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Edited Transcript of PRFT earnings conference call or presentation 26-Feb-19 4:00pm GMT

Q4 2018 Perficient Inc Earnings Call

ST. LOUIS Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Perficient Inc earnings conference call or presentation Tuesday, February 26, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey S. Davis

Perficient, Inc. - Chairman, President & CEO

* Paul E. Martin

Perficient, Inc. - CFO, Treasurer & Secretary

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Conference Call Participants

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* Brian David Kinstlinger

Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst

* Francis Carl Atkins

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Joshua Goltry

Maxim Group LLC, Research Division - Equity Research Associate

* Kyle David Peterson

Needham & Company, LLC, Research Division - Associate

* Surinder Singh Thind

Jefferies LLC, Research Division - Equity Analyst

* Vincent Alexander Colicchio

Barrington Research Associates, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Perficient Earnings Conference Call. (Operator Instructions) As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, Chairman and CEO, Jeff Davis. You may begin.

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [2]

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Thank you, and good morning. With me, as usual, on the call today is Paul Martin, our CFO. I want to thank you for your time today. As is typical, we've got about 10 to 15 minutes of prepared comments, after which we'll open up the call for questions. Before we proceed, Paul, will you please read the safe harbor statement?

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Paul E. Martin, Perficient, Inc. - CFO, Treasurer & Secretary [3]

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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 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, 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?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [4]

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Thanks, Paul, and once again, thanks for joining. We're pleased to share our fourth quarter and full year results with you as well as provide a first look at expectations for 2019. As I'm sure most of you saw on the release, we had a strong finish to 2018. I couldn't be more proud of the team and our performance and I'm equally excited about how this year is already shaping up.

Paul will share the financial details shortly, but across the board, we're very pleased with the quarter and the momentum we're building in our business and the market. We're routinely winning big, important long-term work in the largest enterprises and the most recognizable brands in the market are engaging us on a daily basis. We're doing all that by outthinking, outhustling and outperforming competitors many times our size. We're winning on multiple fronts, in addition to several months in a row of very solid bookings. Our partners continue to recognize us with high-profile awards and recognition, which further separates and elevates us from the competitors as we go to market. And in fact, this month alone, MicroStrategy named Perficient its North American partner of the year, and IBM named Perficient its Watson Commerce Partner of the Year. A few days later, our partners at Twilio specifically called Perficient out as the partner they are seeing great success with on their earnings call. And on the last call, we spoke of awards from important and growing players like Red Hat, Sitecore and Pivotal. Our extended leadership team is operating the business with tremendous dedication and discipline and with a consistent collaboration that is driving real results. I am optimistic that's going to translate into an increasingly impressive top line performance this year, and at the bottom line, improvements in 2018 are not an anomaly but sustainable.

Perficient is growing bigger and better each and every day in many ways. And as I've said several times, our runway for growth here is years and decades, not months and quarters.

Investments we made in recent years in our systems and our sales, marketing and delivery organizations are really coalescing right to now produce strong results. We're continuing to build on those foundations and now bringing additional focus to our talent acquisition recruiting organization and strategies to ensure we have the capacity to support the demand we're now seeing. We've got a great story to tell candidates earlier this month as St. Louis Business Journal named us the best places to work finalists. And the opportunities in career paths we're able to provide our colleagues are pretty unique in the marketplace due to our size and consistent growth and expansion.

Investments we've made to expand our portfolio around high growth areas like cloud and digital are accelerating our performance as well. And our market traction there is impressive. In fact, earlier this year, Forrester named Perficient Digital among the largest B2B agencies in North America. And that's high praise and great visibility from a respective thought leader in the industry.

Again, I couldn't be more excited about where we're at and where we're headed. It's only a matter of time before we double the size of the business, again, and cross the $1 billion revenue threshold. As the next major milestone we're targeting in 2019 is when that journey really starts.

With that, I'll turn the call over to Paul to cover our financial results before I touch on a few additional items of note and our outlook for the first quarter of 2019. Paul?

