Perficient, Inc.
Q4 2015 Earnings Call Transcript

Published: 3 Mar 2016

[Operator:]

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2015 Perficient Earnings Conference Call. My name is Cowanda and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to President and CEO, Jeff Davis. Please proceed, sir.

[Jeff Davis:]

Thank you and good morning. With me on the call as usual is Paul Martin, our CFO. I would like to thank you for your time this morning. As typical, we have got about 10 to 15 minutes of prepared comments. After which, we will open up the call for questions. Before we proceed, Paul, would 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 meanings of the securities laws. Actual results may materially differ from those discussed in these forward-looking statements and we encourage you to refer to 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 including 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, 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 once again, thanks everyone for joining. We are pleased to discuss our fourth quarter and full year results with you today. 2015 was a tale of two ads, as you are all aware, project delays hampered our first half performance, but we anticipated and realized a strong rebound in the second half. And during the fourth quarter, the momentum that began building in the third quarter really accelerated and has carried us into 2016, helping us get off a struggle start to a year and many years. Cloud, SaaS, digital transformation, business optimization and customer experience initiatives are driving our success and we are uniquely positioned to capitalize on those trends for years to come. Despite the seasonality associated with the fourth quarter, services revenue actually grew sequentially and that was on top of sequential growth of 9% in the third quarter. We continue to focus on leveraging the ABR improvements we have made in recent years across a larger book of business to drive additional organic growth. Clients continue to respond well to our intelligent sourcing model and approach to global delivery that has differentiated from and more effective than the pure offshore firms. During the fourth quarter, the offshore revenue represented more than 6% of overall revenues. We talked about this last quarter as well. Our acquisition in early 2015 of Zeon was responsible for some of that growth, but not all of it. In fact, revenue from our legacy India operation more than doubled. So, we are continuing to see the significant mix shift to offshore. As our customers further understand our approach, we are benefiting and seeing sustainable increased utilization there as well. In fact, our largest client, the healthcare firm we are working on a multiyear digital transformation effort that contributes tens to millions of dollars annually to our business, recently made a certification visit to our facilities in India and is looking closely at that as an option to supplement our existing work and to assist where their current provider is struggling. Q4 year-to-date 2016 bookings have been quite strong. In fact, we set an all-time record in December and then followed it up with a significant beat of that number in January. I am sure you have seen the Q1 and full year guidance in the news release already and can sense the optimism in my tone, but it’s worth highlighting a couple of details that are driving that confidence. Our January bookings this year were up more than 100% organically from the prior year month and actually eclipsed the combined totals from January and February of 2015. Those performances are driving the largest backlog we have ever had and again had us off to the strongest start in years. We have talked about this for a couple of calls, but it means 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 are able to provide unrivaled technical talent with creative capabilities on par with the finest agencies in the world, we are in an enviable position in the market. We improved that position further late last year with the acquisition of Enlighten, a full service digital marketing agency specializing the development, implementation, integration and support of digital experience solutions. We are integrating the Enlighten team with our existing agency team. As you would see, we have integrated the Enlighten team with our existing agency team and intend later this year are introducing and launching a more formal agency organization, along the lines of Accenture Interactive, Delayed Digital, SapientNitro, et cetera. We beat those groups fairly regularly when we have the opportunity to compete and by more aggressively marketing our skills in this space, we expect to drive more opportunity. I mentioned this on the last call, but Perficient is now the agency of record or primary digital and creative provider to a number of large accounts and more than two dozen midsized and smaller accounts. So, we expect the rollout of Perficient digital to accelerate that success going forward. So, during the quarter, Perficient continue to be recognized by partners and press alike for our contributions to the market and the company we are building. On the heels of IBM naming Perficient its worldwide analytics business partner of the year late last year, we just received the prestigious IBM Beacon award for outstanding cloud enterprise solution. FlexJobs named us on their top 100 flexible employers list and we were named the top workplace in St. Louis by the St. Louis Business Journal. I will touch on a few other notable topics and speak to our outlook for Q1 and the full year, after Paul shares the details about the fourth quarter and full year results. Then, as usual, we will open up the call for questions. Paul?

