Perficient, Inc.
Q3 2007 Earnings Call Transcript

Published: 8 Nov 2007

[Operator:]

Good day, ladies and gentlemen, and welcome to the ThirdQuarter 2007 Perficient Earnings Call. My name is Colby and I will be youroperator for today. At this time, all participants are in listen-only mode. Wewill conduct a question-and-answer session towards the end of this conference.(Operator Instructions) I would now like to turn the call over to Chairman and CEO,Jack McDonald. Please proceed, sir.

[Jack McDonald:]

This is Jack McDonald. With me on the phone today is JeffDavis our President and COO and Paul Martin, our CFO. I'd like to thank you foryour time this morning. We’ll have about 10 to 15 minutes of prepared comments,after which we'll open the call up for questions. Paul, would you read the Safe Harborstatement?

[Paul Martin:]

Thanks, Jack, and good morning. Some of the things we willdiscuss in today's call concerning future company performance will beforward-looking statements within the meaning of the Securities laws. Actual results may materially differ from those discussed inthese forward-looking statements, and we encourage you to refer to theadditional information contained in our SEC filings concerning factors thatcould cause those results to be different than contemplated in today'sdiscussion. In addition, our earnings press release includes areconciliation of certain non-GAAP financial measures to the most directly comparablefinancial measures prepared in accordance with Generally Accepted AccountingPrinciples or GAAP. This is posted on our website at www.perficient.com undernews and events. We have also posted a reconciliation of certain non-GAAPgoals to the most directly comparable financial measures prepared in accordancewith GAAP on our website at www.perficient.com, under Investor Relations.

[Jack McDonald:]

So, the headline for Q3 is we posted record revenues, recordcash flow or EBITDA and record non-GAAP and GAAP EPS. We exceeded the analystconsensus estimate we beat on cash EPS and we also have issued strong Q4revenue guidance. This was our 18th consecutive quarter of revenue growth andour 22nd consecutive quarter of positive EBITDA. On revenues we came in withinour guidance range, albeit at the low end of that range, posting roughly 20%year-over-year growth in total revenues. Our non-GAAP or cash EPS again exceeded analyst consensusestimates and we set another record. We achieved $0.21 on a rounded basis, socurrently at an annualized run rate of about $0.83 to $0.84 on cash EPS. Nowthat's 40% growth, 40% growth in cash EPS or non-GAAP EPS in the quarter, overthe same period last year. So, that's clearly demonstrating the operating andearnings leverage that we've been talking about. On EBITDA, if you look at it ex-stock comp, which is thepreferred measure for looking at it for us, again, another record, $10.7million on quarterly EBITDA ex-stock comp. So, roughly $43 million annualizedEBITDA run rate. It was that strong cash flow generation, which allowed us tofully fund the cash portion at the BoldTechacquisition, which we did this quarter, which is our largest acquisitionto-date, in terms of purchase price and still exit the quarter with no debt. And I've noticedwell, that EBITDA margins ex-stock comp were at 20.1%, that's an all timerecord. It's up from 18.5% in the second quarter, which was the previousrecord. And again, is consistent with what we've been talking about in terms ofexpanding margins, as we generate SG&A leverage, particularly G&Aleverage with further scale. Jeff's going to talkmore about this later, but the operating metrics remains strong. Servicesgross-margins, excluding stock comp and reimbursed expenses, were over 39%. Andthat's consistent with comparable 2006 period, and that's at an 82% utilizationrate, which is well within our comfort zone, and what we believe to besustainable. So, even in a quarter where growth was not what we wanted itto be, we did, I think, a very good job of managing the head count, managingutilization, managing labor costs and still achieving really close to recordgross margins. On organic growth specifically, as we talked about, we didhave a tapering in the middle of the year, really sort of an what looks at thispoint to be an April to August phenomenon. And really that was due principallyto three factors one was some slackening in demand. The second was the loss ofa $4 million backlog project, because the client with whom that work wasproceeding was acquired ironically by another client, and so there was a goodpossibility that work could come back. We'll see on that. So, some slackening of demand. A $4 million backlog projectthat fell out really principally impacting Q3, and a tough comparison to a veryrobust 2006. In any event, business has strengthened from a revenue-per-daystandpoint and from a variety of other perspectives. Business strengthened throughout the third quarter and wesee that strengthening continuing into Q4. And its that strengthening andorganic growth, which enables us to issue the strong revenue guidance for thefourth quarter, that we put out today, which was in-line with the analystconsensus estimate, and which shows year-over-year services revenue growth of30% to 37%. So, on a total basis, 30% to 37% revenue growth implicit in that Q4guidance. Now, we're going to talk more about guidance later, but froma strictly organic growth perspective, after bottoming out at around 4% organicgrowth in Q3, our organic growth should increase to the 5% to 10% range in Q4.Again and those would be the bookends based on the current Q4 revenue guidanceshows us moving into that 5% to10% organic growth range for Q4. And again, our target for next year, goal for next year remainsat 10% to 15% range. So, our hope is to re-accelerate as we enter into nextyear, no guarantees, but that’s the target. Now, as I say, we've continued to see earnings momentum. Weare still very comfortable with the $0.76 non-GAAP goal for this year, the cashEPS goal, which was up from $0.51 last year. And again, still targeting thesame goal of $0.90 to a $1.00 in cash EPS for next year. And we continue to believe beyond that, that with providedwe can grow organically at around a 10% range and with additional acquisitionsalong the lines of what we have done historically, that beyond 2008, we cancontinue to grow earnings, at approximately 30% a year over the next severalyears. No guarantees, of course, but that's our goal. So, very much intact interms of earnings for this year, our outlook for 2008, and our long-termoutlook for growth in earnings. Other exciting news in the quarter on the acquisition front,we acquired BoldTech. This is a $20 million plus business, which strengthenedour presence in Denver and in the Rocky Mountainmarket, but also brings China.And Jeff is going to talk more about this later. But this further diversifies our delivery capability. Itmeans now that over 25% of our delivery headcount is either offshore or foreignnational H1Bs. And we have opportunities now, particularly with that Chinafacility, to scale that over time. This will help us manage labor costs, boostmargins and ultimately enhance competitiveness and growth. Continuing on the M&A front, our M&A pipeline isstronger than it has ever been. We currently have $50 million of capacityavailable under our credit facilities. As I say, we came out of the quarterwith no debt, even after paying the cash portion of the BoldTech acquisition.So, we have $50 million of borrowing capacity to fund additional accretivedeals this year, and as we move into next, and we are aggressively in themarket looking at deals. With BoldTech and our accelerated organic growth puts ourrun rate going into Q4 and exiting the year at about $250 million annualized.That was the target we had hoped to hit. We would still like to get at leastone more acquisition done by year end/January to boost that run rate evenfurther. And we are actively in the market right now executing on our M&Apipeline. So again, revenues came in within our original guidancerange, albeit at the low end. We beat on cash EPS. We've issued strong Q4revenue guidance and we'll exit the year at or about $250 million in annualizedrevenues, which was our goal. Organic growth is accelerating from that Q3 dip; we see itmoving to 5% to 10% in the fourth quarter based on the guidance we put out. Andwe continue to target 10% to 15% organic growth rate, again no guarantees, butthat's what we target going into 2008. That plus we are aggressively in themarket for acquisitions. So with that, I'm now going to turn the call over to PaulMartin to discuss the Q3 results in greater detail. Paul?

