Perficient, Inc.
Q1 2016 Earnings Call Transcript

Published: 8 May 2016

[Operator:]

Good day, ladies and gentlemen and welcome to the Q1 2016 Perficient Earnings Conference Call. My name is Steve and I will be your Operator for today. [Operator Instructions] As a reminder this call is being recorded for replay purposes. I would now like to turn the conference over to President and CEO, Jeff Davis.

[Jeff Davis:]

Good morning everybody this is Jeff Davis. With me on the call today is Paul Martin, our CFO. I would like to thank you for your time this morning. As typical, we have got about few minutes here of prepared comments after which, we will open up the call for questions. Paul, would you please read the Safe Harbor statement?

[Paul Martin:]

Sure 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 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 Earnings Per Share. 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 under Investor Relations. Jeff?

[Jeff Davis:]

Thanks, Paul. And once again, good morning, thanks everyone for joining. We are pleased to discuss our first quarter results with you. 2016 got off to a great start with total services revenue up 12% overall and 6% organically. In the year where we’re targeting single digit organic growth -- high single digit organic growth, our performance in Q1 laid a solid foundation to build on. As three consecutive quarters of sequential revenue growth and our course I’m sure many of you saw the release that our Q2 revenue guidance, outlines the likely that a fourth consecutive quarter of growth is underway. December, January and March were very strong months for bookings, in fact they represent our three largest bookings month ever and the great news is that, much of the growth there is organic. The result of the performance is a solid backlog and continuing confidence that will be able to -- we’ll be capable of delivering our strong year of growth. We continue to focus on levering the ABR improvements we’ve made in recent years across the larger book of business to drive organic growth. Things are trending well there, total organic billable hours in Q1 were up 11% annually. Cloud, SaaS, digital transformation and customer experience initiatives are driving our success, and we are uniquely positioned to capitalize on those trends for years to come. And we previewed our plans to launch the Perficient digital agency on the fourth quarter fall in the recent weeks did just that. The early feedback from our clients, partners, prospects and press is overwhelming [ph]. What we’ve really done with Perficient digital is enhance and expand upon the solid foundation of agency oriented skilled that had exited the Perficient for many years. A user centered design and creative excellence have been core to our being for more than a decade. But we start the opportunity to enhance our capabilities. So we got busy building. First supplementing our capabilities with the great team that came to Perficient via the Zeon [ph] acquisition and then adding Enlighten, a digital marketing agency. Those three consolidated teams now forms or new agency Perficient Digital and we expect to be a meaningful growth catalyst going forward. Unlike several of our traditional agency competitors and consultancy competitors, we’re not an IT and management firm with an agency offering a bolted on as an afterthought, and on the flipside, we’re not an agency that dazzles but can’t deliver. In many ways, Perficient is a permanent provider of the exact entry that customers what and need and that our competitors strive but fail to be. As the world continues to digitally transform, customer experience and technology are now in inextricably linked. In business today and tomorrow your digital or dead, and Perficient with Perficient Digital not only brings both brilliant creative and marketing mines to bare on this business imperatives but an un paralleled deep and broad technical expertise, that enables the operational implementation of those solutions. So in conjunction with the launch of the agency, we also launched a re-imagined Perficient website that was designed by our agency. If you haven’t seen it yet, I encourage you take a look. We’ve wining this work and billing the ExTenure interactive and Deloitte Digital, [indiscernible] as well as the smaller agencies in the real fairly regular already and by formally launching the agency and more aggressively marketing our skills in this space, we expect to drive significantly more opportunity. I’ll touch on, touch on a few other notable topics and speak to our Q2 outlook after Paul shares the details about the first quarter results, and then as usual we’ll open the call up for questions. Paul.

