Perficient, Inc.
Q3 2017 Earnings Call Transcript

Published: 2 Nov 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Q3 2017 Perficient Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Davis, Chairman and CEO.

[Jeffrey Davis:]

Thank you, and good morning, everyone. Thank you for joining us this morning. This is Jeff Davis, with me on the call is Paul Martin, our CFO. Again, I want to thank you for your time. And as typical we've got a few minutes of prepared remarks, after which we'll open the call for questions. But before we proceed, Paul, will you please read the Safe Harbor statement.

[Paul Martin:]

Thank you, Jeff, 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 security's laws. Actual results may maturely differ from those discussed in the 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. Times during this call, we 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 our reconciliation of certain non-GAAP to the most directly comparable financial measures compared in accordance with GAAP on our website under Investor Relations. Jeff?

[Jeffrey Davis:]

Thank you, Paul. Well, again, thank you for joining. We're pleased to be with you this year our third quarter results. We've talked all year about our intended ability to drive margins higher during the third quarter and we continue to do just that. Services margins rose 180 basis points in the quarter over the prior year quarter. We've also talked several times about the opportunity we have to continue to gradually higher as GAAP that exists between Perficient and several of our largest competitors as we continue to compete against them and beat them. We'll be able to incrementally increase our ADR. North American bill rates hit $148 during the quarter, and there's room to build upon that in the quarters and years ahead. Net opportunities drive rates higher exists offshore as well. We did realize even larger sequentially year-over-year ABR growth. Our realized bill rates for both our China and India GDC run double digits from Q3 2016. Third quarter bookings were solid, up 26% year-over-year. Our pipeline is solid and anecdotal feedback in terms of our sales leader remains a very positive in terms of both quantity and quality of the pursuits were involved. Some of that, of course, is due to the macro improvements in the economy heading into 2018. We're optimistic that the positive and super confidence coupled with the possibility of corporate tax reform will bold their enterprises to invest even further in driving digital transformation and moving deeper into high growth higher opportunity areas by machine learning and IoT and Cloud. We're also benefiting from our focused efforts in recent quarters to move up the market. Pursuing in winning longer-term deals within Fortune 1000 space. As we've grown our brand, demonstrated our differentiation and proven our value, large enterprises are increasingly willing to give us larger and longer duration work. One of the trends I'm particularly excited about is the success we've had in recent months with our software factory office. We now have agreements in place with a few very large entities where our teams are on site, not specific to one project but rather embedded within the client's overall development framework and where are work stands in multiple projects. Our core team is considering extension of the customer's overall development efforts. And it first creates consistently as well as increased quality and productivity across multiple initiatives for our clients. Of course, this also delivers stable and revenue commission and compliant relationship and positions us well for accounting expansion. Finally, before I turn call back over to Paul for the financial results, it's worth mentioning that the first time in Perficient's history, we ended the quarter with more than 3000 . And as someone who's been with the company since it was around 100 people, I take great deal of pride in what we've built here and look forward to the day we move through the 4,000 counting mark on our 5,000 and beyond. So I'll turn the call back to Paul now for the financial results. Paul?

[Paul Martin:]