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Paul E. Martin, Perficient, Inc. - CFO, Treasurer & Secretary [5]

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Thanks, Jeff. Services revenues were $130 million for the fourth quarter of 2018, an 11% increase over the comparable prior year period.

Services gross margin for the 3 months ended December 31, 2018, excluding reimbursable expenses, stock compensation and tax-related bonus increased 90 basis points to 39.5% compared to the prior period.

SG&A expense, excluding stock compensation and tax-related bonus, increased to $29.9 million in the fourth quarter of 2018 from $25.1 million in the comparable prior year quarter. SG&A expense, excluding stock compensation and tax-related bonus as a percentage of total revenue, increased to 22.7% from 18.8% in the fourth quarter of 2017, primarily due to the change in software and hardware recognition from gross to net and increased bonus expense.

EBITDAS, excluding tax-related bonus, for the fourth quarter of 2018 was $21.7 million or 16.4% of revenues compared to $20.7 million or 15.5% of revenues in the fourth quarter of 2017.

The fourth quarter included amortization expense of $4.3 million compared to $3.9 million in the comparable prior year period.

Interest expense for the fourth quarter of 2018 increased to $1.8 million from $0.4 million in the comparable prior year period, primarily due to noncash amortization of debt discount and issuance cost related to the company's convertible senior notes, which were issued in September of 2018.

Our effective tax rate for the fourth quarter of 2018 was 22% compared to a negative 44.2% for the fourth quarter of 2017, which was impacted by revaluing the company's support income tax liability to reflect the reduction of the federal corporate tax rate.

Net income grew 16% to $7.5 million for the fourth quarter of 2018 from $6.4 million in the fourth quarter of 2017. Diluted GAAP earnings per share increased to $0.23 for the fourth quarter of 2018 from $0.19 in the fourth quarter of 2017.

Adjusted earnings per share increased to $0.47 for the fourth quarter of 2018 from $0.37 in the fourth quarter of 2017. You can see the press release for a full reconciliation to the GAAP earnings. Adjusted EPS is defined as GAAP earnings per share plus amortization expense, noncash stock compensation, acquisition costs, amortization of debt discounts and issuance costs, the fair value adjustment to consideration, tax-related bonus and the impact of other infrequent or unusual transactions, net of related tax is divided by average wholly diluted shares outstanding for the period.

I'll now turn to the full year results. Services revenues were $494 million for the 12 months ended December 31, 2018, an increase of 11% compared to the prior year.

Services gross margin for the 12 months ended December 31, 2018, excluding reimbursable expenses, stock compensation and tax-related bonuses, increased 10 basis points to 37.5% compared to the prior year.

SG&A expense, excluding stock compensation and tax-related bonus, increased to $108.3 million for the 12 months ended December 31, 2018, from $97.1 million in the prior year.

SG&A expense, including stock compensation and tax-related bonus as a percentage of revenues, increased to 21.7% from 20% for the 12 months ended December 31, 2018, primarily due to the change in software and hardware recognition from gross to net and increased bonuses expense.

EBITDAS, excluding tax-related bonus, for the 12 months ended December 31, 2018, was $76.5 million or 15.3% of revenues compared to $70.8 million or 14.6% of revenues for the 12 months ended December 31, 2018. The 12 months ended December 31, 2018, included amortization of $16.4 million compared to $15 million in the prior year.

Interest expense for the 12 months ended December 31, 2018, increased to $3.6 million from $1.8 million in the prior year, primarily due to the noncash amortization of debt discounts and issuance costs related to the company's convertible senior notes issued in September of 2018.

Our effective tax rate for the 12 months ended December 31, 2018, was 24.1% compared to 31.5% in 2017. The lower effective tax rate for the 12 months ended December 31, 2018, was primarily due to the reduction of the federal corporate tax rate beginning in 2018.

