Perficient, Inc.
Q2 2016 Earnings Call Transcript

Published: 8 Aug 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Perficient Second Quarter 2016 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 is being recorded. I would like to introduce your host for today's conference, President and CEO, Jeff Davis. Sir, you may begin.

[Jeffrey Davis:]

Thank you. Good morning, everyone. Thanks for joining us. With me on the call today is Paul Martin, our CFO. Again, thank you for your time today. We have about 10 to 15 minutes of prepared comments as usual and then we'll 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 refer to the additional information contained in our SEC filings concerning factors that could cause those results to be different than contemplated in today's discussion. At times during this call, we will refer to adjusted EPS, our earnings press release, including a reconciliation of certain non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with Generally Accepted Accounting Principles, or GAAP, is posted on our website at www.perficient.com. We have also posted a slide deck which includes a reconciliation of certain non-GAAP goals to the most directly comparable financial measures prepared in accordance with GAAP on our website under Investor Relations. Jeff?

[Jeffrey Davis:]

Thanks, Paul. Well, again, good morning and thanks for joining us as we discuss our second quarter results. Second quarter total services revenue was up 11% overall, and that number would have been higher had it not been for an unexpected development which is the extension of timelines associated with projects at our largest account which I'll talk about in more detail shortly. In the near term, it's forced us to make some revisions, but in the long run, there's no impact at all, really, and it sets the stage for what could be a very strong start to 2017. We filed very strong Q1 bookings with a solid performance in Q2, June in particular was a great bookings month. And just a few days ago, we closed the deal nearing eight figures at a global chemical leader. On that note, we're making great progress on our strategy to move up market. Our sales team is focused on selling bigger and longer-term deals to a strategically defined a set of larger enterprise accounts. In fact, year-over-year organic growth in our top 50 account segment was 20% in the quarter and 18% year-to-date. And the average tenure of those relationships is now 5.5 years. While we'll always be opportunistic, of course, in general, we're purposely not pursuing one-and-done-type smaller accounts where the propensity for long-term spend is not commensurate with the pre-sales investment required. And while macro environment signals are a bit inconsistent and I don't think anyone yet has visibility into how the upcoming presidential election and the subsequent ramifications there may impact enterprise demand, we're not seeing signs of pricing pressure. North American ABR remained healthy at $144 an hour, and we continue to realize an increasing offshore mix shift. In fact, offshore hours were up 38% over the prior-year period and represented a larger percentage of revenue than ever. That's contributing to a healthy increase in overall billable hours, which were up organically 17% over the prior-year period. We also formally launched the Perficient Digital agency during the quarter. And as I mentioned on the Q1 call, feedback from clients, partners, prospects, and press has been overwhelmingly positive. Microsoft just named us Partner of the Year in each of the three regions in North America for the second year in a row. To earn that recognition in one region is exciting, obviously. But to sweep the entire country two years in a row is something else entirely. Really a fine testament to our partnership with Microsoft which, as all of you know is becoming an increasingly formidable and important cloud player. So as I mentioned earlier, we were notified approximately mid-quarter by our largest client that they'd be temporarily pausing some of the projects, roughly half of the projects that we were working on until 2017. And of course, that timing was unfortunate as it's related to our second quarter results and it will impact H2 as well. I want to be very clear that client has advised us, they simply wish to postpone some of the work until 2017, primarily due to logistics and managing such a large endeavor. It's an extension of the timeline, not a reduction in the commitment of work to Perficient. So this all stays in backlog, it just gets extended. We've confirmed that within the last week with the client. Anyone trying to assess the health of the business should understand there's no material difference in our long-term prospects or thesis. Bookings remain strong and our backlog remain sound. This delay simply pushes some of the work we anticipated this year into next year, and beyond. If you're measuring Perficient possibilities and increments greater than a quarter, this is a non-event. I'll touch on a few other notable topics and speak to our outlook for Q3 after Paul shares the detail about the second quarter results. Then as usual, we'll open up the call for questions. Paul?