Thank you, Jeff. Total revenues for the third quarter of 2017 were $123.7 million, a 4% increase compared to the year-ago quarter. Services revenues were $114.1 million for the third quarter of 2017, extruding reimbursable expenses, an increase of 11% compared to comparable prior year period. Services gross margin for the 3 months ended September 30, 2017, excluding stock compensation and reimbursable expenses, increased to 180 basis points to 37.4%. SG&A expenses, excluding stock compensation increased to $24.7 million in the third quarter 2017 from $22.5 million in the comparable prior year quarter. SG&A expenses, excluding stock compensation as a percentage of revenue, increased to 20% from 18.9% in third quarter of 2016. In the third quarter of 2017 was $19.2 million or 15.5% of revenues compared to $15.1 million or 12.7% revenues in the third quarter of 2016. The third quarter included $2.9 million compared to $3.3 million in amortization expense. An Adjustment of $0.4 million was recorded during the 3 months ended September 30, 2017, net impact of the fair value -- fair market value adjustment to the RAS contingent consideration liability and accretion of the fair value continue consideration related to the acquisition of the wholesale environment. Our effective tax rate in the third quarter 2017 was 33.3%, compared to 26.9% from the third quarter of 2016. Lower effective tax rate for the 3 months ended September 30, 2016 was primarily due to additional research tax credit related to 2016 tax year. Net income increased 27% to $7 million for the third quarter 2017 from $5.5 million in the third quarter of 2016. Diluted GAAP earnings per share produced $0.21 a share for the third quarter of 2017 from $0.16 a share in the third quarter of 2016. Adjusted net growth per share increased to $0.34 a share for the third quarter of 2017 from $0.26 in the third quarter of 2016. Adjusted GAAP EPS GAAP earnings per share plus amortization expense noncash stock compensation transaction cost in fair value adjustable consideration and the impact of other unusual transactions net of related taxes divided by average diluted shares outstanding for the period. Our global headcount was 2,553, including 2,304 billable consultants and 241 subcontractors, and SG&A headcount was 460. I'll now turn to the 9-months results. Revenue for the 9 months ended September 30, 2017, was $351.8 million, a decrease of 4% over the comparable prior year period. Services revenue for the 9 months ended September 30, 2017, excluding reimbursable expenses was $319.8 million, essentially flat for 2016. Services gross margin for the 9 months ended September 30, 2017, excluding stock compensation and reimbursable expenses increased to 37% from 35.7% in the prior year period. SG&A expense, excluding stock compensation, decreased to $72 million for the 9 months ended September 30, 2017, from $70.1 million in the comparable prior year period. SG&A expense, excluding stock compensation as a percentage of revenue, was 20.5% for the 9 months ended September 30, 2017, compared to 19.1% in the comparable prior year period. EBITDAS for the 9 months ended September 30, 2017, was $50.1 million or 14.3% of revenues compared to $48.8 million or 13.2% of revenues in the comparable prior year period. For the 9 months ended September o f2017, included amortization of $11.1 million compared to $9.9 million in the comparable prior year period. The increase in amortization is due to the additional intangible assets from the 2016 and 2017 acquisitions. And adjustment $0.8 million was recorded during the 9 months ended September 30, 2017, which represents a net impact to the fair value adjustment of the RAS and Bluetube continue consideration liability addition to the accretion of the fair value estimate from the continued consideration related to the quarter. Our effective tax rate for the 9 months ended September 30, 2017 was 46.4% compared to 31% for the 9 months ended September 30, 2016. The increase in effective tax rate was primarily due to poor earnings of the company's Chinese subsidiary that no -- that are no longer part of the reinvestment. Net income for the 9 months ended September 30, 2017, decreased $12.1 million compared from $16.8 million for the 9 months ended September 30, 2016. Diluted GAAP earnings per share decreased to $0.36 from $0.48 for the 9 months ended September 30, 2016. Adjusted GAAP earnings per share increased to $0.86 a share for the 9 months ended September 30, 2017, from $0.82 in the comparable prior year period. We ended the third quarter of 2017 with $65 million outstanding debt, an increase of $33 million from year end. The increase was primarily due to acquisition of RAS and Clarity during 2017. Our balance sheet continues to leave us well positioned acting on our strategic plan. Finally, our day sales outstanding on account receivable was 79 at September 30, 2017, compared to 81 at that same point last year and 79 at year end. I'll now turn the call back over to Jeff for little more comments, Jeff?

