Perficient, Inc.
Q4 2013 Earnings Call Transcript

Published: 6 Mar 2014

[Operator:]

Good day, ladies and gentlemen. Welcome to the Fourth Quarter 2013 Perficient Earnings Conference Call. My name is Dominique, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to President and CEO, Mr. Jeff Davis. Please proceed sir.

[Jeff Davis:]

Thank you. Thanks everyone for joining, with me today as Paul Martin our CFO. As is typical we got our 10 minutes to minutes of prepared comments after which we’ll of course open the call up for questions. Be before we go on, I’d like to ask Paul to please read the Safe Harbor statement.

[Paul Martin:]

Thanks, Jeff and good morning, everyone. Some of the things we will discuss in today's call concerning future Company performance will be forward-looking statements within the meaning of the securities laws. Actual results may materially differ from those discussed in these forward-looking statements and we encourage you to refer to the additional information contained in our SEC filings concerning factors that could cause those results to be different than contemplated in today’s discussion. At times during this call, we will refer to adjusted EPS. 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 also posted on our website at www.perficient.com. We have also posted a slide deck, which includes a reconciliation of certain non-GAAP goals to the most directly comparable financial measures prepared in the accordance with GAAP on our website under Investor Relations. Jeff?

[Jeff Davis:]

Thanks Paul, well good morning again and thanks everyone for joining we appreciate your participation on the call. We’re pleased to share our fourth quarter and full year 2013 results with you today. Fourth quarter caped another strong and successful year for Perficient. Services revenue growth of 20% in the quarter, net income up 26% and adjusted earnings per share up 30%. And we continue to demonstrate the ability to incrementally raise rates and it moved our adjusted -- or I am sorry average build rate for North American employees to an all time high of $138 an hour, that’s up about 5% year-over-year and that’s actually on the yield of a 6% gain last year, so in just two years we have been able to raise those rates more than 10% and we see more opportunity to drive ABR higher again this year and beyond. Another initiative we continue to focus on we have heard me talk about before is our land and expand selling process. It’s a program that we have implemented over the last 1.5 years or so to ensure that our sales marketing and delivery efforts are primarily targeting key strategic accounts that can become multi-year multi-million dollar long-term client relationships for us. We’ve had good success there and we established a sales leadership team along the way that helps us reinforce this culture and align sales per compensation to drive the proper behavior. So some of the results from that are that in 2013 we served 74 clients in million dollar plus relationships compared to 69 in 2012 and 53 in 2011. 37 of those clients were $2 million plus, our cap 50 accounts averaged $3.5 million during the year compared to 3.2 in 2012 and 2.9 in 2011, 2.4 by the way in 2010 so you can see again a good track-record there, the continuing increase in that average each year as we move along in these larger accounts. And again our strategy is to continue to gravitate more towards those accounts and move more up channel. We expect each of those trends will continue and we account to see the growth this year and beyond as well. As we indicated in the news release Perficient has a lot of momentum as 2014 gets underway the market continues to strengthen from our perspectives, clients are demonstrating an increased propensity to consider and commit to larger and longer term projects with us, and that’s being reflected in our pipeline and bookings. The Q4 bookings increased 19% year-over-year and that trend has carried into this year as well. Even baking out contributions from the firms we acquired last year January 2014 easily represents the strongest bookings month in the Company’s history and obviously has us off to a great start this year in terms of the bookings. We sold 23 deals over $500,000 during the fourth quarter and they averaged to $1.8 million each and that compares to 25 in the third quarter that averaged $1.4 million each and 24 in the fourth quarter of 2012, that averaged $1.3 million. So from 1.3 million averaged to 1.8 million averaged in a year’s time. So velocity and volume largely disclosed obviously remains healthy and the deal size is again noticeably larger. After Paul shares the financial details for the quarter and year, I’ll be back to share more insight and color on performance in Q4 as well as our outlook for Q1 and the full year and some notes about our plans for M&A. Paul?

