonus based on those factors, but we accrue the bonus based only on adjusted earnings. The reason for that is that we set the bar so high that we know that we’re not going to be accruing unless we’re driving top line growth. We run the company operationally efficiently, there is no more wiggle room there I would say. So it has to be through top line growth. And you may or may not recall last year, we had, it swung the other way, so we had an additional state income tax hit last year that impacted us or actually federal income tax hit that impacted us as well due to long-term travel. So it kind of swings both ways, that came out of the bonus pool, so some of those went into the bonus pool.

George Price – BB&T Capital Markets

Got you.

Paul Martin

George, from a margin perspective, if you pull out the increase in bonus, margins would be notionally about flat with Q3 of 2011.

George Price – BB&T Capital Markets

Got you, okay. And just in terms of 4Q, I think you talked a little bit about this, but you have typical seasonality, can you talk about – do you expect anything different to play out in that with those typical seasonal trends versus other years in 4Q?

Jeffrey Davis

Yes, I think it’s a little different than last year, because of the softer bookings at the end of Q2, I think that’s impacted our October. However, our revenue per billable day, which is really how we break it down that lowest common denominator, is actually on the rise. So I think that impact has sort of come and gone, it was primarily in October.

It did, in fact, impact obviously the guidance to some degree. In addition to that too, we added some additional caution around Hurricane Sandy, we had about a 100 to 125 people who are impacted either at client sites and as an example, we’ve got the large contingent at the State of Pennsylvania that’s been closed – that announced early on this week that they’re going to close all week long and a number of other people who either couldn’t get to their client site, some of whom were able to work remote, some were not and then again, in some cases, we had clients closed for anywhere from one day to the entire week.

So we’ve tried to bake some caution in around that. I honestly don’t think that’s going to be sort of a real material impact, it’s maybe – I would estimate between two tenths and five tenths of a percent of revenue but that’s baked in their too.

Paul Martin

And George, let me clarify one thing on the gross margins, I stated that incorrectly, there is about a 60 basis point impact on gross margins from bonuses, so they’re up 60 basis points, so year over-year absent the bonus, it would have been up 120.

Jeffrey Davis

Yes and for the year, just since we brought that back up, for the year, I am still showing about a 100 bp improvement on gross margins, that’s about 50 basis points below what I thought we would be, but that 50 basis points, to Paul’s point, is attributed to this additional bonus that wasn’t necessarily planed for. And then EBITDAS because of the bonus effects, I think will be flat year over year. I had hoped for another 100 bps there, but I think again mainly because of this bonus, it’s going to be closer to flat. EBITDA, not EBITDAS, EBITDA actually is up year over year as well.

George Price – BB&T Capital Markets

Okay. And Jeff, could you just go back through some of that impact in terms of employees? I guess the net of that with the hurricane because I would imagine some of the midsized firms out there depending on their particular exposure, we may hear more about this, but so I think you said 125 people on site, is that sort of everybody Northeast or was that, there is particular clients and then I think just to confirm you said, you thought that was only what 20 bp to 50 bp of growth, was that year over year for the fourth quarter or for the year?

Jeffrey Davis

Sequential – I am sorry, sequential for the fourth quarter.

George Price – BB&T Capital Markets

Okay.

Jeffrey Davis

Sequential for the fourth quarter, maybe a 20 bp to 50 bp impact and it’s about 125 employees – 125 to 150 employees that either live in that region or are working in that region. But, both of which are impacted and their ability to get to the job site, in some cases or of course, where have clients there and we have a number of clients in New York, New Jersey, Mid-Atlantic and North, that had various levels of impact. We’ve got one client, who has got 30 feet of water in their building, we have another client that shutdown for one day and was back in business on Tuesday. So we did the best we could to kind of pull everybody understand what the impact was but, obviously it’s imprecise at this point, so that’s why we came up with the 20 bps to 50 bps.

George Price – BB&T Capital Markets

Sure, sure. All right, fair enough. Let me just ask a couple more around demand kind of segueing off of that. I think it’s fair to say you’ve seen a rather mixed picture out of the broader tax base in the third quarter thus far, in many cases, many companies have indicated a noticeable pullback in client spending in September. You obviously saw a little bit of sluggishness earlier in the summer and it seems like that has – that you’ve rebounded off of that and things seem to be coming back.

