Perficient, Inc.
Q4 2007 Earnings Call Transcript

Published: 4 Mar 2008

[Operator:]

Good day ladies and gentlemen and welcome to the fourth quarter and full year 2007 Perficient earnings conference call. My name is Stacey and I will be your moderator today. At this time all participants in a listen only mode. We will be facilitating a question and answer session towards the end of the conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today Mr. Jack McDonald, Chairman & CEO. Please proceed sir.

[John T. McDonald:]

With me on the phone today are Jeff Davis our President and COO and Paul Martin our CFO. I’d like to thank everyone for their time this morning. As is typical we’ll have about 15 minutes of prepared comments after which we’ll open up the call for questions. Paul can you read the Safe Harbor Statement.

[Paul E. Martin:]

Good morning everyone. Some of the things we will discuss in today’s call concerning future company performance will be forward-looking statements within the meaning of the securities laws. Actual results may materially differ from those discussed in those 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 certain non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with generally accepted accounting principles or GAAP. This is posted on our website at www.Perficient.com under news and events. We have also posted 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.

[John T. McDonald:]

So, I want to cover a few things upfront on today’s call. Obviously we’re going to review our Q4 and full year 2007 results and as you saw from this morning’s press release we had a great fourth quarter. We had record revenues, record cash flow, record earnings and a great 2007. So, more on Q4 and the full year 2007 results in just a few minutes. But second, I want to discuss what we’re seeing right now in the first quarter. I mean, it should be no surprise to anyone who’s listening to this morning that there’s been a slowdown in US economic growth and there’s obviously some concern among investors about the economy and its impact on our business. I would say in a sense it seems like the worlds coming to an end for our business which is clearly not the case. The headline for us is, in terms of the first quarter is that January was soft and that softness is reflected in the Q1 revenue guidance in today’s earnings release which shows services revenues in the first quarter, at least based on our current revenue guidance will be up 17 to 23% on a year-over-year basis. So, up 17 to 23% on a year-over-year basis but down a touch sequentially from about $57.5 million to about $56.5 million in the fourth quarter 2007 first quarter. So, it touched down sequentially even after adding in our latest acquisition. So, that shows a few points of negative growth on the organic side and is obviously weaker than we’d like to see. But, that said, since January we have seen steady strengthening in our business as measured by revenue per day, sales growth, sales activity, pipeline and other key metrics. And, this is a very key point, after a dip in January revenue per day is now back up to Q4 levels. So, if revenues per day continue with the levels that we’re currently achieving, no improvement but just where we’re currently achieving we can see a very healthy snap back in the business both in revenue growth and earnings in the second quarter. As always, no guarantees but those are the facts as we’re seeing them right now. At the same time, as a result of the softer January and given the economic environment we have boosted sales activity, we have right sized our consulting headcount which we always do, we never carry a bench of any material size, we’re always right sizing to market demand and we’ve trimmed non-essential costs in order to boost our revenue, optimize our utilization and gross margin levels and ultimately enhance cash flow and profitability and Jeff Davis is going to speak more about these efforts a little bit later in the call. Again, although there are no guarantees the sales and revenue trends that we are currently seeing and the actions that we’ve already taken on a cost side give us optimism as we look forward to the second quarter and the rest of 2008. Now, notwithstanding the positive trends we’re seeing on a month-by-month basis we’re going to reduce our earnings targets for 2008 and we’re doing this for two reasons. One, is the impact of that soft January on the Q1 results and the second is any potential impact of the economic slowdown on the year as a whole. So, really we just want to reset expectations to a conservative level here. In terms of actual numbers that means the following

[Paul E. Martin:]

