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Perficient Inc
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Ladies and gentlemen thank you for standing by and welcome to the Quarter 3 2019 Perficient Earnings Conference Call. [Operator Instructions]
I would now like to hand the conference over to your speaker today Mr. Jeff Davis Chairman and CEO. Please go ahead sir.
Thank you this is Jeff Davis. With me on the call today is Paul Martin our CFO; and Tom Logan our COO. I want to thank you for your time this morning and as typical we have got about 10 to 15 minutes of prepared comments after which we'll open up the call for questions. Before we proceed Paul, would you please read the safe-harbor statement?
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've also posted a slide deck which includes a reconciliation of certain non-GAAP guidance to the most directly comparable financial measures prepared in accordance with GAAP on our website under Investor Relations. Jeff?
Thanks Paul. Well once again thanks for joining. We're pleased to be with you this morning to discuss our third quarter results. Coming to the year we communicated our expectations that 2019 will be a strong year and that's certainly been the case through the first 3 quarters. We're building our momentum and we're confident that fourth quarter will put an exclamation point on milestone year for provision. As you saw in the release, we're again raising guidance. There are a variety of factors powering our performance some external but many of which are in our control and we believe sustainable. Obviously, there's some benefit from a macro wins in our back. And of course there's a long-term force of digital transformation at play something in our view is a permanent reality now for enterprises not a trend or anything cyclical.
The new normal to thrive in many instances survive is a state of confident level. However we're confident that we're well positioned to outperform in any market environment because of the DNA of our firm the strategic decisions we've made in recent years and the investments we're continuing to make now. At our core forward flexible fluid and evolving always balancing our focus on what's now and what's next. A great example of that is our ability to do business which is now approaching $100 million business that practice didn't even exist a few years ago and we saw the market evolving greatly the investment and organically built most of what exist today from the ground up. We did a couple of acquisitions along the way to build breadth and depth. And just a week or 2 ago we earned the platinum partner status with Adobe. We've talked a lot on recent calls about the capacity we've added from a sales perspective and that's absolutely fueling our success.
And there's more dry powder there as our newer members of the team continue to gain experience and knowledge. Equally important and something I want to share a bit more context on is the expansion and enhancement of our digital offerings and business in recent years. Despite the fact that we've always been delivered – we always delivered the digital-oriented work and had great shots around user experience and front-end design several years ago we were perceived primarily as a systems integrator. We certainly had deep roots there so that reputation was understandable but we weren't be able to truly capitalize on our all that was possible because we fully understand our digital capabilities. So we set out to change that. First via the introduction of Perficient Digital and then through a rapid build of skills in marketing and sales messaging.
And of course we strengthened the portfolio building breadth and depth organically and via acquisitions in areas like mobile application development search engine optimization marketing automation e-commerce and more. And now we are pursuing far more every opportunity and winning much more customer experience business than ever before. We are routinely selling to Chief Marketing Officers and Chief Digital Officers and we are taking share because they now realize Perficient unlike many of our competitors genuinely possesses the true end-to-end capabilities they are all in dire need of. We are not an agency trying to become a consulting firm or an integrator trying to bolt-on a creative component. We're the provider capable of integrating it all seamlessly and designing amazing digital customer experiences that actually work. We're talking about big work for big brands.
We recently extended our agreement with the world's largest vehicle fleet operator to continue optimizing their digital properties for the next 3 years delivering QA testing and establishing a system of government – governance for more than 70 digital properties across that business. We're building the e-commerce platform for the electric vehicles subsidiary and one of the world's leading automobile manufacturers. Using the integrated platform electric vehicle owners can now purchase charging products for their home as well as subscriptions to use the manufacturer's network of charging stations throughout North America. We also just won work with a luxury department store chain helping to digitally transform how they communicate with their customers. Not only would the retailer be able to provide a better customer experience across all major communication channels but they'll gain the ability to make more informed business decisions based on those interactions. And I want to underscore that while we're having all this success there is a tremendous internal effort and energy around operational excellence and ensuring we are doing the things necessary to support the rapid scale of our business. And Tom is going to provide a bit more color there and a few other notable details after Paul shares the financial results for the quarter.