[Paul Martin:]

Thanks, Jeff. Total revenues for the second quarter were $124.4 million, a 15% increase over the year-ago quarter. Services revenues were $107.9 million for the second quarter of 2016, excluding reimbursable expenses which is an increase of 11% over the comparable prior-year period. Services gross margin for the second quarter of 2016, excluding stock compensation and reimbursable expenses, was 35.4% compared to 36.3% in the second quarter of 2015. SG&A expense, excluding stock compensation, increased to $23.2 million in the second quarter of 2016 from $22.7 million in the comparable prior-year quarter. SG&A as a percentage of revenues decreased to 18.7% from 20.9% in the second quarter of 2015. EBITDAS for the second quarter of 2016 was $16.5 million or 13.3% of revenues compared to $13.4 million or 12.4% of revenues in the second quarter of 2015. The second quarter includes an adjustment to fair value of contingent consideration of $1.4 million, related to a change in estimate associated with the earn-out for the Enlighten acquisition that was completed in 2015. Our effective tax rate for the second quarter of 2016 was 34.4% compared to 19% for the second quarter of 2015. The increase in the effective rate is primarily due to non-recurring tax benefits related to prior year research credits that were recorded in the second quarter of 2015. Net income increased 45% to $5.8 million in the second quarter of 2016 from $4 million in the second quarter of 2015. Diluted GAAP earnings per share increased to $0.17 a share for the second quarter of 2016 from $0.12 a share in the second quarter of 2015. Adjusted GAAP earnings per share increased to $0.28 a share for the second quarter of 2016 from $0.25 in the second quarter of 2015. And again, adjusted GAAP EPS is defined as GAAP earnings per share plus amortization expense, non-cash stock compensation, transaction cost, and fair value adjustments of contingent consideration, net of related taxes divided by average fully diluted shares outstanding for the period. Earning billable head count at June 30, 2016 was 2,434, including 2,256 billable consultants and 178 subcontractors. And the SG&A head count was 449. I'll now return to the year-to-date results through June. Revenue for the six months ended June 30, 2016 were $248.2 million, which is a 13% increase over the comparable prior-year period. Services revenue for the six months ended June 30, 2016, excluding reimbursable expenses, was $217.6 million, an increase of 11% over the comparable prior year period. Services gross margin for the six months ended June 30, 2016, excluding stock comp and reimbursable expenses, decreased to 35.7% from 36.1% in the prior-year period. SG&A expense, excluding stock comp, increased to $47.7 million for the six months ended June 30, 2016 from $44.4 million in the comparable prior-year period. SG&A as a percentage of revenues was 19.2% for the six months ended June 30, 2016 compared to 20.3% in the comparable prior-year period. EBITDAS for the six months ended June 30, 2016 was $33.7 million or 13.6% of revenues compared to $29 million or 13.2% of revenues in the comparable prior-year period. The six months ended June 30, 2015 included amortization of $6.7 million compared to $7.2 million in the comparable prior-year period. This decrease is primarily due to intangible assets related to previous acquisitions becoming fully amortized, partially offset by the addition of intangible assets from acquisitions completed in 2015. An adjustment of $1 million was recorded in the six months ended June 30, 2016, which was primarily a result of a fair market value adjustment to the Enlighten earnings base contingent consideration liability. Our effective tax rate for the six months ended June 30, 2016 was 32.9% compared to 27.7% for the six months ended June 30, 2015. The increase in the effective tax rate again is primarily due to the additional research and development tax credit recorded during the six months ended June 30, 2015, related to the finalization of the company's 2014 research and development tax credit. Net income for the six months ended June 30, 2016 increased 39% to $11.2 million from $8.1 million in the six months ended June 30, 2015. GAAP earnings per share increased to $0.33 from $0.24 for the six months ended June 30, 2015. Adjusted GAAP earnings per share for the six months ended June 30, 2016 was $0.56, up 12% from $0.50 for the six months ended June 30, 2015. Ended the second quarter with $36 million in outstanding debt. This is a decrease of $20 million from March 31st, and we have $9.5 million in cash and cash equivalents. In June, the company also amended and extended the maturity of its credit - the amended agreement extended the maturity date to July 31, 2018 and reduced our LIBOR margin by 25 basis points. Our balance sheet continues to leave us very well positioned to execute against our strategic plan. Our day sales outstanding on accounts receivable were reduced to 79 days at the end of the second quarter of 2016 compared to 81 days in the second quarter of 2015. I'll now turn the call over to Jeff for a little more commentary. Jeff?

