Perficient, Inc.
Q4 2016 Earnings Call Transcript

Published: 28 Feb 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Perficient Q4 2016 and Year-End 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 be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I would like to turn the call over to CEO and President, Jeff Davis. You may begin.

[Jeffrey Davis:]

Good morning. Thank you. This is Jeff Davis, Perficient’s CEO and President. With me on the call this morning is Paul Martin, our CFO. I want to thank you all for your time this morning. As this is typical, we’ve got several minutes of prepared comments after which we’ll open the call up for questions. Before we proceed, Paul, would you please read the Safe Harbor?

[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. With time 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 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 in accordance with GAAP on our website under Investor Relations, Jeff?

[Jeffrey Davis:]

Thanks, Paul. Good morning once again. Thanks everyone for joining us to discuss our fourth quarter and full-year results with you today. Despite the standard challenges imposed by the fourth quarter seasonality, we closed 2016 well with a rebound and performance from the trough of the second and third quarter, as we witnessed that momentum here year-to-date into the New Year in 2017, and we’re focused on several strategic and tactical initiatives, we believe can drive margin expansion with the returns to levels we’ve delivered historically and are confident we will deliver again. Again, growing ABR is an important component of that margin expansion. You may recall a few years ago, we made a concerted long-term effort to grow bill rates and we did so and then turned our attention to the growing volume, because we built that volume over the last couple of years. We’ve maintained North American bill rates in the mid-140s for the last two or three years. However, as we continue to move up market, we have an opportunity to close a gap that is as high as $50 in some cases against our largest competitors. Now, this is a gradual process obviously, and as we pursue and win larger and longer-term deals, we often need to make great concessions to win that business, of course, those larger deals also come up higher utilization bill, so the margin opportunity is still there. There’s also definitely an opportunity for you to build ABR going forward. We’ve got some plans in place this year to do that. Another place we’re focused on is, in fact, utilization and capacity management. You’re going to see an improvement in 2017 utilization numbers, and our goal is to return to low-80s throughout the year. And we’re focused on managing our labor costs not only for utilization, but also by ensuring our staff reflects the optimal pyramid for our business. So that we’re grooming young professionals today to be the consulting leaders of tomorrow. You’re going to see investing – us investing more time in career fairs, campus recruiting efforts with a goal of continuously building our ranks. Finally, we expect our unique and differentiated offshore approach to continue to play an increasingly important role. As we continue to leverage our global delivery centers teams and more and longer-term engagements, something we must do competitively. Margins will benefit despite the growing mix shift being a bit of a headwind to top line. As you may recall, our offshore margins run in the high-50s to low-60s. We’re particularly well-positioned, given the healthcare industries growing comfort with a hybrid approach. For many years, our healthcare customers were very apprehensive about leveraging offshore. So we’ve seen that change dramatically. In fact, our healthcare offshore volume is up 77% since 2014. Our overall – that compares by the way to our overall organic offshore growth rate of about 54% over that same timeframe. So the fact that our largest vertical, excuse me, and many of our largest competitors are now asking for this bodes well continuing – going forward for margins. There are several external factors we believe can contribute deposit outcomes in 2017 as well. First and foremost now that we’re beyond the election, some of the uncertainty in apprehension that typically a company that environment should pass. And of course, if things like corporate tax reform and or repatriation come to fruition, it would potentially benefit us directly. Our Q4 tax rate was over 40% in the fourth quarter. But more broadly those developments could provide our enterprise customers with more flexibility and confidence to make decisions and investments to grow their business. And aside from those those two possibilities, there are industry centric issues that could lead to increased investment. For example, in our second largest vertical financial services, the focus may shift from compliance and cost reductions to investing for growth. And finally, before I turn things back over to Paul, I want to touch on one more subject, I know it’s top of mind for many of you and that’s the impact of potential new regulations or changes to the H1-B visa program. And we’re confident that we’re very well-positioned there for a number of reasons. First and foremost, we leverage the program very modestly with fewer than 15% of our consultants holding these visas. Secondarily, we’ve not abused the intent of the program as it appears others have by paying substantially reduced labor rates to H1-B holders. So any legislation that would restrict members, mandate minimum salaries or both would impact many of our competitors much more directly and immediately. And while they subsequently seek to address what would be material issues for their business, we’ll be able to focus on continuing to take market share from – I’ll touch on a few other notable optics and speak to our Q1 and full-year 2017 outlook after Paul shares the financial details. Paul?

