Perficient, Inc.
Q3 2016 Earnings Call Transcript

Published: 6 Nov 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Perficient Q3 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. At this time, I would like to introduce your host for today's conference, President and CEO, Jeff Davis. You may begin.

[Jeffrey Davis:]

Thank you. Good morning, everyone. Thank you for joining us this morning. With me on the call is Paul Martin, our CFO. We've got about 10 to 15 minutes of prepared comments per usual after which, we'll open up the call for questions. Paul, would you please read the with Safe Harbor statements.

[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 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 discussions. With time during this call, 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 General Accepted Accounting Principles or GAAP, which is posted on our website at www.perficient.com. We've also posted a slide deck, which includes a reconciliation of certain non-GAAP goals to the most directly comparable financial measures compared with GAAP on our website under Investor Relations, Jeff?

[Jeffrey Davis:]

Thanks, Paul. Once again, good morning, thank you for joining us as we discuss our third quarter results. While revenue is up 8% year-to-date through the end of September, we did witness a decrease of 1% in third quarter revenue. Projects based business is always subject to unanticipated velocity impacts. Clients routinely ask us to ramp up faster or slower than initial projections might indicate and during the quarter, we certainly realized more of the later. That coupled with weakening sales cycles, we attribute to macro uncertainty and clients possibly taking a wait and see approach to the upcoming elections resulted in a third quarter that did not meet our expectations as well as a tempered fourth quarter forecast. We moved aggressively in the quarter to bring cost down and are committed to do so going forward while reducing or adding headcount is never easy. We did and will continue to react in real time to ensure we are managing key metrics like utilization well. During the quarter, quick adjustments resulted in utilization increasing quarter-over-quarter to 79% and we'll continue to be focused on improving that. ABR remained consistent at $144 an hour in North America and we continue to believe we have a meaningful opportunity to continue to increase those rates incrementally going forward and close the gap that exists between our rates and the higher rates of many of our competitors. As I mentioned in the last call, we continue to make important progress on our strategy of moving up market. We're focused on selling bigger and longer-term deals to a strategically defined set of enterprise accounts and we have several large opportunities in the pipeline including an opportunity well into the eight figures we expect we'll closed late this year or early next. We are confident that this is the proper long-term strategy that winning larger deals can present challenges as we transition the business due to the longer sales cycles. We mentioned our largest top tier account hitting pause on some deliverables on last quarter's call. And unfortunately, we've been notified by another large customer of a project stoppage that has impacted the fourth quarter guidance. We’ve managed this business for a long time and understand how to react to its cyclicality and drive profitability. In the short term, things can get lumpy, but the overarching trends are intact. Perficient's long-term story of growth and expansion remains on course. I'll touch on a few other notable topics and speak to our outlook for the fourth quarter after Paul shares the details about third quarter and year-to-date to results. Then as usual, we will open the call up for questions. Paul.

[Paul Martin:]