[Paul Martin:]

Thanks, Jack. Total revenue for the third quarter of 2007was $53.1 million, which is a 20% increase over the year-ago quarter. Services revenue, excluding reimbursable expenses were $48.4million, with organic growth of approximately 4% on a trailing four quartersaverage annualized basis including businesses owned at least two quarters. Gross margin for services, excluding stock comp andreimburse expenses for the third quarter, was 39.2%, which is essentially flatwith the third quarter of 2006 and the second quarter of 2007. SG&A expense was $9.8 million in the third quarter,which included $1.1 million of non-cash stock compensation expense. Excluding non-cash stock compensation, SG&A expense was$8.7 million, which represents 16.4% of revenues compared to SG&A of $9million or 20.4% of revenues in the comparable 2006 quarter. This decrease in SG&A, excluding stock comp as apercentage of revenues, is driven by lower bonuses tied to increasinglychallenging goals in 2007 and lower cost as a percentage or revenue across manyof our SG&A, and particular G&A categories, as the Company leveragesits infrastructure to deliver economies of scale. EBITDA was up 46% over the year ago quarter to $9.2 million,which includes absorbing $0.7 million more of non-cash stock compensationexpense in the third quarter of 2007, compared to the third quarter of 2006. EBITDA excluding stock compensation was $10.7 million, up51% over the comparable prior year quarter. EBITDA margins excluding stockcompensation expense improved over 4 full margin points over the comparableprior period to 20.1%, a Perficient record. The third quarter annualized EBITDA run rate excluding stockcompensation is approaching $43 million. This is our 22nd consecutive quarterof positive EBITDA. Net income was up 60% over the year-ago quarter to $4.5million, which includes absorbing $0.7 million more of non-cash stockcompensation expense in the third quarter of 2007 compared to the third quarterof 2006. This is our 17th consecutive quarter of positive net income. Diluted GAAP earnings per share was up 50% over the year-agoquarter to $0.15. Non-GAAP earnings per share was up 40% over the year agoquarter to $0.21. Non-GAAP EPS is defined as GAAP earnings per share, plusnon-cash amortization expenses and non-cash stock compensation, net of therelated taxes, divided by the average fully diluted shares outstanding. As previously mentioned, during the third quarter of 2007,our utilization rate was 85%, including sub-contractors and 82%, excludingsub-contractors. Our average billable headcount for third quarter was 973,which includes 151 sub-contractors, excluding BoldTech. We ended the thirdquarter with 1,002 billable consultants, including 191 active sub-contractors.In addition to the billable headcount, we currently have 149 SG&A personnel,which results in a total colleague headcount of 1,151 as of September 30th2007. From a year-to-dateperspective, year-to-date revenues for the nine months ended September 30, 2007are a $155.7 million, a 40% increase over the prior year. Year-to-date servicesrevenue for the nine months ended September 30, 2007 were $137.6 million,compared to $98.6 million for 2006, an increase of 40% as well. Year-to-date 2007 gross margin for services excludingreimbursed expenses, and stock comp was 39.1%, an increase of 60 basis pointsover the 2006 period. SG&A expenses were $30.1 million for the nine monthsended September 30, 2006 excluding $3.4 million of non-cash stock compensationexpense. Excluding the non-cash stock compensation expense, SG&A expense was$26.7 million, which represents 17.1 % of revenues, a 260 basis point decrease,from the comparable prior year period. Again, primarily the result of lowerbonus tied to our increasingly challenging goals and lower costs as apercentage of revenue across many G&A categories as the Company leveragesits infrastructure. EBITDA for the nine months ended September 30, 2007increased 63% over 2006 to $24.2 million, which includes $4.5 million ofnon-cash stock compensation expense in 2007. Without the effect of stockcompensation, EBITDA increased 67%. For the nine months ended September 30, 2007, net income was$11.7 million. Fully diluted earnings per share increased 56% over 2006 to$0.39, non-GAAP diluted earnings per share was $0.56. Again non-GAAP measuresdefined as GAAP earnings minus amortization, stock comp and the tax effects. Wecontinue to generate strong operating cash flow that we used to fund bothinternal growth and growth from acquisitions. As Jack mentioned, the Company has fully repaid alloutstanding debt balances as of September 30, 2007. This includes funding thecash portion of the BoldTech acquisition completed late in the third quarter.The Company has full access to its $50 million unused credit facility as ofSeptember 30, 2007 and a modest amount of cash on hand. The Company has generated $10.2 million of cash flow fromoperating activities in 2007, more than double the comparable prior yearperiod. Our Day Sales Outstanding on accounts receivable was 76 days normalizedfor acquisitions at the end of the third quarter, up slightly from the 74 daysat the end of the third quarter. Our goal is to maintain DSOs between 70 days and75 days over time. We will intensify our efforts in the fourth quarter to bringthis metric back in to our stated range. I will now turn the call over to Jeff Davis for a littlemore commentary behind these metrics. Jeff?