To wrap up I'll provide our outlook for the fourth quarter and full year and then we'll take questions. Paul?
Thanks Jeff. Services revenues were $144.1 million for the third quarter of 2019 a 17% increase over the comparable prior-year period. Services gross margin percentage for the 3 months ended September 30 2019 excluding reimbursable expenses and stock compensation increased 240 basis points to 40.2% compared to the prior-year period. SG&A expense excluding stock compensation increased to $31.7 million in the third quarter of 2019 from $26.7 million in the comparable prior-year period. SG&A expense excluding stock comp as a percentage of revenue increased to 21.9% from 21.5% in the third quarter of 2018. Adjusted EBITDA for the third quarter of 2019 was $25.3 million or 17.5% of revenues compared to $19.5 million or 15.8% of revenues in the third quarter of 2018. The third quarter included $4 million of amortization expense which is consistent with the prior-year period.
Net interest expense for the third quarter of 2019 increased to $1.9 million from $0.8 million in the comparable prior-year period primarily due to noncash amortization of debt discount and issuance cost associated with the company's convertible senior notes offering completed in September of 2018. Our effective tax rate for the third quarter of 2019 was 29.7% compared to 25.3% in the third quarter of 2018. The increase in the effective tax rate was primarily due to one-time items in the quarter. Net income increased 55% to $9.8 million for the third quarter of 2019 from $6.3 million in the third quarter of 2018. Diluted GAAP earnings per share increased to $0.30 in the third quarter of 2019 from $0.19 in the third quarter of 2018. Adjusted earnings per share increased to $0.56 a share in the third quarter of 2019 from $0.41 in the third quarter of 2018. See the press release for full reconciliation to GAAP earnings.
I'll now turn to the year-to-date results through September. Services revenues were $418.2 million for the 9 months ended September 30 2019 a 15% increase over the comparable prior-year period. Services gross margin percentage for the 9 months ended September 30 2019 excluding the reimbursed expenses and stock compensation increased 220 basis points to 39%. SG&A expense excluding stock compensation increased to $92 million for the 9 months ended September 30 2019 from $78.4 million in the comparable prior-year period. SG&A expense excluding stock comp as a percentage of revenue increased to 21.9% for the 9 months ended September 30 2019 from 21.4% in the comparable prior-year period. Adjusted EBITDA for the 9 months ended September 30 2019 was $68.5 million or 16.3% of revenues compared to $54.8 million or 15% of revenues in the comparable prior-year period. 9 months ended September 30 2019 and '18 included amortization expense of $12 million.
Net interest expense for the 9 months ended September 30 2019 increased to $5.6 million from $1.7 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 issued in September of 2018. Our effective tax rate for the 9 months ended September 30 2019 was 25.9% compared to 25% in the comparable prior-year period. Net income increased 48% to $25.3 million for the 9 months ended September 30 2019 from $17.1 million in the comparable prior-year period. Diluted GAAP earnings per share increased to $0.79 a share for the 9 months ended September 30 2019 from $0.50 a share in the comparable prior-year period. Adjusted earnings per share increased to $1.49 for the 9 months ended September 30 2019 from $1.13 in the comparable period up 32% year-over-year. Our earning billable headcount as of September 30 2019 was 3111 including 2846 billable consultants and 265 subcontractors.
And again SG&A headcount was 513. Our outstanding debt net of unamortized debt discount and deferred issuance cost as of September 30 2019 was $123.5 million compared to $120.1 million at December 31 2018. We also have $36.4 million in cash and cash equivalents as of September 30 2019 and our balance sheet continues to leave us very well positioned to execute against our strategic plans. Finally our day sales outstanding on accounts receivable were 74 days at the end of the third quarter compared to 77 days at the end of the third quarter of 2018. I'll now turn the call back over to Tom Hogan for a little more commentary. Tom?