[Paul Martin:]

Thanks Jeff. Total revenues for the first quarter of 2016 were 123.8 million a 12% increase over the year ago quarter, services revenues were 109.7 million for the first quarter of 2016, excluding reimburse expenses, which represents an increase of 11% over the comparable prior year quarter. Services gross margin for the first quarter excluding stock compensation and reimbursable expenses were 36.1% compared to 36% in the first quarter of 2015. SG&A expense, excluding stock compensation increased to 24.5 million in the first quarter of 2016 from 21.7 million in the comparable prior year quarter. SG&A as a percentage of revenue increased slightly to 19.8 from 19.7 in the first quarter of 2015. EBITDA for the first quarter was 17.2 million or 13.9% of revenues and was essentially flat compared to 15.5 million or 14% of revenues in the first quarter of 2015. The first quarter of 2016 included amortization expense of 3.4 million compared to 3.8 million in the comparable prior year quarter. The decrease is primarily due to intangible assets related to previous acquisitions becoming fully amortized partially offset by the addition of intangible assets from acquisitions that were completely during 2015. Our effective tax rate for the first quarter of 2016 was 31.1% compared to 34.6% in the first quarter of 2016. The decrease in the effective rate is primarily due to research and development tax credit and the early adoption of ASU No. 2016-09 Improvements to Employee Share-Based Payment Accounting. Net income increased 33% to 5.4 million for the first quarter of 2016 from 4.1 million in the first quarter of 2015. Diluted GAAP earnings per share increased to $0.16 a share for the first quarter of 2016 from $0.12 in the first quarter of 2015. Adjusted earnings per share increased to $0.29 for the first quarter of 2016 from $0.26 a share in the first quarter of 2015. Again, adjusted EPS is defined as GAAP earnings per share plus amortization expense, non-cash stock compensation, transition cost and fair value adjustments of contingent consideration, net of related taxes divided by fully diluted share outstanding for the period. We ended the first quarter of 2016 with 56 million in our standing debt consistent with the balance at December 30, 2015 and 9 million in cash and cash equivalents. Our balance sheet continues leave us very well positioned to execute on our strategic plan. Our annual global headcount at March 31, 2016 was 2,540 including 2,342 billable consultants and 198 subcontractors. Ending SG&A headcount was 432. Our day sales outstanding on accounts receivable were 85 days at the end of first quarter 2016 compared 80 days at the end of the fourth quarter and 79 days at the end of the first quarter of 2015. I will now turn the call back to Jeff for a little more commentary behind the numbers. Jeff?

[Jeff Davis:]

Thanks Paul. As I mentioned bookings in the first quarter were quite in that we sold 50 deals north of $500,000 during the quarter and they averaged $1.4 million each and that compares to 35 in the fourth quarter averaging $1.4 million each and 38 in the first quarter of 2015 that averaged to $1 million. So as you can see a significant increase in the number of larger deals booked sequentially and a meaningful increased in volume and size on an annual basis. Healthcare and financial services verticals again represented a significant portion of revenues collectively accounting for 48%. Those two verticals also were strongest from the Q1 bookings perspective. Before we close, I also wanted to reiterate that it remains our intention to add 2 to 3 more deals this year via M&A. Obviously we will be patient as we need to find the right deals and there are no guarantees we'll find them, but we are in advanced discussions with a few firms we believe will be good strategic fits. So again in summary, a really solid start to 2016 Q1 bookings were great, we launched Perficient Digital. We remain confident in our full year projections and are looking forward to great year growth. So turning our attention to the expectations for the second quarter, Perficient expect that second quarter 2016 services in software revenue including reimbursable expenses to be in the range of $119 million to $129 million comprised of $113 million to $119 million of revenue from services including reimbursable expenses and $6 million to $10 million of revenue from sales of software. The midpoint of the second quarter 2016 services revenue represents growth of 15% year-over-year for the second quarter. With that, we can open up the call for any questions. Operator?

[Operator:]

[Operator Instructions] And that question comes from the line of Mayank Tandon from Needham & Co. Please proceed.

[Mayank Tandon:]

I wanted to kick things off again, good start to the year but I just want to make clear Jeff and Paul, did you -- you gave 2Q guidance, are you reiterating also the guidance you've given previously for fiscal ’16 in terms of the revenue range and the EPS range?

[Jeff Davis:]

Yes.

[Mayank Tandon:]

Okay, I didn't see that in the press release so I was just curious that was still intact.

