Perficient, Inc.
Q3 2015 Earnings Call Transcript

Published: 8 Nov 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the Q3 2015 Perficient Earnings Conference Call. My name is Credit and I’ll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today President and CEO, Jeff Davis. Please proceed.

[Jeff Davis:]

Thank you, this is Jeff Davis. Thanks everyone for joining us today. With me on the call is Paul Martin our CFO. Again I want to thank you for your time this morning as is typical we’ve got a few minutes here of prepared time after which we’ll open the call up for questions before we go on though Paul will you 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 and this is 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 accordance with GAAP on our Website under Investor Relations. Jeff?

[Jeff Davis:]

Thanks, Paul. And again thanks for joining this morning we’re pleased to discuss our third quarter results with you here today. As we indicated on the Q2 call we expected a strong rebound in Q3 and that’s what we’ve reported. A great quarter all around for Cloud, SaaS and digital transformation initiatives that are driving the growing momentum and we’re uniquely positioned to capitalize on those trends for years to come. Services revenue was up sequentially more than 9% and projects that have been delayed and now underway and growing as we had anticipated. New clients as well as expanding relationships are contributing to the success. We continue to focus on leveraging the ABR improvements we’ve made over the past several quarters across larger book of business to drive organic growth. Things are trending well there, total organic billable hours in the third quarter were up 9% sequentially and 6% year-over-year. Our intelligent sourcing model is resonate well with clients and is driving more leverage of our global delivery teams our total offshore revenue represented 6% of overall revenues and was the highest it's ever been on a real dollar basis, up nearly 200% over the prior year quarter. We talked about this in Q2 our acquisition earlier this year with Zion was responsible for some of that growth but not all of it. As our customers further understand our approach and differentiated delivery model relative to the pure offshore firms we’re benefiting and seeing sustainable increased engagement there. We took meaningful effort in the quarter to improve utilization and did so driving utilization back to 80% for the quarter. That focus continues obviously into this quarter, the fourth quarter despite seasonality we anticipate similar year-over-year improvements. Bookings during the period were the strongest they’ve been in seven quarters. We’ve talked about this for a couple of calls, but it remains worth reiterating enterprises are reacting to market forces and competitive landscapes moving faster than ever. All companies are dealing with digital transformation and rising consumer and constituent expectations. Because we’re able to couple unviable technical talent with creative capabilities on par with the best agencies in the world we’re an enviable market position. In fact that our largest account during the quarter and one we project will be our top five customers for years to come, we’re helping an integrated managed care consortium with the complex multi-year initiative that represents the complete digital transformation of their business. We’re working on more than a dozen projects at the account that improve digital experiences, integrate systems and deliver content to mobile devices. We’re improving number of portal users experiences for shopping, quoting and membership we’re also transforming the way members in care ever seek, receive and pay for care with a streamline omnichannel experience that enables them to access care where and how they want to, via a phone, email, video or in person. I mentioned this on the last call, but Perficient is now the digital agency of record to a number of large accounts and more than two dozen mid-size accounts. We intend in 2016 to push even further into their space. Our strong partnerships with many of the world’s leading technology innovators continues to help drive our business and underscores our differentiation. We continue to receive meaningful recognition from our partners for the work and expertise we provide. We were particularly excited recently that IBM named Perficient its Worldwide Analytics Business Partner of the Year Award obviously a prestigious honor encompassing all solutions under IBM’s analytics software brands including Big Data, Business Analytics, Enterprise Content Management and Information Management Watson. It’s clearly an honor to be selected for this award given that tens of thousands of business partners IBM has globally. So as recognition like that from our partners and our track record of maintaining and growing long-term client relationships that continue to reinforce our belief that we’re continuing to build something great and unique at Perficient. I’ll touch on a few other notable topics and speak to our outlook for Q4 after Paul shares the detail about the third quarter results then as usual we’ll open the call up for questions. Paul?

