Perficient, Inc.
Q1 2008 Earnings Call Transcript

Published: 27 May 2008

[Operator:]

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Perficient earnings conference call. My name is Erica and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Jack McDonald, Chairman and CEO. Please proceed.

[Jack McDonald:]

Good morning. This is Jack McDonald. On the phone today, I've got Jeff Davis, our President and COO; and also, Paul Martin, our CFO. I want to thank everybody for their time this morning. As usual we'll have 10 or 15 minutes of prepared comments, after which we'll open the call up for questions. Paul, could you read the safe harbor statement?

[Paul Martin:]

Sure. Thanks, Jack, and good morning. Some of the things we will discuss concerning 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 the forward-looking statements and we encourage you to refer to the additional information contained in our SEC filings concerning factors that could cause those results to be different than contemplated in today's discussion. In addition, our earnings press release includes a reconciliation of non-GAAP financial measures to the most directly comparable measures prepared in accordance with the general accepted accounting principals or GAAP. This is posted on our website at www.perficient.com under news and events. We have also posted a reconciliation of certain non-GAAP goals to the most directly comparable financial measures prepared in accordance with GAAP on our website at www.perficient.com under investor relations. Jack?

[Jack McDonald:]

So, all in all, this was a very solid quarter for Perficient. And as we talked about before, January was challenging due to the economy. But the good news is, it appears there may have been a temporary blip. Jeff's going to talk a little bit more about this later and no guarantees, of course, but we do feel good about where things are headed and despite the macroeconomic noise out there, we saw our business momentum accelerate throughout the quarter. So, February was stronger than January, March stronger than February. And as our guidance indicates, we will get in to this more, we see that strength, that growth continuing into Q2. Again no guarantees, but that's the outlook. So despite the initial January there, we grew topline services revenues 20% year-over-year. And in addition, our cash earnings per share came in at the upper end of our revised expectations. So we came in at $0.17. We had talked about a $0.15 to $0.17 range, and we're pleased with that relative to our revised expectations for the quarter. So the business acceleration I referred to has this feeling good about the potential. Again, no guarantees for a healthy snap back in metrics like gross margin and earnings per share for the second quarter. So, we expect gross margins to return, along with utilization rates, to historical levels. You saw a little bit of a dip in gross margins and the utilization due to January. So you saw the overall impact utilization in the high 70s, as opposed to our 80 to 82, 80 to 84 target range and gross margins on services ex-stock comp as we'll talk more about coming in at around 35% versus the 38, 39% target. We expect those to snap back in Q2 here, that's what we're seeing already in the business and again, that should bring cash earnings up to $0.20, maybe even $0.21 or better a share. So, again, no guarantees on that but we're feeling good about the trends that we're seeing in the business in terms of revenue per day, in terms of backlog, in terms of pipeline, Jeff's going to talk about this, but we're at record levels on a number of those. So it's our diversified solutions offerings, our geographic diversity, our solid client relationships, all of those are serving us well in this environment. And I want to stress it's really a business as usual. We remain committed to our growth plans and achieving a $500 million revenue run rate by the end of 2010. You saw in the press release, we're continuing to earn industry recognition, IBM and EMC both recognized us with prestigious partner awards during the quarter. And of course, we continue to believe our stock at these levels is very attractive and a better buy frankly than an acquisition right now, although we are maintaining dialogue with a number of M&A candidates. So we're keeping that pipeline warm, but at the current price levels, we're more apt to buy our own shares under our previously announced acquisition program -- buyback program. Now, again, we can't make those purchases until after we're out of earnings blackouts. So, again, all in all, a very solid quarter. Accelerating business momentum throughout the quarter, still nicely profitable, again, not what we had wanted for Q1, but we're looking at the potential for a nice snap back to historical rates of gross margin utilization and getting those earnings per share numbers back up into the 20s right here in the second quarter. So, all of that is great news. So with that, let me turn the call over the Paul, who can walk through the financial results in greater detail. Paul?