[Jeff Davis:]

Thanks Paul, well as previously discussed, we had anothersuccessful third quarter and there are a few noteworthy items that I would liketo address and reiterate in some cases. I think most importantly is that the keyoperating metrics remained strong and really did help us realize increasedprofitability, again this quarter. Gross margins remained strong and its over 39% net of stockcomp. And EBITDA margin, excluding stock comp, was 20.1, those things bearrepeating. Utilization excluding subcontractors was 82%, which is inthat range, and we've talked about before as being a range that we feel issustainable. We are shooting for that 80% to 85% range. Average billed rate ata 115, was the highest that's been this year. SG&A expense, Paul mentioned, continued to decline as apercentage of revenues, down to 16.4% net of stock comp, and some of that istied to a lower bonus as a result of lower organic growth. But there is asignificant component as well, that's a result of scale. These factors combined allow us to really post the highestearnings per share figures in the Company's history. I think that's something,again, worth reiterating. One of the quarter's more important developments is, as Jackmentioned earlier, was the acquisition of BoldTech Systems. Net transaction wasimportant for a number of reasons; first of all, it was our largestacquisitions to date from both a revenue standpoint, as well as, headcount. That'sa validation as we continue to scale or are able to consider and close largerdeals. Also, acquiring BoldTech, of course, helps us further expandour footprint in the Western U.S. and reallydeepened our expertise in the public sector markets a presence that they have strongabilities in. The most unique and very exciting element though of the BoldTechacquisition as Jack mentioned is our global development center that we acquiredin China.Now, this is a CMMI Level 4 certified center, where we currently have about 90employees, and we expect to increase that number substantially over the nextseveral months, as we begin cross-selling that capability into our markets. Infact, we are already pursuing a number of opportunities in our existing accounts,leveraging that offshore capability in China. I also want to talk little bit more about the organicgrowth, Jack addressed this already and I'd reiterate a couple of points thathe made. But while the again the growth number for quarter is not what we were shootingfor, it's important to note that we did experience that substantial pickup atthe end of the quarter, that Jack was referring to the revenue per billable day,in September was about at 8% or 9% increase over what we had seen since aboutthe May timeframe. So, we are seeing a pickup that in fact carried over intoQ4. So, it is repeated in October and in fact in November. Now December is apretty seriously affected month due to seasonality, but we are seeing thatcarry forward. We are seeing some strength in the market that we are encouragedby. All these things lead us to believe that, that 10% to 15%organic growth target is in fact achievable and sustainable. I don't think thatwe are of a size yet where we can't maintain that kind of growth in areasonably healthy market. A couple of things specific to the quarter , as Jackmentioned earlier, 2006 was a very strong year for us and that made it for us atough comp this year, and in particular in the third quarter. Jack also mentioned that one of the larger accounts that wehave, had about $4 million worth of projects were cancelled as a result of anacquisition of that account. And the good news as Jack mentioned is, it was acquiredby another relationship, another account of ours, another client and we'reoptimistic that we will be back in there. But that really did affect, pretty dramatically, theJuly-August numbers and again that explains the up-tick that we saw inSeptember, that I believe we actually would have seen earlier. And in fact the4% organic growth that we're posting now in a trailing four quarter basis, Ibelieve would have been 6% to 7%, had it not been for the loss of this account.And we'd get back to that rate and perhaps better coming out of the fourthquarter. So, as a result, as I mentioned July and August were alittle slower, we saw a pick up in September, a serious pickup in Septembercarrying into the fourth quarter. And we're optimistic about the overall yearbeing in that state of 5% to 10% range, hopefully the higher end of that forthe year. From our perspective, the general market remained solid inthe third quarter. Again if it wasn't for that cancellation, we would haveposted a solid quarter. We continue to close multiphase, multimillion dollarengagements full lifecycles solutions, strategy through full technologydeployment. Now, we're related to the economy, because we expect Fortune1000, sort of enterprise level accounts to whether any potential softness, perhapsbetter than SMB customers might. We will be more rigorously pursuing enterpriseaccounts in 2008 and moving forward until we get through some of theseuncertain economic times, if you will. And we continue to build our presence in these large accountswe've got the scale, the breadth and depth to do so. And we continue to expandthat component of our portfolio everyday. And again, will be real concerted andfocused on efforts on doing that on a go- forward basis. So finally, from our perspective we see the market againgenerally strong. Our business development team is busier then ever, respondingto proposals, pursuing opportunities, etcetera. I expect that over the longterm, we will continue to grow organically, at a faster pace than most of ourcompetitors and the industry in general. And keeping that in perspective, there's a couple of morepoints I would like to make before I close. That we of course will continue toaugment organic growth through smart M&As, as we move towards the goal ofmore than doubling the business by the end of 2010 to $500 million. We'recurrently on pace to do that, and I am optimistic we're going to stay on paceto do that. We expect that profitability of the business will continueto scale faster than the overall revenue, as it has which again, we expect togrow faster than the industry averages. Over 40% year-over-year cash EPS growthfor the quarter, is validation of that. With that I will turn the call back to Jack.

[Jack McDonald:]

So again, in terms of Q4 outlook, we expect fourth quarterservices and software revenue, including reimbursed expenses, to be in therange of $56.3 million to $62.1 million, and that's comprised of $54.3 millionto $57.1 million of revenue from services, including reimbursed expenses. Andbetween $2 million and $5 million of revenue from software. In that guidance range of services revenue, includingreimbursed expenses, would represent services revenue growth of 30% to 36% overthe fourth quarter of 2006. So again, we're well positioned moving forward. We've scaledthis business over the last eight years from a start-up to $250 million runrate. We are the logical consolidator of a large, growing and fragmentedmarket, and we're beginning to enjoy the benefits of scale and winning biggerprojects, realizing better operating leverage and profitability, and becomingstronger M&A buyers. Our competitive position has really never been better, andour operating team is deeper and broader than it's ever been. So, with that Iwould like to open the call up for questions.