[Paul Martin:]

Thanks, Jeff. Total revenues for the third quarter of 2015 were $120.9 million, a 3% increase over the year ago quarter. Services revenues were $105.4 million for the third quarter of 2015, excluding reimbursed expenses, an increase of 5% over the comparable prior year period. Services gross margin for the third quarter 2015 excluding stock compensation and reimbursable expenses were 38.2% compared to 39% in the third quarter 2014. SG&A expenses excluding stock compensation increased to $23.7 million in the third quarter 2015 from $22.2 million in the comparable prior year quarter. SG&A as a percentage of revenues increased to $17.9% from 17.1% in the third quarter of 2014. EBITDAS for the third quarter of 2015 was $19.9 million or 16.5% of revenues, compared to $20.7 million or 17.7% of revenues for the third quarter of 2014, with the decrease primarily results of the higher SG&A cost. The third quarter of 2015 included the amortization of $3.4 million, compared to $4 million in the comparable prior year quarter. The decrease is primarily due to intangible assets related to previous acquisitions becoming fully amortized, partially offset by the addition of intangible assets for acquisitions during 2014 and 2015. Our effective tax rate for the third quarter of 2015 was 33.4%, compared to 38.8% for the third quarter of 2014. The decrease in the effective tax rate is primarily due to additional research and development tax credits recorded during the three months ended September 30, 2015 related to the finalization of the company’s 2014 research and development tax credit. Net income increased 1% to $7.4 million for the third quarter 2015 from $7.3 million in the third quarter of 2014. Diluted GAAP earning per share was $0.22 for each of the quarters during September 30, 2015 and 2014. Adjusted GAAP earnings per share decreased slightly to $0.36 a share for the third quarter of 2015 from $0.37 in the third quarter of 2014. And as a reminder, adjusted GAAP EPS is defined as GAAP earnings per share plus the amortization expense, non-cash stock compensation, transaction costs and fair value adjustments of contingent consideration, net of related taxes divided by average fully diluted shares outstanding for that period. Our ending billable headcount at September 30, 2015 was 2,326 compared to 2,152 consultants -- including 2,152 billable consultants and 174 subcontractors. Ending SG&A headcount was 408. Now I’ll turn to the year-to-date results. Revenues for the nine months ended September 30, 2015 were $314 million, a 3% increase over the comparable prior last year. Services revenue for the nine months ended September 30, 2015 excluding reimbursed expenses were a $301.2 million, an increase of 5% over the comparable prior year period. Services gross margin for the nine months ended September 30, 2015, excluding stock compensation, reimbursable expenses decreased to 36.9% from 37.9% in the prior year period. SG&A expenses excluding stock compensation increased to $72.6 million for the nine months ended September 30, 2015 from $65.4 million in the comparable prior year period. SG&A as a percentage of revenue was 19.4% for the nine months ended September 30, 2015 compared to 17.8% in the comparable prior year period. EBITDAS for the nine months ended September 30, 2015 was $48.9 million or 14.4% of revenues, compared to $53.5 million or 16.2% of revenues in the prior year period. The nine months ended September 30, 2015 included amortization expense of $10.6 million compared to $10.5 million in the comparable prior year period. 2015 has included acquisition cost of $0.5 million primarily related to the acquisition of Market Street compared to $2.5 million related to acquisitions of ForwardThink, BioPharma and Trifecta in the comparable prior year period. Our effective tax rate for the nine months ended September 30, 2015 was 30.5% compared to 40.8% for the nine months ended September 30, 2014. The decrease in the effective tax rate is primarily due to additional research and development tax credits recorded during the nine months ended September 30, 2015 related to the finalization of the company’s 2014 research and development tax credit. Net income for the nine months ended September 30, 2015 decreased 8% to $15.4 million from $16.7 million in the comparable prior year period. Diluted GAAP earnings per share decreased to $0.45 from $0.51 for the nine months ended September 30, 2014. Adjusted GAAP earnings per share for the nine months ended September 30, 2015 was $0.86 a share down 8% from $0.94 a share in the nine months ended September 30, 2014. We ended the third quarter with $61 million in outstanding debt, up $1 million from June 30, 2015 due to the acquisition of Market Street and $8.7 million in cash and cash equivalents. Our balance sheet continues to leave us well positioned to execute on our strategic plan. Our day sales outstanding on accounts receivable were 84 days at the end of the third quarter of 2015, down from 92 days in the third quarter of 2014. I’ll now turn the call back over to Jeff. Jeff?