[Paul Martin:]

Thanks, Jeff. Let me start with the fourth quarter results. Total revenues for the fourth quarter of 2015 were $133.7 million, a 6% increase over the year ago quarter. Services revenues were $110.3 million for the fourth quarter of 2015, excluding reimbursable expenses, which is an increase of 10% over the comparable prior year period. Services gross margin for the fourth quarter of 2015, excluding stock compensation and reimbursable expenses, were 39.5% compared to 40% in the fourth quarter of 2014. SG&A expense, excluding stock compensation, increased to $25.3 million in the fourth quarter of 2015 from $22.7 million in the comparable prior year quarter. SG&A as a percentage of revenues increased 18.9% from 18% in the fourth quarter of 2014. EBITDAS for the fourth quarter 2015 was $19.8 million or 14.8% of revenues compared to $19 million or 15.1% of revenues in the fourth quarter of 2014. The fourth quarter of 2015, include an amortization of $3.3 million compared to $3.9 million in the comparable prior year quarter. This decrease is primarily due to intangible assets related to previous acquisitions becoming fully amortized partially offset by the addition of intangible assets from acquisitions during 2014 and 2015. Our effective tax rate for the fourth quarter of 2015 was 28.7% compared to 30.6% for the fourth quarter of 2014. The decrease in the effective tax rate is primarily due to the impact of the federal R&D tax credit for 2015 being signed in the law in the fourth quarter. The R&D tax credit is now a permanent part of the tax code and will be recorded each quarter starting in 2016. Net income increased 18% to $7.6 million for the fourth quarter of 2015 from $6.4 million in the fourth quarter of 2014. Diluted GAAP earnings per share increased to $0.22 a share for the fourth quarter of 2015 from $0.19 in the comparable prior year quarter. Adjusted GAAP earnings per share increased to $0.37 a share for the fourth quarter of 2015 from $0.36 a share in the comparable prior year quarter. Again, adjusted GAAP earnings per share is defined as GAAP earnings per share plus amortization expense, non-cash stock compensation, transition cost and fair value adjustments of continued acceleration, net of related taxes divided by fully diluted average outstanding shares for the period. Our ending billable headcount at December 31, 2015 was 2,439, including 2,248 billable consultants and 191 subcontractors. Ending SG&A headcount was 430. I will now turn to the full year results. Revenue for the year ended December 31, 2015 was $473.6 million, a 4% increase over the prior year. Services revenue for the year ended December 31, 2015 excluding reimbursable expenses was $411.5 million, an increase of 6% over the prior year. Services gross margin for the year ended December 31, 2015 excluding stock compensation reimbursable expenses decreased to 37.6% from 38.4% in the prior year period. SG&A expense, excluding stock compensation, increased to $91.3 million for the year ended December 31, 2015 from $81.6 million in the comparable prior year period. SG&A as a percentage of revenue was 21.1% for the year ended December 31 ‘15 compared to 19.8% in the prior year. EBITDAS for the year ended December 31, 2015 was $68.7 million or 14.5% of revenues compared to $72.5 million or 15.9% of revenues in the comparable prior year period. The year ended December 31, 2015, included amortization expense of $13.8 million compared to $14.5 million in the prior year. Our effective tax rate for the year ended December 31, 2015 was 29.9% compared to 38.3% for the year ended December 31, 2014. The decrease in the effective tax rate was primarily due to additional research and development tax credit recorded during the second quarter of 2015 related to the finalization of the company’s 2014 research and development tax credit. In addition, the effective tax rate for the year ended December 31, 2014 included a lower tax benefit for the 2015 research and development credit and domestic production deduction compared to 2015. Net income for the year ended December 31, 2015 decreased 1% to $23 million from $23.2 million in the prior year. Diluted GAAP earnings per share decreased to $0.67 a share from $0.70 a share in the prior year. Adjusted GAAP earnings per share for the year ended December 31, 2015 was $1.22 compared to $1.30 in 2014. At the end of the fourth quarter of 2015 with $56 million in outstanding debt, down $5 million from September 30 and $8.8 million in cash and cash equivalent, our balance sheet continues to leave us well positioned to continue to execute against our ongoing strategic plan. Our day sales outstanding on accounts receivable were 80 days at the end of fourth quarter 2015, down from 84 days at the end of the third quarter and 81 days at the end of the fourth quarter of 2014. I will now turn the call back to Jeff for a little more commentary. Jeff?