[Paul Martin:]

Thanks, Jack. Total revenue for the first quarter of 2008 was $57.3 million, a 15% increase over the year ago quarter. Services revenue including reimbursable expenses were $52.1 million with organic growth of approximately minus $5.2 on a trailing four quarter average annualized basis including businesses owned at least two quarters. The Company is expecting organic growth improvement in the remainder of 2008. Gross margin for services excluding stock compensation and reimbursed expenses for the first quarter was 34.7%, which is down from 38.6% in the first quarter of 2007. Lower utilization and a modest decline in the average bill rate led to the gross margin decline. SG&A expense was $10.8 million in the first quarter, including $1.6 million of non-cash stock compensation expense. Excluding non-cash stock compensation, SG&A expenses were $9.2 million, which represents 16.1% of revenues compared to SG&A expenses of $9.1 million or 18.2% of revenues in the comparable 2007 quarter. The decrease in SG&A excluding stock compensation as a percentage of revenues is primarily driven by lower bonus costs associated with the increasingly challenging bonus targets in the 2008 plan. EBITDA was essentially flat at $6.8 million compared to the year ago quarter. However, the current year includes absorbing $0.7 million more of non-cash stock compensation expense compared to the first quarter of 2007. EBITDA excluding stock compensation was $9.1 million, up 9% over the comparable prior year quarter. EBITDA margins excluding stock compensation declined slightly to 15.9% of revenues compared to the prior period of 16.7. As a result of changes in its cost structure as the quarter progressed and improved revenue outlook, the Company is anticipating improved gross margins and EBITDA margins for the remainder of the year. Net income declined slightly to $3.1 million compared to $3.2 million in the year ago quarter. This is our 19th consecutive quarter of positive net income. Diluted gap earnings per share was down 9% over the year ago quarter to $0.10 a share. The increase in amortization experience associated with 2007 acquisitions drove this slight decline. Non-GAAP earnings per share was up 6% over the year ago quarter to $0.17. Non-GAAP EPS is defined as GAAP earnings per share plus non-cash amortization expense and non-cash stock compensation net of related taxes divided by average fully diluted shares outstanding for the period. Our average billable headcount for the first quarter of 2008 was 1,185 including a 132 full-time equivalent subcontractors. We ended the quarter with approximately 1,032 billable consultants and 132 full-time equivalent subcontractors for a total billable headcount of 1,164. In addition to the billable headcount, we currently have 176 SG&A personnel, which results in a total colleague headcount of 1,340 as of March 31, 2007. Importantly, we continue to generate strong operating cash flow that we're using to fund both internal growth and growth from acquisitions. Our operating cash flow has improved substantially over the comparable prior year quarter, which resulted in ending the quarter with no debt and $12.9 million in cash on hand. Our day sales outstanding on accounts receivable was 74 days at the end of the first quarter compared to 73 days at the end of the fourth quarter of 2007. As we previously stated, our goal is to maintain DSOs between 70 and 75 days over time. We will continue our efforts in 2008 to maintain this metric within our stated range. I'll now turn the call over to Jeff Davis for a little more commentary behind these metrics. Jeff?

[Jeff Davis:]

