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Edited Transcript of PRFT.OQ earnings conference call or presentation 30-Jul-20 3:00pm GMT

Q2 2020 Perficient Inc Earnings Call

ST. LOUIS Sep 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Perficient Inc earnings conference call or presentation Thursday, July 30, 2020 at 3:00:00pm 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

* Thomas J. Hogan

Perficient, Inc. - COO

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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

* Jack Vander Aarde

Maxim Group LLC, Research Division - Equity Research Analyst

* Mayank Tandon

Needham & Company, LLC, Research Division - Senior Analyst

* Surinder Singh Thind

Jefferies LLC, Research Division - Equity Analyst

* Theodore Riley Starck-King

William Blair & Company L.L.C., Research Division - Associate

* 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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Ladies and gentlemen, thank you for standing by. And welcome to the Q2 2020 Perficient Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Jeff Davis, Chairman and CEO. Thank you. Please go ahead, sir.

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

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Thank you, and good morning, everyone. With me on the call today is Paul Martin, our CFO; and Tom Hogan, our COO. I'd like to thank you for your time this morning. As typical, we'll have 10 to 15 minutes of prepared comments, after which we'll open up the call for questions.

Before we proceed, Paul, could you please read the safe harbor?

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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 that 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 discussions.

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, are posted on our website at www.com (sic) [www.perficient.com].

Jeff?

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

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Thanks, Paul. And once again, good morning. Thanks for joining. We're pleased to be with you this morning to discuss our second quarter 2020 results.

There's a lot to be excited about at Perficient right now. But as we did on the first call -- first quarter call, I want to begin by thanking both our colleagues and our customers for their perseverance and professionalism throughout 2020. Our colleagues had actually been extraordinary, as you can see from our results. Our people are more determined and dedicated than ever to continuing to build a world-class global digital consultancy. Our clients have been great as well. They've demonstrated grit and steady resolve, keeping plans and projects on track and in many instances, making new and substantial investments. You'll hear more about that later.

When we gathered in early May to discuss Q1, we were cautiously optimistic that Q2 would continue well. But we lacked some of the clarity on the second half of the year that we have now. With the benefit of several additional weeks behind us, it's more apparent to us that the COVID-19 pandemic is not going to prevent Perficient from having a strong year. In fact, some reductions on the cost side of the business as a direct result of the virus that we've realized from reduced travel and marketing events, coupled with bill rate improvements and solid utilization, are powering profitability in a challenging environment. So a good result overall, as you can see.

And Paul will speak to the details shortly, but North American bill rates reached $154 during the quarter, which is an all-time high and up about 4% year-over-year. North American utilization was 80%, which is up 4% sequentially and 2% year-over-year. And again, in the environment that we're in, I think that's a heck of a feat. So thanks to our employees for that.

As I mentioned earlier, there's a lot to be excited about here. And later in the call, Tom will speak to our bookings success in the quarter, including some details around wins at net new accounts and the overall strength of the pipeline, both of which are impressive. The most exciting development in the quarter, of course, was the acquisition of PSL based in Colombia, South America. We looked for a long time to find the right nearshore firm to turbocharge our global ambitions, and we could not be happier having expanded our team by more than 600 colleagues with this announcement. A really wonderful leadership team, and you'll hear more about that as well.

Our global billable headcount now accounts for nearly 40% of our delivery capacity. We worked for several months to complete this acquisition. It's one of the larger ones that we've completed. And so we took our time, made sure we were careful, but the integration began day 1, and we're already making great progress having discussions with our customers how they can begin to benefit from this additional service. It's hard to overstate how meaningful we expect this to be. The addition of a team with great technical talents, strong communication skills and working from the same time zones immediately enhances our ability to offer our clients fully flexible and customized delivery models. I'm confident we'll look back on this development as a true and powerful inflection point for the business and a real catalyst of our long-term growth.

Lastly, before I turn the call over to Paul for the financial results detail, I want to welcome Nancy Pechloff to the Board of Directors. Adding Nancy's experience and expertise to our Board is one more thing that we're excited about as we continue to scale our business in the second half of 2020 and beyond.

So with that, I'll turn the call back over to Paul for details on the financial results. Paul?