Total revenue for the fourth quarter 2007 was $62.4 million, a 26% increase over the year ago quarter. Services revenue excluding reimbursed expenses were $53.8 million with organic growth of approximately 10% on a trailing four quarters averaged annualized basis including businesses owned at least two quarters. Gross margins for services excluding stock comp and reimbursed expenses for the fourth quarter was 39.2% which is up from 37.1% in the fourth quarter 2006. SG&A expense was $11.9 million in the fourth quarter including $1.3 million of non-cash stock compensation expense. Excluding non-cash stock compensation SG&A expense was $10.6 million which represents 17% of revenues compared to SG&A expense of $8.2 million or 16.6% of revenues in the comparable 2006 quarter. The increase in SG&A excluding stock comp as a percentage of revenues is driven primarily by higher bad debt costs associated with an isolated issue related to an IT procurement manager we were required to use by several global 2007 accounts. EBTIDA increased 44% over the year ago quarter to $9.5 million which includes absorbing $.8 million more of non-cash stock compensation expense in the fourth quarter of 2007 compared to the fourth quarter of 2006. EBITDA excluding stock compensation was $11.2 million up 49% over the comparable prior year quarter. EBTIDA margins excluding stock compensation improved 2.8 margin points over the comparable prior year period to 17.9%. The fourth quarter annualized EBITDA run rate excluding stock compensation is approximately $45 million. This is our 23rd consecutive quarter of positive EBTIDA. Net income for the quarter increased 63% over the year ago quarter to $4.5 million which includes absorbing $.8 million more of non-cash stock compensation expense in the fourth quarter of 2007 compared to the fourth quarter of 2006. Diluted GAAP earnings per share was up 50% over the year ago quarter to $0.15. Non-GAAP earnings per share was up 47% over the year ago quarter to $0.22. 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 excluding ePairs which was acquired in late November for the fourth quarter of 2007 was 1,176 including 158 subcontractors. We ended the fourth quarter with approximately 1,260 billable consultants including 50 billable consultants acquired as a result of the ePairs acquisition in November and 185 active subcontractors. In addition to the billable headcount we currently have 167 SG&A personnel which results in total colleague headcount of 1.427 as of December 31, 2007. Turning to the full year results, revenue for the full year ended December 31, 2007 was $218.1 million, a 36% increase over the prior year. Services revenue for the year ended December 31, 2007 were $191.4 million compared to $137.7 million for 2006, an increase of 39%. 2007 gross margin for services excluding reimbursed expenses and stock compensation was 39.1%, an increase of 100 basis points over 2006. SG&A expense were $42 million for the year ended December 31, 2007 including $4.7 million of non-cash stock compensation expense. Excluding the non-cash stock compensation expense SG&A expense was $37.3 million which represents 17.1% of revenues a 160 basis point decrease from the comparable prior year period primarily the result of lower bonus tied to the increasingly challenging goals in 2007 and lower costs as a percentage of revenue across other SG&A categories as the company leverages its infrastructure to delivery economies of scale. This was partially offset by a 30 basis point increase in bad debts primarily associated with the fourth quarter bad debt charge previously described. EBITDA for the year ended December 31, 2007 increased 57% over 2006 to $33.7 million which includes $6.1 million of non-cash stock compensation expense in 2007. Without the effect of stock compensation, EBTIDA increased 62%. For the year ended December 31, 2007 net income was $16.2 million. Fully diluted earnings per share increased 54% over 2006 to $0.54 per share. Non-GAAP diluted earnings per share was $0.78, a non-GAAP measured defined as GAAP earnings per share but excluding amortization of intangible assets and stock compensation and the related tax affects and an increased 50% compared to $0.52 in the comparable prior year period. As Jack mentioned, we continue to generate strong operating cash flow that we are using to fund both internal growth and growth from acquisitions. The company has full access to its $50 million unused credit facility as of December 31, 2007 and our cash balance as of December 31 was $8.1 million. The company generated $23 million of cash flow from operating activities in 2007 which is a 76% increase over 2006. Our day sales outstanding on accounts receivable were 73 days in the fourth quarter compared to 76 days at the end of the third quarter. As we discussed many times our goal is to maintain DSOs between 70 and 75 days overtime. We will continue our efforts in 2007 to maintain this metric within our stated range. With that, I’ll now turn the call over to Jeff Davis for a little more commentary behind these metrics.

[Jeffery S. Davis:]