[Operator:]

(Operator instructions). Your first question comes from theline of John Maietta with Needham & Company. Please proceed.

[John Maietta:]

Hey, thanks very much. Hey, Jeff, I was wondering if youcould comment on, you said you saw re-acceleration in the business as we movedinto September, could you comment on across different industry verticals, maybewhere you are seeing re-acceleration and to what level?

[Jack McDonald:]

Yeah, the level is going to be kind of hard to assess againfor us. We saw a pickup of about literally 8% on the revenue per billable day,month-over-month moving into September from August, which had been kind oflargely flat. I think we’ve just seen that pickup a little sooner had it notbeen for the cancellation we referred to a couple times. In terms of industry, it's pretty well across the board, ofcourse, we are enjoying. We've got a nice presence in the south, as you know;based out of Houston we've got Dallas and some markets down there. We areseeing certainly some opportunity around the energy sector, but across the boardwe are seeing still general health, not a major slowdown from what we can see.I don't think that market’s quite as hot for us as it was a year ago, but thedifference is subtle enough, but it's actually hard really to put a figure on. Very, very busy; lots of proposals out there, the salescycle is a little shorter also than it was maybe at the beginning of the year.And so, the softness that we saw was probably more at the end of the year, Imean, at the beginning of the year in hindsight, honestly it wasn’t so dramaticthat it was really noticeable to us, as you know. And it lagged in itsrevelation and in the numbers and really that I believe, was kind of a April,May through August sort of phenomena that we’ve seen to be coming out of now. And if it's sustainable or not, I don't have a crystal ball,but it feels pretty good, and we are hearing that also in the industry talkingto some of our peers and some other companies and of course, on the M&Apath we talked to a lot of smaller companies. And they are seeing similarthings, so there are signs of to be reason to be optimistic.

[John Maietta:]

Okay. And then just to be clear, that $4 million deal thatgot pushed or cancelled that's not included in the Q4 guidance?

[Jack McDonald:]

That's correct.

[John Maietta:]

Okay. And then just last question I had is I am wondering ifyou could just provide a little commentary around the undergraduate pilotprogram and how that's ramping?

[Jack McDonald:]

Yeah, we have slowed down a little bit on that, given againthe uncertainty that we were experiencing in the quarter. Although, we'veactually ramped up our recruiting capability and changed our old structure andinfrastructure around that, we have dedicated corporate director level managerrunning and recruiting, and in fact we're renewing the campus recruitingprogram this year. So, I am still optimistic that we could be recruiting asmany as 50 folks off campus over the next 12 months, perhaps more. If we see apick up, we get back to the 15% to 20% rate, I am hoping that we can expandthat. So, it's still definitely a strategic element of our hiring. We did slowit down and focused more on experienced hires, over the last say, four or fivemonths. But, we will be back on campuses for the spring season; in fact, we areramping up for that now.

[John Maietta:]

Great. Thanks very much.

[Jack McDonald:]

Sure.

[Operator:]

(Operator Instructions) Your next question comes from theline of Brian Kintslinger with Sidoti and Company. Please proceed.

[Brian Kintslinger:]

Hi, good morning. The first question I have was related to theSG&A it's come down three straight quarters. [Tom], you mentioned bonusescoming down, but you added Tier1 in this quarter too it's an $11 millionbusiness, if my memory serves me. So, can you give us the pluses from Tier1 andmaybe just tractions from bonus accruals compared to the June quarter, becauseit's amazing that you will be able to drop that when adding Tier1 I think?

[Paul Martin:]

Yeah, from the total SG&A perspective, the decline as apercentage of revenue, about two-thirds of the decline in the quarter isassociated with the year-over-year change in the bonus accrual, and theremainder is due to, as I talked about, the leveraging of the infrastructure.

[Brian Kintslinger -Sidoti & Company:]

Right, but did you not add SG&A from Tier1, in theacquisition? From a dollar perspective not percentages, it’s actually down at$100,000.

[Paul Martin:]

Yes, it was a modest amount that we've added as a result ofthe Tier1 acquisition, but there is slightly less bonus in the third quarter,relative to the second quarter. The numbers I was referencing were theyear-over-year comparisons.

[Jack McDonald:]

Right, the dollars increased from Tier1 are more than offsetby the dollar reduction in the bonus relative to Q2.

[Brian Kintslinger -Sidoti & Company:]

Okay, can you give us a sense what Tier1's SG&A wouldbe, you do you have those number for that is?

[Paul Martin:]

Yeah, it’s quite modest, I don't have an exact number infront me, but typical with our acquisition strategy, is that substantially allthe back office function is consolidated and so there is a fairly modest amountof SG&A that comes with each deal.

[Brian Kintslinger -Sidoti & Company:]

Okay, if I…

[Paul Martin:]

Brian, you can assume that it’s going to be consistent on apercentage basis, with the company now certainly from a sales perspective, theG&A maybe slightly lower, so, the combined SG&A amount as a percentageof that $11 million is probably going to be a percent or so below of the totalcompany. That's a reasonable estimate.

[Brian Kintslinger -Sidoti & Company:]

All right, if I talk of the tax-rate, shouldn’t be much of asurprise, because the same thing happened exactly last year, but every quarterseems to come down in the first three quarters, in the first quarter it's thehighest, it’s come down and it’s come down again in the third quarter. What'sthe phenomenon that drives that?

[Paul Martin:]

So, the tax-rate is really a function of obviously thestatutory rate and there is also the impact of some non deductible stock comp,as well as when people do, exercise options and so there is what's called a nonqualifying disposition that the company gets a benefit of those. So, with thehigh reasonably or relative high amount of activity in option exercises in thethird quarter, that's essentially what help drive the rate down sequentially.