I guess just given your focus with a lot of different technologies and the way your clients are spending on even, in some cases, beyond just you guys, like didn’t hear about what you’re seeing, what’s your take on the soft September tech trend and I guess any implications or risks you see as we go into the fourth quarter, I mean IBM is clearly a company you have a good relationship with, right, they are pretty good data point for exactly that?

Jeffrey Davis

Yes, now I agree and I can say clearly we pay attention to that and it has us thinking about it or concerned. It’s – right now, we’re not seeing the evidence of it. Now, that could change. We’ve started the quarter with decent bookings in October, so no big surprises there. We’ve obviously got to get through November, December. And December particularly should be a strong bookings month. So frankly, we’ll know more then.

Anecdotally, things do look quite positive, the pipeline is where it should be given the growth that we want. Our book-to-bill ratio year to date in total is about 1.08, 1.09 and again, as we look forward, look at the pipeline and our expected close, we run a report actually ad hoc that at least typically a couple of times a month that shows what our expected close bookings are based on a weighting methodology et cetera and it’s pretty accurate and it looks pretty good for the fourth quarter. And again, anecdotally, going into the first quarter, repeat of last year, we’re already in negotiations with clients about the renewals next year or continuing relationships next year, and the spend among most of those looks to be higher.

The Blue Cross Blue Shields, we don’t know yet what it’s going to be there, but I expect it to be flat or may be better. But this Premier channel, the overall channel in introducing a lot of new companies, new members into the pipeline, the pipeline as it stands today here on November 1 of 2012, our pipeline is already up to nearly $30 million in 2013, and that’s very early in the game and that compares to $13 million that we booked year to date in that channel.

So those things combine our traction in financial services and the efforts that we’ve made there to build out that vertical. As Paul mentioned, that’s one where we had some nice bookings and moved ahead of there in the quarter. All those things combined have us, I would say, cautiously optimistic and they caution comes from the things you noted, what our peers or competitors are saying, or our partners are saying, has us concerned but we are not seeing a dramatic impact yet. Again, that could change quickly but so far so good for us.

George Price – BB&T Capital Markets

And just real quick and then I’ll circle around, did you give, I am sorry if I missed it, but did you give a metric just in terms of the bookings in October, was there a growth number?

Jeffrey Davis

We don’t have it yet, we’ll actually be compiling that today, we don’t have it in yet, but I can’t even really speculate, it was a solid number.

George Price – BB&T Capital Markets

Okay.

Jeffrey Davis

Well over 20 million for bookings.

George Price – BB&T Capital Markets

Okay, all right. I’ll get back in the queue. Thanks very much.

Jeffrey Davis

Sure.

Operator

(Operator Instructions). Your next question comes from the line of Brian Kinstlinger with Sidoti & Company. Please proceed.

Brian Kinstlinger – Sidoti & Company

Hey, good morning, guys, how are you?

Jeffrey Davis

Hey, good morning, Brian. Good.

Paul Martin

Hi, Brian.

Brian Kinstlinger – Sidoti & Company

So the first question, you talked a little bit about healthcare, but it is down sequentially, if you use that percentage against services or total revenue for two quarters. So, I guess you said you have been talking to them and you think there is a huge pipeline, what do you think that drop in revenue sequentially for the last two quarters is related to?

Jeffrey Davis

I think, it’s a pause made primarily with a couple of clients. Actually, most of the decline, and Paul mentioned this, in both of those quarters is a function of dilution from the acquisitions we did that had no healthcare clients, that’s the primary driver.

Brian Kinstlinger – Sidoti & Company

We aren’t talking about total dollars though. Total dollars are actually down.

Paul Martin

Yes, as Jeff mentioned, I think there was a pause in a couple of accounts but again as we look at the pipeline, that is quite optimistic about how we’re going to go forward on that.

Brian Kinstlinger – Sidoti & Company

And do you think it anyway relates to the election? Is there any discussion around your customers about waiting to see election results or does that not relate to the type of projects right now you’re doing?

Jeffrey Davis

I don’t know that anyone is saying that, but there is no question that – I am sure it impacts it. Not that I don’t think – I don’t think they’re going to stop spending sort of no matter what happens. I think they are waiting to see where they need to apply their resources. So, yes, there is some discussion about it, but I think it’s intuitive as well that they are waiting right now to see which way the wind is going to blow. They are still going to spend money, they have to, but their priorities may shift.