I’ve just got a few comments to make. I’ve got a couple brief comments about the fourth quarter. I’m going to focus most of my attention as Jack did really on what we’re seeing right now and the remainder of the first quarter and beyond. So, as previously has been discussed already we’ve had a strong fourth quarter. We’re pleased with the results for the fourth quarter. We continue to close multiphase, multimillion engagements. In fact, 30% of our new sales averaged about $1.2 million in individual deal size which is up from $950,000 in the third quarter. That’s a record high for Perficient. With that I’m going to move on really to what we’re seeing right now and as I mentioned, the balance of the first quarter and beyond. We’re still closing a number of multimillion dollar deals and have an active healthy pipeline so far in the year. We have had some large projects wrap up on the December/January timeframe which is really through normal completion, no big surprises there but they were large. We’re back filling fairly well but not as rapidly as we’d like. The deals are there but the sales do appear to be a little extended over the year ago quarter. However, year-to-date we have closed more than $36 million in new deals which is at a pace ahead of revenue meaning that we’re selling a higher dollar volume in new projects per day than we are billing per day on existing projects and implying obviously, an upwardly sloping revenue line and growth. So, we’re hoping that trend continues but time will tell and we anticipate right now that it will as Jack mentioned earlier. Year-to-date we’ve added 30 new clients with initial contracts that total more than $3 million in contract value and represent a potential total revenue value of more than $15 million over the next 12 to 24 months. And again, that implies that we’re landing new client relationships at a fast pace and really at a faster pace than we normally do so that’s another reason to be encouraged. Current Q1 services backlog is at 92%, this is signed committed contracts, 92% of the fourth quarter total services revenue and the total Q1 forecast right now is at 97% of the fourth quarter total services revenue and I think there’s some potential upside to that possibly to get even beyond those numbers. In terms of the momentum January is always a seasonally slow month and as we’ve commented several times and Jack pointed out was really softer than usually this year so we’re really working from a lower base than we’d like from the first quarter. Again, it’s typically down from flat or down with December which is always a down month and we usually see a little faster pace of pick for January than we saw this year. However, we did begin to see that pick up in February and actually on into March and as I mentioned before if these trends continue we’re relatively encouraged beyond the first quarter. We’re looking at a 5 to 6% in total pick up in February and March over the January month. So again, I think a solid good sign there. As I mentioned there are no guaranties but if that continues we should see a solid sequential uptick in revenue and probably more meaningful increase from profitability from Q1 to Q2. So, as we progress through 2008, January could prove to be just an anomaly but in light of the macroeconomic picture, as Jack mentioned we’re modeling a more conservative approach and taking a more conservative view of the outlook. Either way, as Jack also mentioned we will continue to manage the business as we have and react quickly right size and make sure supply and demand are in synch. Our fiscal discipline, focus on the bottom line is what has always helped Perficient post metrics that are among the best in its class and we see no change to that. We’re taking several steps right now in fact, including continuing to maintain what we began six months ago focusing specifically on large enterprise sort of global 2000 accounts. Firms that we believe have less sensitivity to the US specific economic concerns and over better promise to us in terms of the growth for the year. Also, we’re managing headcount to ensure that utilization remains near or within our targeted goals. We’re doing that through allowing actually natural attrition to sort of overtake hiring. So, we’re stepping down our headcount slightly but we’re doing that primarily by allowing attrition to overtake the hiring for the time being. Which we anticipate that will flip back again here in the second quarter assuming that the trends hold. We’re also stepping up our marketing campaigns and increasing our insides sales support of those campaigns and others actually by leveraging our recruiting team. These are folks that are accustomed to doing cold calls and sales at some level and we feel like they’re going to do a good job for us from an inside sales standpoint. So, we’re leveraging them to follow behind those campaigns and help generate new leads. So, to summarize while we’re seeing some flatness and softness early in the year, it’s really nothing catastrophic as Jack mentioned. And, based on the recent trends we’re seeing I’m still optimistic that we’ll enjoy decent growth this year. In fact, our MBO targets are still set at better than 10% organic growth for the year which would actually top last year. Whether we will achieve that or not remains to be seen but that’s what we’re shooting for. With that, I’ll turn it back to Jack.

[John T. McDonald:]

So, just looking at the outlook now for Q1 again, we’ve talked about it but just to go through the actual numbers one more time. The following statements are based on current expectations, these statements are forward-looking and actual results obviously may differ materially. We expect first quarter 2008 services and software revenue including reimbursed expenses to be in the range of $54.8 to $58.9 million. So roughly $55 to $59 million comprised of approximately $54 to $56.5 million of revenue from services including reimbursed expenses and then $1 to $2.5 of revenue from sale of software. That guidance range of services revenue would represent services revenue growth and reimbursed expenses of between 17 and 23% on a quarter-over-quarter basis, in other words over the first quarter of 2007. With that, I’d like to now open the call up for questions.

[Operator:]

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

[Colin Gillis:]

Can you just talk a little bit about the utilization that you saw in the month of January? And, are you already starting to scale back the use of subcontractors, sort of putting some of the shock absorbers in place?

[Jeffery S. Davis:]

Sure. From a employee only perspective on utilization for January it was really in the, I’m going to say around 70% mark, maybe in the high 60s. We ended the year, the fourth quarter I think Paul mentioned, at about 158 subcontractors on average. So, we talk about having active subcontractors and sometimes it can be a little confusing. We said we ended the year with 185 active subcontractors. Those are subcontractors that we have sort of on our books that we can choose to use or not. Many of those are part time so the average number for the fourth quarter was 158. The average number that we’re looking at right now coming out of February is about 120 to 125. So, to answer your question, yes we’ve scaled back the use of subcontractors in addition to those other measures that I mentioned earlier. So, about 70% roughly in January, we’re seeing that uptick and expect utilization will be back into the low 80s for employees only in March.

[Colin Gillis:]

You made some comment about the size of the projects that you’re seeing in the marketplace. Are they getting broken up into smaller pieces?

[Jeffery S. Davis:]

You know, we’re not really seeing that to be honest with you. We’ve seen, interestingly at least initially so far this year that the opposite is true. Now, that might just be that an anomaly based on some large deals closing that we’ve been working on for a while coming into the year. But, right now we’re not seeing the smaller deals pick up, we’re actually seeing some larger deals close.