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

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Thanks, Jeff. We'll start with the second quarter. Services revenues, excluding reimbursable expenses, were $144.3 million for the second quarter of 2020, a 5.5% increase over the comparable prior year period. Services gross margin percentage for the second quarter ended June 30, 2020, excluding reimbursable expenses and stock compensation, increased 20 basis points to 39.3% compared to the prior year period. SG&A expense, excluding stock compensation, increased slightly to $30.8 million in the second quarter of 2020 from $30.5 million in the comparable prior year period. SG&A expense, excluding stock compensation, as a percentage of revenue decreased to 21.1% from 21.5% in the second quarter of 2019. Adjusted EBITDA for the second quarter of 2020 was $26.4 million or 18% of revenues compared to $23.6 million or 16% of revenues in the second quarter of 2019.

The second quarter included amortization expense of $4.4 million compared to $4 million in the comparable prior year period. Net interest expense for the second quarter of 2020 increased to $2.1 million from $1.9 million in the comparable prior year period. Our effective tax rate for the second quarter of 2020 was 31.8% compared to 26% in the second quarter of 2019. The increase in the effective tax rate was primarily due to the nondeductible acquisition costs incurred during the 3 months ended June 30, 2020.

Net income decreased 23% to $6.6 million for the second quarter of 2020 from $8.5 million in the second quarter of 2019 primarily as a result of increased acquisition-related costs. Diluted GAAP earnings per share decreased to $0.20 a share for the second quarter of 2020 from $0.27 in the second quarter of 2019. Adjusted earnings per share increased 10% to $0.57 a share for the second quarter of 2020 from $0.52 a share in the second quarter of 2019. Please see the press release for a full reconciliation to GAAP earnings.

I'll now turn to the 6-month results. Services revenue, including reimbursable expenses, were $285.3 million for the 6 months ended June 30, 2020, a 7.3% increase over the comparable prior year period. Services gross margin percentage for the 6 months ended June 30, 2020, excluding reimbursable expense and stock compensation, increased 40 basis points to 38.8% compared to the prior year period. SG&A expense, excluding stock compensation, increased to $61.1 million for the 6 months ended June 30, 2020, from $60.3 million in the comparable prior year period. SG&A expense, excluding stock compensation, as a percentage of revenue decreased to 20.9% for the 6 months ended June 30, 2020, from 21.9% in the comparable prior year period.

Adjusted EBITDA for the 6 months ended June 30, 2020, was $50.1 million or 17.2% of revenues compared to $43.3 million or 15.7% of revenues in the comparable prior year period. The 6 months ended June 30, 2020, included the $8.3 million of amortization expense compared to $8.1 million in the comparable prior year period. Net interest expense for the 6 months ended June 30, 2020, increased to $4 million from $3.7 million in the prior year. Our effective tax rate for the 6 months ended June 30, 2020, was 22.8% compared to 23.4% in the comparable prior year period. The decrease in the effective tax rate was primarily due to the increase in tax benefits recognized related to share-based compensation during the 6-month period.

Net income for the 6 months ended June 30, 2020, and June 30, 2019, was $15.6 million. Diluted GAAP earnings per share remained flat at $0.48 per share for the 6 months ended June 30, 2020, when compared to the prior year period. Adjusted earnings per share increased 14% to $1.07 for the 6 months ended June 30, 2020, compared to $0.94 in the prior year period. Our ending global headcount at June 30, 2020, was 3,687, including 3,464 billable consultants and 233 subcontractors. Ending SG&A headcount was 536.

Finally, our outstanding debt, net of unamortized debt discount and deferred issuance costs, as of June 30, 2020, was $139 million, which included $12 million outstanding under our credit agreement. We also had $19.5 million in cash and cash equivalents as of June 30, 2020, and $112.7 million of unused borrowing capacity under our credit facility. Our balance sheet continues to leave us well positioned to execute against our strategic plan and objectives. Days sales outstanding on accounts receivable increased to 71 days at the end of the second quarter compared to 69 days at the end of the second quarter of 2019.

I'll now turn the call over to Tom Hogan for a little more commentary behind the metrics. Tom?

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Thomas J. Hogan, Perficient, Inc. - COO [6]

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Thanks, Paul. As Jeff mentioned earlier, we had another solid quarter for bookings. And most importantly, the pipeline remains extremely strong. In fact, on a weighted basis, it's larger than it's ever been. We booked 66 deals greater than $500,000 during the second quarter of 2020. That compares to 62 the year ago period.