[Jeffrey Davis:]

Thanks, Paul. We sold 32 deals in $500,000 each during the first quarter, and they average actually $1.9 million. That compares to 46 in the second quarter at $1.48 million each and 25 in the third quarter of 2016, that average $1.4 million each. So again, on a year-over-year basis, 32 deals averaging 1.9 compared to 25 averaging 1.4 last year. As obviously, solid growth and large deal size, as I've mentioned earlier, and add volume versus last year. During the quarter, health sciences, financial services, automotive and retail consumer goods verticals represented 62% of revenue. Healthcare at 28%, financial services 16%, automotive 9% and retail consumer goods at 9%. And we mentioned on last quarter's call, we anticipated a strong second half from the health sciences vertical. And during the quarter, we realized the 20% increase in revenue there. I expect to see similar results during the fourth quarter. Another vertical worth mentioning is automotive. It's an industry where we've always have the solid foundation of customers, but where we are really building some momentum right now. Several of the major manufacturers are already clients, and we have significant pipeline in the industry as well. And that success and opportunity extends beyond just the manufacturers though and into the supply chain as well as financial services arms of these large enterprises. I expect to see solid growth in the automotive vertical in 2018. So turning attention now to our expected results for the fourth quarter and full year. Perficient expects fourth quarter for the year 2017 services and software revenue and reimbursed expenses to be in the range of $126 million to $140 million, comprised of $113 million to $119 million of revenue from services excluding reimburse -- including the reimburse expenses and $13 million to $20 million for revenue from sales of software. Third quarter adjusted earnings per share is expected to be in the range of $0.32 and $0.38. Perficient's adjusting and narrowing as previously provided full year 2017 revenue guidance to a range of $477.8 million to $491.8 million and adjusting and narrowing it's full year 2017 adjusted earnings per share guidance to a range of $1.18 to $1.24. So with that, we can open the call up for any questions. Operator?

[Operator:]

[Operator Instructions]. Your first question comes from the line of Mayank Tandon from the Taminco.

[Mayank Tandon:]

Jeff and Paul, a few questions here. Wanted to just get a sense on guidance. If I look at a number of 3Q, they were pretty good, except for the maybe decline in the software, hardware revenue. But service revenue was positive and you had good margins. But the guidance for 4Q and for the full year is narrowed lower. Can you maybe comment on what your thought process is around the guidance?

[Jeffrey Davis:]

Yes, I think we're seeing a little more seasonality than we would normally see in the fourth quarter, which actually is kind of normal based on the past history. You know that's -- I think sequentially, we're down may be -- we're guided down maybe 1 or 2 points, sequentially. And overall, for the year, it's only about one point down on services. Most of the adjustment is in software and reimbursement expenses. And as we continue to do more work in our DBC, both internationally and , which we're experiencing less travel requirements, which is actually a positive all the way around, but It, obviously, is taking down the reimbursed expenses. And likewise, the industry -- software industry ships more to a SaaS model and Cloud in a way we're seeing that in that software as well. So it's a modest adjustment in services, and most of the adjustment is software reimburse expenses.

[Mayank Tandon:]

Got it. But underlying business remained strong. You said bookings were pretty good. Health care is strong, broad-based growth. So nothing really fundamental that's going on in services that would be impacting your guidance, just outside of seasonality?

[Jeffrey Davis:]

Yes, that's exactly right. I think the guidance represents like 1% to 7% organic growth this quarter year-over-year in services.

[Mayank Tandon:]

Got it. And what was the organic growth in third quarter in services?

[Jeffrey Davis:]

Down about, yes, it was down about 2%.

[Mayank Tandon:]

Got it, okay. And then in terms bill rates, you mentioned that you saw a nice increase in the quarter, obviously, that helped revenue and margins. What is your expectation in terms of bill rate increases in the fourth quarter but more importantly, as you go into '18?

[Jeffrey Davis:]

You know, we're going to try and talk about this for a while. We'll stick with the same guidance, about 2% to 3% per year. So we do expect Q4 to -- 2018 to be about 2% to 3% above Q4 of '17 if that makes sense. So it's 2% to 3% across the year.

[Mayank Tandon:]

Okay. And then one last question for me. In terms of looking ahead into '18 on overall revenue, especially in healthcare -- obviously you've seen a nice uptick for your business. Is it company-specific or are you seeing -- there hasn't been much clarity in Washington around healthcare. So I'm just wondering if we do get any kind of clarity, would that actually be a potential tailwind? If you could just provide a somewhat thought process around what's going in healthcare both for your company and of course, just generally for IoT services market, that would be helpful.