[Jeff Davis:]

Thanks, Paul. Little bit on our sales results for the quarter we sold 37 deals north of $0.5 million during the third quarter averaging $1.3 million each compared to 33 in the second quarter that averaged $1.2 million and 35 in the third quarter of 2014 averaging $1.4 million. Healthcare and financial services verticals remain particularly strong, collectively accounting for 46% of revenues in the quarter. We’ve talked for several quarters about our continued focus on developing and marketing Perficient owned IP to our clients we closed a $300,000 deal during Q3 for Healthcare Analytics gateway product at a community hospital and are in discussions with the handful of other organizations regarding that tool with closing one or two more before the end of the year. Notable on that by the way is not just the revenue from the IP sales itself but each of those deals comes in with an initial implementation of $1.5 million to $2 million Phase 1 with follow on opportunities with these accounts. So it’s a great door opener and opportunity establisher relationship with new customers. It’s also worth noting that we completed the small acquisition of Market Street Solutions during the quarter, as Paul alluded to that transaction strengthened our IBM analytics capabilities and help us a bit in the Southeastern United States. Analytics remains a hot space and we’re thrilled to deepen our skills and grow our geographic presence with that deal. As I indicated on our last call we’re still working to complete additional acquisition by year’s end and I remain optimistic that we’ll complete a deal or two before the end of this quarter. So turning our attention now to the expectations for the fourth quarter and full year. Perficient expects its fourth quarter 2015 services and software revenue including reimbursed expenses to be in the range of $118 million to $128 million comprised of $107 million to $112 million of revenue from the services including reimbursed expenses and $11 million to $16 million of revenue from sales of software. The midpoint of the fourth quarter 2015 services revenue guidance represents growth of 5% over the fourth quarter of 2014 services revenue. Company is revising its full year 2015 revenue guidance to be in the range of $458 million to $568 million and in 2015 adjusted earnings per share guidance range of $1.20 to $1.24. So with that we can open the call up for questions. Operator?

[Operator:]

[Operator Instructions] Your first question comes from the line of Frank Atkins with SunTrust. Please proceed.

[Frank Atkins:]

Thanks for taking my questions. I wanted to ask a little bit about the pipeline on the healthcare side any areas of particular strength or weakness there?

[Jeff Davis:]

Actually very strong, the healthcare component in the quarter represented a big chunk of bookings I think it was about 40% of bookings. So continued strength both on the payer and provider side I do think that payers having more money to spend and doing a lot of interesting things in the paradigm shift in the industry, we’ll imply that there will be a larger gap between payer and provider. Right now it’s about 60-40, but I expect that that’ll probably widen favoring the payer side.

[Frank Atkins:]

Okay, great that’s helpful. And a quick numbered question can I get organic growth in the quarter?

[Jeff Davis:]

Just about flat it was slightly down.

[Frank Atkins:]

Okay. And then talk a little bit about the hiring environment and kind of retaining people out there right now or do you think any changes?

[Jeff Davis:]

No we remain about at the same level we have been on attrition, hiring is always difficult to fine grade people and obviously those are the ones we want to hire, but I would say no notable change. A quick comment though on organic growth as well, so as we noted in the prepared statements down slightly on revenue, but actually up about 6% in volume of hours. That’s the best quarter of hours growth that we’ve had in the couple of years now and that’s on top of modest growth that we’ve had throughout the year. So I’m optimistic that the momentum is shifting as we design to as we talk about ourselves compensation plan coming into the year to drive more focus on growing the business at the core hours basis, a little less emphasis on expanding rates.