[Paul Martin:]

Thanks, Jeff. Total revenues for the fourth quarter of 2016 were $119.6 million, or a 11% decrease compared to the year ago quarter. Services revenues were $98 million for the fourth quarter of 2016, excluding reimbursable expenses, a decrease of 11% compared to the comparable prior year period. Services gross margin for the fourth quarter of 2016, excluding stock compensation and reimbursable expenses were 36.6% compared to 39.5% in the fourth quarter of 2015. SG&A expense excluding stock compensation decreased to $22.2 million in the fourth quarter of 2016 from $25.2 million in the comparable prior year quarter. SG&A expense, excluding stock compensation as a percentage of revenues decreased to 18.6% from 18.9% in the fourth quarter of 2015. EBITDAS for the fourth quarter of 2016 was $15.4 million, or 12.9% of revenues compared to $19.8 million, or 14.8% of revenues in the fourth quarter of 2015. The fourth quarter included amortization of $3.4 million compared to $3.2 million in the comparable prior year quarter. The increase is primarily due to the addition of intangible assets for acquisitions during 2015 and 2016, partially offset by intangible assets related to previous acquisitions becoming fully amortized. Our effective tax rate for the fourth quarter of 2016 was 40.5% compared to 28.7% in the fourth quarter of 2015. The increase in the effective rate is primarily due to fourth quarter of 2015, including the full-year impact of the research hurdle, which was primarily added to the tax code at that time. Net income decreased 51% to $3.7 million for the fourth quarter of 2016 from $7.6 million in the fourth quarter of 2015. Diluted GAAP earnings per share decreased to a $0.11 a share for the fourth quarter of 2016 from $0.22 in the fourth quarter of 2015. Adjusted GAAP earnings per share decreased to $0.27 a share for the fourth quarter of 2016 from $0.37 a share in the fourth quarter of 2015. And again, adjusted GAAP EPS as defined as GAAP earnings per share also 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 period. Our earnings billable headcount at December 31, 2016 was 2,286, including 2,125 billable consultants and 161 subcontractors and the SG&A headcount was 442. I’ll now turn to the full-year results. Revenue for the year ended December 31, 2016 was $487 million, an increase of 3% over the comparable period last year. Services revenue for the year ended December 31, 2016, excluding reimbursable expenses was $418.6 million, an increase of 3% over last year. Services gross margin for the year ended December 31, 2016, excluding stock compensation and reimbursable expenses decreased to 35.9% from 37.6% last year. SG&A expense, excluding stock compensation includes the $92.4 million for the year ended December 31, 2016 from $91.3 million in the comparable prior year period. SG&A expense, excluding stock compensation as a percentage of revenue was 19% for the year ended December 31, 2016 compared to 19.3% last year. EBITDAS for the year ended December 31, 2016 was $64.2 million, or 13.2% of revenues, compared to $68.7 million, or 14.5% of revenues in 2015. The year ended December 31, 2016 included $13.4 million of amortization compared to $13.8 million in the comparable prior year period. Adjustments to fair value of contingent consideration of $2.4 million were recorded during the year ended December 31, 2016 related to the change in estimate associated with the earn-out with Enlighten acquisition completed in 2015. Our effective tax rate for the year ended December 31, 2016 was 32.9% compared to 29.9% for the year ended December 31, 2015. The effective rate for 2015 included a tax benefit for the 2015 research and development tax credit in a portion of the 2014 credit. Net income for the year ended December 31, 2016 decreased to 11% to $20.5 million from $23 million in 2015. Diluted GAAP earnings per share decreased to $0.58 a share from $0.67 a share in 2015. Adjusted GAAP earnings per share were $1.08 compared to $1.22 for 2015. We ended 2016 with $32 million in outstanding debt. This is down $24 million since last year. This is after spending $21.7 million on share repurchase and $9.6 million on acquisitions. We also ended 2016 with $10.1 million in cash and cash equivalents. Our balance sheet continues to leave us well positioned to execute against our strategic plan. Finally, our day sales outstanding on accounts receivable were 79 days at the end of the fourth quarter, down from 81 days at the end of the third quarter and 80 days at the end of the fourth quarter of 2015. I’ll now turn the call back over to Jeff for a little more commentary. Jeff?

