Perficient, Inc.
Q1 2017 Earnings Call Transcript

Published: 6 May 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Perficient First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. President and CEO, Jeff Davis. Sir, you may begin.

[Jeffrey Davis:]

Thank you. This is Jeff Davis and with me on the call today is Paul Martin, our CFO. I want to thank you all for your time this morning. As typical, we have about 10 to 15 minutes of prepared comments, after which, we will open the call up for questions. Paul, would you please read the Safe Harbor statement.

[Paul Martin:]

Thanks Jeff and good morning everyone. Some of the things we will discuss in today's call concerning future company performance will be forward-looking statements within the meaning of the securities laws. Actual results may materially differ from those discussed in these forward-looking statements and we encourage you to review 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 includes a reconciliation of certain non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with generally accepted accounting principles, or GAAP, and this is posted on our website at 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 compared in accordance with GAAP on our website under Investor Relations. Jeff?

[Jeffrey Davis:]

Thanks Paul. Once again, good morning and thanks for joining us as we discuss our first quarter results with you today. Momentum built as the first quarter progressed. 2017 is off to a solid start and ramping. Our revenue and earnings expectations for the year remain intact. As we mentioned on the Q4 call just a couple of months ago, we're focused on several strategic and tactical initiatives we believe will drive margin expansion to the levels we previously delivered. Those results have begun to materialize and will be reflected in our Q2 results when we report in early August. I'm sure you saw in the news release that in addition to the quarterly revenue guidance, we provided historically, we'll now be issuing quarterly earnings guidance to provide the market with a better sense of how our revenue will flow through the earnings in any given quarter. As you can see in the Q2 guidance that we're projecting a strong uptick in Q2. Services margins during the quarter -- Q1 were 36.1%, consistent with similar period performance for several years. Importantly, we're expecting a 200-plus basis point increase to EBITDA in the second quarter and similar margin expansion in the second half of the year. One of the factors that will drive improved margins is growing ABR. North American ABR was up 1% during the quarter and we expect we can drive rates 3% higher by the end of the year, which should translate into a 2% increase for the full year. Entering the year, we adjusted our sales plan to incent this behavior and we're seeing in the results. There are a lot of positives right now as we move further into 2017. First, our pipeline is very strong and pipeline is up almost 20% year-over-year. And more importantly, our high probability weighted pipeline is up nearly 30% from a year ago this time. Our brand and reach is building and we're now in conversations and deals we've rarely been in. Across the Board, we're pursuing more business than ever before. You recall just over a year ago, we formally launched our new brand and agency, Perficient Digital. Our work there is routinely winning awards and we're now competing for and winning opportunities we otherwise wouldn't have. I mentioned that strong weighted pipeline earlier and we expect soon to close a new multi-year deal near $10 million annually, much of which hinges primarily around agency of record status with a large healthcare provider. And there are other multimillion-dollar opportunities in the pipeline as well. We continue to build the strength and partner relationship with the world's leading and emerging technology vendors. During the quarter, Adobe elevated Perficient to its premier partners here, one of just six firms globally recognized with that designation. We're really quite bullish on the opportunities we have with Adobe and around that platform. We spoke last call about the advantages we possess when it comes to H-1B reform. And now with more definition there, we remain confident we're well positioned on a relative basis against many of our competitors. In fact, you may have seen one of the offshore firms earlier this week, their news -- or their announcement that they will attempt to hire 10,000 U.S. workers in the next several years. That's easier said than done, of course. And while our competitors scramble to adjust to the new regulations, we're able to focus on continuing to pursue and win new client relationships. In fact, all of the major IT vendors have a significant issue of some sort here as it relates to visas. I'll touch on a few other notable topics and speak to our Q2 outlook after Paul shares the financial details. Paul?

[Paul Martin:]