[Jeffrey Davis:]

Yes, absolutely. I think I've said for a while, and I believe it continues to be true. I think we're seeing evidence of it that the way we are positioned in healthcare, in a large way, around digital transformation for the most part, I think it's largely unaffected by Washington. The impact of Washington whether it's certainly introduced does create some business fits and starts along the way, as we've seen. But the primary thesis and the work that we're doing in the space, doesn't go away. And as we've demonstrated time and again, even EBITDAS little bit of a valley, it always comes back. And the reason for that is, the work that we're doing this is all around the paradigm shift in the industry to more consumerism, patient as a consumer, better outcomes for treatment as well as service. So I think that continues. That's the work that we do. And I honestly think it's, sort of, independent of everything that Washington is doing. The industry has become more competitive. It's become more consumer-oriented and that drives most of the business that we're doing at the states. And like I said, I don't see anything .

[Operator:]

You're next question comes from the line of Franc Atkins with SunTrust.

[Francis Atkins:]

I wanted to ask a little bit about the people side of the business, some nice growth in headcount. Can you remind us of your philosophy in terms of headcount addition relative to the pipeline or work you're getting. Do you, kind of, hire ahead or concurrent with that? And then secondly, what are you doing to attract and keep good talent in this environment that's getting more and more tight?

[Jeffrey Davis:]

Good questions. So we rarely hire ahead. We do sometimes when it's a very special skill that's in demand and in supply. For the most part, we keep candidates warm. And in the candidate pipelines and as the work closes, we bring them on. That's what allows us to keep our utilization in the high 70s and long-stated goal of 80%, 81%, and we achieved that this quarter. And -- so that's our philosophy in terms of that question is. Keeping our pipeline warm, bringing them on as work is available and get them billable right away with a little bit hiring ahead, again, in the specialty areas. In terms of how we recruit. I think our culture is very helpful, actually. You compare us to our primary competitors like Accenture, Deloitte and people like that, it's a very different business here. I can tell you that it's far most far more entrepreneurial and. So we try to give people an opportunity in platform to show what they can do and reward them for that performance. And I think that helps us in recruiting and retention. Despite the uptick in demand, we're able to keep up with them.

[Francis Atkins:]

Okay, great, that's helpful. And then a nice pick up in deal size, going to 1.9. Anything behind that? And what does that do for the company, going forward in terms of margins and visibility of roadmap?

[Jeffrey Davis:]

Yes. I would say that there's something behind it. I think it's beginning to realize some provision on this, sales investments that we've made over the last couple of years. I won't drive into a lot of detail, but we've taken a much more strategic approach into actions of sales. We have more resources, focus on specific accounts, particularly those accounts that we believe will yield better results, of course, in terms of growth. And I think we're seeing that this is the combination of or beginning to see the culmination or fruition of that. The other thing absolutely has to do with -- as we grow larger and our brand gross, we are invited to participate not only in more deals, but also larger, more complex engagements. That's why, by the way, that while our bookings are up 26% year-over-year, we're not going to see revenue at that level -- that level of growth. But that's due the fact that these are longer-duration engagements. So a lot of that extra $0.5 million on the average, if you will, on those deals that have occurred earlier is an extension to the future. But to your question, to your point, that obviously does get us -- give us better visibility. We have a higher backlog going into 2018 than we ever have before, both in absolute dollars and as a percentage of what we expect to do with revenue next year, which obviously helps us put a foundation in place that we can build on and drive better growth.

[Francis Atkins:]

Okay, great. And my last question is on the financial services vertical. Any changes there? We've heard from some of your peers that there's strengthen insurance and some of the regional banks while the larger banks are struggling a little bit more. Any trends or areas of strength or weakness you could call out in financial services?