[Paul Martin:]

Thanks, Jeff. Total revenues for the fourth quarter of 2013 were $97.5 million, which represents a 17% increase over the year ago quarter. Services revenue for the fourth quarter 2013, excluding reimbursable expenses increased 20% to $6 million. Services gross margin for the fourth quarter of 2013, excluding stock compensation and reimbursable expenses increased to 38.5% from 35.5% in the fourth quarter of 2012, with increased average build rates continuing to drive year-over-year margin improvement. SG&A expense increased to 20.3 million in the fourth quarter of 2013 from 15.8 million in the comparable prior year quarter. SG&A as a percentage of revenues increased to 20.9% from 19% in the fourth quarter of 2012. EBITDAS for the fourth quarter of 2013 was 15.7 million or 16.1% of revenues compared to 12.6 million and 15.9% of revenues in the fourth quarter of 2012. The fourth quarter of 2013 includes amortization of 2.2 million which was flat with the comparable prior year quarter. Net income increased 26% or 5.5 million for the fourth quarter 2013 from 4.4 million in the fourth quarter of 2012. Diluted GAAP earnings per share increased to $0.17 a share for the fourth quarter of 2013 compared to $0.14 in the fourth quarter of 2012. Adjusted GAAP earnings per share increased to $0.30 a share for the fourth quarter of 2013 from $0.23 for the fourth quarter of 2012. As a reminder, adjusted GAAP EPS is defined as GAAP earnings per share plus amortization expense, non-cash stock compensation transaction cost and fair value adjustments of contingent consideration, net of related taxes divided by average diluted shares outstanding for the period. Our effective tax rate for the fourth quarter 2013 was 35.8% compared to 37.7% for the fourth quarter of 2012. This decrease in the effective rate is primarily due to the research and development tax credit and the U.S. domestic production deduction. Our ending billable headcount at December 31, 2013 was 1,740, which includes 1,573 billable consultants and 167 subcontractors. Ending SG&A headcount at December 31, 2013 was 301. Now let me turn to the full year results. Revenue for the year-end of December 31, 2013 was $373.3 million, a 14% increase over the comparable period last year. Services revenue for the year ended December 31, 2013 excluding reimbursable expenses was $326.6 million, an increase of 14% over the comparable prior year period. Services gross margin for the year ended December 31, 2013 excluding stock compensation and reimbursable expenses increased to 37.6% from 35.9% in the prior year period. SG&A expense increased to 77.6 million for the year ended December 31, 2013 from 64.9 million in the comparable prior year period. SG&A as a percentage of revenues was 20.8% for 2013 compared to 19.8% for 2012. EBITDAS for the year ended December 30, 2013 was 56.6 million or 15.2% of revenues compared to $48.2 million or 14.7% of revenues in 2012. 2013 has included amortization of 8 million compared to 7.8 million in 2012. 2013 includes acquisition cost of 2.3 million primarily relating to the acquisitions of TriTek, Clear Task and CoreMatrix compared to 1.9 million in 2012 related to the acquisition of PointBridge, Nascent and Northridge. Net income for the year ended December 31, 2013 increased 33% to 21.4 million from 16.1 million in 2012. Diluted GAAP earnings per share increased to $0.67 a share from $0.52 in 2012. Adjusted GAAP earnings per share for the year ended December 31, 2013 was a record $1.11, up 21% from $0.92 in 2012. Our effective tax rate for the year ended December 31, 2013 was 32% compared to 38% in 2012. The decrease in the effective tax rate was due to the research and development tax credit for 2012 and 2013 and the U.S. domestic production deduction for 2010 to 2013. We ended the fourth quarter with 90 million in outstanding debt and 7 million in cash and cash equivalents. Our balance sheet continues to leave us very well positioned to execute against our strategic plan. Our days sales outstanding on accounts receivable decreased to 74 days at the end of the fourth quarter 2013 which was down from 75 days at the end of the fourth quarter 2012. We will continue to focus on keeping DSO in the 70 to 75 day range. I’ll now turn the call back over to Jeff for a little more commentary, Jeff?