Thanks, Paul. One of the things I'd like to spend a little time discussing is that while our Q1 results were impacted by the slow start in January we already talked about, our sales performance actually accelerated significantly from the fourth quarter. We've discussed the gradual strengthening we saw on our realized revenue, our revenue per billable day, if you will. But it's important to note that sales pipeline activity grew along the same general curve. In other words, we sold more in February than January, more in March than February, et cetera. And April produced the same results. So in fact, during Q1 both the number of deals sold and the associated revenues increased materially. We closed $54 million in new services business compared to less than $45 million in the fourth quarter. 21 deals were sold with contracted services billings greater than $500,000. These deals represented more than 40% of our total sales dollars for the quarter. So we sold a lot more large deals in the quarter. That compares to eight deals in that range representing about 30% of sales in the fourth quarter. Average deal duration increased as well, which implies that backlog base that we're working from for 2008 is also increasing as we move along. So again, these metrics have us feeling pretty good about the business despite the broader economic concerns. As Jack said, no guarantees, but we are seeing some marked improvement here in fairly short order. Utilization in Q1 fell below our target range of 82% to 84%. That's drove quite a bit of the decline in the margins. So, although, we began working in this direction in the fourth quarter, it's really difficult to shift gears sort of overnight from growth mode to cost management mode. However, I'm actually quite pleased that by March our field management team had restored our gross margin and profitability to run rate levels more in line with our past performance. And as I mentioned this wasn't all through cost reduction, we also experienced decent topline improvement throughout the quarter. So as a result, I expect margins will be substantially improved in Q2 and I remain cautiously optimistic for the remainder of the year. As Jack said, no guarantees, but again, we're certainly seeing some positive signs here. And another thing I'd like to briefly address, because we've had some questions from both the analysts and investors throughout the quarter, is that we expect the consolidation that's occurring in the software business to benefit Perficient. As the space continues to consolidate around a handful of large players, it really benefits a firm like ours that has strong relationships with many of those major firms. Oracle's recent acquisition of BEA, for example, we see as very positive for Perficient with relationships, deep technical expertise and a growing business around each platforms, the deal simply makes Perficient an even more important solution as provider to Oracle. Another example is IBM's relatively recent acquisition of Cognos. As IBM assimilates those technologies, they assess which of their existing partners can be leveraged. Since Perficient is really at the top of that list, it makes for a very positive situation for us. Finally, I wanted to mention that we recently launched a vertical alignment initiative within Perficient with the formation of a nationally focused healthcare business unit. While we've always built upon and leveraged the knowledge that we gain through delivery in similar verticals, and in fact, we really have strong leaders in place with expertise representing many industries. Our primary organization model has traditionally been a matrix combination of geographic and technology platform or horizontal solutions. So given the body of our work in healthcare industry and the significant revenues we derive from it, which is about a 20% on a revenue run rate basis, about 20% of our current run rate, we've decided to build a business unit with dedicated delivery and sales resources targeting that industry. I bring this up because I believe it's an important step in the maturation of the business and Perficient as we continue to evolve. I also believe this addition to our organization structure will assist us in reaccelerating organic growth as well as enable even greater scalability. With that, I will turn the call back to Jack.

[Jack McDonald:]

Great. Thanks, Jeff. I just want to talk a little bit about the outlook for Q2. As indicated in the press release, we've got some strong guidance. Looking ahead to Q2, we expect second quarter services and software revenue including reimbursed expenses to be in the range of roughly $57 million to $61 million, $56.8 million to $61 million. So looking at some good forward guidance. Now that's comprised of $55.6 million to $58.5 million of revenue from services including reimbursed expenses and $1.2 million to $2.5 million of revenue from sales of software. So that guidance range would represent services revenue growth of 14%to 20% on a year-over-year basis. And it's also worth noting that on a sequential basis, organic only, you're talking about from flat to up 5%. Now, we'll see where it comes in along that range. But if you get to the upper end of the range, you can see that that's some pretty healthy organic growth when you're looking at that just being sequential obviously, you annualize that out, even factoring seasonality, it's still some fairly healthy organic growth. Now granted, that's off of Q1 that was not what we had wanted, but looks like again it's just a further indication of that reacceleration of the business. And then again, I just want to emphasize through this we've continued to generate strong cash flow. As Paul indicated, $13 million in cash, which is a record for us and also when you look at net current assets as a whole, about $50 million. And you look at borrowing capacity, even higher than that in the $60 plus million, $65 million roughly range. So in very good shape in terms of being able to execute against the buyback program or acquisitions, once our stock gets to a level that supports our goals for accretion and IRR into that program which may happen sooner rather than later. So with that, let's now open the call up for questions.

[Operator:]

(Operator Instructions) Our first question comes from the line of Colin Gillis from Canaccord Adams. Please proceed.

[Colin Gillis:]

Hi. Good morning, guys.

[Jack McDonald:]

Good morning.

[Colin Gillis:]

So the pace of business is clearly accelerating, I mean do you find that your customers are now more inclined to spend their budgets, that budgets are not being reduced?

