Perficient Inc

NASDAQ:PRFT

Earnings Call Transcript 2018-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Perficient Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

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

[Jeff Davis, President and Chief Executive Officer]

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’ll give 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 repeat the safe harbor statement?

[Paul Martin, Chief Financial Officer]

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 at our website at www.perficient.com. We have also posted a slide deck, which includes a reconciliation of certain non-GAAP goals to the most directly comparable financial measures prepared in accordance with GAAP on our website under Investor Relations. Jeff?

[Jeff Davis, President and Chief Executive Officer]

Thank you, 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 in most recognizable brands in the market, R&D, I guess, on a daily basis. We’re doing all that by operating, outhustling and outperforming competitors many times of our size. We’re winning on multiple fronts, in addition to several month in a row, with 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. 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 where the consistent collaboration is dragging 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 our 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?

[Paul Martin, Chief Financial Officer]

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 three 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 non-cash 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, non-cash 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 bonus increased 10 basis points to 37.5% compared to the prior period.

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, excluding stock compensation and tax-related bonus as a percentage of total revenue, 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 bonus 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, 2017. 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 $3.6 million from $128 million in the prior year, primarily due to the non-cash 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 $0.72 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. Earning SG&A headcount was 504. Our outstanding debt, net of unamortized discounted 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 were 71 days for the fourth quarter of 2018 compared to 76 days in 2017.

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

[Jeff Davis, President and Chief Executive Officer]

Thank you, Paul. We sold 49 deals, north of the $0.5 million reached 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 board. 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 that 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 times 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?

[Operator]

Thank you. [Operator Instructions] And our first question comes from Surinder Thind with Jefferies. Your line is open.

[Surinder Thind, Jefferies]

Good morning. 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 and the $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?

[Jeff Davis, President and Chief Executive Officer]

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, as I’ve talked this in the past that, that’s revenue – we continue to experience better result there, 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 build.

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 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 on the basis of 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 marked well, 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 will drive into the low end with the exception of something that’s completely unknown, a cancellation or something like that. The reason to believe at the end that will happen, we’ve got no indicators of that. But we have to be cautious.

[Surinder Thind, Jefferies]

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 to 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?

[Jeff Davis, President and Chief Executive Officer]

We didn’t see that. I know that others are talking 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.

[Surinder Thind, Jefferies]

Understood. And then one final quick question. Obviously, again, a solid number on the number of large deals that were booked over $500,000. 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 looks 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 billing out maybe more rightsized projects so they want more projects like maybe they can get to completion quicker and they’re offering more of those.

[Jeff Davis, President and Chief Executive Officer]

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 the same place for years. So that customer I’m referring to, that doesn’t want contract that way. It’s been a customer for five, six 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 the contracts.

[Surinder Thind, Jefferies]

Okay. Well, thank you very much. I will get back in the queue for follow-ups. Thank you.

[Operator]

Thank you. Our next question comes from Frank Atkins with SunTrust. Your line is open.

[Frank Atkins, SunTrust]

Thank you for taking my questions. 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 carrying from your clients? And what is demand around some of those areas?

[Jeff Davis, President and Chief Executive Officer]

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 are actually taking on the transition there. So certainly, our relationship with IBM and the pretty interesting relationship we have 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 the early indicators, again, just based on the activity and discussions that we’re having with them. We should be in the capital received there. And I know that IBM is going to put a lot behind driving that growth.

[Frank Atkins, SunTrust]

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

[Jeff Davis, President and Chief Executive Officer]

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

[Frank Atkins, SunTrust]

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?

[Jeff Davis, President and Chief Executive Officer]

It has 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, which we have better visibility each year as well just in terms of, again, in these relationships, but 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.

[Frank Atkins, SunTrust]

All right, great. Thank you very much

[Jeff Davis, President and Chief Executive Officer]

Thanks, Brian.

[Operator]

Our next question comes from Mayank Tandon with Needham & Company. Your line is open.