[Jeff Davis:]

Thanks, Paul. Well, as I mentioned earlier we are pleased with our momentum right now. I mentioned booking this year started out well. We’d be getting together again here of course in just a couple of months to discuss Q1 in detail but I think it’s worth noting that at the end of February on a trailing five month basis bookings are up 18%. That strength is pretty broad-based by the way from an industry perspective. Healthcare, financial services continue to do very well but energy and utilities, auto and manufacturing are also performing well. Everyone saw our acquisition last month ForwardThink Group, our biggest deal ever from the revenue perspective. Great firm by the way, strong East Coast presence, a very meaningful relationships with the world’s largest financial services firms. Very well run, great rates and margins, high-end strategic work, great group of folks type of management and consulting that really leads to a lot of technology implementation work. These guys are really more on the front-end driving the strategy that leads to the types of projects that Perficient traditionally does, so the combination is very strong. And we are excited about the work that will drive. The growth revenue we’ll drive together. Additional M&A remains a near-term goal for the quarter, I am sorry for the year. We are in very active discussions with a handful of firms and remain very optimistic that we can add I would say at least another $30 million in revenue this year through acquisitions. That plus we believe there would be solid organic growth that have us approaching and possibly surpassing our articulated goal of $500 million revenue run rate this year. We will have to see, it’s a bit of a stretch but we are feeling actually pretty good about the momentum as I mentioned earlier. Before we drive the margin expansion we expect that will come with the increasing ABR I mentioned earlier continue to fine tune Perficient we should see another increase in margins as well this year, so another bit of positive sign that we see going into 2014. So again things are going well, we’re pleased with the quarter and the year and looking forward to more growth and even better results in 2014. And now on to 2014 commenting on Q1 2014 and the full year. Perficient expects its first quarter 2014 services and software revenue including reimbursed expenses to be in the range of 97 million to 104.2 million compromised of $91.5 million to $96.2 million of revenue from services including reimbursed expenses and $5.5 million to $8 million of revenue from sales of software. The midpoint of the first quarter 2014 services revenue guidance represents a growth of 22% over the first quarter of 2013 sales -- services revenue. So again a very solid start to the year with 22% year-over-year projected for the first quarter. The Company is issuing its full year revenue guidance range of $430 million to $450 million and adjusted earnings per share guidance range of $1.26 to $1.36 for 2014. So with that operator, we can open up the call for questions, please. Question-and- Answer Session

[Operator:]

Yes sir. (Operator Instructions) And your first question comes from the line of Mayank Tandon of Needham. Mayank Tandon - Needham & Company Thank you. Good morning. Jeff for just to kick things off can you talk about what the organic growth was in the fourth quarter and then what is embedded in your expectations for both the first quarter and for the full year fiscal ’14?

[Jeff Davis:]

Yes, the organic in the fourth quarter was just under 10%, 9.8% to be exact. The midpoint of our guidance for the first quarter is around 6% or 7% organic. And I want to point out by the way that a year ago we were flat in the first quarter. So being reporting to up, 6%, 7% obviously is a much better foundation going forward. And likewise for the year the midpoint on organic growth I want to say is about 7% for the year. Mayank Tandon - Needham & Company Okay. Great and then when you talk about the bookings I think if I heard it through the end of February is up 18% year-over-year. What does it look like on an organic basis?

[Jeff Davis:]

The trailing five months I want to say is about 5%, February was a little softer than January but that’s on a monthly basis that moves around a lot. So we’re expecting a big margin that will probably bring it back up to at least high single if not low double-digits on the organic side. Our book-to-bill ratio organically remains over 1.1. Mayank Tandon - Needham & Company Sure. And then just moving down to P&L I wanted to get a better sense of the expectations on margins over the course of fiscal ’14, both gross and operating. And then just may be talk about the seasonality in terms of margin expansion over the course of the year?