[Brian Kintslinger -Sidoti & Company:]

Okay.

[Paul Martin:]

And we're looking at a comparable rate to the third quarteras we look out to Q4.

[Brian Kintslinger -Sidoti & Company:]

From Q3, for the average?

[Paul Martin:]

Right. For a comparable to Q3.

[Brian Kintslinger -Sidoti & Company:]

Okay, thank you. And if I take a look at bill rates; myguess is its sounds like you have added some acquisitions that had a higherbill rate. Give us a sense for when you look to '08 you are booking this outvery well before, how much you think of your revenue growth is going to comefrom bill rate increases. Is it going to be a little bit less than it's been,than your staff?

[Jeff Davis:]

Yeah, I am still optimistic that for 115 now, we can stillget to 120 if you look at it purely on an organic basis. Is something that wecan manage to. We'll start to see more pressure then. So, I am not enough crispenough in front of me to give you a percentage of our organic growth from billrate increase, a 1% or 2%. I would hope its still achievable going into thenext year. And that's something we managed through our incentivecompensation plans both for the management, as well as our sales folks. So, wemay have dual review Board structure that oversees that. So, I believe there'sstill some room there. I do think that we will begin to see some pressure, butI don’t think we're there yet. So, again I think from 115 to 120, we still gotsome runway.

[Brian Kintslinger -Sidoti & Company:]

When you look at your, you mentioned looking at some largerenterprises, given the spending environment. How does pricing change going fromthe SMBs to the enterprises if at all?

[Jeff Davis:]

I think there is less pressure in price, I do think enterpriseswas price sensitive on a rate basis for the most part. It really depends on thenature of work and how you are selling, and although selling solutions as avalue proposition versus off of a rate card is something that's more readilydone in the enterprise base. It's a little more sophisticated buyer, if youwill. So, it might give you a little more room there, although,most of the S&B that we work with is at the higher end of the S&B andtend to be really sophisticated buyers too, at the end of the day you probably wantto see a huge difference.

[John Maietta:]

And two more questions and I will get back in the queue. Thefirst is related to, can you give us a sense of attrition in the quarter versusnet hires actually, net of attrition, ex-acquisitions of course?

[Jeff Davis:]

Yeah. Attrition, voluntarily attrition annualized continuesto run about, where we’ve run all year long around 18% in the quarter. Our goalis in that 15% to 20%; always like to see it a little closer to 15%, and Ithink Q4 is traditionally a slower, lower voluntarily attrition quarters. So, Iexpect that it will end the year somewhere below that 18% annualized, butthat's what it was for the quarter. Net new hires was actually down a little, we actually netteddown probably about 10 folks as a result of that slower organic growth that wetalked about. However, also as a result of that uptick that we saw at theend of the quarter, we've already got about 60 committed new hires, 38 of whichstarted in October, the rest starting in November. And expect to add to thatthrough this quarter. Again, there will be some attrition against that, wenetted up in October, I believe about 18 full-time employees. And we are addingsubcontractors as well. So, down a little for the Q3, but already starting togrow again and build again in the fourth quarter.

[John Maietta:]

It's really helpful. Last question I have

[Paul Martin:]

Yeah, I just have CapEx here for the -- its $1.3 million forthe year. I don’t have the quarter number in front of me, and we are expectingit to be little under $2 million for the full year.

[John Maietta:]

Right, I’ll come back into it, thank you.

[Operator:]

You next question comes from the line of Tim Brown with RothCapital. Please proceed.

[Tim Brown:]

Yeah, good morning, guys.

[Jack McDonald:]

Good morning.

[Tim Brown:]

Just wanted to delve into the new organic growth a littlebit more, maybe you could give us your outlook for the industry referred from acouple of the larger players that they see 2008. IT spending slowing, and whatkind of overall industry growth rate are you guys seeing for 2008?

[Paul Martin:]

You know, it’s funny. I will comment on that, and allow anybodyelse to join in. But, I wish it were that easy, I mean, I wish I could say out itsdefinitely going to be this, but we look at Forrester, we look at number ofsources, Forrester's saying, that it grew 5% in 2007. That sounds a littlerobust to me, and they are saying 8% for 2008. Gartner, on the other hand, is saying CIO should prepare twobudgets, all based on the economic conditions that one budget is, 8% growthsounds about right or 5% to 10% growth in spending sounds about right. Theother one actually is a reduction. So, I wish I knew the crisp answer to that, I would sayright now, we are seeing things pick up again. I think there was someuncertainty more in the beginning or middle of the year; that seems to haveactually improved. I don’t think the economy has performed as badly as somepeople purported that it would, more in the beginning of the year. I do thinkit’s tied to that though, and if we experience some serious issues with theeconomy, next year, we will see a lesser amount of spending. Probably not experience the 8% that Forrester is predicting,possibly even contraction. So, we're basically planning to do what we've donethis year and sort of roll with the punches if you will. We maintained 82%utilization through some slower times and will do the same thing next year,although, we will be hoping for a strong economy and a robust growth in theindustry.

[Jack McDonald:]

I would say a couple of thing on that; one if you reallytried to plan your business based on what those analysts say, you gone a windup in a heap of trouble. I remember when we first got in to this eight or nine yearsago, those guys were talking about projections through the moon for the dotcoms,and everybody who followed that siren song, winded up going out of business, 9out of 10 of them. So, I don’t know how much weight that really put in theirprojections. What we can offer in terms of perspective on the market is whatwe're seeing in our business. And I think that, what Jeff and I said earlier is absolutelyright, which is that we saw slowdown. It looks like the worst of it was in theApril to August period. And if you look at this business on a revenue per daybasis; July was better than June, and August was better than July, andSeptember was better than August, and October was better than September andthat improvement is continuing, as we move into the fourth quarter. So, from a revenue per day standpoint, from a backlogstandpoint, from a pipeline standpoint, from a new sales activity standpoint,from an anecdotal standpoint in terms of what we're hearing from our salespeople, and hearing from clients, and hearing from other people in theindustry, both peers' companies of around our size, and also from the smallercompanies that we're looking at acquiring, we're feeling like we're going tosee an increase in organic growth and obviously we're on the line on that interms of our revenue guidance. You saw organic growth bottom out at around 4% in the thirdquarter, the guidance that we put out shows it going to 5% to 10% in Q4 andit's still our target to move to 10% to 15% as we go into next year.