Net income increased 32% to $24.6 million for the 12 months ended December 31, 2018, from $18.6 million in 2017.

Diluted GAAP earnings per share increased to $0.73 in 2018 from $0.55 in the prior year. Adjusted earnings per share increased to $1.59 for the 12 months ended December 31, 2018, to a $1.23 in 2017.

Our earning billable headcount at December 31, 2018, was 2,795, including 2,556 billable consultants and 239 subcontractors. Ending SG&A headcount was 504.

Our outstanding debt net of unamortized debt discount and deferred issuance costs at the end of 2018 was $120.1 million compared to $55 million at prior year-end. The increase in -- was due to the issuance of the convertible senior notes during the third quarter of 2018. We also ended 2018 with $45 million in cash and cash equivalents, and our balance sheet continues to leave us well positioned to execute on our strategic plan.

Finally, our days sales outstanding on accounts receivable was 71 days for the fourth quarter of 2018 compared to 76 in 2017.

I'll now turn the call back over to Jeff for a little more commentary. Jeff?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [6]

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Thank you, Paul. We sold 49 deals, north of the $0.5 million each during the quarter. That compares to 45 in the third quarter of 2018 and 48 in the fourth quarter of 2017.

During the quarter, the health sciences, financial services, retail consumer goods, automotive and manufacturing verticals combined to represent 76% of revenue. Health care was at 30%, financial services at 15%, retail/consumer goods at 11%, and automotive and manufacturing each representing about 10% of revenue. So we're seeing strength across the border. From our perspective, the market seems quite strong. And in addition to really solid bookings in recent months, our pipeline remains very healthy on both the gross and probability weighted basis.

I mentioned this on the last call, but I feel it's worth reiterating, Fortune 1,000 firms are realizing we have the strength and scale to deliver the same work the majors do, but at higher quality, more efficiency -- more efficiently and with quicker time to value. We are as good as, and most of the time better, than the biggest names in the industry, and our approach is not only more thoughtful and collaborative but more comprehensive. I frequently hear from our customers that Perficient is a breath of fresh air when expressing their perception around our uniqueness and the value we deliver. So things are going very well, and as I mentioned in the release, I am as optimistic as I've ever been.

So moving on to the future, we're excited to issue our first quarter and full year 2019 guidance. Perficient expects its first quarter 2019 revenue to be in the range of $129 million to a $133 million. First quarter GAAP earnings per share is expected to be in the range of $0.15 to $0.18. First quarter adjusted earnings per share is expected to be in the range of $0.38 to $0.41. Perficient is issuing a full year 2019 revenue guidance range of $515 million to $545 million, a 2019 GAAP earnings per share guidance range of $0.74 to $0.86, and a 2019 adjusted earnings per share guidance range of $1.65 to $1.77.

With that, we can open up the call for your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Surinder Thind with Jefferies.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [2]

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I'd like to kind of start with the top line here in guidance. When I look at the high and low range between the $515 million to $545 million, can you talk a little bit about what maybe gets you to the high end? And what the difference is between the low end? And maybe break that down in terms of organic growth versus your expectations for maybe any increase in the average billing rate?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [3]

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Yes, the organic growth in there -- I've got to start to be at the end. The organic growth in there is 1% to 7%. But I want to reiterate, again, I've talked about this in the past that, that's revenue. We continue to experience what results in a positive impact to margins but a mix shift to offshore. So while it's 1% to 7% organic growth on top line revenue, that translates into roughly 4% to 10% or 4% to 11% organic growth on hours billed. Billable rate, our target, our goal for the year is an increase of about 1.5%. We were more or less flat last year. We had a goal to increase, and we've done some tweaks and put some changes in place this year around some compensation plans to help with that. So I'm optimistic we'll be able to achieve that. But in spite of being relatively flat last year, another factor to point out is that, again, we have the offshore, driving gross margins substantially above offshore. Offshore, we're about 55% gross margin. And the other factor is that as we take on these larger engagements, we're able to build out more of the base of the pyramid. So the average base salary of our consultants in 2018 actually dropped throughout the year by about 1.5%. That helped with some margin expansion as well. And then back to what can drive us to the high end of that range versus the low, I would tell you that it's the continued momentum that we have now. If this momentum continues and all indicators are that it will, but if it continues, I think we would be at the high end of that range or even beyond it. Of course, it's early in the year. So we wanted to be as reasonable as we could in terms of that guidance. I don't expect that there is much that would drive into the low end with the exception of something that's completely unknown, a cancellation or something like that. No reason to believe any of that will happen. We've got no indicators of that, but you always have to be cautious.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [4]