Thank you, Paul. As Jeff mentioned earlier, we really been focused on proactively identifying opportunities to move the needle operationally. And these efforts are translating into the improved ABR and utilization you're seeing which impacts margins in a meaningful way. This group of senior executives and leaders spearheading a broad array of multiphase – multi-faceted initiatives designed to even further improve our operations and simplify our colleagues’ lives. So collectively we can all focus even more on gaining and growing our customer relationships. Fundamentally what we're doing is that we're planning for our future. We recognize that if we grow Perficient revenue to $1 billion and beyond the organization will require some different technologies tools and processes that we do today.
There's inherent difference in running a business with say 10000 employees than there is what we have today. So we're looking across the board of technologies and the business processes we used to fund organization and how we can further simplify our colleagues’ lives to ensure our overwhelming focus remains on our customers and advancing their businesses. For example we are driving improved utilization right now with a rigorous focus on resource management and we'll continue to do that. But we also appreciate that balancing supply and demand modeling with lot of scenarios and aligning talent with opportunities will be inherently more complex when our global workforce doubles or triples in size. So we're planning for this complexity. As we continue to grow our footprint in the years ahead at these very large accounts there are additional complexities that we're trying to address now as well. For example how do we create the velocity and scale when we need to.
As we penetrate more broadly into these very large accounts how do we ensure different work streams across multiple departments and lines of business well-coordinated in a fashion that drives mutual success for our customers and Perficient. The business is going to be materially larger in the years ahead. We're just investing time and energy to make sure that we are scaling the foundation properly. So we give ourselves the best opportunity to drive the same double-digit growth that we're seeing now in the future. Turning our attention back to the quarter. We put 49 deals greater than $5000 during the quarter that compares to 45 deals greater than $5000 during the third quarter 2018. Notably we booked a meaningfully large number of deals and it's here just below than we did in the prior year quarter.
Health sciences remains an industry driving meaningful growth for us and one where we continue to build a strong reputation in client roster. Health sciences represent 32% of revenue during the quarter followed by financial services at 16% and automotive and manufacturing each representing 10% of revenue. Also worth noting in terms of its impact on growth and profitability is the success we're having with our differentiated approach to global delivery and we are rapidly accelerating integration of our global delivery teams in much of our work. You might have seen the release we issued earlier in the quarter around the investments we've made collectively tripled our space in Chennai Nagpur and Bangalore India. In third quarter offshore revenue and hours’ volume were higher than they've ever been. Hours’ volume in particular was up 23% versus the prior year period. As we've talked about before offshore to be a slight headwind to top line but we also see it's critically important to competitively and also make sure we are a key driver to margin expansion. To note the expansion of the India space is of course because we continue to participate rapid growth of our offshore teams and their contributions.
And with that I'll turn things back over to Jeff for fourth quarter outlook and updated full year guidance.
Well thanks Tom. So in summary we continue to fire on many cylinders and succeed on several fronts. We are winning new logos gaining share and systematically building a much larger and more powerful business. We are growing bigger and better for our customers our colleagues and our shareholders. And we feel great about the future and our trajectory. We expect to end 2019 strongly and carry that momentum into the new year and get off to a great start in 2020 which we expect will be another very solid year growth. Now returning to guidance. Perficient expects its fourth quarter 2019 revenue to be in the range of $142 million to $148 million. Fourth quarter GAAP earnings per share is expected to be in the range of $0.34 to $0.37. Fourth quarter adjusted earnings per share is expected to be in the range of $0.55 to $0.58. Perficient is narrowing and raising its full year 2019 revenue guidance range to $562 million to $568 million from the previously provided range of $553 million to $568 million. Raising its 2019 GAAP earnings per share guidance range to $1.12 to $1.16 from $1.02 to $1.12 and raising 2019 adjusted earnings per share guidance range to $2.04 to $2.07 from $1.94 to $2.04.
And with that operator we can open up the call for questions.