[Jeff Davis:]

Thanks Paul. While we sold 35 deals north of $500,000 during the fourth quarter, averaging about $1.4 million each, that compares to $37 in the third quarter at $1.3 million each and 40 in the fourth quarter of 2014 that averaged $1 million each, so about a 40% increase to the average deal size north of $0.5 million year-over-year. Healthcare and financial services verticals again represented significant portion of revenues, positively accounting for 47% of revenues. It’s healthcare at 30%, financial services at 17%. IBM, Microsoft and Oracle continue to remain our largest partners from a vendor platform perspective, but we are realizing increasing success with the cloud players like Salesforce, Adobe and Magento. In fact, we recently elevated Adobe internally to our highest enterprise level partner classification, which means that we will make some additional investments around that relationship to help accelerate the growth. As in recognition of our internal success building that practice out and the momentum Adobe has in the marketplace. We are expecting great things there going forward. So again, in summary, a really great close to 2015 and an excellent start to 2016. And the world’s leading enterprises are increasingly turning to us to help them design, develop and implement innovative digital experience business optimization and industry solutions. We expect this to be the year, Perficient again approaches or achieves or even exceeds double-digit organic growth by exceeding the 10% level. So turning the attention now through our expectations for the first quarter and full year, Perficient expects its first quarter 2016 services and software revenue, including reimbursed expenses to be in the range of $120 million to $125 million, comprised of $114 million to 117 million of revenue from services, including reimbursed expenses and $6 million to $8 million of revenue from software sales. The midpoint of the first quarter 2016 services revenue guidance represents growth of 13% over the first quarter of 2015 services revenue. I will be issuing a full year 2016 revenue guidance of $505 million to $535 million and 2016 adjusted earnings per share guidance of $1.40 to $1.52. So with that, we can open up the call for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Mayank Tandon with Needham & Company. Please proceed.

[Mayank Tandon:]

Thank you. Good morning. Congrats Jeff and Paul, a good set of numbers.

[Jeff Davis:]

Good morning Mayank.

[Paul Martin:]

Thanks.

[Mayank Tandon:]

So just to kick things off, you are obviously very upbeat on the demand environment, given the backlog and booking trends, but that also concerns about the economy, so just give us a sense of how does the visibility look this year versus previous years given some of the dynamics in the market and then of course based on your own strength in bookings and backlog?

[Jeff Davis:]

Yes. The visibility is actually better than ever, I would say. It’s the best that we have had. As I mentioned earlier the backlog is the largest we have had and that correlates obviously to visibility. So it’s a very good – I attribute that to I think a couple of things and I know that there is some chatter there about the economy. We are not seeing a demand issue and I think for a couple of reasons. One is the areas that we are focus on, we are talking about before. I think healthcare is a must spend environment, so I think they are fairly insulated from the macro and even if the economy is down, people get sick. And likewise, the other areas that we’re in, we are focus on Fortune 1000. Our last experience with them has been that they are very stable. And through macro gyrations, the spend continues to be there. Lastly, I would comment on the efforts that we put into improving our sales process and sales team structure. We put the final steps of that in place this year, but I think we had began to see some impact from it last year including the additional capacity that we put in place.

[Mayank Tandon:]

Great, that’s helpful. And looking at the organic growth trends, the 1Q numbers obviously, you mentioned 13% growth, how much of that is organic and then you mentioned that the model calls for about 10% organic growth this year, is that – are you referring to volume growth or total revenue growth?

[Jeff Davis:]

Revenue growth for Q1, the midpoint of our range is 9% organic. And the midpoint of the range for the year is 8%, that’s revenue. I would expect that volumes or hours would be above that to your point, probably about a 3% differential. So 9% revenue this quarter likely translates to 10% to 12% in volume. And for the year, 8% would translate again to probably 9% to 11% volume. Not surprisingly by the way, we feel like we have been reasonably conservative with these guidance numbers as well. So I do feel like there is a decent shot, it’s from upside.

[Mayank Tandon:]

Great. And then just moving on to margins, what is your expectation in terms of margin trajectory for the year, remind us of the key drivers and how should it track seasonally over the course of the year?

[Jeff Davis:]

Yes. Obviously, rates impact margins. We expect whole rates – rate increases probably consistent with our wage inflation. So not a lot of margin expansion there, but we will get margin expansion through increased utilization. As we move into this period of higher growth particularly as we are at the 10% or above level on volume, we will seen and have already seen in fact in the fourth quarter utilization rise. So we will get an extra, I think point or two points out of utilization which will translate straight to gross margin, so 100 basis points to 200 basis points of gross margin expansion this year. And then, translating that to EBITDA probably in the 100 to 150 range, primarily - the difference there primarily due to at this higher level of achievement in performance, the bonus accrual will be higher as well.

[Paul Martin:]

And one other thing Mayank, from a seasonal perspective as you know the first quarter with the payroll tax reset the margins are lower than the ramp from there, but we are expecting year-over-year gross margin improvement each quarter.

[Mayank Tandon:]

Got it. Okay. And then, just one final question, I will jump back in queue after that. Tax rate, I think Paul you made some comments around the R&D credits continuing this year if I heard you right, so what should we expect for a tax rate for the year?