We've had good deal volume, and as Jeff mentioned earlier, we're particularly pleased to be competing for and winning work with net new customers right now. As we reacted earlier this year to the emergence of the pandemic, we didn't know if or how it might impact our ability to win opportunities at accounts we previously hadn't worked with. But to date, we're having great success winning new work, and the entire organization has been energized by our progress gaining important new clients.

And we're also proud to be involved with enterprises doing great work to combat the current challenges. For example, one of the world's largest and most well-recognized pharmaceutical plants -- firms is using clinical trial management solutions delivered by our life sciences group to run testing for their COVID-19 therapy trials. On the new client front, we won a 7-plus-figure project with a Fortune 100 global food and drink conglomerate. We're building an AI-enabled data platform for one of their subsidiaries, which produces and markets pet food and operates the largest pet adoption website in the world. The platform will enable animal shelters and rescue organizations to better match and place pets with the right prospective adopters.

Also during the quarter, we began partnering with a diversified health care services company that's pursuing a major cloud modernization effort across their entire organization. We're migrating the legacy application used for the records management and workflow systems. The client anticipates substantial cost savings and improved employee experiences based on this initiative. And this is another 7-plus-figure project, and we anticipate that to lead to more opportunity. And we're even competing for several 8-figure deals right now. All in all, a great quarter. We have a strong pipeline, and we have a lot of momentum as we head into the second half of the year.

And with that, I'll turn things back over to Jeff to discuss the remainder of 2020.

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

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Well thanks, Tom. We can discuss our perspective really on the second half of the year sort of anecdotally in the Q&A. But as we mentioned in the news release, given the uncertain duration and scope of the pandemic and its impact on economic and financial markets, we can't really reliably predict that on our business, operations or financial results. Accordingly, we're going to continue to withhold guidance at this time.

With that, operator, we can open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Maggie Nolan with William Blair.

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Theodore Riley Starck-King, William Blair & Company L.L.C., Research Division - Associate [2]

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This is Ted on for Maggie. I hope you guys are doing well. Jeff, I guess, to that point, maybe just looking across your verticals, do you feel that demand has maybe bottomed here in the second quarter? And that this should maybe some sequential growth across all your verticals? And are there may be some areas in the business that are facing a little bit more of headwinds? Just any kind of commentary there regarding forward-looking from your verticals.

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

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Yes. I would say it's fairly consistent across the verticals. We don't have a lot of exposure to the most impacted verticals. We have some, but most -- even our retail was -- is online. So in fact, some of that's thriving, as you all know. So I would say it's fairly consistent across the board. No big standouts. And yes, I'm optimistic that we've seen the bottom, barring any other macro events in a very interesting time. Who knows? But barring any of that, I'm optimistic that we've seen the bottom, and that, hopefully, we'll see some at least modest growth going forward. But I think the idea that we would decline is probably behind us.

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Theodore Riley Starck-King, William Blair & Company L.L.C., Research Division - Associate [4]

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Okay. That's very helpful. And then Jeff or Tom, this might be a question for you. So great to hear about the success with new clients. I'm curious what you would attribute that to.

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

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Go ahead, Tom.

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Thomas J. Hogan, Perficient, Inc. - COO [6]

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Great. I think a lot of it is the determination of our team. Our portfolio and the space we play in is well positioned, and a lot of these clients are turning towards digital transformation, especially with COVID, and our ability to credentialize ourselves with the portfolio. And our team is doing a nice job of being proactive and engaging these customers. And as we work and we show up and demonstrate the power of Perficient, our customers and, more importantly, the new customers are really responding.

We're also connecting new customers with existing customers. That's been quite beneficial as we turn to credentialize ourselves with some of these newer clients, we're really pointing them back to organizations we've already worked with. And our current clients have been great and really speaking to how great Perficient has been to work with. So I mean, all in all, we've positioned our legacy business and these new customers. And also these customers willing to invest, as Jeff mentioned earlier, I don't want -- I'd be remiss not to mention that there are a number of organizations that continue to invest. And obviously, we appreciate that. Their employees appreciate that, and it's really transforming their organizations as well.