Brian Kinstlinger – Sidoti & Company

Quickly, could you go over, utilization was down, I think you said there is room for upside there. Why was utilization down and I guess how many – I know you mentioned something about hedge adds from acquisitions. How many organic hedges did you add in that?

Jeffrey Davis

I’ll let Paul look that up, but I – on the utilization, we were at 81%, which is actually pretty healthy, that’s in the range that we try to run in. I would say Q2 and Q3, we like to be more towards mid-80s, but again 81% is a respectable number. Some of that has to do with adding the number of resources that we added through acquisitions applying frankly our processes and methodologies to those acquisitions, but I am not sure how much they had contributed to it or not, I don’t know if we’ve got that breakdown on the head count from organic...

Paul Martin

Yes, so we added 62 billable employees with the Northridge acquisition and we’re actually up 30 – it looks like 33 in total, so we’re actually down.

Jeffrey Davis

Yes, so we’re net down actually.

Brian Kinstlinger – Sidoti & Company

Is that from voluntary turnover, or involuntary turnover?

Jeffrey Davis

A combination and keep in mind that our bill rates are up $3 too, so we’re getting more growth from bill rate versus just head count.

Brian Kinstlinger – Sidoti & Company

Right, okay. And then if we look at Premier, it sounded to me that that you might be close to adding a couple of new customers. When I looked at your new customer list, I think I only saw one that was an existing customer, so maybe talk about where negotiations are with that consortium that you’re working with and maybe some of the newer hospitals that are entertaining your services?

Jeffrey Davis

Yes, and I confess, I am not as crisp on exactly where we are in negotiations with them but I know that where things are moving forward, with the group of four, I believe we just signed the third one of the four just a few couple of months ago, I think we talked about that. And the fourth is still there but beyond that, we’ve actually lined up a number of new names and I am looking at the pipeline that I alluded to earlier and there is about three new clients listed on this – in this pipeline above and beyond the three that we’re engaged with, of course, above and beyond Premier themselves.

Brian Kinstlinger – Sidoti & Company

Great. And looking at the NASCO partnership, I think you’ve only had it about for three months, maybe four months if I am not mistaken. You’ve done a lot of Blue Cross Blue Shield work prior to that. Is there anything changed since then, has this partnership sparked conversations with new blues, just maybe give us an update of what that’s done for you over the last few months, if anything?

Jeffrey Davis

Yes. No, I think it’s early actually for those entrees as we get closer to laying out the complete framework in details and actually begin some of the build-out of the services that we’re building for them for claims processing. That’s the point at which we’re going to have the opportunity to get a lot of entrees, to the 20 some odd Blues that use that service. So, I think that will come, Brian, more in the early half of, the early part of next year, sometime in the first half, maybe as early as the first quarter where we will be able to leverage that and get some new entrees there.

I think we’ve got nine Blue entities right now and I believe there is, like I said 20 some odds use NASCO. We won’t win all of those, but it will be an opportunity for us to go in there and do a lot of integration work for them to line up there services to the NASCO clearing house. And then, of course, once we’re in the door there, our track record has been very good and expanding beyond the specific opportunity.

Brian Kinstlinger – Sidoti & Company

Great. The last question I have is software, hardware seem to be higher than ever is, not overly important to your business, but I guess I am curious, was there anything that drove that September quarter and does it mean anything for the future of your business in terms of installing something that, that requires a lot more services around it?

Jeffrey Davis

Yes, I think it’s, I always think, there is not a 1 – a 1.0 or 1 for 1 correlation obviously to software. But it’s not a bad indicator either. Just because it’s up, doesn’t mean we’re going to see the kind of, what we saw 40% more software than we did in the prior quarter. I am not expecting services to jump back quickly that fast, but again it’s not a bad indicator, and we are pretty focused on the software, not for software as revenue but because the software we know leads us right into services and we’re leveraging that channel more than we have in the past. We’ve got some people focused on it that are producing these kinds of results. We’re also reselling a little more software, little more varieties of software than we did in the past adding some more from Oracle to our already strong IBM resale.

Brian Kinstlinger – Sidoti & Company

Great. Thanks, guys.

Jeffrey Davis

Thanks, Brain.

