Perficient, Inc.
Q2 2017 Earnings Call Transcript

Published: 6 Aug 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q2 2017 Perficient 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 introduce your host for today's conference, Chairman and CEO, Jeff Davis. Sir, you may begin.

[Jeffrey Davis:]

Thank you very much. Good morning, everyone. With me on the call today is Paul Martin, our CFO. I'd like to thank you 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. But 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 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. 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 it 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. Well, once again, good morning and thanks for joining. We're excited to share our second quarter results with you today. We've talked for a couple of quarters now about our intent and ability to drive margins higher and during the second quarter we did just that. Services margin rose 200 basis points in the quarter, and we expect sequential margin expansion in Q3 and similar year-over-year results in both third and fourth quarter this year. Let me [indiscernible] this morning, it not just contain some margins and profitability, our bookings momentum is very strong right now, in fact the month of June represented a single largest booking month in our history and it was nearly 25% greater than January 2016 which previously represented our draw [ph] month that drove a record Q2 bookings, total up sequentially year-over-year substantially. On the yields of that performance, third quarter is off to a great start with record bookings for the month of July. Those successes have our sales organization operating with right momentum and with real energy, enthusiasm in growing sense of confidence right now; things are very exciting in Perficient. One of the key contributors to June's record bookings was the signing of our first $20 million plus statement of work; a milestone win for our digital and healthcare teams at a world renowned healthcare provider. And then on the yields of that success we went and executed $25 million win in the automotive industry in July at an existing client in extending us well into '19, in fact both of those engagements had a lot of these bookings extend into 2019 and produce a backlog that into 2018 it will be very strong. Digital transformation is driving mission critical business and technology investments in many ways of mandatory enterprise survival. Across every industry businesses must develop faster than ever. Companies to have a choice, they must adapt [ph] themselves or the competitors and consumers will. And arguing these approach, unparalleled portfolio, unequal talent and undeniable values resonate strongly in the market. Digital, cloud, AI, IoT; these disciplines are driving tremendous spend and Fortune 1000 enterprises are increasingly realizing that Perficient is a premier provider in this space. We're just beginning to capitalize on that awareness. As I mentioned in the last call and as evidenced by the pursuit of winning a larger and longer term work, our brand and reach is building and our move-up market is well underway. I'll touch on several other exciting notable topics including our outlook for Q3 as after Paul shares the financial details. Paul?

[Paul Martin:]