Thanks Jeff. I'll discuss first quarter results. Total revenue for the first quarter of 2017 was $111 million, a 10% decrease compared to the year ago quarter. Services revenues were $100.9 million in the first quarter of 2017, excluding reimbursable expenses, a decrease of 8% compared to the comparable prior year quarter. Services gross margin, excluding stock compensation and reimbursable expenses, was 31% -- 36.1%, excuse me, for each of the three months ended March 31, 2017 and in 2016. SG&A expenses, excluding stock compensation, decreased to $23.4 million in the first quarter of 2017 from $24.5 million in the comparable prior year quarter. SG&A expenses excluding stock compensation, as a percentage of revenue, increased to 21% from 19.8% in the first quarter of 2016. EBITDAS from the first quarter of 2017 was $14.1 million or 12.7% of revenues compared to $17.2 million or 13.9% of revenues in the first quarter of 2016. The first quarter included $3.6 million of amortization expense compared to $3.4 million in the comparable prior year quarter. Adjustments to fair value of contingent consideration of $0.2 million were recorded during the three months ended March 31, 2017, which included the accretion of the fair value estimate for the earnings pace, continued consideration related to the acquisitions of Enlighten, Bluetube and RAS. Our effective tax rate for the first quarter of 2017 was 40.2% compared to 31.1% for the first quarter of 2016. The increase in the effective tax rate is primarily due to differences between book and tax results and restricted stock vesting during the three months ended March 31, 2017 versus the three months ended March 31, 2016. The tax implication of restricted stock vestings were required to be reported as discrete adjustments in the quarter in which they occur. Net income decreased 50% to $2.7 million in the first quarter from $5.4 million in the first quarter of 2016. Diluted GAAP earnings per share decreased $0.08 a share for the first quarter of 2017 from $0.16 in the first quarter of 2016. Adjusted GAAP earnings per share decreased to $0.24 a share for the first quarter of 2017 from $0.29 in the first quarter of 2016. Adjusted EPS is defined as GAAP earnings per share plus amortization expense, non-cash stock compensation, acquisition costs, and fair value adjustments to contingent consideration net of related taxes divided by average fully diluted shares outstanding for that period. Our earning billable headcount at March 31, 2017 was 2,292 and that included 2,118 billable consultants and 174 subcontractors. And the SG&A headcount in March 31 was 461. We ended the first quarter 2017 with $38.5 million in outstanding debt and $10.9 million in cash and cash equivalents. Our balance sheet continues to leave us very well-positioned to execute against our strategic plan. Our day sales outstanding on accounts receivable decreased to 69 days at the end of the first quarter of 2017 compared to 79 days at the end of the fourth quarter of 2016 and 85 days at the end of the first quarter of 2016. I'll now turn the call over to Jeff for a little more commentary. Jeff?

[Jeffrey Davis:]

Thanks Paul. Regarding Q1 bookings, we sold 49 deals, north of $0.5 million each during the first quarter. In fact, they averaged $1.4 million each that compares to 40 in the fourth quarter averaging $1.4 million and 50 in the first quarter of 2016 that averaged $1.4 million as well. So, a nice uptick sequentially in large deal line and another strong first quarter bookings performance as I mentioned earlier. During the first quarter, the healthcare and financial services verticals again led the way with automotive and retail and consumer goods, also demonstrates strength. Collectively, those four groups accounted for 62% of revenue; healthcare at 25%, financial services at 16%, automotive 11%, and retail and consumer goods at 10%. And we touched on this in the last call, but we continue to focus on moving up market and cultivating long-term relationships at the highest level within large enterprise accounts. And that's something we have been doing quite successfully in recent years. We made great progress during the quarter, integrating RAS & Associates, management consulting firm we acquired at the beginning of the year. And we remain committed to M&A and in active discussions with several firms, focused on adding $40 million plus in run rate revenue before the end of the year through that program. We remained active buyers of our stock during the first quarter. We expect to continue that through the second quarter and the rest of the year. We've now repurchased more than $12.5 million of shares and stock since the program's inception. Finally, we're excited to welcome Brian Matthews to our Board. Brian is a seasoned serial entrepreneur and a well-known, well-regarded business leader. We're going to benefit from his insights and leadership as we continue to grow the firm. So, now turning our attention to expectations for the second quarter. Perficient expects second quarter 2017 services and software revenue including reimburse expenses to be in the range of $111 million to $123.5 million comprised of $106 million to $112.5 million of revenue from services, including reimbursed expenses and $5 million to $11 million of revenue from sales of software. The company expects second quarter adjusted earnings per share to be in the range of $0.29 to $0.31. The company is reaffirming its previously provided full year 2017 revenue and earnings guidance ranges. With that, we're going to open up the call for your questions. Operator?

[Operator:]

[Operator Instructions] And our first question comes from Frank Atkins with SunTrust. Your line is now open.

[Francis Atkins:]

Thank you for taking my questions. I wanted to ask first on the healthcare vertical, tick down a little bit as a percentage of total revenue. There's a lot of things going on in other areas as well. But as we look at the healthcare vertical specifically, can you point to any areas of strength or weakness there?