[Jeffrey Davis:]

Thanks, Paul. A couple more stats on the fourth quarter. From a booking standpoint, we saw 40 deals north of $500,000 each during the fourth quarter and averaged $1.1 million, that compares to 25. In the third quarter averaging $1.4 million and 35 in the fourth quarter averaging $1.4 million. So a nice uptick in the fourth quarter, I’m sorry for 2015. So a nice uptick in large deal volumes something we mentioned in the last call. We anticipated as a few deal quit from the third quarter to the fourth. We’re still seeing sales cycles that are somewhat extended that, I think is related to the geopolitical climate. But hopefully as that settles, I mentioned earlier, we’ll see those deals come to fruition. May of those deals are still there. They are just needed – they’re taking a little bit longer for us. During the fourth quarter, the healthcare and financial services verticals again were very strong. Selectively accounting for 45% of revenues, healthcare of 28% and financial services of 17%, followed by retail and consumer goods and automotive each at 10% of fourth quarter revenue. So looking forward – moving onto 2017, the first week of 2017, we announced the acquisition of RAS & Associates, a management consulting firm based in Denver. As we continue to move up market, it is important we broaden and deepen our business consulting services. Those types of engagements and relationships often lead to significant technology investments in areas we already excel, including systems integration, data reporting and analytics. It’s a great team, well-managed, solid plan roster, and keys the level relationships, integration is underway and going well. And speaking of M&A, we expect activity to accelerate in 2017. We’re in active discussions with several firms some of which are a bit larger than our recent deals. And our goal remains to add an additional $40 million to $50 million in run rate before the end of the year as we did that program. And I’m sure you also saw on the release that the Board recently authorized the expansion of our share repurchase program for another $25 million and extended the term for a year. We were very active during the fourth quarter with stock buyback. And I expect in 2017, we’ll use our strong cash flow and balance sheet to execute against our M&A program and continue to repurchase shares. And finally, I want to touch on something we’re very excited about, which is the building momentum we have around cognitive computing, specially with a Watson platform. Earlier this month, IBM named Perficient as their Beacon Award winner for Outstanding Watson Solution based on some really exciting work we’re doing in the healthcare space. And we’re already leveraging the technology in other in other industries as well. Artificial intelligence and machine learning is going to drive significant opportunities in the coming years, and we’re very well-positioned in the space. So turning the attention now to our expectations for the first quarter and the full-year, Perficient expects its first quarter 2017 services and software revenue, including reimbursable expenses to be in the range of $109.7 million to $120.2 million comprised of $102 million to $107.5 million of revenue from services, including reimbursed expenses and $7.7 million and $12.7 million of revenue from sales of software. The company is issuing its full year 2017 revenue guidance of $485 million to $515 million, a 2017 GAAP earnings per share guidance in the range of $0.60 to $0.75 and 2017 adjusted earnings per share range of $1.17 to $1.31. With that, operator, we can open up the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from Brian Kinstlinger of Maxim Group. Your line is open.

[Brian Kinstlinger:]

Hi guys, thanks. Can you talk about the last one or two years your largest healthcare customers or one of them has lead to some lumpiness in your business, can you kind of talk about where you are with that account? Are they expected to be a top customer in 2017, just maybe to help with the uncertainty or certainty around one of your largest customers? Thanks.

[Jeffrey Davis:]

Yes, thanks, Brian. Yes, I think that account is settled down now. We’ve – you know there is a big undertaking on the part of the client. They had some challenges along the way just due to the very nature of the size of the endeavor. But things did stabilize finally, I would say in the second half of last year and coming into this year, I think things are well underway. You know it’s impossible to say with certainty, it’s their decision they can only change. But right now things are very stable. There’s good momentum on the engagement and if anything, we expect to pick up some additional work there going forward. I don’t know that we are going to have a surge back of some of the work that slowed down. I do think that program will just be extended further into the future, but we do expect to get some incremental revenue. And to answer your question, yes, it’ll be still a – probably a top at least two or three account if not our top account again this year.