[Jeffrey Davis:]

Thanks, Paul. So as relates to bookings, we sold 44 deals over $0.5 million each during the second quarter, they averaged $1.3 million. That compares to 50 in the first quarter, that averaged $1.4 million each and 33 in the second quarter of 2015 that averaged $1.2 million. So we've made great progress in bookings in the second quarter year-over-year. You can see a meaningful increase in deal volume. The healthcare and financial services verticals again represented a significant portion of the revenues, collectively accounting for 48% of revenue. Those two verticals remain our largest from a bookings perspective, though we saw strength in automotive and telecom verticals as a result. So before we close, I also want to reiterate that it remains our intention to add a couple of more deals this year via M&A. Obviously, we'll be as patient as we need to, to find the right deals and there are no guarantees we will, but we remain in advanced discussions with a few firms we believe could be good strategic fits. So again, in summary, a solid quarter other than the adjusted and extended project timeline associated with a large customer that impacted the back half of the quarter, and we'll push some of the revenue and earnings from 2016 into some of the out-years. As I mentioned before, the long-term thesis remains intact, and we expect a solid second half despite this account-centric delay. So, turning the attention to our expectations for the third quarter, Perficient expects third quarter 2016 services and software revenue, including reimbursed expenses, to be in the range of $118.5 million to $128.5 million, comprised of $109.5 million to $115.5 million of revenue from services, including reimbursed expenses, and $9 million to $13 million of revenue from sales of software. The midpoint of the third quarter 2016 services revenue guidance represents growth of 3% over the third quarter 2015 services revenue. The company has revised its full-year 2016 revenue guidance to be in the range of $495 million to $515 million, its 2016 GAAP earnings per share guidance to a range of $0.70 to $0.82 and its 2016 adjusted earnings per share guidance range of $1.25 to $1.35. So with that, we can open up the call for questions. Operator?

[Operator:]

[Operator Instructions] And our first question comes from the line of Joan Tong of Sidoti & Company. Your line is now open.

[Joan Tong:]

Good morning, guys. A couple of questions here. I guess, first off, related to that larger deal and - I guess my question is, like, looking at - you guys pretty much had the same issue last year when those project work got pushed out for that particular large transaction. So, I'm just wondering, is it something related to, hey, these type of projects actually, like, comes in stages. So when you're done with the first stage and you're moving to the next, and there always seems to be some sort of, like, timing, variation, and delays, can you just like elaborate a little bit more?

[Jeffrey Davis:]

Sure, Joan. Actually, this wasn't a break in the phasing of the projects. What happened - this was a very, very large undertaking on the part of this client. It's about $0.5 billion in services, total over about five years. And frankly, the logistics, I think, just proved to be challenging. There were interdependencies across several projects that were underway simultaneously, and some of the dependencies for the work that we were doing. And, by the way, I want to be clear that we are on track. Quality is not an issue, not a concern, client is happy with our work. But they really need to get some more foundational things in place. So, what it means, by the way, is our revenue from that client for this year is probably going to be somewhere between half and two-thirds of what we expected. Now again, that client is committed to ramp back up that other project stream and begin that work early next year. So we should see that same client ramp back up. So this is not normal. Again, it's a large undertaking for them. I think the logistics proved to be more challenging than anticipated and they needed to take this time to get some of those dependencies in place before we pick back up this other work. It's hard to say for sure whether we'll see this again from this client, it was the same client last year, but I don't think so. I think once these dependencies are in place and the foundational work is largely complete, it should actually be off and running and we shouldn't see more disruptions.