[Jack McDonald:]

It's been interesting to me in the number of conversations over the past quarter, is that you talk to CIO's, you talk to division heads, and presidents within Global 2000 companies, and you are seeing a continuation of strategic IT investments. Our clients are being impacted by globalization and the internet. They're accessing global markets. They're not completely beholden to the domestic economic cycles. And you do see not only a continuation of spending but the nature of the spending, I think, is important. It's strategic not -- you're not seeing a massive shift to cost rationalization, which one would typically associate with a slowing market. So, again, no guarantees out there. We don't have the perfect crystal ball, but we're seeing the numbers improve and the background, the environment in terms of what we're hearing from clients supports that. Jeff do you want to address that as well?

[Jeff Davis:]

Yeah. I think you hit the nail on the head, Jack. Really, we're not seeing clear indications of a strong change. I mean there is a couple of pockets that we're seeing some slowdown, we've seen also some strengthening in areas, such as healthcare, energy and other sectors that are actually decent growth sectors for us right now. So I would say, if anything we've seen some improvement over the last four or five months.

[Colin Gillis:]

But Jeff, looking out at the landscaping, is there any other spot you would want to be plugged into besides (inaudible)?

[Jeff Davis:]

I think I'm satisfied with where we are at right now. These again are, I think, very strategic technologies, technologies support very strategic initiatives, we're seeing a lot more or so in integration initiative getting kicked off. And these are things that CIO's and business folks alike understand that they need to get on with. They're meaningful differentiators for their business. Their competitors are doing it. And there's still a significant amount of demand and spend there. And we're in the middle of that.

[Colin Gillis:]

Does the environment change the churn rate and then the wage hikes, could you give us sense as to what those two numbers are?

[Jeff Davis:]

The churn rate in terms of, I'm sorry?

[Colin Gillis:]

Employee basis. Are you losing people? Keeping people more easily?

[Jeff Davis:]

Yeah. As we mentioned, we have done some cost reduction. That did affect some folks in the first quarter. I think we netted down in the employee base about 41, and of course, we worked mostly on the subcontractors and netted that down 26. Any time you do that, it's going to affect voluntary attrition, but our voluntary attrition is still running right around 20%, which is below industry average. So I think attracting folks, we've got our recruiting team fully intact and we hired 86 people in the first quarter. So right now that doesn't feel a lot different to me either. Any time, like I said, you go through this, you're going to see that voluntary attrition spike up a little bit. But I'm actually pleased with where it's at right now. It's not too high. And we're able to hire right now without issues.

[Colin Gillis:]

Nice job. Thank you.

[Jeff Davis:]

Thank you.

[Operator:]

Our next question comes from the line of Peter Jacobson from Brean Murray. Please proceed.

[Peter Jacobson:]

Thanks. Good morning. Can you just expand a little bit more in terms of the technology evolvement and where you're getting your primary revenue across areas like middleware or CRM or business intelligence and SOA? And where are you -- what types of skill sets are you adding and building in terms of technologies, and which skill sets are maybe winding down or getting phased out?

[Jeff Davis:]

Yeah. I think clearly business integration, including SOA as well as more traditional EAI and the platform implementations around IBM process server Tibco, webMethods are still very strong. And that's an area where we continue to hire and that represents about 24% of the business on a solutions basis right now. Next to that is CRM, primarily C but we do also custom CRM work, primarily C. And again, it's an area where we continue to see growth and we're continuing to do hiring in that space. So I think that's going to be sustainable for quite sometime. In terms of what's winding down, I guess I don't see a lot that is slowing down dramatically over the others. I mean, I think those are growing ahead, I wouldn't say that the others are shrinking as much as maybe they are just slowing a little bit, but have for sometime now. Custom app development outside those platforms I already mentioned and, of course, all these things require a lot of custom work, is not the front runner anymore, but I wouldn't say it's shrinking, just not growing as fast or perhaps it's stagnated. But Portals and Collaboration is really still a strong business for us. It's obviously a mature business, but still a strong business and we still see lots of opportunity out there. That's more in S&B and I expect that will be a little more impacted by the general economy. But right now for us, we're still doing quite well in that space. We broadened our portfolio there in bringing Microsoft and Sharepoint into the mix last year with the acquisition of Etech. So I think those are mature solutions that I think are probably a little slower in a market like this and the ones that are really on the front end for us are certainly business integration. So we're seeing actually more Oracle fusion opportunities, as that technology really comes on line and matures, and a lot of CRM.