Thanks, Jeff. Total revenues for the third quarter of 2016 were $119.2 million, a 1% decrease compared to the year-ago quarter. Services revenues were $102 million for the third quarter, excluding reimbursable expenses, a decrease of 2% compared to the comparable prior-year period. Services gross margin for the third quarter 2016 excluding stock compensation and reimbursable expenses were 35.6% compared to 38.2% in the third quarter of 2015. SG&A expense excluding stock compensation increased to $22.5 million in the third quarter of 2016 from $21.7 million in the comparable prior year quarter. SG&A expenses excluding stock compensation as a percentage of revenue increased to 18.9% from 17.9% in the third quarter of 2015. EBITDAS for the third quarter 2016 was $15.1 million on 12.7% of revenues compared to $19.9 million or 16.5% of revenues in the third quarter of 2015. The third quarter included an adjustment of fair value of contingent consideration of $1 million related to a change in estimate associated with the year now for the Enlighten acquisition completed late last year. Our effective tax rate for the third quarter of 2016 was 26.9% compared to 33.4% for the third quarter of 2015. The decrease in the effective rate is primarily due to additional research and development tax credit related to the current year and a favorable impact related to the early adoption of the new accounting standard on improvements on employee share-based accounting. Net income decreased 25% to $5.5 million for the third quarter 2016 from $7.4 million in the third quarter of 2015. Diluted GAAP earnings per share decreased to $0.16 a share for the third quarter of 2016 from $0.22 a share in the third quarter of 2015. Adjusted GAAP earnings per share decreased to $0.26 for the third quarter of 2016 from $0.36 in the third quarter of 2015, and again adjusted GAAP earnings per share is defined as GAAP earnings per share plus amortization expense, non-cash stock compensation transaction costs, and fair value adjustments of contingent consideration, net of related taxes divided by average fully diluted shares outstanding for the relevant period. Earnings billable headcount at September 30, 2016, was 2,316 including 2,135 billable consultants and 181 subcontractors and the SG&A headcount was 430. I'll now turn to the results for the nine months ended September 30, 2016. Revenue for the nine months ended September 30, 2016, were $367.4 million, an increase of 8% over the comparable period last year. Services revenues for the nine months ended September 30, 2016, excluding reimbursable expenses was $320.6 million, an increase of 6% over the comparable prior year period. Services gross margin for the nine months ended September 30, 2016, excluding stock compensation of reimbursable expenses decreased to 35.7% from 36.9% in the comparable prior year period. SG&A expenses excluding stock compensation increased to $70.1 million for the nine months ended September 30, 2016, from $66.1 million in the comparable prior-year period. SG&A expenses excluding stock compensation as a percentage of revenue was 19.1% for the nine months ended September 30, 2016, compared to 19.4% for the nine months ended September 30, 2015. EBITDAS for the nine months ended September 30, 2016, was $48.4 million or 13.3% of revenues compared to $48.9 million or 14.4% of revenues in the comparable prior year period. The nine months ended September 30, 2015, included amortization of $9.9 million compared to $10.6 million in the prior year period. 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 completed during 2015. Adjustments to fair value of contingent consideration of $2.4 million were recorded in the nine-month period related to changes in the estimate associated with earn out for the Enlighten acquisition, which was completed in late 2015. Our effective tax rate for the nine months ended September 30, 2016, was 31% compared to 30.5% in the nine months ended September 30, 2015. Net income for the nine months ended September 30, 2016, increased 9% to $16.8 million from $15.4 million in the nine months ended September 30, 2015. Diluted GAAP earnings per share increased to $0.48 a share from $0.45 a share. Adjusted GAAP earnings per share decreased to $0.82 for the nine months ended September 30, 2016, from $0.86 in the nine months ended September 30, 2015. We ended the third quarter of 2016 with $28 million in outstanding debt, $8 million from June 30, 2016, and $28 million since yearend. Our balance sheet continues to leave us very well-positioned to execute on our strategic plan. The day sales outstanding on accounts receivable were 81 days at the end of the third quarter, down from 84 days at the end of the third quarter of 2015. I'll now turn the call back over to Jeff for little more commentary. Jeff?

[Paul Martin:]

Thanks, Paul. We closed 25 deals north of $500,000 during the quarter averaging $1.4 million each. That compares to 44 in the second quarter averaging $1.3 million and 37 in the third quarter of 2015 averaging $1.3 million of piece. The good news is that many of these larger deals we expected to secure in the third quarter weren't lost or canceled. They simply pushed into the fourth, and as we mentioned earlier, we are hopeful of getting past the elections might be an inflection point that gives us some enterprises the confidence that they need to move forward. Healthcare and financial services verticals again represented a significant portion of revenues, collectively accounting for 44% of revenues at 28% for Healthcare and 16% for Financial Services. Retail and Consumer Goods represented 15% of third quarter revenues, which is up from last year where we continue to see strength there. We also see strength in Automotive and Telecom as well. I'm sure you saw the recent news regarding acquisition of Bluetube, a relatively small, but very strategic addition for us. A great team with outstanding mobile applications expertise. In a mobile first world, they're going to be a significant complement to our overall digital business. And speaking of Digital, Perficient Digital continues to impress clients, prospects and industry pundits. That team has been recognized a half dozen times already this year with various industry awards for delivering work that improves the digital experience for our clients’ customers. Most recently, we learned the Academy of Interactive and Visual Arts is recognizing Perficient Digital in two separate categories in their annual W3 Awards, which recognize creative excellence. And we are consistently adding agency of record wins to our belt. Just last week, we were notified by a prominent American apparel retailer with more than 1,100 locations that they would be dismissing their existing firm and awarding Perficient Digital a nearly 7 figure annual agency of record retainer. And on top of that retainer, we expect there will be additional work streams not only at that account, but at its parent, a multibillion specialty retail with several brands. So we remain committed to supplementing our growth through M&A. And I expect that we may even pick up the pace in 2017. Our goals are to add $50 million to $60 million of run rate revenue in 2017, through that program. We got a number of opportunities in the pipeline that we expect we'll be closing, if not late this year, then early next. We are well-positioned to do that given the strength of our balance sheet, which Paul referenced earlier. Obviously, we look to leverage our strong cash flow and balance sheet resources in the most impactful way possible for our business and shareholders, which will likely include more aggressive share repurchasing going forward. But before I speak to Q4, it's worth noting that our weighted pipeline of high probability deals, that is deals at 50% or greater, is more than 30% larger than it was a year ago this time. And what ended is a very strong bookings quarter, up 17% year-over-year. So right now, we are sitting at 30% larger, high-weighted deals than last year and last year ended at 17% up year-over-year. So again, the larger deals we expected would close in the third quarter have pushed out, but we remain confident we’ll win many of them in the coming weeks, which could position us for a nice start to 2017. Obviously, those deals have to close, but we're still hearing confidence from the clients that they will, they've just been delayed. So turning our attention to the expectations for the fourth quarter. Perficient expects its fourth quarter 2016 services in software revenue including reimbursed expenses to be in the range of $112 million to $122 million comprised of a $101 million to $106 million of revenue from services including reimbursed expenses and $11 million to $16 million of revenue from sales of software. Perficient also revised its full-year 2016 revenue guidance to be in the range of $479 million to $489 million. It's 2016 GAAP earnings per share guidance to a range of $0.56 to $0.63, and 2016 adjusted earnings per share of non-GAAP measures, see attached schedule, which reconciles the GAAP earnings per share guidance. Guidance range to a range of $1.06 to $1.11. With that, we can open up the call for questions.