[Operator Instructions] Your first question comes from the line of Surinder Thind with Jefferies. Your line is open.
Another really good quarter. So congratulations on that. I would like to start with a question about kind of the longer-term outlook for the top line and kind of some of the trends that you guys are seeing within your clients in the industry. Can you talk a little about what would be not necessarily next quarter or maybe next year but what you actually think the longer term potential from an organic growth perspective for the firm is?
That's a great question. And we've talked for a long time about achieving the goal of 10%. But I don't think that's the limit. I firmly believe that we can grow the business beyond that. As I mentioned several times, we've made a lot of investments in sales and I believe it will get us there. And as I also mentioned in the prepared statements, we've got a lot of dry powder here. So we've got investments that is yet to yield result. But it is. We've got proof of that. So I believe beyond 10% probably won't go further than that in terms of predictions but I think 10% should be the bottom and there's no reason we couldn't go substantially above that.
Understood. And then related to that in terms of just the investments that you guys have made with respect to the sales force how far into that cycle should we think about where you guys are getting closer to, I'll say the run rates? So where should we expect kind of be – maybe toward the end of next year and then maybe year after is that kind of where you feel like you might be at a bit of an equilibrium point that you're seeing the full benefit of let's say the investments that you've made over the past 24 months or so forth? I think it's always going to be a little bit of a continued investment but just kind of understanding where we are in that cycle in that cadence?
Yes exactly. I think you hit the nail on the head. It's going to be an ongoing process and ongoing investment. However I think we're seeing meaningful results now and our bookings have been very, very solid and we're seeing an incredible pipeline looking forward. So I think we're seeing results now but if these 12 months go by again that team continues to gain momentum and on a per person basis the productivity increases. So I do think we'll see meaningful results from that next year. And then to your point probably over the next year to 2 it will be more of a steady state but it will continue to be an ongoing investment and ongoing process.
Got it. And then one additional question. Just related to the – as you guys kind of spoke about the strength of the India operations and the ability to move more business over there or conduct more business from their given the higher-margin profiles. You guys have also talked in the past about kind of 100 basis point goal for margin improvement on a year-over-year basis. Obviously, there's some ebb and flow to that number. And talk about – a little bit about the strength of how you're able to ramp up operations there or how quickly? It just seems like things have been going or moving faster than I would have anticipated.
Yes. I think that's great news. It is growing ahead of the rest of the business. And that's by design in many cases. In some cases it's driven by competitive factors obviously budgets by our clients. But we're also aggressively moving into that space because I think we've got a very unique offering in the hybrid approach that we take which again affords us the opportunity to get breaks that demand about 55% gross margin offshore. Our ability to scale there has been very good as you noted. And I think that's only going to continue. I mean we are in the right locations in the right cities and we have the right sort of attractive opportunities for people who want to get out of these massive sort of commoditized offshore centers and work on current technology that's frankly more interesting and more exciting to be engaged in and obviously better for their career. So we've had great success with recruiting there and building that team and great quality coming out of that organization along the way.
Okay, thank you guys.
Thank you.
Next question comes from the line of Maggie Nolan from William Blair. Your line is open.
I wanted to dig into the strength in the quarter was that driven by new or existing clients? And then how have your top accounts performed this year compared to non-top accounts whether that be non-top 20 or non-top 10?
Yes. That's a great question. So we definitely have added a number of new logos this year. It's a big emphasis and focus for us on the sales front. So it's been a combination of both. However our top accounts they have performed well also. Historically I think the CAGR there over the last several years has been 10% to 12% organic but it looks like right now we're running above 15% for the year. Obviously, we'll see how it closes. But we're really able to expand in those accounts. Obviously if they're not increasing their spend at those levels, we're definitely taking share away from competitors. Below sort of that top 50 or even top 100 there is still a share and as we've talked before executing our land and expanding strategy it's our goal to – on a go-forward basis to continue to kind of rationalize the number of accounts that we serve and focus on building them up. So it's a combination of both winning new logos as well as increasing the work that we have in existing accounts.