[Jeff Davis:]

Yes.

[Mayank Tandon:]

And then I know that 1Q is not a good reflection of the margin trajectory but also want to be clear in terms of your expectations from margins for this year, are you still thinking in terms of 150 to 200 basis points of services gross margin improvement and then I think you had mentioned 100 to 150 basis point of EBITDA margin expansion for fiscal 16, is that still kind of the range we should be modeling?

[Jeff Davis:]

Yes, I think 150 to 200 on gross services and 100 to 150 on EBITDA is still a good goal for us. It will be more backend loaded much like the last few years have been, so expect continued expansion as we move forward through the year.

[Mayank Tandon:]

Got it and then I think you've mentioned the 11% organic volume growth I am assuming that’s higher than the overall revenue growth organic just because you have more than offshore impact, is that a fair assessment?

[Paul Martin:]

Yes that's exactly right, we continue to see a very strong growth of offshore and we expect that will continue. So while it creates a little bit of headwind on top right revenue growth obviously the volume growth is very-very good and this is probably the best volume growth we've had in years. And off-course we’ve strong margins off-shore as well, so it will help with the margin expansions.

[Mayank Tandon:]

While I’m double checking all the numbers, but also want to make sure, that your organic revenue growth was about 9% this quarter and you’re still thinking in terms of the 8% organic revenue growth for fiscal ’16 based on your previous guidance.

[Paul Martin:]

Yes it was 6.5% in the first quarter, the midpoint of guidance for Q2 is about 10% and yes 8% the midpoint of our overall annual guidance is about 8 and we’re still holding to that.

[Mayank Tandon:]

Got it, okay and then just moving to more a qualitative question, you call out health care, obviously that’s an important vertical for you, would you just remind us and investor in terms of your value preposition within healthcare, what are some of the key engines of growth, where are you differentiated and how are you failing versus some of the emerging competitors in that space.

[Paul Martin:]

I think we’re differentiated in a lot of ways, really and lot of must going on in healthcare happens to be exactly in our sweet spot, not to mention actually, Perficient Digital participating more and more in healthcare. So the services we’re providing there I would run again under the digital transformation umbrella, consumerism in healthcare continues to rise, and so we got payers and providers both optimal systems and plans, viewing the patient as a consumer and rightly so, as patients have more choices like consumer. So they are putting in place, systems and process, very similar to retailer or consumer products companies. So that involves again everything digital transformation. Placement portals, mobile, a lot of things [indiscernible] with the patients and not least, in fact I would say most important and probably our biggest differentiator is data analytics. So the analysis of quality of care, cost of care and in fact predictive analytics around patients care.

[Mayank Tandon:]

That’s helpful and then just one final question for me, in terms of the guidance for fiscal 16, how does the revenue breakdown between rest of the patients for pricing improvement, utilization trends and then headcount growth.

[Jeff Davis:]

I think we’ll see some improvement on rates, we because of the couple of large engagements that we’ve started last year, but as we mentioned the time that we had to give some discounts to get those, however the tradeoff was utilization. So I do, speculation will continue to be higher than last year, two to three points I would expect across the year. And was rates up slightly, I think we’ll see some improvement there as well, but most of growth, that I think we’re going to see both in volume and in revenue is going to come just from new winds and more business. Again, a lot of other things kind be equal, other than increase utilization driving higher margins.

[Mayank Tandon:]

Excellent great job guys.

[Operator:]

And the next question come from the line of Frank Atkins from SunTrust. Please go ahead.

[Frank Atkins:]

Wanted to ask a little bit about the talent or hiring environment that you’re seeing out there, any changes or you still being able to get great people?

[Jeff Davis:]

Actually we’ve had great success, we continue to be really, I would say thrilled is not an over statement, in terms of the quality of people that we’re able to attract, I do think, we’re an attractive employer and are set apart given our focus, the technologies that we focus on, the solutions that we focus on and our growth, I think makes us attractive as well, in fact our attrition in Q1 was a lowest it’s been in quite some time, a little over 16%, which is I’d say close to best of breed in the industry for company of our size. So everything is going very well on a talent acquisition and retention front.