[Jeff Davis:]

Yes absolutely. So margin expansion for the year we expect about the same as we had last year. Or as we -- our goal was last year at least, so 100 to 200 basis points on gross margins and likewise 100 to 200 on EBITDA. I think we’ve got some good leverage on EBITDA so I think we’ll actually beat the expansion on the EBITDA side slightly over the gross margin side. But still expansion similar to I think to what we realized last year as we’re expecting again this year. And then in terms of the seasonality of the year I would say very parallel with last year, we’re seeing the year start a little slower, just like it did last year but we’re expecting it to see a nice pickup in Q2 and beyond. And again we’re seeing 7% at our midpoint organic growth, we realized about 4% last year. And if you do some just simple math and look at as I said before we’re 6%, 7% in the first quarter, that’s 6% to 7% above last year obviously. And we ended the year at 4%. So if you do a simple math we’ve got a shot I think at that low-end of double-digit organic growth for the year. But I do think we’ll see more growth as the year progresses beyond the first quarter. Mayank Tandon - Needham & Company Okay. And then just one final question on the tax rate Paul, maybe you could give us what is embedded in the EPS guidance on the tax rate side?

[Paul Martin:]

Yes, so the tax rate will be up a couple of points over the rate we’re experiencing in 2013. So the adjusted rate should be somewhere in the 38, 39 range. Mayank Tandon - Needham & Company 38, 39, excellent I will jump back in the queue. Thank you.

[Jeff Davis:]

Thanks Mayank.

[Operator:]

Your next question comes from the line of Brian Kintslinger of Sidoti & Company. Brian Kintslinger - Sidoti & Company Hi. Good morning guys.

[Jeff Davis:]

Good day.

[Paul Martin:]

Hi Brian. Brian Kintslinger - Sidoti & Company The first question I had, your organic revenue growth is 7% for the year and maybe Jeff can you talk about which industries you think are going to grow faster starting and which may grow slower, and maybe what will drive that?

[Jeff Davis:]

Actually we’re seeing decent improvement across the board. I do think the healthcare is going to remain strong. We have got some opportunities in the works there that I think could drive significant growth again in that space. But we’re also seeing other industries come along nicely as well, so a relative growth for healthcare may not be as strong as it had been in the past. We certainly expect a lot from financial services. I can’t say enough I think about the value that the ForwardThink acquisition brings to the table in terms of our ability to drive additional revenue around the financial services industry. As well as on the insurance side also. And these guys are more focused on peer financial services that we are seeing some nice improvement in the insurance space and mutual fund wealth management space as well from a financial services perspective. But automotive is strong, great relationship with four directors potentially moving into a big relationship, a bigger relationship with Forward proper, Volkswagen and again for another automotive, either auto manufacturers or second market folks that we’re working with still strong there. And we still like oil and gas and utilities and we’ve got a good presence in south we’re seeing a nice pick up there as well. So and retail again is strong. So as I said it’s kind of across the board those are probably the highlights in terms of the areas that we spend most growth. Softness from an industry standpoint, we really don’t see it too much I mean manufacturing is always our lowest spend but even that I think from our perspective at least is improving some. So all-in-all I’d say the tide is drifting boats from what we can see at least in our world. Brian Kintslinger - Sidoti & Company And then maybe in 2014 as part of the 7% organic growth, what percentage of that, what percentage is going to come from price increases?

[Jeff Davis:]

Well last year we -- sure as I -- last year we enjoyed about 5% rate increase on that we are more conservative in that in our planning so it’s probably what’s in that 7% is probably a realized price improvement of say 2% to 3% for the year and the rest would be organic growth now or organic hours growth. One thing to keep in mind is that our offshore continues to outpace onshore growth as you might expect it would and with that of course the rates are much lower. So build hours may increase the 7% is on revenue. So if you look at build hours we might see an increase beyond the 7% minus the 3% of rate improvement that makes sense. Brian Kintslinger - Sidoti & Company Right, right. And then I ask you every quarter, can you just give us some statistics on the Premier channel what your expectations are maybe for ’14 how you ended the year?