Okay and then you've done a nice job in increasing your utilization this year. Are you comfortable operating at kind of these elevated levels that you've seen this year? Or do you think utilization in 2020 needs to come back down closer to kind of 2018 levels?
I'll let Tom answer that.
I think our utilization – we have some nice room in the business some are higher some are lower. But I think we're investing in the right areas to enable us to help with increased sales and to grow the business. I think the utilization around that 80% is still a good number as we look into 2020.
Right. And then one more for me the organic growth rate in the quarter?
It was about 13%. I want to point out there was an extra day in the quarter. So if you kind of normalize that on a year-over-year basis by the way it's kind of normalize there to around 11%. And our guide for Q4 is I think the midpoints around 9%.
Thank you.
Next question comes from the line of Mayank Tandon with Needham Incorporated. Your line is open.
Congrats on the quarter once again. Wanted to go back to the organic growth. So based on what you just said 11% for the third quarter 9% in the fourth quarter. So let's call it you're going to end up somewhere in that what 10% number for the full year. If that is the case how should we...yes go ahead sorry.
I want to say the guidance is actually 9% to 10% for the year.
Right. So that's obviously a tremendous acceleration from prior years. So great to see. So just in terms of 2020 thinking about the trajectory of growth could you maybe provide some insights based on the budgets I know it's still early in the game but the feedback from clients the spending levels within your core client base what's your confidence level at this point that you could replicate '19's organic growth in 2020?
It's excellent. I think we can exceed the 2019 actually the way things look right now. But the pipeline hard and fast dollars as well as the anecdotal to your point that we're getting back from our clients is no slowdown at all anywhere. And we're seeing more and more opportunity. I think there's a couple of reasons for that. As I mentioned in the beginning, I think the macro environment is pretty good. But I think the other factor is the digital sales capacity that I keep emphasizing but I think it's really important and the new logos that we've added. We've added a number of what we consider the enterprise accounts this year that enterprise accounts have the potential to be $10 million plus annual accounts for us. So that's what we're going after and that's the portfolio we're building.
And I think we're in early stages in many of those relationships where they're going to yield more and more growth and probably accelerated growth. If you think about the initial relationship starting at say $250 000 to $1 million. And by the way many of them actually start multimillion but a lot of them start $0.5 million something like that and we can turn those accounts into a $5 million account in a year. You can begin to sort of size up the kind of growth implied there. So I feel very good about next year. I feel very good about the 9% to 10% we put up this year and I believe we can beat that next year.
And then one final question on margins. I think in the past you've said 100 bps on services gross margin 100 to 150 on EBITDA. Is that still the model going forward as you look into 2020?
Yes. I think – yes so, our guide, right? Good question. So our guide here if you back into right around the midpoint puts us at about 150 actually on both of those for this year. Going into next year I think another 100 is very doable. As Tom mentioned utilization is probably sustainable but probably about levered out. But we've got a lot of leverage both within the delivery organization. We've got offshore delivering very high margin and we have economies in SG&A. So another 100 to gross margin 50 to 100 maybe next year yields 100 to 150 again in EBITDA I believe.
Thank you.
Next question comes from the line of Vincent Colicchio from Barrington Research. Your line is open.
You had a nice increase in the contribution from healthcare. I'm wondering is that the ramp up of your large project? Or are you seeing broad-based growth there?
It's both. We continue to gain share in those large accounts there and our medium-sized accounts I guess starting to mid and large accounts within the health science space but we've added a number of very meaningful new logos there this year as well. That – some of which actually start off with a pretty large run rate multimillion as I said but some of which are starting off a little slower that we think will accelerate going into probably the second quarter or so next year.
There's one thing I'd add on healthcare is we've gotten certified in India and are doing work with a number of healthcare providers. And as we got the first couple of those completed and snowballing, we're getting additional accounts in there and we're seeing that as growing.
And what verticals and solution categories were strongest in terms of bookings growth in the quarter?