[Frank Atkins:]

All right, great. Thank you very much.

[Jeff Davis:]

Thank you.

[Operator:]

And your next question comes from the line of Mayank Tandon with Needham & Company. Please proceed.

[Mayank Tandon:]

Thank you, good morning. Jeff just to be clear so you said the offshore revenue grew 6%, was that tied to the volume growth you just mentioned or was that separate from the numbers that you just gave out in terms of the overall volume growth for the company?

[Jeff Davis:]

The 6% was actually the percent of revenue represented by offshore, it’s the largest percent that we’ve had so far. The growth was actually -- has actually been substantial. Our organic offshore growth year-to-date is around 25%, actually over 25%. And then of course we’ve added to that with the Zion acquisition facility in Nagpur. So that’s driven over 200% in total, but organic it’s been over 25% year-to-date.

[Mayank Tandon:]

That makes sense. So just to be clear then the 6% volume growth obviously is very impressive, but then that would imply some pricing degradation is that pricing because of the offshore mix or there’s something else going on in the sector where you’re having to discount to win deals?

[Jeff Davis:]

It’s two things, it is certainly the mix shift offshore, which overall is positive, I’d say strong positive. The other factor is recall Kaiser from Q2 and we’ve got a volume based discount agreement with them that that is kicking in now based on the volume we have with them. So for roughly $25 million to $30 million a year opportunity we certainly offered some discount there off of our standard rates, so that is a contributor. And then also our fin serve business we had a slow point in the early part of the quarter that’s a high rate business, high 100s, low 200s, so that nicked it a little bit but I can tell you that rates increased from August to September and again in October. So we are seeing them come back. And our goal this year was to be up a little bit in rate, but not alive again emphasizing more volume growth.

[Mayank Tandon:]

Okay. And should that trend persist then in 60 where you’ll focus more on volume growth, but you’ll still get some rate increases on net-net we should see an improvement in the dollar revenue growth as well organically?

[Jeff Davis:]

I think so, what we’re going to push for is 10% plus volume growth, which I think even given the mix shift to offshore should translate to 7%-8% top-line revenue growth in services.

[Mayank Tandon:]

That makes sense, okay. And then you commented that the bookings were the strongest in seven quarters, could you just confirm you did say that I want to make sure? And then secondly what is the mix of bookings are you seeing specific strength in certain verticals and maybe just give us more color on what are the drivers there?

[Jeff Davis:]

Sure that is what I said, so very, very strong quarter obviously we’ve got to closed out the year strong that’s what’s going to be most important here are literally the December and really January bookings are going to be more of a tell for 2016, but so far running very nicely from coming out of Q3. I mentioned that healthcare was a big driver there about 40% of those bookings coming out of healthcare, but again we’re seeing fin serve pick back up, retail is doing well, automotive is doing well, energy is off not surprisingly we’re a little down there, but for the most part seeing decent strength across the board with that exception I’d say manufacture and energy kind of down everyone else up, but healthcare again leading the way.

[Mayank Tandon:]

Okay. And then one final question, it seems that business has stabilized and hopefully we’ll see improvement in ‘16 as well, should we expect to get back to some trajectory of margin expansion? And then how should we think about the various levers that you have to drive that margin expansion potentially in ‘16?

[Jeff Davis:]

Yeah I think we’ll see margin expansion again in the fourth quarter actually. On EBITDA I think we’ve got some tougher comps, we had a tougher comp for gross margin on services in Q3 and in Q4 as we were running about 40% last year. So we’ll be about flat, but on EBITDA and net income et cetera I expect we’ll see some nice expansion in the fourth quarter of course with a dip in Q2 the overall year will be flattish, maybe down a little bit in EBITDA, but I do think that comes right back in 2016. Really the issue for 2015 is going to be Q2 now. So we’re coming out of that in Q3 and like I said I think you’ll see nice year-over-year expansion in Q4.