[Jeff Davis:]

Yes sure absolutely I mean actually quite a lot has changed there as planned too so it’s a good thing you brought it up. We saw the healthy pipeline we’re still working with Premier we expect probably more services opportunities there than anything and working with some of the Premier members. However, we’ve entered into a relationship with IBM and are taking a lot of the same solutions and particularly the assets that we’ve spoken about in the past direct-to-market with them in the provider space. And in fact we should have our first major sale of the assets here this quarter ’14 this quarter, before the end of the quarter. We have got a deal now that’s actually just on legal review with the client and we expect it will close in March for about $350,000 for those assets. And of course services that come along with that. So the Premier channel just kind of shifted to the Premier/IBM channel is the way I would describe it, and the pipeline has improved with that shift. Obviously IBM has got a big sales force. They like our assets a lot and we’re working with from the CTO of their healthcare group down and we’re expecting some good things out of that relationship. Little early to project in dollars but I would say again we’ve got a lot of opportunity there. And I think a much better outlook, the better opportunity that we were just looking. Brian Kintslinger - Sidoti & Company If I can just drill down that I want to touch on the software piece that you mentioned but first how many Premier member hospitals are you working with at the end of the year?

[Jeff Davis:]

We got 10 coming out of last year. And two more in pipeline right now.

[Paul Martin:]

There is 6 in the pipeline.

[Jeff Davis:]

6 in the pipeline, sorry. Thank you. Brian Kintslinger - Sidoti & Company And then what you’re talking about was IBM is that the software piece you’ve been talking about for I think in the last two or three calls and how much $350,000 I think is what you are talking about software license is that embedded in the guidance as well?

[Jeff Davis:]

It is in the, yes, it is in our numbers for Q1, that deal is as good as nearly done. And there is, we -- go ahead. Brian Kintslinger - Sidoti & Company Sorry, and so that software license and where would that be booked as your software line item is a remarketed software I think. So will that still be seen in software or will that be seen then in your services piece?

[Jeff Davis:]

No, this will still be software yes to just to keep nearly high margins, high margin software, yes. Brian Kintslinger - Sidoti & Company Right, okay and so what’s the pipeline do you think for that software piece I mean that’s a little different than the rest of your business in the higher margin. Can you just sort of speak to how IBM and as well as Perficient is looking at selling that, is there a maybe a pipeline you can maybe give us to measure?

[Jeff Davis:]

Honestly Brian not right now it’s early on that relationship and this whole area has been somewhat elusive, but again a good sign is that within weeks of us forming this relationship with IBM and this is global business services by the way I should mention the consulting side. So within weeks of us began developing that relationship we’ve already closed a deal, or nearly closed the deal I should say. So I am optimistic that we could see three, four or more of these opportunities between now and the end of the year none of which is in our pipeline now. Then for you to know on the margin on that is nearly 100% there is a small connection that goes along with it but it’s not 95% because we have already expensed the cost. Brian Kintslinger - Sidoti & Company And just quickly one more question on the software, how do you recognize that when it’s closed do you book 100% of that $350,000 for example right away?

[Jeff Davis:]

Yes. Brian Kintslinger - Sidoti & Company Yes, okay.

[Paul Martin:]

So, typically that would include, if it includes maintenance that gets recognized overtime, but the actual sale of the software perpetual license will be recognized upfront. Brian Kintslinger - Sidoti & Company Great. And then Paul for modeling purposes, can you just give us part of your forecast for amortization of intangible expenses in stock comp may be you gave that I didn’t hear?

[Paul Martin:]

Yes, give me a second here, yes, so the amortization will be increasing as a result of the acquisitions that we did or the ForwardThink acquisition that we did and a full quarter of CoreMatrix. So, we are looking for about 2.2 million in amortization in Q1 and a little over 10 for the year and from a stock comp perspective, looking at those roughly 3 million in the first quarter and 12.5 for the year. Brian Kintslinger - Sidoti & Company Great. And I just wanted to touch on the booking rates, I want to make sure I get it right. The organic bookings in the last five months were up 5% and then what were they in the fourth quarter?

[Jeff Davis:]

Organic bookings with fourth quarter, I am going to say was about 12. Brian Kintslinger - Sidoti & Company 12?