[Paul Martin:]

One of the things that we have done on our website with the financial metrics we put out both the weighted average shares and the effective tax rate and so the estimated effective tax rate for 2016 is 35.5%.

[Mayank Tandon:]

Got it. And I will take a look. Thank you.

[Jeff Davis:]

Thanks Mike.

[Operator:]

Your next question comes from the line of Frank Atkins with SunTrust. Please proceed.

[Frank Atkins:]

Thanks for taking my questions and my congratulations on a nice quarter as well. Wanted to ask about the healthcare vertical, any particular areas of strength there, we have heard some mix results from competitors?

[Jeff Davis:]

Well, we continue to focus on consumers and healthcare and analytics. Those are the primary two areas that we would focus on and we continue to see a tremendous strength there actually. The spend has only risen. And the other thing I would say too and this kind of translates to our backlog also as you know the tenure that you have in the industry and with a lot of our clients gives us a lot more visibility into their plans and also actually gets – is getting us larger commitments early on in the year, so good visibility. But in healthcare, those two areas just consumers and in general, so everything really that fits under digital transformation applies to what we are doing in healthcare and in particular, analytics both on the payer and provider side in terms of quality of care, etcetera.

[Frank Atkins:]

Okay, great. That’s helpful. And a quick numbers question, what was organic growth in 4Q year-over-year?

[Jeff Davis:]

I think it was about 2%?

[Paul Martin:]

2% and about 5% on volume.

[Jeff Davis:]

Yes, about 5% on volume, yes.

[Frank Atkins:]

Okay, great. And you mentioned some very nice bookings trends in December and January. Any color you can give us on where that’s coming from either from a vertical – industry vertical or service vertical or any color on kind of the mix of those bookings?

[Jeff Davis:]

Yes, happily, it’s fairly across the board from an industry standpoint, obviously, a concentration there in healthcare force. But fairly across the board and I would say kind of from a technology standpoint really obviously a lot more in the digital transformation side, that’s just where the spend happens to be, but still I would say very diversified from a technology standpoint as well.

[Frank Atkins:]

Okay. And last one for me is on the margin side, as we look at software and hardware costs over the course of the fiscal year coming up, anything you can tell us about the cadence of those costs and how you plan to make some of that spend?

[Jeff Davis:]

Yes. So, a couple of things on software. Keep in mind that while it’s not our core, it’s sort of a nice to have. So, we are not – we don’t invest the time in getting software. We are pursuing those deals for the services, but it’s easier now for us to go ahead and do that resale. The average typical margin on that is about 13%. Now, we get some margin expansion overall on software, because we do sell our own assets. And I think we had about $1 million or so last year of our own assets, which obviously helps improve that margin by a few points. And going forward and we saw this some last year as well, IBM, along with many other players are moving to more of a cloud model, it’s more of a platform-as-a-service. So, it’s not a multi-tenant environment, but its platform-as-a-service in the cloud and really sold in a SaaS license manner. So, we are going to see likely not only software as a percent of revenue decline and that’s because we only have a couple of partners that we resell with anyway. But also because those partners are moving to a SaaS model which means that from an accounting standpoint we will be booking only the margin on those deals and not the top line revenue per GAAP rules. So, you will see that number come down, but you will see the margin on it improve dramatically I think over the next year or two. So, we are getting to the point now where software and hardware is not really dilutive to EBITDA like it used to be for us. So, that’s a good thing I think. I think going forward again, I think we’ll see improvements to that all the while the revenues will be dropping a little bit, but the margin will still be there.

[Frank Atkins:]

Alright, great. Thank you very much.

[Jeff Davis:]

Thanks, Frank.

[Operator:]

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

[Peter Heckmann:]

Good morning, gentlemen. Nice results.

[Jeff Davis:]

Good morning, Pete. Thanks.

[Peter Heckmann:]

Looking at your slide deck, it looks like you had some pretty nice build in headcount towards the end of the quarter and wanted to see – but we didn’t see any deterioration in utilization. So, a good sign that I am sure some of that came from the acquisition, but it appears you are adding headcount organically as regards that, are you seeing much in the way of wage inflation or changing expectations on the part of new hires?

[Jeff Davis:]

I would say no more than usual. The skills that are at high demand such as Adobe and several others command more of a premium. The more general skills, development, etcetera, whether it’s the key to our business are a little slower in terms of wage inflation. We are anticipating for the year probably a realized wage inflation of about 2.5% to 3%, taking into account attrition and the fact that when people do leave the company, we are able to typically replace them with a lower cost resource. So, that helps offset that wage inflation, but we are anticipating again 2.5% to 3% which we are hoping or expecting to offset through the rate increases.