[Brian Kinstlinger:]

Great. And then you had mentioned, Jeff, some comments about, a little bit longer sales cycles during the election, it sounded like some of the December bookings were delayed. I realize your large deals did very well, but my guess is, broad based bookings were down a little bit. So I guess I’m wondering, when I look at the first quarter services guidance versus the full year, is the mid-point in the high-end assume a pick up over the next months in bookings that drives a stronger second half of the year, is that how we should think about it?

[Jeffrey Davis:]

Yes, I think that’s a part of that – an element of it. But I actually think that we’re not necessarily expecting – we’re not banking on, I want to be clear, sort of a big surge in that. So the bookings at the pace that we are seeing them now are decent and that’s where we modeled the year around. So we’re not dependent on some big surge forward on bookings here in the near-term to make that happen. If that were to happen, I think we’d see some upside.

[Brian Kinstlinger:]

Okay. And then maybe talk about customer accounts, I think maybe two years ago one of the reasons rates were coming – stabilizing and not increasing for you was the focus on winning new customers and driving growth that way. Maybe talk about your view on the progress of new customer wins over the last two years and how that’s impacting your demand?

[Jeffrey Davis:]

Sure. We had – certainly we had won some new accounts, some of which are performing very well and growing nicely. You know you have to, I think, last year if you will, a lot of new customers defined that next top 20 customer in that bunch and we’ve certainly have seen a couple of those. But I would say, right now we’re seeing more traction around that, you know literally at the moment. We’ve got – if you think about our top 5 or 10, let’s say top 10 customers, we’ve got another probably four or five in pipeline right now. That we have started engagements with or that we have deals on the table with, sizable deals, you know multimillion dollar deals that could be our next top 5, top 10 customer and that’s unique, I mean that’s not something that we’ve had a lot of it, it’s usually one or two, not typically as many as we’re looking at right now. Now of course we got to land those, but I would say we are seeing some traction and some benefit of the changes that we made that you are alluding to, around going after some of these new accounts. And I guess the traction is there, we’ve already seen some of it, but I would say right now we’re on the cusp of some real opportunities that we can land these larger accounts I’m referring to.

[Brian Kinstlinger:]

Great, last one from me is that, a two-parter on the margin and I’ll get back in the queue. Gross margin, Paul you mentioned, went from 36 – sorry went to 36 and change from 39 a year ago. First, can you remind us what caused that pressure? And then I missed what utilization was in the fourth quarter? And then finally I’m curious, every 1% you increase utilization, because you talked about getting to the low to mid-80s, I think, how does that impact your gross margin on services [Multiple Speakers]

[Jeffrey Davis:]

I’m going to let Paul give the utilization number from Q4. But real quick, you might recall we talked about this on the Q3 call. We had another healthcare cancellation in October of last year, which is what really kind of hurt utilization and hurt the quarter overall really to the tune of about, I think, $3 million. So October utilization was really poor. Now, we reacted to that quickly and got it adjusted again i.e., November. But with the seasonality in the November/December, the overall utilization, I’m sure was fairly poor relatively on a year-over-year basis. That’s all behind us. We started off the year stronger and again with hopefully a stable revenue.

[Paul Martin:]

Yes. So on the fourth quarter, North American utilization was 77%, it was down from a year ago. As Jeff said, I think there’s opportunities as we do our capacity planning to get that into the low 80s for 2017.

[Jeffrey Davis:]

Yes, by the way that that goal would be right around 80 or low-80s.

[Brian Kinstlinger:]

And if you improve 3%, what does that do to services margin?

[Jeffrey Davis:]

It will be a pretty much 3Q margin. So I didn’t take it, as an example, 36 to 39, I mean, it’s almost a one for one translation.

[Brian Kinstlinger:]

Great. Okay, thanks.

[Jeffrey Davis:]

Thank You.

[Operator:]

Our next question comes from Peter Heckmann of Avondale. Your line is open.

[Peter Heckmann:]

Good morning, guys.

[Jeffrey Davis:]

Good morning, Pete.