[Mayank Tandon:]

Great, thank you for the color. Thank you.

[Jeff Davis:]

Thanks, Mayank.

[Operator:]

And your next question comes from the line of Peter Heckmann with Avondale. Please proceed.

[Peter Heckmann:]

Good morning, gentlemen nice results. Just Jeff trying to think about the transition increasing moved to offshore as a percent of revenue seeing very strong organic growth there. Two questions, are you seeing the customers more willing to incorporate offshore as a portion of the project on a more wide spread basis in order to lower the bundled bill rate or you’re seeing some pure offshore work? And then number two, I would assume that increasing mix to offshore has positive implications for gross margin, so kind of thinking about next five quarters we might see lower revenue growth, but that might be offset by -- somewhat offset by some strong gross margin growth, the growth in EBITDA should continue to be pretty solid?

[Jeff Davis:]

Yeah, so that’s right. I think it’s a combination of all those things you mentioned really to think about our top 50 accounts our average tenure there is almost five years in those relationships. Overtime, I think initially in those relationships we weren’t really entertained for offshore, as you are competing with the big guys out there and we were willing to relinquish that. But overtime, I think clients have really grown to appreciate our more hybrid approach where we’ve got offshore resources at lower dollars with better the equivalent skill level and experience level of our onshore resources. So it’s a project team and a hybrid basis so little different than our competitors in offshore do it. Not quite as cheap our rates are 35 to 40, but our margins of course are in about 60% or 65% offshore to answer to your margin question. So yes, it’s clients recognizing that there is good value proposition there giving us a shot and actually being very pleased with the results and then allowing us to expand in those relationships. And I would say in healthcare there has been a shift also two, three, four years ago most healthcare providers and payers would shy away from offshore because of the compelling value proposition they’ve changed and are adopting it more and of course we’ve got a lot of clients in that space. So a lot of our offshore work is increasingly becoming healthcare related. And yes margin should be driven by that shift, we should see margin expansion.

[Peter Heckmann:]

Okay, that’s helpful. And then on the analytics side can you talk about what type of projects you’re being engaged on in analytics, we’ve talked about some of the interesting stuff going on in healthcare, but are you seeing same kind of type of interest in retail or other verticals, if so could you give us some examples?

[Jeff Davis:]

Yeah we are, I don’t know how specific I can get, but certainly we’re seeing at a more and more industry retail for sure, I mean customer analytics and understanding omnichannel customer 360 views helping clients with that and how to better penetrating cross-sell et cetera in the retail space. But really I think in any industries now, even energy even though the industry is on the decline, they’re looking at different ways to leverage smart meter data as an example, we’ve helped with that. I think there is a kind of a no end really to where you can apply analytics with the proliferation of data in all industries. But we participate in that in a lot of different industries as you pointed out healthcare is the primary focus, but certainly we’ve enjoyed in other places as well.

[Peter Heckmann:]

Okay. That’s helpful. I’ll get back in the queue.

[Jeff Davis:]

Thanks, Peter.

[Operator:]

And your next question comes from the line of Brian Kinstlinger from Maxim Group. Please proceed.

[Brian Kinstlinger:]

Great, hi how are you guys?

[Jeff Davis:]

Hey, Brian good how are you?

[Brian Kinstlinger:]

Good. So a couple of quick questions and the first is the bookings strength I’m curious if that has continued into the early stages of this quarter?

[Jeff Davis:]

October was up year-over-year not as strong as Q3, but it’s early. The big bookings months for Q4 would be December.

[Brian Kinstlinger:]

Okay. I’ve got lot of earnings call this morning, so I wasn’t quite clear, are you expecting services revenue not including reimbursement expenses to be up sequentially, flattish I know there is probably fewer billable days given vacation and things like that?

[Jeff Davis:]

Yeah I think our guidance implies, if you look at the midpoint certainly the high-end does imply increase sequentially and I think some year-over-year growth on top-line and certainly in volumes as we talked about earlier.