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Understood, that's very helpful. And then maybe just related to that. There was obviously some volatility in the fourth quarter. I'm assuming that was -- it just happened too quickly, meaning the rebound. But was there any change in discussion or maybe a hint that clients might have been started to get a little bit more cautious on the way that they were thinking about? Or did it just happen too fast?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [5]

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Yes, we didn't see that. I know that others have talked about it, but we had a strong Q4. You could argue bookings are always lumpy, and it's impossible to know what drives that. We had a tremendous Q3. Q4, maybe it wasn't quite strong, but it was still very strong. And then we started off the year with kind of gangbusters. So the way you position it, I think it was correct. But if there was anything in there, it was almost too quick to really realize much. And like I said, right now, things look very good.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [6]

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Understood. And then one final quick question. Obviously, again, a solid number on the number of large deals that were booked over $500k. Can you talk a little bit about maybe the average size of the deals? I haven't seen those numbers in the last couple of releases in terms of the average size. And when I look over maybe a longer period of time, it looked like they were just biased down slightly. And so are there structural changes that are maybe going on in terms of -- you guys are winning more deals, but clients themselves are only doling out maybe more bitesized projects, and so they want more projects like maybe they can get to completion quicker and they're offering more of those.

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [7]

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Yes, that's a good question. I don't think there's a fundamental change. In fact, if anything, our average has increased across a long period of time. As I said, bookings are lumpy. So to isolate any given period, I'm not sure it tells you a lot, to be honest. But I would say, over time, the average deal size has increased. And in fact, the average deal size in those deals over $0.5 million was $1.1 million in the quarter. And again, I would tell you that the buying patterns of the customers are in long-term thinking, I would say, as we've seen. Some procurement organizations operate in the way that you described and sort of meter things out on a quarterly basis even in some cases, even our largest customer does that. But others -- and by the way, even with that, we've got a blueprint that we're working with them towards -- that's been in place for years. So that customer I'm referring to, that does let contracts that way, has been a customer for 5, 6 years. And so I would say the sustainability or reliability, visibility is good there, despite the fact the way they're billing the -- the way that their procurement organizations choose to let contracts.

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Operator [8]

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Our next question comes from Frank Atkins with SunTrust.

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Francis Carl Atkins, SunTrust Robinson Humphrey, Inc., Research Division - Associate [9]

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It was a bit early last quarter but wanted to ask again. Are you seeing impact from the IBM, Red Hat? And what are you hearing from your clients? And what is demand around some of those areas?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [10]

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Demand around Platform as a Service, both Red Hat as well as OpenShift, as well as Pivotal Cloud Foundry, is really strong. There's a ton of interest in it. I think we're just actually kind of crossing over into a higher demand for that right now. There's a lot of clients that we're working with that are in the planning stages still. But a lot of them that are actually taking on the transition there. So certainly, our relationship with IBM and the preexisting relationship we had with Red Hat, it is an absolutely benefit to us. There's a lot of discussion and activity with IBM and how we can help them accelerate growth around Red Hat. I would say we haven't realized a ton of that just yet, as you said it's early. But all the indicators are, again, just based on the activity and discussions that we're having with them, is that we should be in the catbird seat there, and I know that IBM is going to put a lot behind driving that growth.