[Tim Brown:]

Jack, do you think that you see enough acceleration forbusiness to get back into the double-digits by say Q1 of next year?

[Jack McDonald:]

You know that's a question I don't the answer to that yet. We'llknow more obviously as the quarter progresses, but I will say we feel, when wewere looking at those September and October numbers that was a key sort ofmetric for us in terms of whether we saw that uptick, whether we saw that uptickat the beginning of September, whether we saw that sustain into October andthus far the numbers are looking good on that front. So, I'm not again as Jeff said absence some kind of massive contractionin the economy, we are not seeing a sub 5% organic growth scenario for nextyear. My gut is we'll probably have a pretty good chance of just continuing inthe 5% to 10% as the downside case with the potential of moving it aback to 10%or 15%. And of course that's all well within our, that gets us wellwithin our earnings range of $0.90 to a $1.00 for next year even absence additionalacquisitions. And of course we will be making acquisitions. So, I think all inall it’s a pretty positive outlook.

[Tim Brown:]

Okay. That’s helpful, and then just the other area of growthwe saw has been acquisitions, and you made your largest acquisitions to-date.Can we expect acquisitions larger than the $20 million type acquisition of BoldTech?And also you going be looking to acquire more consultancies with offshoreexpertise?

[Jack McDonald:]

I would say in terms of the size of the deals, you will seethe average deal move up from the $12.5 million to $15 million where it istoday, probably to a $15 million to $17.5 million. Because you are going to seea mix, we have some deals in the hopper that are as small as $6 million or $7million and some deals that are big as $30 million. So, you will see that average move up a touch, just likeit's been moving up, over the past few years. And right now, you know, the sortof middle-of-the-road game plan is to do another three to four acquisitionsnext year and add roughly $50 million in revenue. And we may have the opportunity to do more than that. Weclearly have the capacity to do more than that. To do $60 million to $70million in acquired revenue, but we are going to wait and see what's out there;we are not going to rush deals, just to get deals done. In terms of offshore capacity, yeah, I think you will seesome more there particularly in the H1B space. There is more that we want todo. And so I would not be surprised to see some additional acquisitions thatbring H1B headcount on board. And then the real offshore opportunity for us is toorganically grow China,because we have that CMMI Level 4 certified facility in place there; Jeff spokeabout earlier, and we see opportunities to scale that. Now, we are going tohave to see obviously where that goes, right. Obviously we see some potential for it, we wouldn’t havedone the deal. And we loved doing it this way, because it's a relativelylow-risk scenario, because, we basically valued the BoldTech acquisition basedon the U.S. operations and picked up the China facility for just a smallincremental amount. So, it's a low risk, but potentially high rewardopportunity. We see some great potential for that facility. And so there is agreat real organic opportunity around scaling offshore headcount. So, we'll seewhere that goes over the next 12 months to 24 months.

[Tim Brown:]

Okay. And Jack, just one last question on China, just on theeconomics, can you give us what kind of bill rates, people that are billed outof, and are gross margins there quite a bit higher?

[Jack McDonald:]

Well, the bill rates are around 30, and Jeff, in terms ofgross margin?

[Jeff Davis:]

For China?

[Jack McDonald:]

Yeah

[Jeff Davis:]

Yeah, in excess of 50%.

[Tim Brown:]

Okay. Thanks.

[Operator:]

Your next question comes from the line of Dan Mendoza withAgincourt Capital. Please proceed.

[Dan Mendoza:]

Hi. Most of them had to do with BoldTech, and is that doinga $20 million run rate?

[Jack McDonald:]

$20 million trailing revenue, slightly higher run rate.

[Dan Mendoza:]

Okay. And what kind of organic growth rate they have beenputting up in recent quarters?

[Jack McDonald:]

I think running, Jeff, correct me on this, but running inthat 5% to 10% range.

[Jeff Davis:]

That’s right. I think this year in recent quarters, they hada similar growth record to what we have had over last three years and then thisyear little slower, 5% to 10%.

[Dan Mendoza:]

Okay. And then what percentage of that business runs throughChina?

[Jack McDonald:]

Right now, on a revenue basis, it’s about 15% to 20% at thehigh-end.

[Paul Martin:]

That’s right.

[Jack McDonald:]

So, you’ve got probably half, roughly half their headcount,a little bit less than half there, billable headcount, but about only 15% ofrevenue. But they have built a great facility there, really just a servicethere, their Rocky Mountain business. And,it’s like, when we look at acquisitions domestically, frankly, when you are apublic company and you are managing earnings, it is a much more attractiveproposition to buy the platform rather than Greenfield it. And then the marginal dollar of growth on that platform isimmediately profitable. And really that’s the model we pursue domestically andwould be able to do that offshore make a ton of sense, particularly where youcan do it as we did here, where you're valuing the acquisition based on theU.S. operations, and it’s a relatively small incremental cost, so you got a lotof upside there, you got the marginal dollar growth been profitable and verylittle downside.

[Paul Martin:]

And to Jack's point on that, as we look at their financials,as they've scaled this and increased our utilization, their profitability hasreally been moving in the right direction and as we scale that further that'sjust further opportunity for us.

[Dan Mendoza:]

Okay. And if that gets to be a big enough piece of yourbusiness, does that make the kind of bill rate comparisons become less relevantgoing forward, and I guess its tiny piece of the business kind of but.