[Operator:]

[Operator Instructions] And we have our first question coming from Peter Heckmann from Avondale. Your line is now open.

[Peter Heckmann:]

Good morning, guys.

[Jeffrey Davis:]

Good morning, Pete.

[Paul Martin:]

Good morning, Pete.

[Peter Heckmann:]

I had a question on the gross margins in the period. Given that utilization was at 79%. I would have thought - and granted, revenues lower, but with a slight mix shift to offshore, I would have assumed that we would have seen a little stronger gross margins. Were there discrete items that impacted the gross margin over in the quarter?

[Jeffrey Davis:]

Well, if you look at on a year-over-year basis, Pete, we're down I think about 260 basis points. No, I'm sorry, about 360 basis points. About one of that is in subcontractors. We've ramped up in a couple of highly specialty skilled areas and we needed to rely more on subcontractors that hiring. And that's impacted about 100 of those basis points. And then honestly, the bulk of the balance, that other 200 or so is in fact utilization. We had about 81 and in this quarter last year. We're down at 79 this quarter. Due to a carryover, I would say, from Kaiser, but also because we have had these extended sales cycles on the bookings. So, we've carried more bench this quarter than we would have liked to. And by September, we had that largely corrected, but it was too much to dig out of from July and August.

[Peter Heckmann:]

Okay. And then can you give us an update on that large healthcare customer that pushed out last quarter. Do you still anticipate that they would re-ramp in the first quarter? And if so, or do you continue to carry some excess bench there?

[Jeffrey Davis:]

No, I think, well, I will come back to that. But I think that one we do expect to ramp back up sometime early next year in the first quarter, I don't believe it will be early January, but maybe by the mid quarter, we'll get some additional revenue back from that account. Things continue to go well there. The challenge that we have, as I mentioned in the prepared statements is we have another client that would have been at least in the top 10 category, maybe in the top five category that completely canceled an engagement. We learned that early this quarter, which is what, drove the impact to the fourth quarter. It resulted in a really poor utilization and low gross margin in October. And again, while we have adjusted and continue to adjust to that, it came pretty rapidly and it was too much to completely recover from within the quarter. So, that one's gone and won't come back, but the larger one actually that we've talked about many times, we do expect to come back next year.

[Peter Heckmann:]

Okay, great. That’s helpful. I’ll get back in the queue.

[Jeffrey Davis:]

Thanks, Pete.

[Operator:]

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

[Unidentified Analyst:]

[Indiscernible] on for Brian, thanks for taking the questions. Can you elaborate a bit on the performance in BFSI during the quarter? And then maybe talk about what's driving the declines there. And then maybe when we could expect that segment to recover?

[Jeffrey Davis:]

You're talking about Financial Services?

[Unidentified Analyst:]

Yes.

[Jeffrey Davis:]

That was roughly flat. It wasn't really much of a decline there. There was a decline in Healthcare, driven largely, by this large account that we talked about last quarter and then for the rest of the year combined with the one, I just mentioned that is canceled this year. But I think our Financial Services sector is pretty much flat with year-over-year.

[Unidentified Analyst:]

Okay. And can you talk, I guess, more generally a bit about other verticals that have been experiencing decline and maybe, which industry specifically are more reluctant to commit to new projects?