[Jeffrey Davis:]

Yes, Frank, I think we're definitely seeing a return of momentum there. Couple of things to keep in mind. I think a good portion of that downtick that you're referring to was actually kind of dilution from the acquisitions we've done that don't do healthcare -- that don't focus on the healthcare industry. So, it's more a result of that. However, as we've talked to in the past, we certainly saw sales cycles extend there going into the election and I would even say kind of grew the last quarter. But by March, we've seen that begin to reverse and we're seeing contraction there. We still got a very healthy pipeline. So, I would say we continue to see good strength in that industry and we expect to have good results there, mostly driven by patient as consumer and the move to consumerism within that industry, rooted in analytics and a lot of customer and patient-facing applications.

[Francis Atkins:]

Okay, great. And conversely, you saw tick up in manufacturing. Can you talk about what's driving the growth in the manufacturing vertical?

[Jeffrey Davis:]

Yes, we've had some anchor accounts there. On one of them I think the largest Fortune 50 company is the largest manufacturing I think in the U.S. is a key client of ours that's certainly driving a portion of it. But generally speaking, I would say beyond that, we are seeing a little bit of an improvement there that I would say is probably macro-driven, but remains to be seen. Regardless, we're certainly seeing some nice improvement there as well, as automotive remains strong.

[Francis Atkins:]

Okay. And then a couple of quick ones. What was organic growth in the quarter? And then could you touch a little bit on the talent environment attrition? How you're doing attracting and retaining talent in this environment?

[Jeffrey Davis:]

Yes, the organic growth for the quarter was actually contraction of about 11% or so year-over-year. And as -- with regards to talent, attrition in the quarter annualized was right around 20% -- a little bit over 20%. Our goal is a little below 20%, 17%, 18% is probably the ideal. I think anything below that is actually healthy as well. So, we're a little bit over that, but I -- I'm not concerned about it. In terms of talent acquisition and retention, we really had great success in finding the folks we need. I think I mentioned the -- some of the offshore majors trying to hire talent here. We've always had great success competing with them for talent. I think we're a preferred employer for a lot of reasons, not the least of which is culture.

[Francis Atkins:]

Okay, great. Thank you very much.

[Operator:]

Thank you. And our next question comes from Josh Seide with Maxim Group. Your line is now open.

[Joshua Seide:]

Hi guys, thanks for taking the questions. Over the last year or two your largest health care customer has led to some lumpiness in your business and could you talk kind of about where you are with that account and any uncertainty or certainty that you see regarding that customer for the remainder of the year?

[Jeffrey Davis:]

Sure. Sure Josh. Thanks. I think we're very stable there. It's the way I would describe it. Since we had the partial pullback in Q2 of last year, it's been much more stable since then. I think the dust has settled. We're delivering against our expectations and the overall program is running much more smoothly. So, as it stands today, I think we're very stable there. We don't expect any additional gyrations going forward. Of course, as you know, no crystal ball, but as things stand today, it's very solid.

[Joshua Seide:]

Great. And then you mentioned last quarter, some -- you noticed some lengthening in sales cycles overall. And it definitely looks like there's been improvement there in the March quarter. Could you comment maybe on what you find is driving that shortening of sales cycles in the March quarter? And if you think that improvement is going to be sustainable for the remainder of the year? Thank you.

[Jeffrey Davis:]

Sure. Thanks. I think it is sustainable. And I think the simple answer really is kind of the dust settling after our election. I think there's no question, particularly with hindsight that if you go back to about the middle of last year or certainly beginning of the fourth quarter and we can certainly see sales cycles extending then and carrying into the first of the year. But I think the dust is settling now and I'm optimistic that that is behind us and the trend is upward from here. I'm also encouraged by -- obviously, we're a consumer-driven economy, so consumer sentiment is strong. As you can see, the first quarter was a little disappointing, but I think the seeds were sown for that long before this year and long before this administration. So, I feel overall optimism that things will only improve from here.

[Joshua Seide:]

Great. And then last one from me and then I'll get in the queue. You mentioned efforts to get utilization up into the low 80s in 2017, though it looks like it was flat Q-over-Q here in the March quarter. So, could you maybe comment on how we should think about the trajectory there for utilization throughout the remainder of the year? Thanks.

[Jeffrey Davis:]

Yes, absolutely. So, keep in mind that Q1 was sort of a normal comp. And we did deliver gross margins that were flat relative to the last few years for the first quarter. So, we do expect margin expansion, gross -- both gross margin and EBITDA margin going forward. Utilization by March had risen to about 79%. We're in the 80s as we speak right now at the end of April and into May, we broke into the 80s. And we expect we'll be able to maintain 80-plus, low 80s through Q2 and Q3 and then of course, seasonality will likely drive that back into the high 70s in Q4. So, overall, for the year, I'm still looking for a couple of 100 basis point improvement to utilization. And of course that will drive the same into gross margin improvement and a fair amount of that will drop to EBITDA as well.