[Frank Atkins:]

Okay great and as we look towards the digital agency piece and building out that, what does that mean in for of longer term EBITDA goals and targets and how should we think about the trajectory margins and it’s impacted by that?

[Jeff Davis:]

I think it could be neutral to margins for the lowest part, the key driver and opportunity around Perficient Digital, is being that end to end provider, that I think so many companies are seeking today as I mentioned in the prepared comments, you know not on both on, not on after thought, this is work that we’ve been doing for 15 years, but we’ve recently added to that very, very deep capability. So I think, it will be more of a lead opportunity for us, a tip of the spear if you will and obviously plays a very-very well to the CMO. Who as we all know has more and more influence over IT spend and really both the CMO and CIO again are looking for an integrated solution that can handle both the agency work, the brilliant elegant creative all the way through the deliver and operational solutions.

[Frank Atkins:]

Okay and last one from me, can you talk a little bit about the opportunities you see in the kind of retail consumer segment.

[Jeff Davis:]

We’re seeing good strength at there, I mentioned the Zeon acquisition that we did it really rounded out our capability on commerce platforms adding with Magento, but we can see this be a strength with sterling and IBM commerce as well as other opportunities around retail and particularly around digital transformation as I mentioned before with API development helping retailers enhance their web presence and actually the call centers and getting more information about products that there’re selling, improved services, we’re seeing continued opportunity in all those spaces

[Operator:]

[Operator Instructions] And your question comes from the line of Brian Kinstlinger with Maxim Group. Please go ahead.

[Josh Seide:]

This is actually Josh Seide in for Brian. Thanks for taking the question. We as being hearing a lot of about slower or uncertain enterprise IT spending, are you see this begin to impact your bookings at all?

[Jeff Davis:]

No, there is always ebb and flow, but I think those very custom specific from what we're seeing, so right now we continue to see again great booking in the first quarter, solid start to the second quarter. So it remains to be seen we still got some work to do to shore up the entire year. But I would say thus far we're still seeing nice demand out there. One of the things I think somewhat differentiate us, we're small it's kind of David versus Goliath, but we take share from these big guys. So even if the spend is not driver our growth or increased spending per say, I think we can still grow by taking share away from our larger competitors.

[Josh Seide:]

Okay and can you talk a bit about your ability over the last six months to in new logos, I think it was two years ago that you've announced that you're beginning to work with sales force to incentivize new logo wins and I am curious if there has been any improvement there?

[Jeff Davis:]

I can't quantify that for you now, I can tell you anecdotally that absolutely we've added new logos. I know that a good chunk of the bookings that we had in the first quarter I would say higher percentage in the first quarter came from new logos than in the past, so we're experiencing some success there, like I said I just don’t have that quantified for you right now.

[Josh Seide:]

And can you talk a bit about how of the effort was delivered from what the trajectory there is maybe over the next year and how about the next two years as well? Thanks.

[Jeff Davis:]

It's about 10% roughly of services revenue today and of course keep in mind that the rate differential means it's about 20% to 30% of the volume or billable hours coming from offshore. I think that mix probably continues to rise as a higher percentage of offshore just based on what we're seeing right now. And that's -- I alluded to this earlier, in terms of taking share away from competitors, we've seen a lot of instances over the last 12 to 24 months where we've had long-term trusted relationships with number of enterprise customer that are tuning more and more to us to take on more of the offshore work. Considerably particularly the higher ROI, quick turnaround project based work that frankly our competitors have struggled to deliver. So we continue to see that opportunity there. Also in healthcare, healthcare is a much more open now, so offshoring some of these projects than they were a few years ago. So both of those drivers I think will continue to see an expansion of our offshore relatively to onshore for the foreseeable future.

[Operator:]

I would now like to turn the call back over to Jeff Davis for closing remarks.

[Jeff Davis:]

Once again thank you all for joining today. As you can see we've got a great start of the year and look forward to reporting the second quarter results in 90 days. Thank you.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you very much and have a very good day.