[Joan Tong:]

Okay. Got it. And then Jeff you mentioned that bookings continued to be strong in the second quarter after the very good quarter in the first, in beginning of the year. So I'm just wondering are we seeing actually better, like you know bookings or it's kind of like continue at the same pace. And just want to gauge like other than this like you know particular project is being pushed out. Any softness, like outside of this large deal?

[Jeffrey Davis:]

Yeah, I don't think so. We're really not seeing anything broad based. And again, if it hadn't been for this client, we wouldn't even be having this conversation. So, we feel good about what we're seeing, bookings are up double digits year-to-date, year-over-year. So we feel pretty good about the bookings. Now keep in mind the question always arises, you know when we will see that translate to double-digit revenue. I think we will get closer to that as time marches on, but the projects that we're selling now as I mentioned during the prepared statements, are larger and longer term. So some of that year-over-year increase is actually going out into a longer-term backlog. Very, very good fundamental for the business and very healthy, but it won't translate directly into revenue growth. The other thing that I'll take this opportunity to just mention again or reiterate is the mix shift to offshore continues at a pace, it's actually very good for the business, but it's even at a pace beyond what we'd anticipated. So, that actually presents somewhat of a headwind to top-line revenue growth, but as I've mentioned, 17% organic hours volume growth. That number was zero three years ago, even negative three years ago. So, we've shifted the business to focus on volume, as well as top-line revenue growth and we're certainly seeing the volume come through. The top-line revenue, I think, would have been there had it not been for this particular engagement.

[Joan Tong:]

Okay. Got it. Got it. And then finally, regarding that eight-figure like chemical company business that you booked after the quarter, can you sort of talk about the timeline for us?

[Jeffrey Davis:]

Yes. It's about a two-year and three-month engagement, I believe, in total. It's about $8.5 million, $9 million of revenue there and great win for us. That's a big win. To your point earlier, a lot of these things are phased, and so to win one that large is exciting for us and we're pleased. It's relationship we've had. We've done some other work for them in the past and that's what got us this win. We've done some smaller engagement, but very critical strategic engagements around Hyperion, actually. And so we're back and we won this larger piece of business.

[Joan Tong:]

Okay. All right. Thank you very much.

[Jeffrey Davis:]

Thanks, Joan.

[Operator:]

Thank you. And our next question comes from Frank Atkins of SunTrust. Your line is now open.

[Frank Atkins:]

Thanks for taking my questions. I wanted to ask what organic growth in the quarter was. And as we look at the large delay, what impact does that have on this year's organic growth, and maybe you could size the amount that might be pushed into 2017.

[Jeffrey Davis:]

Sure. The organic growth in the quarter was about 6%. Overall, for the year, we're looking at - and I think if you look at the mid-point of our guidance, we're somewhere in the low-single digits for the year, again, really all due to the impact of this engagement. The dollars, to your question, that go into next year if this ramp-up occurs, and again we've been assured as recently as a week ago that it will, represent somewhere on the order of $15 million to $20 million, I would say, the incremental revenue next year just from this account.

[Frank Atkins:]

Okay. That's helpful. And as you look at the delay here, what gives you the confidence that this is just a delay and there might not be some sort of re-scoping or changing in the value of the work over time?

[Jeffrey Davis:]

Well, we're pretty close to the client. And we're, I mean we're still there doing substantial amount of work. We got probably about a $15 million revenue stream or better now. So we're there every day. Our folks are working very closely with the top executives that are sponsoring this engagement. And of course, all I can tell you is what they're telling us. And every indication has been, from the time they first notified us to as recent as a week ago, that their intention is absolutely to proceed with the project plan they had. They just delayed one particular work stream.

[Frank Atkins:]

Okay. And then as you get this type of delay, that puts you in a position of a difficult balance of utilization and head count and keeping good people so that you're prepared to do that work, how are you thinking about that balance as well as the cost side?