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Theodore Riley Starck-King, William Blair & Company L.L.C., Research Division - Associate [7]

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Okay. And then, I guess, last question here for me. So uptick in adjusted EBITDA margin this quarter was fairly healthy. Given the strong growth of the offshore business, the utilization and acquisition of PSL, do you think you'll be able to maintain, maybe if not, even expand adjusted EBITDA margin for the remainder of the year? And then real quickly, maybe just a housekeeping item, what was the organic growth this quarter?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [8]

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Yes. Organic growth was just about 1%, somewhere about 0.5% to 1%. And yes, actually, I think we've seen good evidence that we're going to be able to sustain that utilization level. And again, I have to caveat everything I say with barring any other unforeseen event, I do expect that we'll have decent adjusted EBITDA expansion for the year. Somewhere around 100 to 200 basis points is even possible, but I think we'll be over 100, at least for the year.

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Operator [9]

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Your next question comes from the line of Surinder Thind with Jefferies.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [10]

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I'd like to start with a question about guidance. I was, I guess, a bit surprised that you didn't provide guidance for at least for the third quarter. Can you maybe talk about the level of confidence that you need to see to be able to reimplement guidance at this point? Given that we're 1/3 of the way through the quarter, what is the source of uncertainty at this point?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [11]

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It's just the macro environment. If you were to tell me that something bizarre wasn't going to happen in 2 weeks, we would have guidance out there. I just think the environment that we're in. And obviously, we are in good company. Most of our peers and competitors are following the same course. And I can't speak for them, but I would imagine it's the same reason. They have the same outlook we do, the same 2 months, to your point. But I think in this environment, it's just so turbulent that it's the wiser course.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [12]

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So I guess, as a follow-on. When I kind of think about -- can you maybe provide a little bit of color of the types of conversations you're having with clients? It sounds like things are looking up. Things are maybe not as bad as they were feared 3 months ago, but, at the same time, it seems like, is it fair to say that clients are still making kind of last-minute decisions in terms of go, no-go when it comes to projects at this point? And that's kind of the source of uncertainty?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [13]

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Yes. I wouldn't say it's like that as much as sales cycles are extended. So I think it's more just a cautious, taking a little longer to make the decision. It's -- I don't think it's so much go, no-go. It's more when. And our pipeline reflects that. The deals that are getting a little extended out are still there. We know the clients still need the work. It's a matter of when they're going to get started. And quite honestly, I think their -- I can't get in their head per se, but what we're hearing from them is very similar to what I mentioned to you, is, I think, just the general uncertainty in the environment has them more cautious than normal, although we are seeing improvement in that. So we did see bookings come around in Q2 that had slipped from Q1. And we're seeing that environment right now as it relates to picking up some of these projects that maybe were slated to close a month or 2 ago. They're still there, and they're looking now to move ahead with many of those. We've got a number of things on the table right now that fit that category.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [14]

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That's actually quite helpful. And then following up on the question about the organic growth. I noticed that your offshore organic revenue growth was mid-teens plus. So in -- while your overall growth rate was slightly positive, so is the idea that clients are, at this point in time, heavily favoring offshore solutions or cost-consciousness is part of that equation at this point? And is that how we should be thinking about things on a go-forward basis?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [15]

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That's right. And I think that's part of it, but, actually, I would tell you that we've built up a very formidable digital capability offshore that I would argue is fairly unique. And I'll back that up with the fact that our Indian bill rates are $35 an hour on average, right? So that's the average bill rate, and that's substantially above our offshore competitors in India. And the reason for that is the different skill set, more experienced and deeper skills, specifically around digital. So as we're able to deliver that obviously at a more cost-effective rate to the client, they've really embraced it. So I would actually say we're selling it more. We get 50% gross margin there. It's a -- but it's a hybrid.

We're -- I think one of the things that's a unique differentiator for us is we've got an incredibly deep and capable onshore component, which is very critical on digital delivery. There's a lot of highly iterative, high-touch customer journeys that really require on-site or at least onshore capability, but that can be backed up, particularly in the development cycles with offshore. But again, these are digital skills. These are not sort of run-of-the-mill commoditized skills. So I think we've got a unique offering. It's an offering that we are highlighting and marketing more and more. And those are the reasons, I think, that offshore is growing at a pace above onshore. Of course, clients always will want to bargain, so that's part of it as well.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [16]

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Fair enough. And then maybe one last question on headcount. It looks like there was like a modest quarter-over-quarter reduction in your North America headcount, and it looked like it was across the board, so whether it was billable employees, contractors or even support staff. So how much of this was voluntary? And then maybe how much was attributable to maybe managing costs?