[Joshua Seide:]

Great. Thank you.

[Jeffrey Davis:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Joan Tong with Sidoti & Company. Your line is now open.

[Joan Tong:]

Good morning Jeff and Paul, how are you guys doing?

[Jeffrey Davis:]

Good, Joan, how are you?

[Joan Tong:]

Pretty good. Hey Jeff can you help us understand, again, over the longer-term sort of the U.S. standard wage inflation environment? And obviously you mentioned that like competitors talk about 10,000 U.S. workers and like -- it seems like there will be more if this political tension continue and I'm just wondering how you feel a little bit more medium term, longer term? I know that at this moment it's fine. And then to offset that maybe you would have opportunity to increase like ABR further. And obviously, you still have a big gap like compared to the Tier 1 here? Thanks.

[Jeffrey Davis:]

Excellent question. And we're certainly keeping an eye on that. To your point, right now, things are fine. But certainly, as these offshore majors look to hire more U.S. folks, I think wage inflation is a concern. And we're prepared for that. But the good news is that, one; I think we're the preferred employer. Even if we have to pay a little more, I still think we get the resources. And in terms of paying a little more, one thing we're doing this year is stepping up our campus recruiting efforts. We've always had great success there and that will help us keep costs in check. But I'll even say this as well, in the past, certainly when this industry was really booming, let's say, we go back to even 2010, 2011, or 2007, we can pretty quickly convert those rising costs and increase ABR. Clients will see ABR rising across the Board. So, there's less resistance actually and less expectation of lowering costs and more of an acceptance of rate increases. So, it would be a matter of timing and making sure that we respond quickly. But I think we can do that. We've done in the past and again, I think clients will be accepting of it because they will see it across the Board.

[Joan Tong:]

Okay. And then like in the past, you talked about offshore like expansion is being one of the growth driver for margin. Obviously, now we're seeing may be longer term a little bit of offset, maybe it won't be growing as fast or maybe just altogether this is not the strategy that you guys are going after going forward. Can you just talk a little bit about what you think, like longer term, how you see this pan out? What is going to be the driver for growth margin going forward?

[Jeffrey Davis:]

Yes, actually we're very bullish on offshore, continue to be. Our gross margins for offshore, even though we've dropped our rates a little bit so we could drive more volume. That's actually still yielding about 55% gross margin. And we believe we can hold that at 50% above or up. The reality is the skill set that we employ offshore is different than the majority of our competitors, it's higher end. And so we can get, and we'll continue to get good rates for those folks. So, we're very bullish on that. I think the mix shift to offshore continues and as much as I believe our offshore business will continue to grow at pace well ahead of the onshore component. And like I said, we love that in terms of margin expansion. It obviously creates a little bit of a challenge in topline growth, but the tradeoff is fantastic margin.

[Joan Tong:]

Right. But then in terms of rhetoric out there, like politically, like you still think that this is a strategy obviously over the long-term?

[Jeffrey Davis:]

Yes. Absolutely. And keep in mind, we're not following a build it and they will come strategy. We're following a more just in time strategy. So, if the market shifts, we can adapt to that. But I personally don't think it will. And even if there are some kind of import taxes or additional taxes imposed, again, it's still an even playing field because that will happen to everybody.

[Joan Tong:]

Okay, got it. That's fair. And then finally on M&A and just talk a little bit about the pipeline with you and also in terms of valuations and what are you seeing out there? Are you too like sort of looking at some of the very hot assets out there, trying to beef up your analytics as well as the digital transformation type of capabilities and maybe just some color would be helpful. Thanks.

[Jeffrey Davis:]

Sure. Absolutely. We do have a number of things in play right know on the M&A front. We got one deal that we're pursuing, pretty focused arrangement with at the moment. So, we're not there yet, but certainly things are looking positive. That does happen to be in the digital space. Valuations remain reasonable. We tried to drive a five to seven times trailing 12-month EBITDA valuation. And certainly with things in the digital space, we're looking at multiple that's at the higher end of that range. But a lot of the way we achieve that is through an earn-out, so we've got downside risk. So, we do have a deal that we're working on right now. We've got several other behind that in the pipeline and/or alternatives if this one doesn't pan out, both digital as well as outside the digital space.

[Joan Tong:]

Okay, got it. All right. Thank you so much.

[Jeffrey Davis:]

Thanks Joan.

[Operator:]

And I'm showing no further questions at this time. I would like to turn the call back to Mr. Davis for any closing remarks.

[Jeffrey Davis:]

All right. Thank you all for joining today. We look forward to discussing the Q2 results with you in a few months.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.