[Jeffrey Davis:]

That's exactly right. And so you'll see that - you've already seen that utilization was impacting the quarter primarily due to this. And you're right. While we did reduce head count in the quarter to reflect this reduction in revenue, you don't want to lose good people. So some of those people did need to come back to the bench until we could find other work for them, and that's ongoing but going well. And I think, on go-forward basis, going back into Q3 now and into Q4, we should see utilization come back up as we get those folks placed and move past the reductions that we needed to do. We should see utilization rise again, it should be back to some reasonable margin expansion.

[Frank Atkins:]

Okay. Great. Thank you very much.

[Jeffrey Davis:]

Thanks, Frank.

[Operator:]

Thank you. Our next question comes from Mayank Tandon of Needham & Company. Your line is now open.

[Mayank Tandon:]

Thank you. Good morning.

[Jeffrey Davis:]

Good morning.

[Mayank Tandon:]

Jeff, in terms of the demand environment, I heard what you said. But we've heard some comments from other companies in terms of a broader slowdown just because of Brexit and the implication of that on the global economy, some uncertainty. But it appears to me that you're not seeing that. Could you confirm that? And secondly, could you comment on why you're not seeing it versus many of your peers who are actually calling that out in their recent quarterly earnings calls?

[Jeffrey Davis:]

Yeah. I would say again that we're not seeing a marked change. I would describe this environment as tepid. I would describe it the same though as it was a year ago, two years ago or even three years ago. It's just not improved. We haven't seen a significant shift. I think some of the reason for that for us is, A, we're smaller than I think some of the players that you're referring to, so we're a little bit of a microcosm. But, B, healthcare. Our healthcare is up 30% year-over-year. So I think healthcare remains healthy for us and that helps - obviously, it's helping continue to drive opportunity for us. The other thing I would tell you is our land and expand strategy in moving into these larger enterprise accounts, if you recall, one of the factors that motivated us to move in that direction was the last recession, the recession in 2008. And the reality is our Fortune 1000 customers, our enterprise customers, really didn't decline much at all for us. Some of them even grew. And so, we've got a much different client mix now and we're doing, again, high-ROI, mission-critical projects that are smaller engagements, I think than maybe some of the larger players are taking on. And, I think, still get budget approval as an example. Again, partly because of their criticality and partly because they're not as expensive as maybe some of the things the bigger guys are doing.

[Mayank Tandon:]

Right. That makes sense. Thank you for that. And then in terms of your expectations on pricing for the remainder of this year and then also maybe comment long term how much more room you have to catch up with some of the larger players. And then, I also wanted to ask you about the margin expectations for the remainder of this year given the guidance revision both on the services gross margin line and also what you expect in terms of EBITDA margins.

[Jeffrey Davis:]

Sure. Yeah. Well, this is obviously a setback to that within the quarter and a little bit of a bleed into Q3. But I think we're seeing improvement even now. So for the year, I would say 50 bps, maybe 100 bps on services gross margin total. And I'd hope to see some of that translate or that translate to EBITDA or EBITDA net of stock comp. Again, I think we got a shot at 50 basis point to 100 on basis point expansion. In terms of rates, I think there is - well, I know there's still a gap between us and the big guys. We will push on rates as we move forward. But quite honestly, if you recall over those kind of two-year transition, we've really had our team focusing on those volumes and the results there had been phenomenal, 17% organic growth in hours - build hours volume, year-over-year this quarter and the mix shift to offshore. Those things will also help us drive margin expansion. Obviously, offshore is more profitable, more - better margins. So I do expect to continue to see margin expansion opportunities aside from again this one client issue. And again, rates, we've got a balanced incentive program in place for our sales folks that balances margin and volume. So, I think we're going to continue to see rates improve, they're stable now, roughly flat, but I think we'll see them inch up here as we move forward. And we're aware of where they're at, we'd like to move them up gradually. We don't want to break the momentum, frankly that we've got going with winning this business and driving volumes at the moment. But I think, we'll be able to drive those up gradually still over time.

[Mayank Tandon:]

Great. That's helpful too. And then a final question from me. Given the pullback in the stock here today, just in terms of plans that you may have for share buybacks, and if you could remind us how much is left authorized under the current buyback program?