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

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The vast majority of it is voluntary, and in some cases, it's performance-based. We've tried to manage that in this environment the same way that we always do. So when there are performance issues, we deal with them. And as we've had voluntary attrition, given that we're sort of flattish right now, we've not gone out and hired back or backfilled. So most of it's coming from that. There's been, like I said, some other performance-based reductions.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [18]

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Fair enough. And then just related to that, it looks like on the -- the offshore headcount, adjusting for the acquisition, that the headcount was relatively unchanged quarter-over-quarter. Given the growth that you're experiencing there, should we expect that headcount to tick up? Or is there capacity there at this point that you can tap into? How should we think about that?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [19]

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Yes, it's both. I think we do have capacity there. We can let utilization come up a little bit from where it's at now. We intentionally keep it lower so that we can ramp projects quickly offshore. That's the nature -- tends to be the nature of their engagement. So I do think we'll be doing some hiring, at least I hope we do, because I do believe we're going to continue to see that mix shift. But I think it'd be a combination of the 2. We'll certainly have -- let utilization rise a little, but also do some hiring judiciously.

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Operator [20]

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Your next question comes from the line of Mayank Tandon with Needham.

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Mayank Tandon, Needham & Company, LLC, Research Division - Senior Analyst [21]

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Jeff and Paul, I just wanted to -- not belabor the point on the guidance issue, but could you talk about the contribution from M&A that you're expecting for the full year? Obviously, you get the benefit from the recent Colombia acquisition. And then on that note, could we maybe assume a modest uptick in sequential revenue growth based on your comments? And then layer in the M&A, would that be a good way to sort of think about the numbers for the back half of the year?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [22]

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Yes, I think that's fair. As I mentioned, I think stable here is kind of where we see ourselves now. So I think -- I think, yes. And then by the way, on PSL, as we advertised, it's about a $33 million business. So I think we're looking at $8 million to $9 million a quarter for that. So does that answer your...

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Mayank Tandon, Needham & Company, LLC, Research Division - Senior Analyst [23]

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Got it.

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

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Yes?

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Paul E. Martin, Perficient, Inc. - CFO, Treasurer & Secretary [25]

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Mayank, sorry, one clarification. We had about $1 million of revenue from PSL for the stub period from acquisition close through the end of Q2 just to factor that into your thinking.

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Mayank Tandon, Needham & Company, LLC, Research Division - Senior Analyst [26]

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Okay. That makes sense. And then I wanted to just -- I know every company defines digital differently, but I wanted to get your take on, what do you think is truly digital for you? And how do you see that growing over time? One would think that's the area that's seen the acceleration, at least in terms of client conversations today. And hopefully, that's going to translate into deals over time. So if you could just help us sort of frame the digital piece. And then what's the balance? And what do you think is the growth profile for that piece of the business, vis-à-vis the digital segment?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [27]

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Yes. So we tend to go with the Altimeter Group definition: Social, mobile, analytics, cloud; SMAC. And I think the cloud is the maybe more debatable one. And if you have a liberal definition of cloud, we do a lot in the financial area in terms of OneStream, Hyperion and things like that, that are cloud-based now. So you could include them or not. We don't, actually. I think we have a conservative view. But I would tell you that our digital-based business is likely 70% to 80% of our business today. We've been working on shifting that. Well I would actually say that we started there before digital was a thing. So we had a lot of it to begin with. But we've been shifting our focus there over the last 5 years, so 70%, 80% of the business today following that definition.

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Mayank Tandon, Needham & Company, LLC, Research Division - Senior Analyst [28]

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Okay. That makes sense. And then, finally, a couple of housekeeping items. I think maybe Tom or Jeff, you talked about the number of deals that were $0.5 million-plus. Could you remind us what that number was? I think we missed that. And then also just on pricing, what you're hearing from clients, it sounds like pricing actually is holding well or even maybe upticking a bit. If you could just provide some clarity around that.

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [29]

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Yes. It was 66 deals above $0.5 million, and -- I believe. Is that right, Tom?