[Colin Gillis:]

Is there any color you can give us to the impact from a slower economy in the March quarter versus having major contracts that are winding down?

[Jeffery S. Davis:]

Yeah, you know it’s hard to separate the two you know. I do think we would likely have been able to replace that revenue. Large contracts always end and we did happen to have two coincide here at the end of the fourth quarter coming into the first quarter and another major one slowed down. The reason for those had nothing to do with the economy. I do think our ability to replace that revenue is likely due to the economy although it’s virtually impossible I think to draw a solid black line there but, I think as we said before we don’t have sort of a magic shield that protects us from the overall slowdown so I’m going to attribute some of it to that. Although, as we said there’s no cliff here that we see and there’s no catastrophe. In fact, right now we seem to be replacing that at a pretty decent pace and seeing a pick up at the moment.

[Operator:]

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

[Tim Brown:]

Just a couple of question, I was wondering first if you could give us a little bit of color on maybe the area and practices and verticals where you’re seeing strength and weakness.

[John T. McDonald:]

If you look at our business it’s a very diversified business. I think tech has been running, if you look over the last few quarters at maybe 15% of revenues, financial services and healthcare running at about 12%, energy running just shy of 10% and then it really sort of drops off after that. There hasn’t been a pronounced enough sort of slowdown to say, “Gee we’re going to hit just in one area or another.” We’ve had a little bit of slowness I would say geographically in the center of the country. But, as Jeff indicated some of this just comes from some large projects where we had roll offs. We’re backing filling well and frankly, in a stronger economic environment we probably would have back filled quicker than has been the case but, we see now if you look at the revenues that we’re just currently experiencing, revenue per day in March is up substantially from where January was. So, if these current trends continue I think you’re going to see a very healthy snap back in the business in the second quarter from an earnings and revenue perspective. But, that said, given the current economic environment we just want to be conservative in terms of outlook.

[Tim Brown:]

Jack, in terms of the practice areas, are you seeing any weakness in any of those?

[John T. McDonald:]

Not really, there’s not enough of a – there’s no sort of specific area where there was any kind of substantial weakness that warrants discussion. I mean, just a little bit of dampening of demand combined with us back filling some normal project completions and that’s really more of what it was about. You know, the results again, the bounce back that we’ve seen since January would really seem to bear that out.

[Tim Brown:]

Then, you mentioned you closed $36 million of new deals year-to-date. Do you have the comparison maybe how much did you close in Q4? What’s a typical quarter? I’m just looking for some context there.

[John T. McDonald:]

Paul, do you have the Q4 total close numbers? It’s going to be skewed slightly Tim due to the acquisitions. In the Q1 numbers I’m talking about I look more at the sort of granular analysis inside that to try to pick up the trends because that includes the acquisitions we did in the fourth quarter where the fourth quarter numbers aren’t going to include those. It’s certainly healthy in the fourth quarter. The fourth quarter, by the way, is always a typically slow sales quarter. So, any given quarter of the year is healthier but this is at a pace that we hadn’t seen before in the first quarter so we’re encouraged by it. It’s going to be difficult for us to sort of give you an apples-to-apples comparison to Q4. Paul, do you happen to have the total sales numbers for Q4?

[Paul E. Martin:]

I don’t have it really broken out that way unfortunately.

[John T. McDonald:]

Tim, we’ll follow up with you on that number.

[Tim Brown:]

Then just a last question, if you guys look at pipeline, can you tell us how you look at pipeline and if you can quantify where you see the pipeline now versus just even three or six months ago?

[John T. McDonald:]

Yeah. The total pipeline right now is again, as healthy, healthier probably then we saw it three or six months ago. The total pipeline right now looks very good. It’s macro of the sales cycles and how quickly we can close the work. I think the work is there and it’s a matter of how quickly we can close it. Our gross pipeline right now is about $110 million worth of deals and that’s the largest it’s ever been even excluding acquisitions, it’s larger than it was six months ago. Again, the issue is how quickly do those deals close? I believe they will and I’ve talked to a number of CIOs, just talking to people in the industry anecdotally. I can tell you that what I’m hearing is that there is cautiousness, that the budgets are there, they’re prepared to spend, many of them are. We are closing deals. But, some of them are taking a little more pause to sort of see how things unfold and whether or not they want to pull some of that budget back. Again, we’re not seeing that come through in a very meaningful way other than what I mentioned earlier that sales cycles are somewhat extended over the year ago quarter by perhaps a week or two on a typical eight week sales cycle. So, in terms of the pipeline again, gross pipeline right now $110 million and certainly as healthy, I would say healthier than six months ago. By the way, in the fourth quarter we closed about $46 million total new business, in the fourth quarter. That would include the Bolt Tech acquisition not the ePairs acquisition which would be about $1.5 on top of that, would be the run rate.

[Jeffery S. Davis:]

Right as compared to $37 million just through the first seven weeks, seven and a half weeks of Q1.