[Peter Jacobson:]

Okay. That's helpful. Thank you very much. That's all I have.

[Jeff Davis:]

Sure.

[Operator:]

Our next question comes from the line of Brian Kintslinger with Sidoti. Please proceed.

[Brian Kintslinger:]

Yes. Hi. Good morning. Thanks. I just was curious, Jack, when you talked about the trends from March to April, was revenue per day in line with March? Is that what you were talking about? Or you're saying continuous strengthening from April -- I mean from March, sorry.

[Jack McDonald:]

Strengthening.

[Brian Kintslinger:]

Strengthening. Great. The next question I had, did I hear you accurately you said $0.20 or $0.21 is what generally the bottomline comes down to in your guidance and possibly more. Was that how you phrased that?

[Jack McDonald:]

Our "official guidance" is limited to revenues.

[Brian Kintslinger:]

Right.

[Jack McDonald:]

But if the trends that we're currently seeing continue, you should see cash earnings per share bounce back into the 20s -- $0.20, $0.21. it could even be better than that now. I wouldn't go there in terms of saying that's a guarantee because I don't think that makes sense right now. But yes, that's the potential if the current trends we are seeing in the business and we're already over a month into the quarter, if they continue. And based on backlog and pipeline and sales activity, as Jeff was talking about, we are optimistic that they will.

[Brian Kintslinger:]

Can any of you guys comment on how many job openings you currently have?

[Jeff Davis:]

Yeah. Sure. I would say now we probably have about 50 open recs, and some of that's due to specialty skills, and some of that, as I mentioned before, is due to the growth we're seeing in some sectors. We came probably through March, still reducing a bit, mostly at that point through voluntary attrition and less hiring back. As I mentioned, we hired 86 folks in Q1. And by the end of March, we were actually growing again on the hiring front. So we're netting up right now in headcount.

[Brian Kintslinger:]

And that 21 deals you signed that you mentioned in the first quarter, are you feeling a similar trend or is that sort of more of a bumpy number that could -- choppy number that could be the first or the third quarter or the fourth quarter, but that's not something you expect every quarter.

[Jeff Davis:]

Yeah, I think that's true. I think there is some choppiness to that, a little bit of a surge, which again, I saw as a good sign. We didn't see that -- if you look at it year-over-year, that's an atypical Q1 and I think it was because an atypically low Q4. Now, that being said, we got a strong pipeline. Pipeline is right now, both gross and weighted pipeline, is larger than it's ever been. So now the sales cycles are a little more extended. We've got to close those deals. But the good news is, they are out there. Companies haven't, and this is what I said before, companies haven't shut down their plans, they haven't shut down their discussions and their budgets are still there. They're perhaps more cautious and the sales cycle is a little more extended, but the deal were there. And I think we could have another Q2 similar to that in sales. As I say, the pipeline is, therefore, it's a matter of do we get them closed within the next 60 days.

[Brian Kintslinger:]

A couple of maintenance questions. If I missed it, I'm sorry. What did you say organic growth was and operating cash flow in the quarter?

[Jack McDonald:]

Organic growth on a trailing 12 basis was negative five.

[Brian Kintslinger:]

Okay.

[Paul Martin:]

That's correct.

[Jack McDonald:]

And operating cash flow net real cash flow generation was what, Paul, around 4?

[Paul Martin:]

Yeah. $4.6 million was the operating cash flow on the cash flow statement. And the 10-Q is on file, so all of this stuff is out there.

[Brian Kintslinger:]

I'm sorry, okay. And I can get the CapEx. And did you provide -- you generally provided a bill rate average. I mean how has that been trending? And maybe you can give us some specifics.

[Jack McDonald:]

It's flat. Roughly. Which is what, it was down a dollar I think, Paul.

[Paul Martin:]

Yes. It's flat, down slightly. And then some of that is the effect of as the China operations continue to scale. But on sort of a base apples-to-apples business, it was down less than $1.

[Jack McDonald:]

And on that score of China, Jeff, you may just want to hit -- headcount over there has gone from what, 70 and change to? Is it 100, 110?