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Thomas J. Hogan, Perficient, Inc. - COO [30]

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That's correct. Compared to 62 a year ago.

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [31]

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There you go. Thank you. And yes, ABR up 3.6% year-over-year, which is impressive. Obviously, that ABR is coming from -- mostly from deals. Not that we're closing -- that's revenue-based, right? So those are deals that we closed in the past. But we're maintaining a good pace on ABR, which I do think, again, validates our positioning.

And in terms of growth overall, some of this is being driven by offshore, of course. Well, much of it is, but I do want to mention that our organic billed hours were up 5% year-over-year, again, most of that driven by the increase in offshore relative to onshore.

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Mayank Tandon, Needham & Company, LLC, Research Division - Senior Analyst [32]

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Right. That's very helpful. Congrats on the results.

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [33]

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Thanks, Mayank.

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Operator [34]

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Your next question comes from the line of 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 [35]

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I just wanted to touch quickly on demand. It sounds like, but I want to make sure, from May to June to July, I guess, as businesses are reopening, are you seeing demand slowly recover in each month? Or are we seeing more stable kind of demand?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [36]

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I'd say slowly. It's stable with pretty modest growth is what we're seeing right now. But it appears to us that, at least, again, barring any other shoe dropping, that from a revenue standpoint, April was probably the bottom. So we've seen an uptick on a normalized basis if you factor out holidays and vacations and things like that. We have seen an uptick sequentially month-over-month, April to May and May to June and June to July.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [37]

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Great. And then is there any way to quantify, whether it's a number of projects or dollar value, that you think projects were delayed and discuss how those projects are moving forward or when they might?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [38]

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Okay. So the latter is difficult to tie back, but we have -- yes, we've estimated that, I think, conservatively, so far, for the year, we've got an impact of in excess of $20 million as a result of projects that were either put on hold, outright canceled, which we didn't see much of, by the way. And we saw very little of things that were in flight, I mean, meaning work that was in flight, that we were in the middle of a project. We didn't see many cancellations of those nature at all, with the exception of one kind of significant client that declared bankruptcy, but in the overall scheme of things, not a huge impact, about $3 million for the year. And even they, I think, are going to come back and restructuring. They've already reached out to us to begin some work there. So generally, it's been just delayed starts, if that makes sense. And we're seeing -- and clearly, I can tell you that we are seeing some of those come back around now, definitely. Whether it all will or not, it's hard to say.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [39]

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Are you able to talk -- it sounds like bookings were pretty strong. Are you able to discuss the 1 or 2 industries where you saw demand the strongest? And then maybe can you talk about the 1 or 2 industries where you're seeing the most caution?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [40]

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So that's a good question. I think -- like I said, I think it's pretty universal where we've seen good demand. For us, it's hard to dissect a single quarter of bookings because they tend to be very lumpy. So I would point more to a trend. And I would say that it's hard to discern. And there's some surprises, I can share with you, which are automotive and manufacturing and industries that are pretty impacted, but they were forging ahead. And in fact, in a couple of cases, our relationship's actually expanding. So we were very happy with that. I think the one industry that we have a fair amount of exposure to that I'm probably most cautious about is health care. But even there -- and the hospital systems obviously have been impacted by elective surgeries and things like that.

We've got a big relationship, as you know, in that space and then several others. But resiliency seems to be the order of the day. And in fact, in some cases, we've actually seen some of these hospital systems in this environment actually shift their focus more to sort of accelerating and moving ahead with some of the things that they needed done strategically and from an ROI standpoint because, frankly, they have a little more time to do it. So, so far, we've not seen any impact there. If anything, we've seen maybe the opposite. And Tom mentioned a life sciences client earlier that we've been working with for a while, where we've actually helped them build a complete custom clinical management system that is open source. They're going to be sharing with other peers. And now they're specifically using that for COVID-19 trials. So we are seeing some incremental revenue as a result, helping to offset obviously some of those delays.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [41]

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Great. And then your response to Mayank's question on price suggested that we're seeing the bill rates of 6 months ago or 9 months ago's bookings. Can you talk about, during this pandemic, has pricing held to those levels to that we'll see bill rate sustained here or even marginally higher? Or should we expect you've had to see marginally lower bill rates to win work during the pandemic?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [42]

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Yes. We've been more aggressive. It's not -- I wouldn't say it's competitively so much. Certainly, candidly, there are some desperate players out there, but I think we've got great differentiation on skills, as I mentioned earlier, and we're seeing that bear out. But we've gotten creative with some clients who, for any variety of reasons, were hesitant to move forward. Maybe in some cases, those are just terms, maybe some deferred payments, things like that, so we might see DSOs go up slightly. These are obviously all creditworthy, viable clients where we've done that.