[Jeffrey Davis:]

Yes, it's definitely Healthcare, sticks out, right now. And if you take each of those accounts in isolation, you may be convinced yourself, it's not macro. But if you take a step back, we're certainly seeing delays, not cancellations and the plans again commitments from the clients, they are going to continue. But they are delaying, and as I mentioned in the prepared statement, we can't know for sure. But we think that's probably election-related. Broadly though, I would say sales cycles are extended, probably across most sectors. So, we do expect a little bit of - have seen a little bit of a slowdown or extension there, and expected that we've already guided to an impact of Q4 from that.

[Unidentified Analyst:]

Okay. And then I just wanted to touch on gross margins again. Guidance seems to imply gross margins also depressed a bit in the fourth quarter. Can we have an expectation that they will bounce back in the first half of 2017 or maybe the back half of 2017.

[Jeffrey Davis:]

Yes, that’s certainly my expectation. From a combination of us, kind of rightsizing the business and actually the very healthy backlog, I'm sorry, healthy pipeline that I mentioned earlier that we have now. The caveat on that pipeline is obviously some of that spilled over from Q3. But even with that, the 30% year-over-year is very strong, the reality, of course, is we have to close those deals. But we feel like again, our view is that post elections, we'll have some more clarity, kind of one way or the other. And we'll know more at that time. But I feel pretty good as we sit here today in terms of the outlook for 2017.

[Unidentified Analyst:]

Okay. Cool. And then lastly, could you just please briefly discussed bonus accruals? Do they accrue as normal or have there been a reversal?

[Jeffrey Davis:]

There was no reversal in the quarter, but they were maybe very modest, if any. But they've been very small accruals as well. So for the most part, the executive team is not going to get a bonus this year based on the performance, not surprisingly. So, we've had pretty modest bonus accruals really throughout the year. But there's no one-time sort of effect in the third quarter related to bonus, really.

[Unidentified Analyst:]

That’s helpful. Thank you.

[Jeffrey Davis:]

Thank you.

[Operator:]

Thank you. And our next question comes from Joan Tong from Sidoti & Company. Your line is now open.

[Joan Tong:]

Hi, Jeff and Paul, how are you guys.

[Jeffrey Davis:]

Hi, Joan.

[Paul Martin:]

Hi, Joan.

[Joan Tong:]

Hi. A couple of questions here. And Jeff and Paul, you mentioned a 17% booking growth. Is it a year-to-date booking growth?

[Jeffrey Davis:]

What I was referring to specifically, I will repeat it, because it's a little complicated. But I thought it was worth noting and I still think it is. So, what I was saying is that our pipeline looking forward from here, weighted pipeline for high odds deals, those deals that are 50% or greater is up 30% year-over-year. And that comp last year was actually up 17% over the prior year. So, it's a very strong momentum there. Bookings overall for the year, I want to say are roughly flat right now. They were down in Q3 as we've alluded to on a year-over-year basis; I want to say to the tune of about 10%. But all of that - biggest chunk of that is spilled into Q4. And again, that's what's causing or challenge here in Q4, revenue wise, but we feel like we got a good chance to bounce back in the first quarter of next year and actually have a strong year overall.

[Joan Tong:]

Got it. Got it. So, the pipeline actually is very sizable growth compared to last year. Okay, thank you for the clarification. And then, so Jeff, I was just thinking that your peers have been talking about the Healthcare softness for quite a couple of quarters and you have been doing well until Q3. So how confident are you that this, like delay that you are seeing this softness, this stretch out in the sales cycle is related to the presidential election more so than some of those M&A activities in healthcare that might be lingering into 2017?

[Jeffrey Davis:]

Yes, I think, to your point the consolidation and some of that direction may be impacting it. But if I look at the landscape of that market or that industry that we are focused on, it's really kind of isolated from that. Those are - tend to be more major players, and honestly, we are more mid-tier, other than a couple of them. And yes, I looked very closely at what our competitors were saying about the Healthcare industry and there declines there. And it was in things like EMR implementation and other kinds of delivery services that we don't do. The things that we do are part and parcel to consumerism in Healthcare and the analytics that are critical to both payers and providers to understand their performance that they are being measured on in order to receive payments. Keep in mind that most of our clients on the payer side are actually Blue Cross/Blue Shield, who are processing a lot of Medicare-Medicaid and now ACA. So, I still feel that's true. I think this is more election-related than broad-based or long-term, I should say. And it remains to be seen. There is no certainty obviously. But that's our feeling. And actually, that's built also to some degree on the feedback we get directly from those clients, of course.