[Jeff Davis:]

That's right. Approximately 70, 80 folks billable when we initially acquired it and we're over 100, about 110. By the way, I should have mentioned earlier, I'd like to highlight and we'll be obviously issuing a release on this, but we achieved CMMI Level 5 certification at that facility now, which is really a phenomenal achievement. We were just notified actually on Monday that we could begin publishing that. And the reason for that headcount increase is we actually won in the first quarter a large engagement, multi-million engagement, which includes a substantial offshore component that will be running in China.

[Jack McDonald:]

So that's exciting news in terms of growth, future impact on margins and really making that China facility start to work more broadly across the business, which obviously was our plan in getting that started.

[Brian Kintslinger:]

Can you give us revenue by industry, once in a while provide that maybe by vertical?

[Paul Martin:]

Sure. So the largest, as we mentioned where we've established the separate business, is that healthcare is about 19%. Energy and utilities is second at 14%. Telecom 7%, financial services -- I'm sorry, telecom 12%, financial services 11% and retail 10% are the largest.

[Brian Kintslinger:]

And my last question, --

[Jack McDonald:]

And I would just note, obviously those are Q1 numbers not trailing 12 as well.

[Brian Kintslinger:]

Right.

[Jack McDonald:]

So they will bounce around a little bit.

[Brian Kintslinger:]

Certainly. And my last question is related to stock-based compensation, it's up some 46% year-over-year. I'm just curious maybe you can comment on trends you expect over the year. I think you made a comment on maybe coming back to historic levels, I missed that as well. So if you can give me just some details on that. Thanks.

[Jack McDonald:]

Yeah. I mean we actually didn't make a comment but it's a good question. And we're going to be in line with our target as we move here through the rest of the year, that's my expectation. We've said all along that we're looking at stock-based compensation running between 15% to 20% of cash earnings. And it was a little bit higher than this quarter because of the slow January, the impact on utilization, and thus, cash earnings in utilization gross margins and those cash earnings. But you'll see that come back into the 15% to 20% target range as we move through the year. And I think that's a great range for us to be. It's, I think, for a people based business, its well managed. The appropriate amount of incentive balancing share growth issues and, of course, we go for five-year vesting. And I think are more conservative than most firms in terms of making that equity sticky. So that's what I would see happening there.

[Brian Kintslinger:]

Actually, one last question. Is it fair to characterize that your 2008 guidance remained $0.75 to $0.80, though, given the recent changes, you feel as though you're much more comfortable feeling that as of now it looks like the high end of that?

[Jack McDonald:]

I think that's a good statement. Look, we're going to try to beat that, right? But we will see what happens. We're not changing that, we're seen some good signs right now. Again, we said no guarantees, we don't have a perfect crystal ball. This is what we're seeing right now in the business. So if these trends continue, that will be a good thing.

[Brian Kintslinger:]

Thank you.

[Jack McDonald:]

Thanks.

[Operator:]

Our next question comes from the line of Tim Brown from Roth Capital. Please proceed.

[Tim Brown:]

Thanks. I think most of my questions have been answered. But, Jeff, maybe if you could give us a little bit more color on some of the bigger deals and what they were around? Was it WebSphere? And then the second part of the question, does that give you more visibility into the second half with some of the larger bigger deals?

[Jeff Davis:]

Yes. I wouldn't care to speculate too much on the second half just yet. As I mentioned, though, in the early part of the call, it certainly is a building of the base, okay. So it makes us feel better, no doubt, than 90 days ago about the second half. And in fact, if you look at it year-over-year it's encouraging. But I think we got about a 60 to 90-day visibility, right now, sort of given the economic climate. Like I said, I think speculation is reckless, but where we sit today compared to 90 days ago, it feels much better. In terms of the nature of the deals, a lot of them really are integration driven. There is a lot of integration. There's a lot of portal work in there. And a lot of those deals at the size that they're at, as you might imagine, are a combination of skills and even platforms. We've got multiple platforms in some of those projects that are involved in really bringing more of the portfolio to bear, which I think is the reason we are able to get larger engagements than we did, say, a year or two ago, is because we've got more services and more capability to bear. But certainly you're seeing a lot of integration, a lot of CRM, a lot of Siebel work there, both integration site, both WebSphere, as well as BEA and certainly Tibco. And Tibco is still our front runner on integration, but also Portal. It's a good mix. When you sell that much, 21 deals in that range, I'd say it's pretty diverse and pretty across the board from the portfolio. The larger deals typically involve more than one platform.