And in some cases, we've gotten more aggressive on rates, but where we've done that, it's been on a temporary basis, where we would agree that, hey, this is "during COVID environment". And we're going to be revisiting in 6 months whether the COVID rates still apply as it were. So we might see maybe a leveling. I don't think we'd see a drop probably, maybe a slight drop. But of course, with the 3.6% increase, we've got some room to actually maintain utilization at 80%. We've got really strong gross margins. And the mix shift, of course, helps with that.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [43]

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Great. Last question. You mentioned you think you have a specialty skill set in India. So what do you need to do to ensure that the employee churn, which is pretty high in India, remains as controlled as possible for your company?

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

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We do a lot of things culturally. We also involve a number of our folks in India in a phantom stock plan, which is unique there, by the way. So they get to participate in some of the equity as well virtually, if you will, and again, phantom-wise. But I would attribute it to culture. And actually, they enjoy the work. The work that we're doing relative to what most people are doing in India centers is more -- maybe not cutting edge, but leading edge. It's more interesting. It's more challenging. The projects are quicker. So that you're not just sitting around for 2 years doing the same mundane job over and over. So I'll tell you, pre-COVID and certainly now, our attrition rates in India have been phenomenal, lower certainly than our peers and lower in many cases than even our onshore attrition rates. We run below 15% in India, and right now, it's even lower than that. So we've always had great success there. And again, I tribute it to those things.

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Operator [45]

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(Operator Instructions) Your next question comes from the line of Vincent Colicchio with Barrington Research.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [46]

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Yes. Nice quarter, Jeff. I'm curious. Some other players out there are benefiting from other vendors that have struggled with transitions. Are you seeing any of that?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [47]

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Yes, absolutely. Yes, I wouldn't say it's huge, but it's part of the reason that our offshore grew 16% in the quarter. We picked up some work from those that struggled.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [48]

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And with the PSL acquisition, and I know it sounds like you guys are optimistic that there's going to be a good amount of interest from your existing client base. I'm curious sort of what your vision is longer term. Can the capacity be a lot larger than it is today in Colombia? And in the more near term, could you rapidly expand capacity in response to demand?

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

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Yes, absolutely. I think both near and long term, that was one of the things we absolutely vetted as part of our -- first, our search, and then our diligence. So great university systems there, the locations that we picked up are near universities. The universities have shifted very much to a STEM focus. So I think there's plenty of capacity, both near term and long term.

And as importantly, it's a phenomenal leadership team there. The business is mature. It's been around for 20-plus years. And a lot of the leaders there have been there -- the key folks have been there 10-plus years or even the 20 years. And so I think they've got an infrastructure, both in terms of management as well as systems as well as methodology. I don't want to get too technical, but Carnegie Mellon SEI, Software Engineering Institute, CMMI Level 5 certification, one of the very first. I think they were 1 of the first 8 in the world to achieve that. So they're highly disciplined, which makes the quality phenomenal. So I think all those things combined make it very scalable.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [50]

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In recent quarters, you've talked about your newer salespeople sort of coming along. Are you feeling the same way, recognizing this is a tough environment?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [51]

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I am. I still think that, that thesis is very intact, a little stunted by the current environment, as you point out. But absolutely, I feel really good as things continue to improve that we're going to continue to see dividends from that.

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Operator [52]

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Your next question comes from the line of Jack Vander Aarde with Maxim Group.

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Jack Vander Aarde, Maxim Group LLC, Research Division - Equity Research Analyst [53]

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Great quarter. So I'll start with just services gross margin was a positive surprise, at least relative to my expectations, given the 3 acquisitions closed during the first half of '20, all of which I believe have higher-margin profiles than the core business. Just a couple of things. Would you expect services gross margin then to further improve in 3Q and 4Q just because PSL kind of came towards the end of the quarter, and that was the largest and, I think, most accretive acquisition? So does that support a fairly confident outlook for gross margin to improve sequentially?