[Jeffrey Davis:]

You know, I would call it stable. I don't think that's going to be a fast-growing vertical for us any time in the next quarter or 2. But it certainly has returned to stability where we actually saw some weakness in the past, which is encouraging. I do think that we will grow. And the opportunities that we have, that we haven't fully exhausted, is actually introducing a lot more digital transformation and technical work in today's industry than we're doing today. A lot of work what we're doing in management consulting, which is excellent work. It's high margin and places us in the right -- we're in the right part of the organization. But we need to leverage that more than we have to drive more of our digital work. We've got programs underway to get that done. So I'm optimistic, we'll be able to grow in that industry, as long as it stays stable, by introducing more of the portfolio in the accounts that we've had for a while.

[Operator:]

You're next question comes from the line of Joan Tong with Sidoti.

[Joan Tong:]

A couple of questions here. And -- so you said the organic growth -- organic decline was 2% in the third quarter, and you're looking for 1% to 7% organic growth year-over-year for the fourth quarter. Are you talking about revenue? Are those revenue numbers or volume number?

[Paul Martin:]

Net services revenue.

[Joan Tong:]

Yes, net. So it's net services revenue. So your average bill rate go -- went up. So I assume volume would be, obviously, lower than those numbers that you just provided. Right?

[Jeffrey Davis:]

Little bit. Now keep in mind though that will continue next ship to offshore. So it's not as much as of a GAAP as you might sort of calculated. So we are throwing in volume offshore faster than we are inshore.

[Joan Tong:]

Got it, got it. Make sense. Make sense. And then Jeff, you mentioned, bookings went up 26% year-over-year. Did I get that number right?

[Jeffrey Davis:]

That's right.

[Joan Tong:]

How about healthcare? Usually you talk about healthcare like bookings as well?

[Jeffrey Davis:]

We'll look that up. I don't have it on my finger.

[Paul Martin:]

I think it was fairly strongly in the quarter from a working's perspective. It looks like it was up about 13%, year-over-year.

[Jeffrey Davis:]

Okay, 13%.

[Joan Tong:]

Okay. Jeff, any, sort of, help in terms of 2018 early read -- your margins obviously expanded very nicely in 2017, contributed, I would say, mostly by the migration to offshore as well as the capacity cut and also the bill rate increase. So next year, what's you're thinking in terms of all these elements? Which one you think or 1 or 2 of them will contribute more to a margin expansion next year?

[Jeffrey Davis:]

Well I think, we've got utilization running pretty close to sustainable macs. We can probably get a point out of it. But to your question, I think the opportunity is greater in ABR and offshore. There will still be a combination of the 3. I'm not sure we'll be able to put up quite the expansion we did this year, given that we had apparently soft comp. Although we had margins to expand, at least, modestly. We haven't done the modelling yet in detail, but you know 100 basis points or so, which actually puts us in, kind of, best-in-class offshore guys.

[Joan Tong:]

Sure. Sure. And then how should we think about volume, going forward? You talk about sales improvement, more resources, bigger deals. Should we see volume to pick up a little bit next year as well?

[Jeffrey Davis:]

Yes, absolutely. I think with bookings that we had, the 5 points that we have, the client base that we have. I think we've got a good shot at sustained growth, and I've said this before, 5% plus, maybe 5% to 10% range in 2018, which is kind of where we're going to be in the 1% to 7% for Q4. And I think that bumps up going to 2018. And I think we can sustain that. So with that, we'll definitely drive some additional volume, certainly offshore, because that's [indiscernible]. But onshore as well, we expect to grow volume.

[Joan Tong:]

Okay, got it. And then finally, you mentioned like AI, IoT, and do you think that you have that capability? Do you feel comfortable when you look at the current capabilities or going forward, maybe some of the acquisition were focusing those 2 areas, IoT and AI as well?