Operator

Your next question is a follow-up from the line of George Price. Please proceed, sir.

George Price – BB&T Capital Markets

Hi, thanks very much, guys. Just a couple of follow-ups, I think a lot of the questions have been asked, but Jeff, just in terms of uses of cash and you mentioned where you guys stand on M&A, the recent uptake and uncertainty, it’s not so much I guess from something like the elections which I think is hopefully will be a fairly temporarily event but maybe more of the uptick that we’ve seen recently and uncertainty around things like corporate earnings and just broader macroenvironment, does that make you anymore hesitant to either to do M&A at this point?

Jeffrey Davis

It doesn’t honestly, there are – we were talking to lot of quality firms that have solid backlogs and see the path forward much the way that we do that, again, I don’t want to come across naïve but I think – and this could change. But even if things weren’t as positive as we’d like, I don’t think there is going to be a – we don’t see a possibility right now for any kind of major contractions. So it really doesn’t, there is this quality deals out there. We like M&A, it’s benefited the business tremendously. We want to continue to do and the fact of the matter is too, to put it bluntly, if we did go into a contracting period, the business will generate a lot of cash as we’re collecting AR.

George Price – BB&T Capital Markets

And on the repurchase side, are you – do you intend to continue to repurchase shares?

Jeffrey Davis

Yes, we do. Right now, our – we had a 10b5 program that expired in the end of June and we’ll re-up that when we can, we’ve been in blackout since it expired, but as soon as we get an open window, we’re going to recreate that. We’re going to keep it, it will be more modest than maybe we’ve done in the past at the price levels we’ll going after, because, of course, we’re preserving cash and leaning more towards acquisitions. But we’re going to continue to keep out there and take advantage of any dips.

George Price – BB&T Capital Markets

Okay. And just you’ve talked also about – the larger average project sizes, that you’ve been booking over the last year helping you to build out bit more of a backlog in the business that structurally is inherently a shorter cycle business, and I guess could you give us your thoughts maybe on where that stands now, whether you feel, how much of a benefit do you see really coming from that as you stand ending this year maybe going into next year, just some additional thoughts or update on that?

Jeffrey Davis

Yes, that’s a good question, and I still fundamentally like our business and the project-based business, the rates are better, the margins are better and it’s work obviously to continue to rebuild that backlog but we’ve got a pretty decent track record of doing that and even just in a tepid macro environment. That said, we do have some long-term clients that are putting more and more pressure on us to enter into three and five-year agreements.

And honestly, George, there are number of customers that I believe we could do that with, but I think it comes at a price and we’ve been intentionally avoiding it. There are some relationships that because of the nature of the relationship and the sophistication of the buyer that we think we’ll be able to work out some agreements that are mutually beneficial that we will be doing that with more going forward. But I still fundamentally like to believe the project-based business.

And I’d want to reiterate to you, our recurring revenue is still in the 85% range. So 85% of our revenue this year is going to come from clients we served in the prior year or prior and obviously another, whatever 7% 8% this year, on top of that is coming from new customers. So it’s a – while you’ve got to work to get those deals closed, they are there and they do close and there is a long track record to that.

George Price – BB&T Capital Markets

Right, right. And last thing, Paul real, quick, I just – I saw broken out in the P&L that you had a little over a $100,000 in sort of what I’d consider kind of one-time acquisition related costs, was there anything else unusual on the cost side?

Paul Martin

No, the acquisition cost as you point out, we broke out, but there is nothing else unusual other than the tax rate which we’ve recovered as well.

George Price – BB&T Capital Markets

Right, right, right, okay, all right. And I guess just you would expect the tax rate at this point, all else being equal to revert back to roughly a 40% rate for the fourth quarter?

Paul Martin

Yes, so I need to make one point there, yes, so that is the case. If congress enacts and renews this R&D credit for 2012 then you would expect it to be below that.

George Price – BB&T Capital Markets

Right, got you. Okay, great, thanks.

Jeffrey Davis

Thanks, George.

Operator

There are no additional questions at this time. I would now like to turn the presentation back over to Mr. Jeffrey Davis.

Jeffrey Davis

All right. Well, thank you, all once again. And again, here we’re all thinking about you and for those of you who are impacted up there, wishing for a speedy recovery and looking forward to talking to you again in about a quarter. Thank you.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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