Health care continue to lead the way. I think we were 32% revenue despite 35% in bookings. And really it continues to be sort of the same profile as healthcare. Its financial services and we continue to do really well in automotive and manufacturing particularly manufacturing which I think is an underserved market within our industry. And we really did a nice job of penetrating and growing. So I think all of those grew nicely or contributed nicely to bookings within the quarter. And I wanted to say that each of those bookings was probably a little ahead of the revenue. So we're seeing growth continuing on a relative basis in those top 4 verticals.
The headcount growth is accelerating in offshore in recent quarters and you had that press release. Should we expect that double-digit kind of year-over-year growth to continue into the foreseeable future on the offshore side?
Yes definitely. Our expectation is we're getting things a better visibility I would say a little more crystallized. And again being proactive in driving that. I would expect offshore to continue to grow probably a solid 5 points or more ahead of the rest of the business. So if we're putting up 10 plus next year as a business, I would expect offshore to be 15 plus maybe more.
Thank you.
Next question comes from the line of Allen Klee from National Securities. Your line is open.
Pricing represented what percent of the year-over-year increase?
ABR was up Tom about 2% I believe year-over-year, right?
Yes right 2%.
Okay. And as your salespeople have been working with clients and potential clients have you heard any feedback of the changing of time of how long it takes to close deals?
I would say sales cycles remain sort of consistent. I don't think they have extended or contracted appreciably over the last year or so. So on a year-over-year basis it's been pretty consistent. 60 to 90 days I think is our typical cycle.
Great. And how do you feel about the health of your M&A pipeline?
The pipeline is quite good. We've had – we've been to the altar a couple of times where we have taken a pass. We're very selective and very strategic in how we go about acquisitions. So we certainly could have done some more deals this year by now. But again we're very choosy. So that said we do have a number of high-quality opportunities in the pipeline. Unlikely they will actually close something before the end of the year that's not impossible but I would expect us to get a deal or 2 done in the first quarter next year.
Next question comes from the line of Jack Vander Aarde from Maxim Group.
And following up with another great quarter performance. Could you just quickly clarify for me again on your midpoint organic growth guidance of around 9% I believe you mentioned was that for 4Q or is that for the full year?
That's 4Q.
And they – we're very excited on the year which is like 9% to 10%. So literally 9.5% at the midpoint for the year. Got it. And then if I just follow up, I'm not sure if you're able to provide this or not but how is Sundog the acquisition of Sundog performed from a revenue contribution perspective relative to, I think your initial outlook was for a run rate of about $14 million?
Yes. I don't know that I can give you the specific numbers but certainly anecdotally I will say it's one of the best performing acquisitions we've done. They had a focus on manufacturing that I alluded to earlier. They're really a go-to-partner for Salesforce in manufacturing and we already have manufacturing clients that we're able to bring them into and vice versa. Some they have – they brought to the table were running the portfolio represented there as well. So it's gone very, very well. I would say it's certainly on that run rate. There's no doubt in my mind it's above that but I just don't have the number in front of me.
No problem. And then my last question is as it relates to large deals just real quick what was the total large deal count? I think it was over 500000 is how you track that? What was that in a quarter?
Yes it was 49 deals compared to 45 a year ago.
And then...
But as we pointed out that the tier below that was substantially higher than last year. I can't give you – I don't have the percentages but deals that fell just under the 500000 were up handsomely as well year-over-year.
Got it. And did you have any large deals in this quarter that were maybe unexpected from any particular industry vertical that is kind of new?
I'll let Tom to comment on that.
No. I don't think we have anything out of the ordinary there. I think we have a strong quarter. I think we are excited about Q4 and some nice deals there lining up for Q4 but nothing out of the ordinary no. So no bluebirds.
No question as of the moment. I would like to turn the call over back to Mr. Jeff Davis.
All right. Well thank you all for your time today. I hope you'll agree it was a great quarter for Perficient and we expect another great quarter and another great year next year. We look forward to speaking to you then. Thanks.
Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.