[Operator:]

Your next question comes from the line of John Maietta with Needham & Company. Please proceed.

[John Maietta:]

With the snap back that you’ve seen in the business today does it imply kind of flat year-over-year growth? Or, are we actually seeing organic growth year-over-year?

[Jeffery S. Davis:]

If you look at the guidance range for Q1 it would imply year-over-year growth in services revenue of between 17 and 23%. Organic growth, as we calculate it, which is four quarter trailing sequential would be in the -4% range, -4 to 45% range.

[John Maietta:]

Just in terms of pricing adjustments announced, probably not the time to try to raise prices with existing clients but with new business do you have more pricing power today versus six months ago or a year ago?

[John T. McDonald:]

Oh yeah, absolutely. The deals that we are replacing, those deals that I have mentioned, those projects that have wound down are at higher rates. We’re not seeing – again, we’re saying that we’re seeing some softness, there is a change but it’s relatively subtle. I mean, it’s there and we’re talking about it but it’s not a point where gosh we’re dropping prices and things are so competitive for the deals that are out there that there’s price pressure. We’re not seeing that and in fact, like I said the revenue that we’re replacing right now is at higher prices, higher rates than we had with those that went away.

[John Maietta:]

Okay. Then just last question, a follow up to the EPS range, does that imply similar tax rates to 07? What’s kind of the effective tax rate there?

[Paul E. Martin:]

Yes. It is similar rates to what we saw for full year 2007.

[Operator:]

Your next question comes from the line of Brian Kintslinger from Sidoti & Company. Please proceed.

[Brian Kintslinger:]

The first question I had was a follow up to two questions ago about the billing, can you give us a sense to what the average bill rate, monthly bill rate was in the fourth quarter, something you had historically given?

[Paul E. Martin:]

So, the average bill rate, again we are now excluding China from that as was required with Bolt Tech the China acquisition, that’s at a significant different rate but the rate all in is about $114 an hour.

[Brian Kintslinger:]

And based on, I think it was Jeff’s comments, is that flat to increasing right now based on some of the newer deals coming in now? Or, how do you see that over the course of the year?

[Jeffery S. Davis:]

I’d describe it as flat to increasing. Right now we’re not seeing the kind of pressure that it would take to have us go backwards. When ePairs is fully baked in it will have some impact on the rates which would not have been included in Q4 but I think it will be relatively small since it was a smaller acquisition. But, the rates were smaller than our normal average, now we also expect to be driving those up but for the year I would say flat and possibly up based on again, replacing the work that was at lower rates with work that was more in line with our average but I don’t expect to see dramatic changes right now in either direction.

[Brian Kintslinger:]

When I look at your updated outlook what does that imply about GAAP EPS? Is that a similar range to what 07 was, the low 50 to 55 to 56% range?

[Paul E. Martin:]

Yeah, we actually have put up on our website the slide that reconciles that to GAAP?

[Brian Kintslinger:]

For the 2008 guidance to you mean?

[Paul E. Martin:]

It reconciles the updated guidance to the equal GAAP measure.

[Brian Kintslinger:]

And what does that number come out to?

[Paul E. Martin:]

Give me a second.

[Jeffery S. Davis:]

I think it’s about $0.52 to $0.54.

[Paul E. Martin:]

That’s right.

[Jeffery S. Davis:]

Brian, in that ballpark.

[Brian Kintslinger:]

Okay and in that range can you give us a sense for what it assumes about bonus accruals if it’s [inaudible] bottom end? Cash EPS or GAAP EPS, either one, just what it assumes if there is and how it compares percentages from 07?

[John T. McDonald:]

Well, we don’t disclose specific bonus levels but it does assume a normal bonus accrual. Obviously, that will be dependent on actual revenue achievement and we’re talking about an earnings guidance here not revenues.

[Brian Kintslinger:]

Right. So, it’s $0.75 there are bonus accruals? Or, at $0.80? Or, the whole range? I’m just curious.

[John T. McDonald:]

Well obviously, it depends on the revenue that’s associated with it but yeah, we’re not assuming a stripped out year in terms of bonus. I know people raise this question, it’s sort of a funny thing, we structure our bonus plan to pay shareholders first. That is a positive, I think a massive positive and I think it’s in contrast to the way some businesses are managed. In fact, this will wind up creating questions from some people about, “Well gee, if there are no bonuses being paid here? Is that why the earnings are growing?” And that’s just not the case. We had a full bonus accrual for 2007, for example so I think that is proof enough that we’re not running it on a stripped out basis, that would be silly.

[Brian Kintslinger:]

When I look acquisitions versus buyback, given there’s some uncertainty but it sounds like some of the metrics that you’re tracking over especially February and now into March are tracking pretty well. What stopped you from wanting to buy back your stock since you obviously know your company so much better than anybody you would acquire? I mean what would stop you from using free cash flow for buying back stock?