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Francis Carl Atkins, SunTrust Robinson Humphrey, Inc., Research Division - Associate [11]

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Okay, that's helpful. And wanted to ask a quick numbers question. What was organic growth in the quarter and the year?

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Paul E. Martin, Perficient, Inc. - CFO, Treasurer & Secretary [12]

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Our organic growth in the quarter was about 4%, 4.5%. And for the year, it was around 3%.

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Francis Carl Atkins, SunTrust Robinson Humphrey, Inc., Research Division - Associate [13]

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Okay. And then, as we think about revenue visibility going into this year, is it roughly the same as last year or do you think there's an improvement in the visibility of revenue?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [14]

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It's definitely improved. I think each year that's true. Again, as we take on the longer-term engagements, we have more backlog rolling into the subsequent year. And even where we don't have it booked contractually, we have better visibility each year as well just in terms of, again, in those relationships, where we're working hand-in-hand with the client on their strategy. We know what they're going to spend even if it's not booked yet. So it's still a project-based business. So there's always a little bit of uncertainty in the later months. But we've got a super solid backlog starting here.

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Operator [15]

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Our next question comes from Mayank Tandon with Needham & Company.

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Kyle David Peterson, Needham & Company, LLC, Research Division - Associate [16]

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This is actually Kyle Peterson on for Mayank today. Just wanted to see if you guys can touch a little bit more on vertical growth and strength? And kind of what verticals you guys are positive on heading into 2019 as driving some of this growth?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [17]

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Yes, absolutely. It's really the ones I touched on in the prepared remarks. Certainly health sciences we continue to be very bullish on. We're super well positioned there and have additional opportunities coming down the pipe in different approaches that we're taking in that industry. Financial services actually is improving from where it was for us a year or 2 ago. So we're seeing some strength there. And of course, retail for us -- and when I refer to retail, I'm referring to primarily online sales, whether it's B2B or B2C, continues to be strong as well. Particularly around commerce as well as a lot of our digital experience capability. And then automotive and manufacturing, once again, are strong for us. It's interesting, and I said this in the prepared statement as well, some of the reason for that is that we had actually managed to position ourselves very strategically with these clients. When you think of manufacturing, and one of our largest customers is struggling a little bit, major industry, heavy equipment manufacturer, but they view digital as key to their future. So they are stepping up and really focusing strategically on those investments, which has been, obviously, a big benefit to us and I think has a long tail.

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Kyle David Peterson, Needham & Company, LLC, Research Division - Associate [18]

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All right, great. And then maybe shifting a little bit over to kind of hiring trends, the kind of war for talent. I know you mentioned that you've -- you're working on flattening the pyramid out a little bit, which has helped actually decrease some of the consult salaries a little bit. But just, if you exclude some of that noise, are you guys seeing any uptick in wage inflation pressures or attrition or any of that? And how would that flow into margins?

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Paul E. Martin, Perficient, Inc. - CFO, Treasurer & Secretary [19]

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Yes, it's a great question. Honestly, not. I think we expect probably the same result, or certainly our merit-increased pool is going to be the same as last year. And We used third-party -- a couple of the third-party services that help us evaluate that. So we're seeing it roughly the same as last year. Attrition for us is actually down. Our attrition in the fourth quarter, as an example, was the best it's been in sometime. It's just over 15%. Like I said, it was 16%, 16.5%, which in this climate, we're really pleased with. The competition for B sources is probably a little tougher. But I would say that it always is. Honestly, I know this sounds cliché, but the type of people that we hire, they have always been difficult to find and not enough of them in the market. But We've actually had great success. It's been less an attrition issue and even less a competitive issue than, frankly, keeping up with our own demand. And as I said earlier, we're scaling our talent acquisition group to do that. But that's been the biggest change for us, is we're seeing some nice growth here and some increased demand.