[Kyle Peterson, Needham & Company]

Hey, good morning. This is actually Kyle Peterson on for Mayank today. Thanks for taking the questions. So I want to see if you guys can touch a little bit more on verticals, growth and strength? And kind of what verticals you guys are positive on heading into 2019 that’s driving some of this growth?

[Jeff Davis, President and Chief Executive Officer]

Yes, absolutely. It’s really the ones I touched on in the prepared remarks. It’s certainly health sciences we’re continuing to be very bullish on. We’re super well positioned there and have additional opportunities to sum it up via the different approaches that we’re taking in that industry. Financial services actually is improving from where it was for us a year or two ago. So we’re seeing some strength there. And of course, retail for us, when I refer to retail, I’m referring to quite nearly 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 is interesting – and as I said this in the prepared statement as well, so 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, in fact, benefits us and I think in the long sale.

[Kyle Peterson, Needham & Company]

All right, great. Let me be shifting a little bit over to kind of hiring trends to kind to war for talent. I know you mentioned that you’ve worked on flattening the pyramid out a little bit, which has helped actually decrease, tune 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 in the margins?

[Paul Martin, Chief Financial Officer]

Yes, it’s a great question. Honestly, not. I think we expect probably the same results. There are certainly our merit-increased pool. It’s going to be the same as last year. 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, with the best experience sometime, it’s just over 15% – Like I said, it’s was 16%, 16.5%, which as this client, we’re really pleased with.

The competition for resources 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. So we’ve actually had great success. It’s been less an attrition issue and even less a competitive issue. And then, frankly, keeping up with our on demand. And as I said earlier, we’re scaling our talent acquisition group to do that. But that’s – the biggest change for us is we’re seeing some nice growth here and some increased demand.

[Kyle Peterson, Needham & Company]

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 headed into 2019.

[Jeff Davis, President and Chief Executive Officer]

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 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 three last year. I hope it 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.

[Kyle Peterson, Needham & Company]

All right, great. Thanks for the color. Nice quarter guys.

[Operator]

Our next question comes from Brian Kinstlinger with Alliance Global Partners. Your line is open.

[Brian Kinstlinger, Alliance Global Partners]

Hi, good morning guys.

[Jeff Davis, President and Chief Executive Officer]

Good morning, Brian.

[Brian Kinstlinger, Alliance Global Partners]

Organic growth has been trending very well. However, in the past, a growth year like 2018 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?

[Jeff Davis, President and Chief Executive Officer]

Yes, that’s a good question. I would say – let me take the step back and find a project to qualify my answer. So for us, a project isn’t necessarily a contract. So a contract is probably averaging $300,000 in six 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 one years now. And those aren’t all, of course, the exact same journey; there are 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.

[Brian Kinstlinger, Alliance Global Partners]

And then in terms of digital transformation, 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 two to three years? Are we talking still five years of growth opportunity? How do you kind of think about that?

[Jeff Davis, President and Chief Executive Officer]

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, actually second, third inning. That’s the beauty of this industry as digital 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 and more IoT devices, et cetera. But the dynamics of the industry are what keeps it running, that’s why I love it so much.

[Brian Kinstlinger, Alliance Global Partners]

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 2019 as your expectation. What was the inhibitor in the last year or two to bill rate growth? And then what’s different do you think this year in terms of the last year or two?

[Jeff Davis, President and Chief Executive Officer]

Yes, we – and we’re talking about this really beginning probably three 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 [indiscernible] flat growth in bill rates. And I do think that we made adjustments to that this year to drive and stack up. However, I still see this steady margin expansion, even if we’re flat again this year.

I still expect we’ll be able to drive margin expansion through the fact as 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?

[Brian Kinstlinger, Alliance Global Partners]

Is that bill rate improvement in 2019 a function of new – contributions from new customers, existing customers? Or is that the acquisitions, I know in the past when you were much a smaller, you’d acquire a company, they have slow – lower bill rates, and you go over those customers and say, you’re part of a bigger opportunity and a better value-added services opportunities, so you’re 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?