[Jeffrey Davis:]

I think we've got about $17 million remaining on the program and certainly, when we're able to, we'll be buying as we always are at these levels and beyond, really.

[Mayank Tandon:]

Right. Great. Thank you for taking my questions.

[Jeffrey Davis:]

Thanks, Mayank.

[Operator:]

Thank you. Our next question comes from Brian Kinstlinger of Maxim Group. Your line is now open.

[Brian Kinstlinger:]

Hi. Good morning, guys.

[Jeffrey Davis:]

Hey, Brian.

[Brian Kinstlinger:]

So, while it's a tough quarter, congrats on the volume changes in the business. I have to say, I for one have been writing about that for a while, so it's been a nice trend there and I don't think investors should underestimate the impact of the offshore mix like you've highlighted. And so with the first question I wanted to ask, do you see the offshore mix as a percentage of the delivery mix continuing to move offshore, can we talk about that over in the next year or two timeframe?

[Jeffrey Davis:]

Yes, absolutely. I don't know if it's going to maintain the pace again, almost 40% year-over-year this quarter. I don't know if we'll maintain that pace, but I frankly wouldn't be surprised if it did. As a matter of fact, the same large account that we've been referring to, recently made a visit - some of their folks made a visit to our facility in Chennai, to certify it to begin giving us offshore business. So we're seeing that trends continue in these large enterprise accounts. Keep in mind that our offshore capability is a little bit different than the big guys. And we can do what they do, but we do something I think is more important, and that is we've got these highly skilled people that are essentially peers in terms of experience level and skill set to the folks here in the U.S. So they're really an extension of a project team. So it helps bring costs down, but you still got that same level of quality and experience, and also using Agile methodology. I think our clients that we've been with for a long time are really recognizing that that's pretty powerful stuff, and giving us more and more opportunity to take share away from the big guys.

[Brian Kinstlinger:]

Great. And then I joined the call late, I'm sorry, so I missed some comments. But did you talk about 2Q bookings compared, I mean, how it trended versus maybe 1Q and how the early trends in third quarter have been playing out, and to that extent, maybe industries that have been weak or strong?

[Jeffrey Davis:]

Yes. So, June was very strong. We commented on that Q2 was strong. I mentioned that year-to-date bookings are double digit, low double digits, so in that kind of 10% to 15% range year-to-date, so good. They're always back-end loaded, so I wouldn't comment much on Q3 quarters were always back-end loaded that seems to be the buying pattern. But we feel pretty good about it. Now in terms of the industries, certainly energy utilities, which thankfully is a small piece of our business now, continues to decline, not surprisingly. Maybe a little softness in FinServ, as I think you've heard some of the other firms talk about for some time now. But healthcare up 30% year-over-year, so very strong in healthcare, and I think that's going to continue to be a, kind of a beacon of growth for us.

[Brian Kinstlinger:]

And to that large customer, is that the same customer that was delayed a year ago. Is that the same customer?

[Jeffrey Davis:]

Yes, unfortunately.

[Brian Kinstlinger:]

Look different, I realized different but...

[Jeffrey Davis:]

Although, I would say actually maybe it's a good thing because we've only got one. But yeah, it's the same.

[Brian Kinstlinger:]

Okay. Yeah. And then, you talked about head count a little bit and the changes to that. So should we expect a few more headcount reductions to manage that over the next few quarters or keep the head count constant? Maybe talk about how you're going to manage it which is obviously tricky.

[Jeffrey Davis:]

Yeah, that it is. And the other thing that we wanted to be mindful of, as I said earlier, we've got highly skilled people that we're on this engagement and we're going to hang on to those folks. We're obviously going to have to and have already made a number of reductions. I think that I alluded earlier that kind of carries over into Q3, so that's still underway as we're sorting out who we'll be going to be able to get placed in other engagements, and frankly, who we're going to have to or the numbers that we're going to have to reduce, unfortunately. But I think most of that is behind us, we've got a little more work to do. And again, I think we'll get back to good margin, not only good year-over-year margins, but even some expansion.