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Kyle David Peterson, Needham & Company, LLC, Research Division - Associate [20]

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All right, great. Then last one for me, and then I'll hop out. Just wanted to get a taste of kind of how the M&A pipeline is looking right now. I know you guys often kind of look for a couple of tuck-in deals a year. Just wanted to see if there is any capabilities you guys are looking for or staffing advantages or geographies or just kind of how that was shaping up as we head into '19.

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [21]

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Yes, absolutely. I would say the pipeline is good. But there's a lot of ongoing activity right now. We don't necessarily have something in the late stages. We do have a few things that are in later stage. So pipeline remains strong, valuations remain reasonable. We're confident that we'll be able to get at least a couple of deals done this year. We did 3 last year. My hope would be, not necessarily in terms of numbers of deals, but a goal of acquiring about $50 million in run rate. Tough to do, it's an aggressive goal, but I think it's possible. And again, we've got the pipeline to do it. In terms of areas of interest, obviously, digital remains an important one around our digital experience capability. But there are also Pivotal, other technologies, including some of the longstanding business optimization capabilities, such as Oracle, ERP and other offerings like that. So there's still a broad portfolio there. And we'll be pursuing that as the year marches on.

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Operator [22]

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Our next question comes from Brian Kinstlinger with Alliance Global Partners.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [23]

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Organic growth has been trending very well. However, in the past, a growth year like '18 would have made it -- made for difficult comps, given revenue churn. So I'm curious today what the average duration of a project is, especially in digital transformation. And then when that project ends, what's the follow-on opportunity?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [24]

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Yes, that's a good question. I would say -- let me take a step back and define project to qualify my answer. So for us, a project isn't necessarily a contract. So a contract is probably averaging $300,000 in 6 months. However, that contract is typically one of many that we'll be receiving along the same journey or same project, same strategy. And those tend to go on for many, many years. Our top 50 customers, the average tenure for those relationships is over 8 years now. And those aren't all, of course, the exact same journey or strategy, there's multiple, multiple projects in there. But again, I would say, the answer is that they are extending and growing. And particularly, if you look at what we refer to as the engagement, which is a portfolio of projects.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [25]

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And then in terms of digital transformation then, what inning do you think we are in terms of this demand trend? Is it still multiyear growth opportunity for Perficient and the entire industry? Are we talking 2 to 3 years? Are we talking still 5 years of growth opportunity? How do you kind of think about that?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [26]

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Yes, it's a great question also. It's hard to say. As I sit here today, I would say we've got a very, very long runway. And to use the baseball metaphor, honestly, second, third inning. That's the beauty of this industry is digital has become a lot more than what digital was a few years ago. I think that's going to continue. And behind digital, it's going to be something else that we probably don't even quite understand yet, whether it's AI, more IoT devices, et cetera. But the dynamics of the industry are what keeps it humming. That's why I love it so much.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [27]

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Okay. And then, Jeff, I am sure you can appreciate for many years, I have asked you about volume growth, and now volume growth is trending in the right direction, and it's been for a little bit. And I'm wondering if Perficient can have, both volume growth as well as pricing growth. And you mentioned 1.5% bill rate growth in '19 as your expectation. What was the inhibitor in the last year or 2 to bill rate growth? And then what's different do you think this year in terms of the last year or 2?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [28]

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Yes, we -- and we've talked about this really beginning probably 3 years ago. We made a lot of changes to the sales organization and sales compensation and the like. And one of the reasons we did that was actually to shift away from the significant focus we had on margin and margin only. So I wanted to bring that back into balance. I would say that drove some of the tepid or flat growth in bill rates. And I do think that we made adjustments to that this year to drive it back up. However, I still see us driving margin expansion, even if we're flat again this year. I still expect we'll be able to drive margin expansion through the factors I mentioned. One, the growth that we are putting up now is going to drive a little higher -- sustainably higher utilization. And then, of course, the offshore does drive a substantial margin improvement as well. So I think that -- yes, go ahead.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [29]