[Jack McDonald:]

Yeah, it’s a good question and it could and so one thing weare looking at is, just publishing two rates, our onshore rate and our offshorerate and that's something that we will probably start doing here in the nextcouple of quarters.

[Dan Mendoza:]

That makes sense. Thanks.

[Jack McDonald:]

Thank you.

[Operator:]

Your next question comes from the line of Devang Kothari withJMP Securities. Please proceed.

[Devang Kothari:]

I had a quick question on organic growth and it’s tough, Ithink you've already addressed it, but as you look out to Q4 and even your nextfiscal year, do you think your growth comes primarily from headcount additionor if there is opportunity for pricing increase, and if you could justgenerally talk about the pricing environment out there?

[Jack McDonald:]

Yeah, Jeff addressed this a little bit earlier. If youlooked at our model historically right, now this is just a rough measure.Roughly 25% of our growth comes from the bill rate increase and 75% fromheadcount addition, and that's based on the organic side of the business,obviously you can muddy the water with acquisitions. And as Jeff indicated, weare at about 115 now, and we see I think a fairly clear path over the next kindof four to six quarters to 120. And then you probably start to plateau a littlebit in that range for a while anyway. But we do see some upside there. So, ifyou’re looking out at 2008 those rough measures should hold about 25/75.

[Devang Kothari:]

Okay, great, thank you.

[Operator:]

(Operator instructions) Your next question comes is a followfrom the line of John Maietta. Please proceed.

[John Maietta:]

Hey, thanks very much. Jack could you comment on the levelof competition you are seeing with the growth of the M&A pipeline. Arethere more folks looking at the same company less or is that kind of about thesame.

[Jack McDonald:]

That’s really about the same. We have not really seen a lotof competition for deals. There aren’t a lot of strategic buyers that are goingafter these sub-$25 million acquisitions. The acquisitions, there have not beena lot of financial players in this market, really, none to speak of to myknowledge right now that are active. And so, not a lot of competition there. Iwould say that just drilling further on that, valuations really have beenplateaued I would say for probably 12 months to 18 months at around the middleof our valuation range, roughly 6 times EBITDA, give or take and so that’s apositive. And if anything, a little bit of slow down in the market isa good thing in terms of putting reality into the minds of folks that havebusinesses and probably makes them more apt to look favorably at an acquisitionand see the benefits of been part of a larger organization with moreestablished client relationships, stronger partnerships and a bigger saleschannel. So, all in all, it’s a more positive environment on the M&A frontprobably marginally more positive than it's been over the past 12 months to 18months.

[John Maietta:]

Got it. Thanks.

[Operator:]

Your next question is a follow-up from the line of BrianKintslinger. Please proceed. BrianKintslinger - Sidoti & Company. Yeah. Hi. I had a few morequestions

[Jack McDonald:]

Yeah. That's right. You would see reversal in that bonusaccrual.

[BrianKintslinger:]

Okay. And two other questions

[Paul Martin:]

Yeah. In certain projects ourexpenses are built into the rates. It just depends on the client that's probablythe biggest piece of it.

[BrianKintslinger:]

Okay. And then the other questionis, when you see that a 4% organic growth rate in the trailing four quarters,was there actual organic growth in the third quarter compared to the third quarterlast year if I just looked at that, that quarter?

[Jack McDonald:]

You mean on a year-over-year basis?

[BrianKintslinger:]

On a year-over-year basis, not atrailing four quarters, just the September quarter alone.

[Jack McDonald:]

Yeah. I think it was actually alittle bit higher. A little over 4% close to the same, but you are talking 3.8%versus 4.1% or something like that? That's right.

[BrianKintslinger:]

So, the June month have been alittle bit lower in order to get you back, in order for your average to come upto 4%, is that right?

[Jack McDonald:]

Well, that's right. That's what wetalk about in terms of comparison with steamy '06, right. If you looked at Q2, justfor example, we had 10% sequential growth, and we set up the time, those kindsof numbers are not sustainable. So, that's part of what you're seeing and now,so you've got the success is, the project that we took head on, well that'sbeen replaced. We're seeing some general uptick in the market and we're movinginto a less strenuous comparison, and all of those factors are driving anincrease in the reported organic growth rate, which again after bottoming atsort of 4% should move to 5% to 10% in Q4 and we look to, the target is to takeit to 10% to 15% next year.

[BrianKintslinger:]

All right. Thank you for the clarification.

[JeffDavis:]

Sure.

[Operator:]

Your next question comes from the line of Colin Gillis with CanaccordAdams. Please proceed.

[Colin Gillis -Canaccord Adams:]

Yeah, hey guys.

[Jack McDonald:]

Hey, Colin.

[Colin Gillis -Canaccord Adams:]

Jack, can you talk a little bit about the pricing landscape?And also, what level of discount do you view profession prices and servicesagainst the majors, like the Accentures' out there?

[Jack McDonald:]

Yeah, so the pricing landscape is generally positive. We see,and I think you've seen that over the past couple of years as our gross marginson services over the last 24 months ex-stock comp right have increased fromaround 35% to 39%. So, its really in line with what we had anticipated, whereyou saw sort of a 7% or so increase. Again, this is looking back over the lastcouple of years, 7% increase annual in bill rate against, may be 4%, 5% and5.5% labor cost increase. So, that's a virtue of spread and it continues to drivehigher gross margins for us. A part of that is due to the fact that we've got a30 plus percent discount relative to those big guys. That's not the number onebasis on which we compete. Price is not the number one basis; it's depth ofexpertise around the EC business, Integration Solutions and reference abilityand vendor endorsement, but that definitely helps.

[Colin Gillis -Canaccord Adams:]

Fantastic, and then just looking at low cost solutions;you're definitely giving some indications while expanding in to China.Are you seeing more demand for low cost solutions for both the H1B and theoffshore facilities?