[Peter Heckmann:]

Okay, that’s hopeful. And then, Paul on your share count guide commentary within the slide deck, does that contemplate any additional share repurchases or is that just reflective of where you are today and the effective...

[Paul Martin:]

Yes, that’s where we are today. I guess the assumption is built into that forecast. There is no additional share repurchase that may or may not happen and obviously we will update that quarterly as we move forward.

[Peter Heckmann:]

Great. Alright, I will get back into queue. Thank you.

[Paul Martin:]

Thanks, Pete.

[Operator:]

The next question comes from the line of Brian Kinstlinger with Maxim Group. Please proceed.

[Brian Kinstlinger:]

Hi, good morning guys. Thank you. The fourth quarter healthcare revenue seemed to spike, I am curious is that mostly the large customer that has been ramping and maybe when will that customer in your opinion be kind of at a mature revenue run-rate based on what you have got in front of you with them?

[Jeff Davis:]

Yes, I think that certainly contributed. However, that sector continues to grow for us outside that particular account. Yes, I actually expect that it will continue to grow in real dollars on a relative basis for us. In terms of the large account, we are pretty much at a steady state right now. So, it’s pretty much at the level that we expect it to be although as I alluded to in my – or mentioned actually in the prepared statements, we are actually seeing additional opportunity there outside of the digital transformation program and within the digital transformation program taking on some of the offshore work. So that account still has some growth opportunity in it, but again we are probably running pretty close to the steady state right now.

[Brian Kinstlinger:]

Great. And then many of the services companies out there are talking about some weaknesses in financial services IT spend, can you talk about how this industry factored into your guidance and maybe also what you are seeing in terms of your bookings and pipeline trends for that industry?

[Jeff Davis:]

Yes. I think we expect slower growth there, but not contraction. Keep in mind that a good chunk of our revenue more than half in the financial services industry is actually, management consulting. And a lot of that is focused on a – addressing regulatory changes and things like that that I again would say are kind of must do. And then outside that area, it’s somehow on efficiency improvement, profit improvement. All things that I think are going to continue to be an areas of spend in the financial services industry. On the IT side, probably a little slower, but again our expectation is flat to up, probably some growth, modest growth, but not contraction.

[Brian Kinstlinger:]

Great. And then, if I look at your revenue in the retail sector, that’s up 100% year-over-year, it’s been since the first quarter, is that acquisition related and if not, what’s driving that growth that spiked in the first quarter and has helped throughout the year?

[Jeff Davis:]

It’s primarily from the Zeon acquisition. However, we still are very bullish on that industry. I think there is a mountain of opportunity there that is exactly in our wheelhouse that we are starting to see some nice results on in terms of attracting new clients.

[Brian Kinstlinger:]

And then finally, can you talk about the pipeline for M&A, how- I mean how valuations have changed given the recent volatility in the market?

[Jeff Davis:]

Good question. The pipeline is strong. We have got a number of candidates lined up and beginning to enter into some active conversations with a couple of smaller ones, but are very strategic in the digital space primarily. The – in terms of valuations, we are not seeing much change. I think to your point, if anything, I think this is your point. If anything they may drop a little or come down a little. But you know we don’t tend to see a ton of fluctuation outside that’s 5x to 7x trailing 12 months. It depends on the skill set. So for things on hot demand, we maybe a little bit at the high end or a little bit above that range. But we are still doing acquisitions that are actually at the low end and below that range. So I still think we average within 5x to 7x trailing 12 months EBITDA range.

[Brian Kinstlinger:]

And finally given you have a little bit more debt and historically and you mentioned you are looking some small deals are you giving your balance sheet looking less and less at some larger deals, is that the reason or is the uncertainty in the market or there might still be some large deals as you just – they are just as close to some of the small ones?

[Jeff Davis:]

Yes. Adobe, it’s really a mix of both. The reason these are small is because they are very new technologies and they actually, haven’t had a lot of time to grow a lot larger. These are businesses that are growing at 50% to 100% a year probably because of their size, but also because of the hot scale.

[Brian Kinstlinger:]

Alright. Thank you.

[Jeff Davis:]

Thanks Brian.

[Operator:]

[Operator Instructions] And at this time, there are no further questions, I would now like to turn the conference over to Jeff Davis for closing remarks.

[Jeff Davis:]

Alright, well thank you. Again, thanks, everyone for joining. And we look forward to speaking to you again in May. But I think we have set the stage here that it’s going to be a terrific year for Perficient with substantial organic growth, looking forward to talking more about that as the year progresses. Thank you.

[Operator:]

Thank you.