[Brian Kinstlinger:]

Is that large healthcare customer continuing to ramp is that what drives that right now?

[Jeff Davis:]

There’ll be ramp a little bit from Q3 to Q4, but I would say there is an overall sort of rebound in our business and we’re seeing some organic growth that I believe will offset the typical seasonality we see in the fourth quarter.

[Brian Kinstlinger:]

Okay. And then I forget to look, but I not sure that you break out insurance as a percent of revenue maybe you do, if you could remind me what percentage of revenue that is and most of your peers have started to see some weakness in there some I am wondering if that’s something you’re seeing or something that is not impacting your company?

[Jeff Davis:]

It’s part of our financial services vertical we included in there. But we haven’t seen any specific to insurance. We saw a little bit of softness in fin serve that may have been unique to us about the [indiscernible] in the middle of the year, but it wasn’t in insurance.

[Brian Kinstlinger:]

Okay. And then finally on the acquisition strategy, a lot of the services companies have started to buy software companies to try to differentiate themselves, you’ve been an acquirer of mostly of services companies I'm curious if your pipeline continue to be mostly services companies and if you’re thinking about any changes in terms of what you’re buying?

[Jeff Davis:]

No it’s still services, I think there is -- we’re always on a look out for interesting things and I’ll tell you that with some of the services acquisitions we’ve done we have picked up some IP and are leveraging that and we sell it, clearly we get some revenue off of it, but again it’s more of a differentiator and I think an opportunity to establish a relationship for services. So services still obviously the primary focus, but we’re always on a look out for that. We did make a small transaction I would say I am not ensuring to call an acquisition it’s where we picked up a product around Internet in a Box sort of if you will, recalled Rise Foundation that we picked up in the third quarter as well. We’ll report more on that later as we see it get some traction. But I think totally it’s always great to have differentiating IP, IP as an accelerator or as I said provide some unique differentiation.

[Brian Kinstlinger:]

Okay, thanks so much.

[Jeff Davis:]

Thanks, Brian.

[Operator:]

[Operator Instructions] Your next question comes from the line of Michael Martin with Michael J. Martin Associates. Please proceed.

[Michael Martin:]

Hi, good morning and thanks for taking my call. Can you give us some guidance on the tax rate for the fourth quarter next year?

[Paul Martin:]

Yeah so the tax rate for the fourth quarter as we mentioned it was some one time stuff regarded to be in the third quarter be around 37% and we’re expecting the 37% to 38% for 2016 obviously subject to if Congress passes the R&D tax credit for both ‘15 and ‘16 that could effected in 2016 if anything it would reduce it.

[Michael Martin:]

Okay. And one other question, on this large healthcare deal was potential for $20 million to $30 million, what kind of timeframe do you see for that ramping up to that, running at that level?

[Jeff Davis:]

We’re actually getting pretty close to it now we should be at about $30 million by the second quarter next year we’re in the 20s now, kind of low to mid-20s right now. So it will run up to that level in the middle of next year, what’s interesting about that account and this is the beauty of our portfolio we started with that one very large engagement which is great but we are always expanding into a couple of other areas there. So we’re in the peak of that engagement it might be a $30 million annual run rate. The overall account I think is actually going to yield more than that as again we bridged out in a couple of other areas.

[Michael Martin:]

And given that there is something like 5% plus organic growth just for that one deal, does that give you help that next year you can be closer to 10% organic growth?

[Jeff Davis:]

Yeah sure it does, I mean that will be our goal somewhere in that range obviously we’ll talk about that on our Q4 earnings call with 2016 guidance, but yeah it’s a great foundation I think you make a good point.

[Michael Martin:]

Thanks so much.

[Jeff Davis:]

Thank you.

[Operator:]

And that concludes the question and answer portion of today’s call. I would now like to turn it back to Jeff Davis for closing remarks.

[Jeff Davis:]

All right well thank you all appreciate your time today we’ll look forward to speaking to you in about four months.

[Operator:]

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.