[Jeffrey Davis:]

We actually have a quite a bit of capabilities. I think I've mentioned this before, but we're key partnered with IBM today. And we are doing a lot with Watson, including some various [indiscernible] in healthcare, around oncology and things like that, leveraging the possible engines. So we certainly have that capability. I think we've got 35 people or so dedicated to the Watson practice already, from year or a 1.5 year ago. And then yes, IoT, absolutely, we've got a fair number of things over the years and recently, yes, things like that. But with the acquisition of Clarity, they drive experience and capability in that space as well. And so they've done things such as with our large consumer product company, would know the name, if I was going to mention it. But using IoT for inventory management and the grocery stores in the stores space and monitory shelf inventory, things like that. So those work is already underway.

[Paul Martin:]

Okay. There's one other thing I want to add. Our profit of 13% was revenues from the quarter. And bookings were relatively flat for a very strong second quarter ultra-bookings.

[Operator:]

And your next question comes from the line of Brian Kinstlinger with Maxim group.

[Brian Kinstlinger:]

Paul, first, a quick numbers question. If I assume and tell me this is reasonable, $10.5 million in services revenue from Bluetube, RAS and Clarity, those are the 3 acquisitions that don't have a year-over-year comparison, is that in the ballpark?

[Paul Martin:]

Yes, that's probably -- may be a little bit light but it's pretty close.

[Brian Kinstlinger:]

Okay. That makes sense. I mean, otherwise it was about 1% of services growth. But I guess, my question is, in the past, despite solid bookings, especially in the back half of the year, it hasn't been -- it's been a challenge to grow volume 5% or so. So the to continue to move to offshore and despite these solid bookings, what gives you the confidence that this year you'd be able to post organic revenue growth above bill rate growth?

[Paul Martin:]

Well I mean, if we replay the bookings numbers, I mean, they're up pretty substantially. Now as I said before, there's a chunk of acquisitions, there's a chunk of that, that actually goes into longer-term duration deals. The issue on that is that's work that you don't have to replace. So I think the momentum will build. But I'll tell you, Brian, it really come back to the work that you've in sales. We, kind of, turn sales both the organization structure and to certain degree, compensation structure. All these years, it's a little strong. We've done a lot of work there. And reorganization, specifically, when growth was whole have been doing that. As I've said before, we're certainly seeing some fruition and you're right bookings for past where the growth is about to the degree of the bookings. And as I said before, it's probably going to be case again, and I'm sure it will be, but bookings were up 26%, quarter-over-quarter. And the time is co-relation, there's never one-to-one. The tight corelation's about 5 months, trailing 5 months. So the bookings in Q2 and in Q3 is going to get us to 1% to 7% growth in Q4. And bookings that we just had in Q3 up 26%, year-over-year. And then we anticipate, we'll have again in Q4. We had a very strong October already. So we expect again that, that 1% to 7% can grow in 5% to 10%. And I expect that we'll begin to see that in the first quarter or at least the first half of next year. And again, with the new model in place, I think that's a sustainable range.

[Brian Kinstlinger:]

Great. Last question I have. As you look at the landscape of IP services guys, a bunch, especially the Indian guys, have the value add maintenance, but it creates a long tale renewity recurring revenue. I don't think Perficient does it as much as Clarity. I'm curious what management has thought or evaluated in terms of somehow trying to increase recurring revenue. I realize a lot of your revenue comes from repeat customers, but there are not a renewity scheme of replacing old projects. So is there a way that Perficient can, in the future, change or improve the strategy to increase the content of recurring revenue?

[Paul Martin:]

Sure. It's a good question. We don't talk a lot about that, but we've been doing that already. I talk about that software-factory approach that I mentioned in the prepared comments. That is a exactly that. Those tend to be 2 or 3-year commitments from a lot of our clients. We're running about -- out of our, let's call it, $40 million a month. We're rung about 20% of that. We call fix monthly basis. And now some of those deals renew annually, but some of those are 2 or 3-year long deals. But I would say that, that sort of $8 million is a very solid base of recurring revenue. I expect that to increase.

[Operator:]

I am showing no further questions at this time. I would now like to turn the conference back to Jeff Davis for closing remarks.

[Jeffrey Davis:]

All right, thank you all, again, for your time today. We'll look forward to speaking again in late February or early March, talking about the year and what we see for 2018. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now disconnect.