[Jack McDonald:]

It's interesting, I'll give you my two seconds on it andthen let Jeff address it, but right now we see an opportunity and this whatwe've been working on for the last few years, right. This is the plan thatstarted three years ago. How do we figure out a way not to ape what theoffshore guys are doing, that would not be a winning business strategy, but tocrack the code on feathering in to a high customer touch, highly innovative,project based integration consulting model, how to feather in some offshorecapabilities? And for us it's been this mix of H1B, the stuff that we greworganically in Eastern Europe, which is now upto 50 people billing and I think 70 total headcounts, so about 20 in trainingin there. And we see an opportunity to increase that in China. Now if it's done just insupport of the existing projects that we do today, and then I think that 25% isa good level of headcount, may be it grows a little bit. But there may be an opportunity to go after some adjacentareas that we are not attacking today. And I'll let Jeff talk more about that,but that could potentially allow us to more significantly scale the offshoreheadcount. Jeff.

[Jeff Davis:]

As we've moved up scale over the last, say 12 months to 24months, we're seeing more of an opportunity if not a demand or requirements in somecases for offshore capabilities. And of course we've had the Macedonia facility, we scaled itfrom about 8 books to 50 over the last 2 years or 3 years, to help supply thatdemand. But, as I mentioned before is our strategy shifts towardsmore enterprising accounts and we're competing more and more with the big guysincluding the domestic players that have locked-in offshore capabilities. It'smore of a factor. It's more of an opportunity, we compete with those guys rightnow without leveraging a lot of offshore capability in a variety of ways. And I think that really speaks frankly to our depth in theareas that we focus in, we are very focused in and honestly they don't havethat kind of depth. So, they are little more reliant on that. They've gotlarger teams, so they've got to bring their pricing down somehow. So, they aremore reliant on the offshore. But as we engage in larger and larger deals andwe've got a number of eight figure relationships ongoing right now it doesbecome more of a factor. So, I think it's good from a competitive capabilitystandpoint as we move up the value chain.

[Colin Gillis -Canaccord Adams:]

Got it. I mean just going back into history, if we doactually have an environment where budgets are contracting as opposed toexpanding. Is there still that same type of cost rationalization workout therethat PRFT made its name on in the early days?

[Jeff Davis:]

Yeah I think there is. We do a lot of them still andactually, if you look at where a lot of firms have gone through this year Istill think we've fared better than most. And I think that the reason for it isexactly what you said. We've got a lot of the fundamental improvement work thatwe do around IT infrastructure in particular, it’s been official, it has ROI.So, there is more of appetite for that I think even during a slower time thanthere is perhaps for some other endeavor. Also, the custom application development, the work that wedo in that space is typically mission critical applications, really a lot of itaround customer intimacy. And even in tough times there aren’t too manybusinesses that won't spend money to improve their relationships with theircustomers, and the whole customer service areas of our business from the CRMapplications, around Siebel, there are custom work we do with portals as wellas the business intelligence and giving people the 360 degree view of thecustomer is something that still sees demand even during tougher times. Are weimpervious to the economy or completely operating in a microcosm, clearly weare not, but I do think we’ll fare better than others do.

[Colin Gillis -Canaccord Adams:]

You did build the business in a tough environment, right?

[Jack McDonald:]

Exactly, Colin that's, I know you know this, but just tomake the point, Perficient, first of all we see a strengthening environmentright now relative to the dip we took in Q3. Obviously further out you move intofuture, the less you know, but we see a strengthening environment right now,and the kind of customer set that we serve are those global 2000 customers forthe most part, that are the ones that are serving global demand that shouldcontinue to grow, and have a need for services, even if they were a taperingoff domestic growth. But your point more directly, I mean, we made a lot of haywhen times were extremely tough in our industry, and in our industry and ITservices didn't go through a recession in the early 2000. So, the economy had arecession but tech and tech services had an outright depression that wasknocking 9 out of 10 of our competitors out of business. We went into thatdepression as a $10 million company, came out of this 50, doubled to 100 then200, 250. So, we not only not have survived in a tough environment, but we knowhow to thrive in a tough environment. This is a company that we started eight years ago, whatevereight people, we've raised a total of $16 million in our entire history ofoutside equity. So, this is not a fat venture or private equity fund to deal.It’s a bootstrap entrepreneurial deal. It’s the way we run the organization. Wekeep our costs low, we don't hire to the bench, witnessed the great job, Jeffand the team did in managing utilization, even in a slower quarter here in Q3. And there will be opportunities presented, as well, if youhave a slowdown on the M&A front, for example, and it's cost managementboth internally for us and then obviously cost rationalization projects for ourcustomers. So, we know how to thrive in a tough environment, but again, I wouldemphasize that what we're seeing right now, what we saw towards the end of Q3,what we see going into Q4 is a pick up in growth, relative to the dip we had inQ3.

[Colin Gillis -Canaccord Adams:]

Got it. And then just check on those lines, any thoughts ofentering into the SAP market? And also is there any need to jigger with thesales first of at all?

[Jack McDonald:]

In terms of the SAP market, we are doing some SAP work thatwe have either grown organically or picked up as part of smaller parts of someof the acquisitions that we've done. And so, we may look at doing a little bitmore there organically. We looked at a lot of SAP shops, most of them that weare looking at were more staffing oriented and so not as interesting to us.Tremendous amount of opportunity that we're seeing around Oracle, inparticularly Oracle, in analytics and the Siebel piece and I wouldn't besurprised to see more acquisitions in that area. And again, this ongoing consolidation in the industry,whether it's the work, the tremendous acquisitions that IBM has been making orwhat Oracle's doing, that's all are real bullish sign for a profession, becauseonce you're under the tag with these larger players and our whole interest forexample ultimately in the middleware area and, you're seeing more of thatconsolidation take place in that area and that's just going to help profession. That and the whole trend towards seller, which continues togrow in the market and that's an area where pound-for-pound we've got moreseller expertise under the hood than just about anybody else out there. So,those are all for next quarter. Thank you.

[Operator:]

Thank you for your participation in today's conference. Thisconcludes the presentation. You may now disconnect. Good day.