Thanks, Jeff. Total revenues for the second quarter of 2017 was $117 million, a 6% decrease compared to the year ago quarter. Services revenues were $104.8 million for the second quarter of 2017, excluding reimbursable expenses, a decrease of 3% compared to the comparable prior year period. Services gross margin for the second quarter 2017 excluding stock compensation and reimbursable expenses were 37.4%, an increase from 35.4% in the second quarter of 2016. As Jeff mentioned, we are expecting year-over-year margin to continue into the second half of the year. SG&A expenses excluding stock compensation increased to $23.9 million in the second quarter of 2017 from $23.2 million in the comparable prior year quarter. SG&A excluding stock compensation as a percentage of revenue increased to 20.4% from 18.7% in the second quarter of 2016. EBITDAS for the second quarter of 2017 was $16.9 million or 14.4% of revenues compared to $16.5 million or 13.3% of revenues in the second quarter of 2016. We are also expecting year-over-year EBITDAS margin to continue to improve in the second half of the year. The second quarter includes the amortization expense of $3.5 million compared to $3.3 million in the comparable prior year quarter. An adjustment of $0.6 million was recorded during the three months ended June 30, 2017, which represents an annual factor of the fair value adjustments to the RES and revenue and earnings space, continued consideration liability in addition to the accretion of the fair value estimate for the revenue and earning space continue to consideration related to the acquisitions of Bluetube, RAS and Clarity. Our effective tax rate for the second quarter of 2017 was 68.4% compared to 34.4% from the second quarter of 2016. The increase in the effective rate is primarily due to the core earnings of the Company's Chinese subsidiary that are no longer permanently reinvested. Net income decreased 59% to $2.4 million for the second quarter 2017 from $5.8 million in the second quarter of 2016. Diluted GAAP earnings per share decreased to $0.07 for the second quarter of 2017 from $0.17 in the second quarter of 2016. Adjusted GAAP earnings per share increased to $0.29 for the second quarter of 2017 from $0.28 in the second quarter of 2016. Again, adjusted GAAP EPS is defined as GAAP earnings per share plus amortization non-cash stock compensation transaction cost and the fair value adjustments consideration and the impact of other increase on earnings for transactions net of related taxes divided by average fully diluted shares outstanding for that period. Our earnings billable headcount at June 30, 2017 was 2,497 including 2,270 billable consultants and 225 subcontractors. I think yesterday that count was 453. Now let me turn to the year-to-date results. Revenue for the six months ended June 30, 2017 were $228 million, a decrease of 8% over the comparable prior year period. Services revenue for the six months ended June 30, 2017 excluding reimbursed expenses was $205.7 million, a decrease of 5% over the comparable prior year period. Services gross margin for the six months ended June 30, 2017 excluding stock comparable reversible expenses increased to 36.8% from 35.7% in the prior year period. SG&A expense excluding stock compensation decreased to $47.2 million for the six months ended June 30, 2017 from $47.7 million to the comparable prior year period. SG&A expense excluding stock compensation as percentage revenue was 20.7% for the six months ended June 30, 2017 compared to 19.2% for the six months ended June 30, 2016. EBITDAS for the six months ended June 30, 2017 was $31 million compared to $33.7 million in the comparable prior year quarter. EBITDAS as a percentage of revenues was 13.6% of both periods. For the six months ended June 30, 2017 included amortization of $7.2 million compared to $6.2 million in the comparable prior year period. An adjustment of $0.4 million was recorded during the six months ended June 30, 2017 which represents a net impact to the fair market value adjustment to the RES, Bluetube revenue and earnings base consideration and just into the accretion of the fair value estimate for the revenue and earning space continued consideration related to the Enlighten, Bluetube, RES and Clarity acquisitions. Our effective tax rate for the six months ended June 30, 2017 was 57.9% compared to 32.9% for the six months ended June 30, 2016. The increase in the effective rate was again primarily due to the core earnings of the companies Chinese subsidiary that are no longer current reinvestment. Net income for the six months decreased to $5.1 million from $11.2 million in the six months ended June 30, 2016 and diluted GAAP earnings per share decreased to $0.15 from $0.32 for the six months ended June 30, 2016. Adjusted GAAP earnings per share decreased $0.52 for the six months ended June 30, 2017 from $0.56 for the six months ended June 30, 2016. The company refinanced its line of credit during the quarter reducing our rates, extending our debt maturity to 2022 [indiscernible] our banker, we believe that the currently available funds, access to capital from our current facility and cash flow generated from operations leave us well positioned to fund future growth. We ended the second quarter 2017 with $68 million in outstanding debt, an increase of $36 million from year end, the increase is primarily due to the acquisition of RES and Clarity during 2017. Our day sales outstanding on accounts receivable were 73 days at June 30, 2017; that compares favorably to the 79 days at June 30, 2016 and December 31, 2016. I'll now turn the call over to Jeff for a little more commentary. Jeff?

[Jeffrey Davis:]

Thanks Paul. Little more detail on bookings. We sold 41 deals, greater than $0.5 million during the second quarter and the average of $2 million each, and that compares to 49 in the first quarter of this year averaging $1.4 million each and 44 in the second quarter of last year 2016 that averaged $1.3 million each. So I want to just highlight again, that's $600,000 increase and an average deal size sequentially, $700,000 increase year-over-year; so that's about 50% increase per deal on deal size compared to last year. There is a quarter health sciences, financial services, automotive and retail consumer goods article represented 62% of revenue. Healthcare was at 27% of revenue, financial services 15%, automotive 10% and retail consumer good at 10% of revenue. On all those sectors we see a strong currently and going forward. We're expecting a strong second half and particularly from health sciences. Our bookings starting second quarter were up more than 30% year-over-year in that industry. Some of our competitors were reporting challenges and slowdowns in the space where we have significant momentum right now, we continue to take share. We've also become a destination of choice for industry [indiscernible]. During the quarter we landed a highly regarded health sciences cellar [ph] from one of our largest competitors. Speaking of our sales organization, other successor in the quarter was the promotion of Patrick Swirking [ph] to Vice President, Sales. It has been one of our most successful sellers and sales leader for over a decade here at Perficient; a guy who has been in the trenches for many of our largest wins and remain central to key pursuits going forward and client relationships. We're excited and fortunate to have Pat move into this role and provide leadership to our entire sales team. Also worth highlighting is that we continue to grow the offshore component of our business. In fact, during the second quarter our offshore revenue was the highest it's ever been in dollars, as well as 100% of revenue basis. As we talked about before, our offshore margins are very strong and our differentiated approach is helping us win work, we only [indiscernible]. We expect the offshore portion of our business to continue to build at a faster rate than our overall growth rate. Finally, I'm sure you all saw the news of our late June acquisition of Clarity Consulting, it's a fantastic Chicago based firm; we're really excited an bring on board. Integration there is underway, we're sighted about the clients and capabilities they brought. They did really impressive thinks around digitals, specifically IoT, self-service kiosks and similar types of solutions. It also brought some really impressive and natural property we're excited about which is like a context center product leveraging Skype for Business. There are approximately $27 million from revenue, this represents one of the larger deals we've done and we'd like to get at least one more deal done this year and remain in active discussion with several firms. As we stated before, our goal is $50 million to $60 million of acquired revenue run rate and we're at about $40 million right now. So turning the attention now to our expectations for the third quarter, Perficient expects third quarter 2017 services in software revenue including reimbursed expenses to be in the range of $120.5 million to $134 million comprised of $114.3 million to $121.7 million of revenue from services including reimbursed expenses and $6.2 million to $12.3 million of revenue from sales of software. Third quarter adjusted earnings per share expect to be in the range of $0.32 to $0.34. We're nearing our previously provided full year guidance to a range of $490 million to $510 million and narrowing our adjusted earnings per share guidance to a range of $1.19 to $1.29. And I want to note here that we continue to see a pretty significant and rapid makeshift to offshore as I highlighted earlier, we're performing more work on a remote basis and we're also seeing the industry obviously rapidly shifting to SaaS as one premise software licensing. So each of these trends, they create a modest headwind on topline overall and we're certainly seeing less reimbursed expenses and again, lower software revenue bookings as SaaS software is booked in a completely different manner. So we'll continue to see those come down, the nice part of them, the good news here is that we'll actually create margin expansion which we've already put some nice margin expansion on services, so that will help overall as well. Operator, we can now take questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Mia [ph] with Needham. Your line is open.