[Paul Martin:]

Pete.

[Peter Heckmann:]

Can you talk about your plans for organic hiring in 2017, you talked about some of the campus – on-campus events trying to find some younger consultants to bring up to the organization. How does that mix work in terms of organic hiring for U.S.-based consultants versus offshore? Do you continue to expect offshore in terms of mix of volume of hours to increase in 2017?

[Paul Martin:]

Yes, I think most of our hiring or net organic hiring will be probably focused offshore, as well as college recruiting, as we mentioned earlier. With a focus on [indiscernible] utilization up a couple of points this year, obviously, we’re going to hold back on hiring as much as we can. If the event that I mentioned earlier where we do see a kind of a surge forward and booking staff and obviously that will change. But as we look at it right now with the guidance we’ve provided, we expect net U.S. organic hiring to be fairly low. Obviously, there’s sales mix in there. So it will be – and there’s attrition in there obviously with the hire. But net fairly low and offshore again will be more of the incremental hiring.

[Peter Heckmann:]

Okay. And then to the extent that there is some sort of development on the immigrant worker, visas, the H1-B programs, would you expect that to create some wage inflation on U.S. citizen contractors and what would it be your ability to pass that through?

[Jeffrey Davis:]

Yes, I think that’s the risk that that we’re concerned about, again, anything else about that I think as a – I see as a benefit to us. I still think we’re – where that wage inflation is going to come from primarily our offshore competitors, and frankly, we’re in market more attractive employer. We pay more. We have more exciting gigs and we can beat compete very well with them for people. That said, I do think wage inflation is a very real possibility. And I think we could pass the rates on fairly readily. And by that obviously, there will be some delays, some negotiation, but I think that the plans are expecting that, and I think the industry in general will go there in terms of driving rate increases. So, we won’t be just us trying to push that, I think it will be sort of universal. So my optimism is that, we will be able to respond pretty quickly to that wage inflation with rate increases negotiated on the fly so to speak. Clients appreciate the continuity 10-year and they understand the attrition risk.

[Peter Heckmann:]

Got it, okay. And just in terms of how we’re modeling the year, really the easier comparisons are definitely in the back-half. Any kind of margin commentary that’s worth putting out in terms of first-half, back-half, or any things to think about in terms of difficult quarterly comparisons?

[Jeffrey Davis:]

I think it will be on a margin basis Q1, as you mentioned, as it was kind of a normal quarter last year for Q1, which is seasonally down in margin. So we’ll probably be close to flat with that on net services. For the rest of the year, I actually – I’m optimistic that we’ll show improvement even in Q2 and then certainly in the back-half where the softer comps are. So for the year overall, I’ll be disappointed if we can’t push, at least, 100 bps – 150 bps improvement to gross margins, we’ll see about 100 or more of that drop to EBITDA.

[Peter Heckmann:]

Good deal. All right, it sounds like a good plan. I appreciate it.

[Jeffrey Davis:]

Thanks, Pete.

[Paul Martin:]

Thanks, Pete.

[Operator:]

[Operator Instructions] Our next question comes from Josh Seide of Maxim Group. Your line is open.

[Joshua Seide:]

Hi, guys. It looks like revenue from retail and consumer was down significantly in the December quarter, both year-over-year and sequentially. Can you just highlight what happened maybe in that segment during the quarter and whether this weakness is expected to continue into 2017? Thanks.

[Jeffrey Davis:]

Sure. The – Q4 actually is a seasonally low quarter for retail. They tend to shut their projects down during approaching their holiday sales season. So what I suspect to happen is that last year was unusually good. So the shorter answer to your question of, does it carry forward is, no, I don’t believe so. I think we’ll see a rebound there coming into this year, again, just due to seasonality in that industry. Again, if we manage to buy that last year, it was probably an anomaly to be honest.

[Joshua Seide:]

Understood. Thanks

[Jeffrey Davis:]

Thank you.

[Operator:]

There are no further questions. I’d like to turn the call back over to Jeff Davis for any closing remarks.

[Jeffrey Davis:]

All right. Well, thank you all for your time. I appreciate it and look forward to talking to you at the end of the first quarter. Take care.

[Operator:]

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