[Jeff Davis, President and Chief Executive Officer]

I do think that we have an opportunity with the existing customers just simply through negotiating around cost of moving 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.

[Brian Kinstlinger, Alliance Global Partners]

Great. Last question I have, I may have missed it, but can you talk about, I don’t know, 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?

[Jeff Davis, President and Chief Executive Officer]

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 for the pretty 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.

[Brian Kinstlinger, Alliance Global Partners]

Thank you so much.

[Jeff Davis, President and Chief Executive Officer]

Thanks, Brian.

[Operator]

Our next question comes from Vincent Colicchio with Barrington Research. Your line is open.

[Vincent Colicchio, Barrington Research]

Thanks for taking my question guys. 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?

[Jeff Davis, President and Chief Executive Officer]

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 are 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.

[Vincent Colicchio, Barrington Research]

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.

[Jeff Davis, President and Chief Executive Officer]

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 revenues are coming from 25 or more clients.

[Vincent Colicchio, Barrington Research]

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

[Jeff Davis, President and Chief Executive Officer]

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% less organic growth probably in the 80% to 81% range. And we had 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 were able to bob that sometimes if we’re ramping up. And then higher in the second and third quarters, the typical seasonal patterns just because of the holidays.

[Vincent Colicchio, Barrington Research]

And then the non-digital 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?

[Jeff Davis, President and Chief Executive Officer]

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 digital piece has. But I would attribute some of that back to the one cancellation we’ve talked about in second quarter last year. However, that business has rebounded nicely and build relationships that we have with partners like OneStream is an example of this, 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 the basic component business, and I expect to see some growth from it this year.

[Vincent Colicchio, Barrington Research]

Okay. Nice quarter guys. Thank you.

[Jeff Davis, President and Chief Executive Officer]

Thanks, Vincent.

[Operator]

Our next question comes from Allen Klee with Maxim Group. Your line is open.

[Joshua Goltry, Maxim Group]

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?

[Jeff Davis, President and Chief Executive Officer]

It’s a combination of the two, certainly, but I think most of what you’re seeing is actually organic. And ones that we’ve obtained ourselves, we certainly gained some customers through acquisitions. 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.

[Joshua Goltry, Maxim Group]

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?

[Jeff Davis, President and Chief Executive Officer]

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 kind of continues. We are doing a lot of digital transformation work in that sector and 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 tie – year, even in industries that maybe aren’t performing as well as others in this market.

And I alluded to earlier, our spending on digital transformation, it’s sort of a [indiscernible]. And we are positioned very well for that. So we’re continuing to focus on those industries as well. We corporate partnerships there with many clients. And they’re continuing to spend, and I think they’ll continue to.

[Joshua Goltry, Maxim Group]

Got it. All right guys. Thanks.

[Operator]

And we have a follow-up from Surinder Thind with Jefferies. Your line is open.

[Surinder Thind, Jefferies]

Thank you for taking the follow-up. 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 the 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 timeline?

[Jeff Davis, President and Chief Executive Officer]

It’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 a Red Hat at the time, to me, it was already growing pretty swiftly. And I think, it’s all ready. So right now, we’re still seeing great opportunities in the pipeline and strong demand around Red Hat.

[Surinder Thind, Jefferies]

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 or 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.

[Paul Martin, Chief Financial Officer]

Sure, Surinder, this is Paul. So a couple of things in there. There were more onetime, including a positive bandwidth experience for our health care plan along with we got 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, obviously, focused on.

[Jeff Davis, President and Chief Executive Officer]

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.

[Surinder Thind, Jefferies]

Okay. That’s it from me guys. Thank you so much.

[Jeff Davis, President and Chief Executive Officer]

Thank you.

[Operator]

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.

[Jeff Davis, President and Chief Executive Officer]

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

[Operator]

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.