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Is that bill rate improvement in '19 a function of new -- contributions from new customers, existing customers? Or is the acquisitions? I know in the past when you were much a smaller, you'd acquire a company, they'd have slow -- lower bill rates, and you'd go over those customers and say, you're part of a bigger opportunity and a better value-added services opportunity. So you were able to increase those prices. What is it this year that you sort of changed from last year? What do you think that reason is that you see that bill rate growth opportunity?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [30]

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I do think that we have an opportunity with the existing customers just simply through negotiating around cost of living adjustments. It's as basic as that. But also we've got a lot of emphasis on new logos as well, where we'll have an opportunity, I think, to demonstrate an additional value and compete more freshly, if you will, against competitors that are charging higher bill rates.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [31]

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Great. Last question I have, I may have missed it, but can you talk about, on an organic basis maybe, the booking trends in the December quarter? And then maybe year-to-date, are you off to a strong start year-over-year? Is it about flat? Can you just may be touch on that, if you could?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [32]

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Yes, we don't disclose the specifics in the quarters just because of the lumpiness I referred to earlier, but I can tell you that the trailing 12 months or for the year was actually low double-digit year-over-year organic. And we're starting off the year on every bit of that strength and a little more so far.

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Operator [33]

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Our next question comes from Vincent Colicchio with Barrington Research.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [34]

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I'm sorry if I missed this, Jeff. What was the billing rate increase in the quarter? And how is it tracking in the first quarter so far?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [35]

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It was flat in Q4. The -- and it's really too early to measure so far in this quarter. We do track booked ABR or bill rate, which doesn't necessarily translate to the realized bill rate. There is some leakage there. However, the trend at least in the book-to-bill rate is up a little bit, probably about 1% over the last couple of quarters. So we're optimistic. We'll see that translate into increased realized bill rate. And like I said, it's probably too early really to comment much on the first quarter.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [36]

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And then on the health care side, is your optimism based on a concentrated small number of clients or is it more broad-based? I know you added a really large contract in recent quarters.

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [37]

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Yes, we have one large -- one of our largest customers is in the health care space. But I'll tell you beyond that, it's very diversified. We've got -- that revenue -- probably 80% of the revenue is coming from 25 or more clients.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [38]

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Okay. And your utilization rate was pretty healthy based on historical numbers, 80%. Could you remind us at what levels you're comfortable moving up to on that side?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [39]

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Yes, I think if we're growing, and we talked about our guidance at the midpoint, 4% or 5% organic, top line revenue, and obviously, increasing the offshore as well. So driving some increased utilization there, which we had certainly in the fourth quarter. But overall, let's just talk about North American for the moment, I think in that kind of growth environment, sustaining 5% plus organic growth probably in the 80% to 81% range. And we hit pretty close to that for the year last year. And the way that will unfold, by the way, is a little bit lower in the first quarter and the fourth quarter, typically. Although, we're able to buck that sometimes if we're ramping up. And then higher in the second and third quarter is the typical seasonal pattern just because of the holidays.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [40]

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And then the nondigital side of your business, can you provide a percent for that in the quarter? And has there been any change in the drag from that side? And also what kind of a drag are you looking for, for the year? Is there any change there versus, say, what you did in 2018?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [41]

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No, actually, it's probably about 20% or 25% and declining, not so much because it's a drag. It's probably not going to experience the growth as the -- that the digital piece has. But I would attribute some of that back to the one cancellation we've talked about many times, that we had in the second quarter last year. However, that business has rebounded nicely and new relationships that we have with partners like OneStream is an example that really fits in that category. But I think we're very innovated with CPM and the cloud and offerings like that. We expect to still see good things to come from that business, and I expect to see some growth from it this year.

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Operator [42]

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Our next question comes from Allen Klee with Maxim Group.