[Paul Martin:]

Yeah. And Brian, you'll notice that when you look at the details in our investor deck that the average head count between Q1 and Q2 is down, I think, seven people. But the ending is now at 68, so obviously, there was more activity late in the quarter...

[Brian Kinstlinger:]

Right.

[Paul Martin:]

...which will benefit in the second half.

[Brian Kinstlinger:]

Great. Thanks, Paul. All right. Thank you so much.

[Jeffrey Davis:]

Thanks, Brian.

[Operator:]

Thank you. And our next question comes from Peter Heckmann of Avondale. Your line is now open.

[Peter Heckmann:]

Good morning, guys.

[Jeffrey Davis:]

Hey, Pete.

[Peter Heckmann:]

[Indiscernible] over the last couple of years, looks like the margins in software and hardware reselling are moving up a little bit. Is that due to a change in the mix of what you're selling there or potentially some of the tools that you've rolled out on the healthcare analytic side?

[Jeffrey Davis:]

Yeah .It's going to be mostly driven by our internally developed assets. And the largest - the highest priced one is in the healthcare space. We've got several others that go along with that as well, and I think that's the primary driver of margin expansion. The resale is about the same as it was.

[Paul Martin:]

And it certainly makes it lumpy because if we have an active internally developed software quarter at the 100% margin, it obviously brings up the overall average.

[Peter Heckmann:]

Got it. Got it. Okay. And then, within the press release, a partnership with Amazon Web Services, is that also a reselling partnership for Perficient clients?

[Jeffrey Davis:]

I don't know if we're - obviously it's providing services to move people into Amazon's cloud, but I don't know whether frankly we have a resell opportunity. A lot of times in a SaaS model like that, we might get a spiff for bringing them a new client. So we're not reselling the software again since it's cloud or SaaS.

[Peter Heckmann:]

Okay. Okay. And then just lastly, could you give us an update on the Digital agency efforts and any changes? It looks like it's a fairly hot area, some other of your competitors are making some acquisitions in that area. Any change in the competitive landscape there? Or is there enough demand to kind of support build-out at a number of competitors?

[Jeffrey Davis:]

I think there's enough demand. Our intent isn't to go out and conquer the world from an agency standpoint. Our intent was to bring the skill set into our account base, and that's been extremely effective. I won't mention the name, we're probably under an NDA, large hospital system in California, well-known, lot of Hollywood types go there. We got a $5 million pure agency engagement that we got there that was born out of the relationship that we already had. So I would say it's resonating very well. Again, our intent - it can also be a door opener. This gives us an opportunity to go into a new account as well and have a conversation with the CMO. And as we all know, CMOs are more and more influencing or directly controlling IT spend. So, we think it's going to benefit both in that way. And again, we may go head to head with other agencies but that's not the primary intent. The primary intent is to say, we've got another great service here that we've been sort of under-promoting, we've had for a while but under-promoting, and taking that back into our existing account base.

[Peter Heckmann:]

All right. Great. And then last question, and this is back to the envelope, had a busy morning this morning, but it looks to me like the reduction in the mid-point of your EPS guidance is somewhat greater than what we would expect, given the reduction in revenue. Would there be an element of conservatism in there or maybe some other items that are worth calling out?

[Jeffrey Davis:]

I think that's a reflection, Pete, of - when this revenue got reduced, we weren't able to reduce cost, as I mentioned, as quickly. And in fact, as I said also, we made the decision strategically to hang on to some of these folks that are great folks. So that impacts our margins, and I think it's more a reflection of that than anything.

[Peter Heckmann:]

Okay. That's helpful, and thank you.

[Jeffrey Davis:]

Thanks, Pete.

[Paul Martin:]

Thanks, Pete.

[Operator:]

Thank you. And at this time, I'm showing there are no further participants in the queue. I would like to turn the call over to management for any closing remarks.

[Jeffrey Davis:]

Okay. Well, thank you all once again. As I said before, thesis very intact. This is all just moved to backlog. So we're looking forward to improve second half and we'll be talking to you again in three months. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation on today's conference. This concludes your program. You may now disconnect. Everyone have a great day.