[John T. McDonald:]

Well actually there’s nothing specifically in terms of whether we would do it as a philosophical matter right. We would look at where it’s cheaper to buy cash flow and as I say today we’re trading at about EBIDTA stock comp. At some point we may well take advantage of that. You know there are black outs, we have M&A activity. It’s not as easy as being able to pull the trigger whenever you might like so I’m not announcing on this call that we’re going to be doing that as I said from my earlier comments. But at these kinds of value levels it is something we’re going to give consideration to.

[Brian Kintslinger:]

Is the there an authorization I just don’t I’m not aware and if so how much?

[John T. McDonald:]

Is there currently an authorization? No. There’s not currently an authorization.

[Brian Kintslinger:]

Last question I have is cap ex what was that, actually two more questions, what was cap ex for 2000 for the fourth quarter sorry?

[Paul E. Martin:]

Lets’ see I got the full year number in front of me was about $2 million so it was around $300,000 or $400,000 in Q4.

[Brian Kintslinger:]

Okay and final question I have, in your earnings what is that assume about stock-based compensation in your guidance, sorry?

[Paul E. Martin:]

We don’t give a lot of those specifics but I can you know you can see what it ran, let me find that number, it ran.

[Brian Kintslinger:]

I have the last year’s numbers, how about directionally do you expect it to be flat?

[John T. McDonald:]

We’ve always talked about the fact that we’re looking to run stock-based compensation in the range of 15 to 20% of cash earnings. Which we think is a very reasonable target much better than most technology companies and particularly given the fact that this is a people centric business. So that’s where we will continue to manage it to. I think that we’ve been running at I don’t have the exact number in front of me but we have been running at the lower end of that range but 15% to 20% is what we’ve previously announced a number of times and that’s where we will keep it.

[Operator:]

Your next question comes from the line of Pete Jacobson with Brean Murray. Please proceed.

[Peter Jacobson:]

A question for Jeff, your 5% to 6% pick up that you indicated in February and March is that on a revenue per day metric?

[Jeffery S. Davis:]

It is.

[Peter Jacobson:]

Okay and given the IBM acquisition of Cognos and anticipated ORACLE acquisition of BEA do you see that impacting your business now or in the future?

[John T. McDonald:]

Yes, I think only positively. We’ve got strong relationships really with all four of those players and we had a nice relationship with Cognos, a very good relationship with Cognos prior to that acquisition and of course we have a great relationship with IBM. So we were excited to see that happen. The same with BEA and ORACLE we have a relationship with BEA. We’ve had a good partnership with them and a great relationship and good partnership with ORACLE. So we’ve successfully navigated the [inaudible] acquisition by Oracle and really built a nice relationship with Oracle. We expect the same thing will happen with BEA and it’s already happened with Cognos.

[Operator:]

(Operator Instructions) Your next question comes from the line of [Devon Capary] with JMP Securities. Please proceed.

[[Devon Capary]:]

Question do you have any other big renewals coming up in the next couple of quarters?

[John T. McDonald:]

No. I actually did that analysis pretty recently and it looks like right now, you know you never know what’s going to happen again there’s no crystal ball but we don’t have any actual conclusions that are occurring that we don’t believe will be extended or carried over to a subsequent phase to that engagement. So right now we think some of those big wind downs are behind us but again, no crystal ball.

[[Devon Capary]:]

Right but how about ones that you think may be extended? I mean are there just contracts that are large revenue buckets that are coming up for renewal even though you believe it will be extended into the next phase? If you could just quantify?

[John T. McDonald:]

That’s you know we don’t get into disclosures of specifics of the contracts but I can tell you that’s the nature of this business. That’s always the case. We have large contracts concluding weekly and I mean meaningful contracts. You know our average contract size is about a half million dollars and that’s typically a phase of a multiphase engagements and those statements work we have ending weekly and you know the relationships that we have. I think that I point back to the metric of 80% to 85% of our revenue is business that we’ve repeated with customers we’ve served in the prior year. So it’s our expectation that that’s going to continue. As I said there’s no crystal ball if some clients decides to not continue on, I think it’s possible but I think it’s unlikely. I don’t think we’re in as economic environment that would drive those decisions. All the work that we’re doing is strategic enough and mission critical enough for these customers that I don’t anticipate that happening. Like I said these are natural conclusions. We don’t have any of those where we are actually completing a multiphase engagement. I mean those were eight figure relationships that I’d referred to where we had worked with those customers for years and we were naturally concluding that the engagements. We don’t have anything like that pending.

[[Devon Capary]:]

Okay alright. And then in terms of your 2008 cash EPS outlook, what kind of revenues is implied by that cash EPS outlook?