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Joshua Goltry, Maxim Group LLC, Research Division - Equity Research Associate [43]

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This is Joshua Goltry in for Allen Klee. Most of my questions were answered as well. But I just wanted to get some more information on whether the new customers that you've acquired in the past quarter were attributable to recent acquisitions or ones you've obtained yourself?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [44]

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It's a combination of the two, certainly, but I think most of what you're seeing is actually organic; ones that we've obtained ourselves. We certainly gained some customers through acquisition. But a lot of the larger ones are newly acquired organically. Certainly in combination or in collaboration with the skills that we've acquired. Often cases, those can be a turning point or an opportunity to win those new deals.

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Joshua Goltry, Maxim Group LLC, Research Division - Equity Research Associate [45]

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Right. And just also building off of the industries that you see as strong growth avenues, like retail and automotive and manufacturing, do you have a sense of the revenue growth from those industries specifically or the average contract size from those industries?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [46]

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I think the -- so health care, of course, is our largest, and I do believe it's going to continue to lead the way in terms of growth. I want to say, organically, it's up in high single digits year-over-year. And I think that's going to continue. We are doing a lot of digital transformation work in that sector -- or in that industry. And we expect that, again, we're still in the early stages of that. So we'll continue to see that, and in fact, build on it. But I would also say that we're kind of seeing a tide lift all boats here, even in industries that maybe aren't performing as well as others in this market that I alluded to earlier. Our spending on digital transformation, it's sort of a must-have, and we are positioned very well for that. So we're continuing to focus on those industries as well. We've got good partnerships there with many clients. And they're continuing to spend, and I think they'll continue to.

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Operator [47]

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And we have a follow-up from Surinder Thind with Jefferies.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [48]

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I just wanted to follow up on one question about the IBM, Red Hat deal. Maybe more of a big picture question in terms of when a transaction like that goes down, when you're partners with both sides, can you talk a little bit about the time line and the types of conversations you have in the sense that, is there maybe a little bit of a pause in activity upfront as the deal is kind of being worked through and integrated and then maybe you see an acceleration towards the tail end? Or are you guys kind of continues throughout and it actually builds? Or how should we think about the opportunity? Is it more after-deal close in terms of time line?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [49]

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That's a good question. Every partner is unique. I would tell you, you specifically referenced IBM, Red Hat. So I'll tell you it's been our experience, we've been a partner with IBM for a couple of decades now. And our experience is they integrate quickly, they hit the ground running. And then we're already seeing that at least in activity. And we're seeing good demand. We were seeing good demand on our OpenShift before the announcement. And we have a strong relationship with Red Hat. And again, in our experience, when IBM puts their sales machine behind something, they could drive a lot of results, and that's what we expect. And I think it will be fairly quick. In fact, as I said, they acquired Red Hat at a time, to me, it was already growing pretty swiftly. And I think this will only accelerate it. So right now, we're still seeing great opportunities in the pipeline and strong demand around Red Hat.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [50]

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Understood. And then maybe more of a modeling question, perhaps, on the services gross margin. Obviously, very strong for the quarter, can you talk a little bit about the delta versus -- I mean was there some true-up activity that was involved there and maybe some seasonality? Obviously, you've put out a long-term target out there. But just how we should think about it in near term? And obviously, it was different than the full year number.

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Paul E. Martin, Perficient, Inc. - CFO, Treasurer & Secretary [51]

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Sure, Surinder, this is Paul. So a couple of things in there. There were more onetime, including a positive benefits experience for our employee healthcare plan along with we had some incentives from the state of Louisiana on our domestic development center. But generally, we're looking at a goal of 50 to 100 basis points' improvement in gross margin in 2019. And probably our guidance isn't probably quite as aggressive as our top end of that, but that's what we're marching to and [have been], obviously, focused on.

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [52]

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That's right. Just to add to that, as Paul just mentioned, our guidance or our model for guidance is probably flattish in the gross margin this year, year-over-year. But we expect to be able to do better than that.

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Operator [53]

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And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Jeff Davis for any closing remarks.

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [54]

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Well, once again, thanks, everybody, for their time today. And we look forward to speaking to you in a couple of months.

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Operator [55]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.