[Unidentified Analyst:]

Good morning. Jeff, I wanted to just drove a little bit deeper into the bookings trends; so obviously a good sign that you're seeing record bookings trends but why isn't that transiting into maybe improved top line performance in the second half, even despite the headwinds that you just mentioned regarding offshore in terms of the revenue? And then as we look into '18, should we see a better uptake in terms of organic trends; these bookings now converted to revenue?

[Jeffrey Davis:]

Yes, absolutely. I think -- well, I think they are yielding some results as the mid-point of our guidance for this quarter is back to flat. And I expect in the fourth quarter the trend continues and we'll be somewhere in the mid-single digits, perhaps upper single digits. The strongest correlation of bookings to revenue is about four or five rolling month, so I expect that the surge in bookings that we enjoy at the end of the second quarter is beginning here for the third quarter, we'll have our greatest impact in the fourth quarter and leading into 2018. We did had some projects always [ph] on some of these larger engagements in the quarter, actually we're only about 1% or 2% I think below in the midpoint of our guidance. And like I said, overall, for the year I think we're so within 1% of our original at the end of guidance and I do expect organic growth to return materially in the fourth quarter and going into 2018.

[Unidentified Analyst:]

Great. And then what is driving the bookings improvement, is it really more sales execution on your side? Is it an industry uptake, you're seeing just more deals and the conversion rate is picking up; what is driving the uptake of booking?

[Jeffrey Davis:]

Yes, I mean -- I think the markets are little healthier but I think it's less that and honestly, I think we're certainly finally seeing some fruition of the investments that we've made over the last couple of years in our sales team in terms of the organization structure, the additional capacity and focusing on the appropriately balanced incentive program; so I think that's actually beginning to pay dividends now and I think that's going to be sustainable. And like I said, while we see some improvement in the market, I think another component to it is our brand building and our differentiation for our clients; the reference ability is fantastic, we're very unique in our ability to deliver improved end-to-end capabilities around digital transformation, the agencies can't do it, the traditional technology shops can't do, something we've been doing for years and we've invested a lot in that over the last couple of years, I mean they are a very formidable portfolio from beginning to end as it relates to digital and I can tell you that's what's resonating, the $20 million [ph] engagement in June that I alluded to at the healthcare provider and helps us continue to win and sustain these relationships. Just to come back real quick to bookings, our Top 50 accounts right now are on a run rate to growing almost 20% year-over-year. So as we talked up before, we're very focused on our land and expand strategy, so that really validates and speaks to the power of that. Obviously, we've got programs around the next 50 to 100 as well to accelerate growth there but I think we see good things coming and as I said before, the backlog that we build up to be strong bookings should have us really well positioned finishing out the year and going into '18.

[Unidentified Analyst:]

Great. Thank you for the color.

[Jeffrey Davis:]

Thanks.

[Operator:]

Thank you. Your next question comes from Franc Atkins with SunTrust. Your line is open.

[Francis Atkins:]

Thanks for taking my question. I wanted to ask what was the organic growth rate for the quarter?