[Tim Brown:]

And Jeff, do you see, obviously there is a nice spike, but do you see Perficient getting in more of these deals because Perficient is getting larger and being seen as more capable or is it a function of there is simply more deals out there?

[Jeff Davis:]

I think it feels like both. The spend -- there is no doubt that despite what's going on in the economy, the spend is absolutely increasing, particularly around integration, but I'll say the same thing about CRM. There was a little bit of a hiatus, I think on companies buying Siebel and implementing Siebel or expanding their Siebel install as they waited to see what Oracle's plans were. And that began to get unleashed about a year and a half ago as the dust sort of settled there. And I think that's continuing on. So that's I think a solid area. But the integration space right now, particularly around initiatives and enterprise services bus and really putting in place that service oriented architecture for the enterprise. And I'm talking, we're involved with a number of Fortune 1000 companies, even including one or two Fortune 100 companies. And I think that speaks to our expertise in that space, which is fairly unique in this country.

[Tim Brown:]

Okay. Thanks.

[Operator:]

Our next question comes from the line of Jon Maietta from Needham & Company. Please proceed.

[Jon Maietta:]

Thanks very much. Jeff, I was wondering if you're seeing clients, say, looking to allocate work to offshore locations to hopefully save some costs, and if so, have you been able to leverage your offshore footprint to capture some of that work?

[Jeff Davis:]

We have. We've got -- Macedonia, when we gained it through the [Ohridska] acquisition about three years ago, little over three years ago, I think it was around 20 folks. And we've got 60 billable there, now fully engaged and fully billable. We've got about four clients, four or five clients that we're serving out of there versus one in the initial acquisition. And that's at the moment. We've actually run projects through there and completed them, obviously over the course of that three years. So we've probably got, I don't know, 20 projects under our belt there and, like I said, four or five currently underway. China, similarly we've got the two major engagements underway there now and two or three others that are a little bit smaller but underway. And actually, really introducing China into the portfolio, we only gained that in September and you can see how it's already scaled. And I think we've got a lot of opportunity to continue to scale that and introduce it into our portfolio. There is a lot of interest in that. We have these trusted relationships with these customers and for sometime now and we've been using Macedonia and we've been looking for that opportunity that [Filtech] represented for us, because we've had customers asking us can you guys do more of this and take on more of this work. So I think it's something we can leverage a lot and scale a lot. As we mentioned before, we're excited about doubling that capacity this year and leveraging in a very big way.

[Jon Maietta:]

Okay. And then, Jack, with regards to the acquisition pipeline, have you seen valuation expectations start to drift back a little bit or is it still status quo from a quarter ago?

[Jack McDonald:]

I would say status quo. I think it takes six months for those to fully kind of filter their way through. And so that should work well for us, frankly, in terms of the point at which our stock gets back to a level that makes sense for us to be out there doing deals, it will probably be at the point at which we'll see some softening of valuation, expectations in the private market. And my gut is we're a quarter or two out from that. But could happen sooner, you never know.

[Jon Maietta:]

Got it. Thanks very much.

[Jack McDonald:]

Thank you.

[Operator:]

(Operator Instructions) Our next question comes from the line of Devang Kothari from JMP Securities. Please proceed.

[Devang Kothari:]

Good morning gentlemen. Most of my questions have been asked. My only question is in this quarter so far, have you bought back any stock yet or have you been blacked out so far?

[Jack McDonald:]

We have not bought back any stock because we have been blacked out.

[Devang Kothari:]

Okay. All right. Thanks. Thanks.

[Jack McDonald:]

Thank you.

[Operator:]

There are no further questions. I would like to turn the call back over to Jack McDonald for closing remarks.

[Jack McDonald:]

Okay. Great. Well, thanks, everyone, for your time this morning. And as I said, we're feeling good about the outlook here as we move into Q2. And we look forward to getting back with you again next quarter. So, thanks very much.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.