[Joan Tong:]

Sure, sure. That's helpful, the client feedback. So, you talk about pipeline, I'm just wondering, can you touch on a little bit on backlog. I know that you guys historically not a big backlog company because you really like, you book and then you bill within a quarter or maybe you cross over to the next quarter. But still some of the larger transactions, your focus is like booking larger transaction, longer duration. Has that changed your backlog profile as of today compared to a couple years ago?

[Jeffrey Davis:]

Yes. It's fairly modest, candidly. But we are up in backlog going into 2017, over last year coming into this year. I mentioned in the prepared statement that we are in transition, and it's true. I do believe that as we continue to win more of these large engagements and open up these larger relationships, we'll see more stability in the business. But in this transition period, we are still seeing some of this lumpiness. However, to directly answer your question, as we sit here today, backlog is up for 2017 over 2016 a year ago.

[Joan Tong:]

Okay, got it. And then my last question is related to M&A. Congratulations closing that transaction. And I just want to ask in terms of valuation, is this deal pretty aggressive out there since you want to buy some of those higher growth strategic assets and might be a little bit more expensive. And just want to see if the valuation has come down given the environment out there or it hasn't been any changes?

[Jeffrey Davis:]

Yes. Good question. And I would say for things like Bluetube, that's in a great space and doing well, putting up high-growth. The valuations haven't changed much. And you're correct to assume that it's going to be at a little bit of the higher end of our range, although we managed to stay by leveraging earn outs pretty much in our five to seven trailing 12 months EBITDA range. So, this along with pretty much all the deals we do today does contain an earn-out that it gives us some downside protection, and obviously, motivation for the sellers. And so, we feel pretty good about that and it allows us to get a little more aggressive to your point. But this wasn't, I wouldn't call it way outside the norm. Just at the higher end of the range. And again, for assets like this, I would say that's going to be the norm for a while. I don't see a lot of disruption to their business. The exception to that might be those hot commodities, those things that were hot commodities a few years ago such as SFDC or Salesforce practices, I do think valuations are going to be - are or already are beginning to come down.

[Joan Tong:]

Okay, got it. All right. Thank you.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from Frank Atkins from SunTrust. Your line is now open.

[Frank Atkins:]

Thanks for taking my question. I wanted to ask about the pricing environment. Are you seeing any changes, especially on the healthcare side?

[Jeffrey Davis:]

It's a good question, Frank. I think - I would say we are seeing more competition. No doubt, but competition has always been there. This is a highly competitive industry. And I would say we are seeing a little higher competition than we have in the past. But honestly, I don't see rate pressure on that with one exception. As we've consciously made the decision to take on more offshore business, which is still very high margin for us, we have lowered some rates in order to win some deals we wouldn't have otherwise. So otherwise some competitive pressure there. But in terms of North American rates, I don't think there is. We adjusted our sales plan coming into this year to focus more on volume and we've driven that volume. And we've driven our billable hours year-to-date organically, are up quite sharply even without - I'm sorry, typically with offshore, as we make that mix shift offshore. But I would say the little bit of rate pressure on offshore not as much onshore. And, in fact, we are going to be working with our sales folks again going into next year to drive some more incremental increases to ABR certainly onshore.

[Frank Atkins:]

Okay. And I wanted to ask what was organic growth in the quarter?

[Paul Martin:]

About minus 5%.

[Jeffrey Davis:]

Down about 5%.

[Frank Atkins:]

Okay. And lastly, is the environment for attracting and retaining people changing at all. Are you still able to get quality talent and what does that landscape look like?

[Jeffrey Davis:]

Yes, actually, we've have had great success both on the recruiting and retention perspective. Our retention rates - our attrition rates are lower than our goal or within our goal range, I should say. So year-to-date below 20%, which is sort of the industry benchmark. And our ability to recruit is quite good. I think people recognize the strategy that we are executing, and actually, very excited to be a part of it. Certainly, as we hire folks away from our larger competitors. It's a different kind of environment here, and I think, a refreshing one for them is the feedback that we get. So, it's always a challenge to hire good people. I think in any industry, in this industry in particular, there is always great demand. So, there is an additional challenge there. But we've had good success with it and I don't think that's a hindrance to us.

[Frank Atkins:]

Okay, great. Thank you very much.

[Jeffrey Davis:]

Thanks.

[Operator:]

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to President and CEO, Jeff Davis, for closing remarks.

[Jeffrey Davis:]

Well, thank you, all for your time today and your interest in Perficient. I look forward to speaking to you in about four months and presenting the Q4 results and a positive 2017 outlook. Thank you.

[Operator:]

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