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

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It does. And PSL will definitely be a contributor, no doubt, very accretive, to your point. I think they run about 50-plus percent gross margin. We're approaching about 40% adjusted gross margin. So that's going to help. But also, clearly, 3.6% increase in bill rate and a 2-point increase in utilization is going to help drive higher gross margins as well. So I mentioned earlier 100 to 200 on EBITDA. There's obviously adjusted EBITDA. There's obviously some scale-down there. So I think 100 to 150 maybe on gross margin is a reasonable expectation, again, barring anything unforeseen.

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Jack Vander Aarde, Maxim Group LLC, Research Division - Equity Research Analyst [55]

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Got you. That's helpful. And then you also -- a lot of comments and questions have been referencing the increase in ABR for North America. And maybe I missed it, but just to be clear, was there any -- was this a structural price like across the board increasing your rates? Or is this just kind of more of an increase in mix of projects that are more premium-priced historically for maybe they're more complicated projects or something? Was it a structural intentional increase? Or was it just more of a mix?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [56]

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It was definitely intentional. And to your point, I do think we've got higher value solutions out there that are also helping to drive higher bill rates. But this is definitely structural. It's something -- Tom became COO about 1.5 years ago. It was almost -- 2 years ago almost. And it's some process and discipline that he put in place that's had an impact right away, and that's what you're seeing.

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Jack Vander Aarde, Maxim Group LLC, Research Division - Equity Research Analyst [57]

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Okay. Great. And then just kind of lastly, sticking on the ABR subject. So outside of North America, I'm not sure if I can find it in any of the materials yet, but did your offshore or just non-North America ABR increase? And what factors contributed to that, if it changed at all?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [58]

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I want to say -- and I don't have it right in front of me, but I want to say it was about flat. I know it was within $1 or $2 of $35. So we're not driving as much increase there. Our concept there is more volume. We don't want to drop the rates. We want to maintain -- we're already getting 50% to 55% gross margin, right? So that's great margin. We just want to focus on driving as much volume there as we can. And frankly, again, that's both tactical and strategic. We want to do that as a first-mover advantage, where I really believe we've got some unique offshore skills that a lot of our competition hasn't figured out how to build yet. So we want to stay ahead of them. We want to leverage those great margins, but we're happy to keep the rates there flattish. And that's what helps us drive higher North American rates is getting a blended rate on an engagement, leveraging the offshore that brings down the overall rate to the client, but still delivers good margins to us.

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Jack Vander Aarde, Maxim Group LLC, Research Division - Equity Research Analyst [59]

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Got you. And then just lastly, organic growth, I think you mentioned, was less than 1%, somewhere around 0.5%, 1% or something for this quarter. I guess, as we look, do you expect a linear -- I know you're not providing guidance, but are you reasonably confident that you'll see organic revenue growth on a year-over-year basis uptick pretty linearly in 3Q and then again in 4Q? And does that also -- would that also assume the North American ABR increase that we saw this quarter to kind of be maintained or increase further?

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [60]

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Yes. We talked about ABR a little bit that it will -- I think it will be maintained. We might see it drop slightly where we've been creative with some clients and offer some discounts where we needed to, to get them to move forward at all. So that's the comment on ABR.

Yes, in terms of growth, there's not a lot I can say there. I think we've got some work to do in terms of getting some of this. We've got a fantastic weighted pipeline that we need to get closed. And again, I refer back to what I said earlier about just delayed decisions or slower sales cycles. So I think we need to see that improve before we can really see substantial growth. I'll go back to what I said earlier is I don't see us going backwards from here in terms of year-over-year growth. I mean I know that, that was modest in Q2. We're hoping for some upside in Q3. And we feel pretty good about it, again, barring any unforeseen event. But if we were real confident, we would have put guidance out.

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Operator [61]

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And there are no further questions at this time. Mr. Davis, I will turn the call back over to you for any closing remarks.

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Jeffrey S. Davis, Perficient, Inc. - Chairman, President & CEO [62]

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All right. Well, thank you for your time, and thank you for your patience. I'm excited about where things are at. And I think things are absolutely looking up. We're looking forward to a strong Q3 and the opportunity to report that back to you in about 90 days. Thanks for your time. Take care.

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Operator [63]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.