[Jeffrey Davis:]

Good morning, Franc. Yes, it was down about 7%. And again, as our guidance for Q3 has this about flat; so good sequential growth and then beginning to pick up some year-over-year growth.

[Francis Atkins:]

Okay, great. And then can you talk a little bit more about Clarity in terms of the growth and the margin for that business? And then is that included in guidance?

[Jeffrey Davis:]

It is included and we -- it's early to predict the growth there. That's -- it has good momentum, it had good momentum since we began diligence, we see that continuing in factors, fantastic synergies really between some of the skills that they bring to the table around custom development and a few other areas in terms of devices, IoT, that I mentioned earlier that we're able to plug right into our channels. So we should see considered using cross-selling there, likewise, I think we've got some folks already working on a couple of their project; so good movement there. In terms of their margins, they are in-line with Perficient, probably a little above our average.

[Francis Atkins:]

Okay, great. And last one from me; can you talk a little bit about average billed rate. What's the impact of Clarity there? What do you see in terms of the pricing environment and your ability to drive average bill rate up going forward?

[Jeffrey Davis:]

Yes, Clarity's bill rates above our average, so that will be accretive to the bill rates but we've also driven ABR up organically about 1.5% year-to-date which is -- our goal was 2% to 3% across the year, so we're on-track or moving nicely to get there; with some help in the second half we should be able to, that's one of the things that's contributed to the margin expansion along with the improved utilization at 80%.

[Francis Atkins:]

Okay, great. Thank you very much.

[Jeffrey Davis:]

Thanks, Franc.

[Operator:]

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

[Joan Tong:]

Good morning. And I just have a couple of questions here. And Jeff, can you mention -- can you talk about like the general operating environment out there; you said that it improved a lot of bit but really debunking the increases because of your sales execution. I'm more interested on the healthcare front given a lot of headlines regarding (NYSE

[Jeffrey Davis:]

Yes, absolutely. There is always uncertainty in healthcare and obviously the geopolitical environment or the political environment but we're seeing good strength, we had fantastic bookings in the second quarter in healthcare, I mean up substantially year-over-year and on a relative basis, our revenue is about 27% in Q2 around health sciences. The bookings in health science is made up like 40%, 50% of our bookings in the quarter. So we're seeing great demand there, and I'm telling -- I will tell you that I think the reason for that is what I said before about digital transformation. I think we're uniquely positioned, we've been in healthcare for several years now, so we've got the domain expertise around the industry but with healthcare companies, both [indiscernible] are doing now is addressing the shift in consumerism in healthcare; so we're able to combine our digital capabilities, our agency capabilities, our user center design capabilities with that integration in technology capability and provide some -- exactly what these guys need under one roof, so they have a department out, it's a multiple shop. So I think that's really resonating and we're really building a significant brand in healthcare as well. So I would say that we stayed away from sort of the back office, we never implemented EMR, we've done a lot with analytics and patient analytics using EMR data but we were never an EMR implementer and I think that's what these guys see -- the competitors are seeing softness in is around back office and I greatly think that they don't have the skills that we do to address the consumer/patient facing solutions that these guys are seeking right now to stay competitive.

[Joan Tong:]

Okay, thank you. And then regarding like the focus of winning larger and longer work, and you said you're developing a backlog; I'm just wondering how much it is, I can only imagine but it is still pretty like -- small in terms of the mix and in any given quarter between revenue coming from backlog versus term business and maybe you can talk about like the pipeline of larger deals and how you see going forward that mix like term versus backlog, maybe over like a longer or medium or with longer term period of time? Thank you.

[Jeffrey Davis:]

Sure. And in fact, that's what ensured the duration of our engagements. Clearly the Top 50 accounts -- I should say contracts, I mean we gave them, it's supposed to be clear in these Top 50 accounts. You know, these relationships are six year old on an average, maybe they've been around longer than that and obviously some fall off rarely, and yet we continue to grow, it was 10% and even 20% year-to-date right now and that's base [ph]. So it's a very good thing, obviously the more we can have in backlog, the less we have to worry about replacing, so it gives us a nice table platform to operate from. Right now the snapshot of backlog in -- from bookings in the second quarter going into 2018 is actually up about 30% year-over-year. Keep in mind, this is a project based business and so that's a fairly low basis or fairly small basis but I do think that's a meaningful indicator.

[Joan Tong:]

Okay. All right, thank you.

[Jeffrey Davis:]

Thanks, Joan.

[Operator:]

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back over to Mr. Jeff Davis for closing remarks.

[Jeffrey Davis:]

All right, well, thank you all for joining us today and very excited about the uplift and looking very much forward to demonstrating strong Q3 in our call in 90 days. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you all may disconnect. Everyone have a wonderful day.