[John T. McDonald:]

You know it’s roughly continuation of current run rate. So you know in that Paul correct me if I’m wrong here, we’re talking something in the 240 to 250 range.

[Paul E. Martin:]

That’s right. It equates roughly to you know kind of 5% organic growth at the low end and 7 to 8 at the high end.

[[Devon Capary]:]

Okay and could you talk a little bit about some of the recent acquisitions you’ve done Bolt Tech as well as ePairs, and how those acquisitions are performing relative to expectations?

[Jeffery S. Davis:]

You know I’ll answer the last question first, very well. I’ll start with eParis which was the most recent acquisition which was a largely staffing oriented, H1B oriented shop that was very, very well run and focused on [seball] primarily, there are skills beyond that that we are excited about gaining some SAP skills in fact but the core was around was around and these are folks that came out of the big guys, big four, big five consulting solutions center out of India. So these are experienced folks and we’ve been able to deploy them immediately into our [seball] engagements and that was really the motivation for doing that deal was to gain these additional skill sets as well as the leadership team that came along with that and the recruiting capability that we now have in [inaudible]. So that’s gone very, very well. Everybody’s fully deployed and that business is performing very, very well. We’re only obviously two and a half months in to that but we’re very please. Same really with Bolt Tech which really now is our business hub in Denver. They’ve got a strong market there serving into that telcom client base there as well as healthcare doing very well, business units performing very well. Of course we gained the China SCI Level IV certified facility in China that we’re excited about and continue to obviously operate as a part of that business unit but also beginning to be leverage by others. So we’re very, very pleased with both of those so far in the say six months or so since we acquired Bolt Tech and the three months or so since ePairs.

[[Devon Capary]:]

Jeff could you talk about any initial feedback you’re getting from your clients as you talk to them about the offshore capabilities in China that you now have?

[Jeffery S. Davis:]

Yes. There’s a good deal of interest you know it’s a little bit of a shift for us in terms of a go to market leader. It’s not something that we’ve done a lot of in the past outside of our Macedonia facility which actually we’ve done pretty well with going from about half a dozen folks to about 60 over the last two or three years and it’s very - it’s met with great reception. And, one of the reasons we want to do that is again we’ve gained a great team there, a great filed team a great executive team but one of the motivators was to get that China facility and to take it back to market out to our clients and they’ve been very interested. One of the things we had heard from it in the past was you know we wish you guys did do more offshore or had broader offshore capability and so we’re excited about its potential. It’s proposed now. It’s a part of proposals on several other engagements that we’re working on again in many other business units outside Denver. So we anticipate that we’ll get traction with that.

[Operator:]

Your next question comes from the line of Paul Kaump with Northland Securities. Please proceed.

[Paul Kamp:]

Utilization you said Jeff that it was running kind of high 60 to 70% in January. What did that rebound to in February?

[John T. McDonald:]

I’m going to say in the low 70s, we’re still closing February so I can’t give you a specific number. I know we improved it. As I mentioned before we’ve slowed down on the hiring we’ve allowed the attrition to overtake hiring a bit so we’re actually coming down some in headcount as well as reducing the subcontractors. So, I’m sure it’s moved into the low 70s and again, I expect it actually to be in the high 70s, low 80s in this month.

[Paul Kamp:]

So for March, high 70s low 80s, you said?

[John T. McDonald:]

Yeah. And, I think we’ll go into Q2 at a low 80s level which is – you know our target that we talk about is kind of the 80, 85 range or 82, 84 range. I think we’ll be back into that in April unless again, this trend turns the other way on us.

[Paul Kamp:]

I may have missed it, Paul did you give the utilization rate for Q4?

[Paul E. Martin:]

It was 81%.

[Paul Kamp:]

81, okay great. Then, given the attrition rate that you’re talking about where would you expect to end average billable headcount at Q1?

[Paul E. Martin:]

Through today or through our current date here we’re down about 20. We’ve slowed hiring down a little bit and let attrition sort of overtake the hiring so we’re down 20 and we would expect it to be down probably at least 30 plus by the end of the quarter.

[Paul Kamp:]

Okay, down 30 plus. Then, and I just forgot what was the average billable headcount at the end of Q4, I’m sorry?

[Paul E. Martin:]

The average billable headcount for the quarter was 1,176 and that excluded ePairs and we added about 50 people with the ePairs transaction.

[Paul Kamp:]

Okay. You know, with valuations falling here considerably are there any new areas of business that you’re not in right now that look interesting from an M&A perspective?