[Jeff Davis:]

Yes, it was high and it was strong. Brian Kintslinger - Sidoti & Company And then the five months ending February, I think maybe I asked that but is that 5%?

[Jeff Davis:]

Yes. Brian Kintslinger - Sidoti & Company Great, okay. Thank you so much guys.

[Jeff Davis:]

Thanks, Brian.

[Operator:]

(Operator Instructions) And your next question comes from the line of Peter Heckmann of Avondale. Peter Heckmann - Avondale Partners Good morning guys, nice results. The EPS guidance range for 2014, the midpoint was higher than what I would expected you to start the year with. Can you talk about some of the things that are giving you confidence on the margin line?

[Jeff Davis:]

Yes, it’s margins that we are exiting 2014 with, so we have got some good leverage as I mentioned in SG&A, but I think we are really starting to gain some benefit around. We did kind of stair step reorganization at the beginning of the last year which is behind us now and I don’t expect any of those additional costs for some time again, it will be a while before we need to do that. So, that’s part of it on the SG&A side and then of course we anticipate as I mentioned before continued improvement to ABR. And an ability to hold the line on costs and possibly even squeeze a little more out of utilization but even without that I think these are realistic targets. Short answer is we are trending out of 2014 with much improved margins from what we entered with. Peter Heckmann - Avondale Partners That’s fair, that’s fair. And then can you talk about your organic hiring plans, you may have mentioned it, I am out of the office since I had a little bit of static there but organic hiring plans for you in the first half and what specific niches are you finding most difficult to hire in?

[Jeff Davis:]

Yes, so in the first half since the year I think it is -- again growth I think will pick up throughout the year, so in the first half, it’s probably a little slower in terms of hiring. You will want to drive utilization up a bit, so we will focus more on that and then than doing a lot of hiring. Of course, we are always hiring but for the year, again I would go back to just the simple math of about 4% driven through for new hours if you will, probably a little more than that because offshore is growing at a faster pace than onshore although it’s still a smaller component of the business overall. But so 4% to 5% net new headcount throughout the year, more of that in the second half than the first half translates by the way to about 80 to 100 people. Peter Heckmann - Avondale Partners Got it, alright, I will get back in the queue. Thanks.

[Jeff Davis:]

Thank you.

[Operator:]

You have a follow-up question from the line of Mayank Tandon of Needham. Mayank Tandon - Needham & Company Thank you. Jeff, so just one clarification around margins, you said 100 to 200 basis points of expansion on gross that would be for the services line right not for the consolidated number?

[Jeff Davis:]

I am sorry, yes, that net services gross margin I should say. Mayank Tandon - Needham & Company Okay. So the gross margin’s total will also expand but not to the extent that the services margins will because of the software and hardware piece, is that…?

[Jeff Davis:]

Yes well and actually if we sell some of our own software, hardware that could shift but it’s more frankly the reimbursed expenses with zero margin, but that’s really what pulls down gross margin, so when I talk about getting the 40%, I am talking net services to your point and then software will likely be dilutive to that as well and certainly reimbursed expenses is also. Mayank Tandon - Needham & Company Okay, that makes sense. And then the EBITDA margin, you also said 100 to 200 basis points so that’s really where the leverage kicks in to your point about EBITDA margin is actually, potentially surprising to the upside even as gross margins expand?

[Jeff Davis:]

Yes, I think so, I mean yes I think what we are seeing now and we saw it in the second half of last year, as long as we can maintain this momentum that let’s say we put up 100 basis points on the gross -- net services gross margin I think that translates to may be 125 to 150 on the EBITDA line. Mayank Tandon - Needham & Company Got it, it makes sense. Thank you very much.

[Jeff Davis:]

Thank you.

[Operator:]

This ends today’s question-and-answer session. I would like to hand the call back to Mr. Jeff Davis, President and CEO.

[Jeff Davis:]

Alright, well, thank you all again for your time. We’re very excited about the outlook for 2013. We look forward to talking to you all again in a couple of months and throughout the year. Thank you.

[Operator:]

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