[John T. McDonald:]

You know I think we have a pretty well defined plan in terms of what we want to do on M&A and that’s really two things. One, really is expand our geographic footprint to cover the rest of the country. At $250 million we’re really, if you look at the geographic footprint, 17 offices in the US, we’re really only covering about a third, 35% maybe 40% tops of the country. So, there is a tremendous amount of just geographic expansion. I think if you basically just spread this footprint over the rest of the country we can grow this to a $500 plus million revenue run rate business and probably beyond that. In terms of – and those geographic expansion acquisitions will continue to comprise roughly half of our M&A activity. On the domain expertise side, you know you’ve seen us over the past couple of years look to diversify our vendor partnerships. For example the ORACLE relationship and we continue to see opportunities there. And, what’s critical in our model is to use acquisitions to acquire critical mass in a given vendor are or domain expertise area and then grow that organically. We continue to look at SAP as we discussed prior publically, it’s hard to find a good solution shop, shops in the size range that we’re looking for. So, you could see more ORACLE out there. There are additional Microsoft opportunities that we’re looking at, there’s more interest in core sort of BI that we’ve been doing. Usability continues to be very strong for us and we’re looking at some shops in the usability area so that’s what you see on the sort of vendor and domain expertise size. That will comprise approximately half of what we do and the other half will continue to be geographic expansion. That pipeline is as strong as it has ever been, north of $1 billion on a gross basis, a quarter of a billion on a net basis. Obviously, we’re out there, we’re talking to folks but we’re going to be patient particularly with our stock at these levels it doesn’t make any sense to rush out there. There is going to be a little bit of a gap period before private market values reflect public market values, right because their values are not traded up and down on a day-to-day basis as are public companies. So, we’re going to look at it, we’re out there, we’re going to be aggressive but we’re going to be aggress about buying deals at our price and we’re not going to jump the gun before we should.

[Paul Kamp:]

And then last question, you mentioned the potentially slower business environment here in 08, slow down in M&A. I’m wondering given those real substantial factors does this put you behind the trajectory to get to the $500 million run rate goal by the end of fiscal 2010?

[John T. McDonald:]

I’m not sure it does, it really depends on the level of M&A activity. This could come out being a slow year for M&A, it could come out being a very big year for M&A. It really depends on what happens as we move through the rest of the year. You know, if you saw what happen when we went into the dot com and Y2K crash, which again was much more significant than anything we’re seeing here at least based on current visibility, that was actually one of our most productive periods in terms of growth through M&A. I don’t think it does, I think based on the run rate we were on we would have hit our $500 million run rate target earlier than the end of 2010. We’re kind of running a little bit ahead of target, at least from my calculations. So, I don’t think this necessarily changes that. And again, the point here is just that we’ve always run this business trying to do the smart things, do the common sense things not look to do acquisitions to create an attractive press release. You do it because it is what makes sense for the business at the time and it makes sense for the business. So, I really wanted to share with folks hey, we’re out in the market, we continue to look but we may wait a quarter or two here, maybe three. I don’t know we’ll see how it plays out. Just so folks are aware of that, it takes the pressure off. I don’t want there to be any expectations of doing deals that don’t make sense and again, I don’t see that impacting the overall strategic trajectory of the business.

[Operator:]

Your final question comes from the line of Colin Gillis with Canaccord. Please proceed.

[Colin Gillis:]

Just a couple of quick follow ups, can you talk a little bit about total headcount turnover and was there any turnover in the sales group?

[Paul E. Martin:]

Yeah. The attrition was about 19% in the fourth quarter and not a lot, I’ll let Jeff speak to the details but not a lot of attrition in the sales force.

[Jeffery S. Davis:]

I think on the sales force point I think we’ve got a 50 plus person sales force, if you look at this business over the past three years it’s virtually zero attrition on the sales force, voluntary attrition.

[Colin Gillis:]

Got it. And, just wage inflation expectations for 2007?

[John T. McDonald:]

I’d say modest, just like the rest of the country. The economy will dictate that. I think we’re estimating I think conservatively about 3% or so in total. Obviously, there will be some performers that will top that. But, my expectation is that it will be modest relative to previous years.

[Operator:]

With no further question in the queue I’d like to turn the call back over to Mr. Jack McDonald, Chairman and CEO for closing remarks.

[John T. McDonald:]

Thank you all for your time this morning. Again, I would just emphasize that this business continues to have a very strong core franchise of global 2000 clients. We are continuing to close multimillion dollar deals, sales pipeline is at an all time high, this is a management team that has grown this business from an eight person start up to a $250 million company on less than $10 million of net invested equity. This is a business that’s got strong entrepreneurial ship in our culture and in our DNA. You see a situation where yeah there was some softness early in the first quarter which it looks like we’re bouncing back from here again, no guaranties but it looks like that based on what we’re seeing on current revenue, that bounce back has already occurred. And, against that relatively benign back drop you see a decline of 70% or more on the stock price. So, I’ll let people draw their own conclusions in terms of what that means for value and opportunity. Again, we appreciate everyone’s time this morning and I look forward to getting back together with you next quarter. Thank you.

[Operator:]

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect and have a good day.