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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen, and welcome to Perficient's First Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference, Jeff Davis, Chairman and CEO. Mr. Davis, you may begin.
Thank you. This is Jeff Davis. With me on the call today is Paul Martin, our CFO. I'd like to thank you for your time this morning. As is typical, we've got 10 to 15 minutes of prepared comments, after which we'll open the call up for questions. But 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 meaning 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 goals to the most directly comparable financial measures prepared in accordance with GAAP on our website under Investor Relations. Jeff?
Thanks, Paul. Good morning, again, and thank you all for joining. We're excited to be with you to hear our first quarter results and update you with the revised outlook for the full year that underscores our optimism and confidence. As indicated in our press release this morning, the first quarter results were very strong. And as we mentioned on the fourth quarter call, a couple of months ago, we're really firing on all cylinders right now. We've previously guided to double-digit services revenue and earnings growth in 2018, and we're pleased this morning to further increase each of those projections.
We realized positive year-over-year momentum across all key performance indicators. ADR was up, utilization was up, headcount up, billable hours were up, EBITDA, net of stock comp was up, services gross margin was up, revenue contributions from our global delivery centers in both China and India were also up. And of course, all that translated into material revenue and earnings increases, and perhaps the strongest overall quarter in our history. Certainly, the most impressive first quarter that we've ever realized. It's clear that the strategic and structural investments we've made in recent years combined with our unique and truly differentiated market positioning as well as the unparalleled breadth and depth of our portfolio is driving this performance improvements and enabling us to gain share.
We're adding and growing relationships that are leading to larger and longer-term deals. And enterprises across industries are increasingly trusting Perficient to play a significant and central role in their digital transformations. As I also mentioned on the Q4 call, more and more our customers are realizing that we are big and strong enough to deliver the same work the majors do but at higher quality, more efficiently and with quicker time to value. We are as good as and most times better than the biggest names, and our approach is not only one of more -- that is more thoughtful and collaborative but also more comprehensive.
That growing awareness is leading to a consistently strong pipeline translating more regularly into wins, which builds our backlog and an incrementally strengthening foundation will continue to build on. On the heels of strong Q4, bookings, we had a solid first quarter of bookings. And we had an exceptional April to get Q2 off to a nice start as well.
In fact, last week, we closed our single largest win of the year-to-date. On top of all that is the second quarter got underway. We announced the acquisition of Southport Services Group, which brought great MicroStrategy business intelligence expertise to our portfolio, expanded our presence in the D.C. metro area, added a location in the southwest and also brought us some nearshore development capabilities based in Mexico City that we're excited about. And with that, I'll turn the call back over to Paul to cover the financial results before I touch on a few additional items of note and our outlook for the second quarter and updated guidance for the full year. Paul?
Thanks, Jeff. Total revenues for the first quarter of 2018 were $120.9 million, a 9% increase over the prior year quarter. Services revenues were $120.2 million for the first quarter of 2018, an increase of 16% over the prior year quarter. Services gross margin for the three months ended March 31, 2018, excluding stock comp and reimbursable expenses increased to 36.3% from 36.1% in the prior year quarter.
SG&A expenses, excluding stock compensation, increased to $26.4 million in the first quarter of 2018 from $23.4 million in the comparable prior year quarter. SG&A, excluding stock compensation, as a percentage of revenue increased to 21.8% from 21% in the first quarter of 2017. EBITDAS in the first quarter of 2018 was $16.9 million or 14% of revenues compared to $14.1 million or 12.7% of revenues in the first quarter of 2017. First quarter included amortization expense of $3.9 million compared to $3.6 million in the prior year. An adjustment of $1 million was recorded during the three months ended March 31, 2018, which represents the impact of the additional fair market value adjustment to the Clarity revenue and earnings-based contingent consideration liabilities to reflect Clarity's performance in excess of previous estimates.
Our effective tax rate for the first quarter of 2018 was 23.2% compared to 40.2% in the first quarter of 2017. The lower effective rate for the three months ended March 31, 2018, was primarily due to lowering the U.S. tax rate from 35% to 21% related to the Tax Cuts and Jobs Act of 2017. Net income increased 82% to $4.9 million for the first quarter 2018 from $2.7 million in 2017. Diluted GAAP earnings per share increased to $0.15 a share in the first quarter of 2018 from $0.08 in the first quarter of 2017. Adjusted GAAP earnings per share increased to $0.35 a share for the first quarter of 2018 from $0.24 a share in 2017. See the press release for the full reconciliation to GAAP earnings. And adjusted GAAP EPS is defined as GAAP earnings per share plus the amortization expense, noncash stock compensation transaction costs and the fair value of contingent consideration adjustments and the impact of other infrequent or unusual transactions not related to taxes, divided by average fully diluted shares outstanding for the relative period.
Our earning billable headcount at March 31, 2017, was 2,653, including 2,429 billable consultants and 224 subcontractors. Ending SG&A headcount was 442. We ended the fourth quarter of 2017 with $56 million in outstanding debt, an increase of $1 million from year-end. Our balance sheet continues to leave us very well positioned to execute on our strategic plan. Our days sales outstanding on accounts receivable were 75 days at the end of March compared to 76 at the end of December.
I'll now turn the call back over to Jeff for a little more commentary. Jeff?
Thanks, Paul. So we sold the company record number of large deals in the quarter. 54 deals over $0.5 million that averaged $1.1 million apiece. And that compares to 48 in the fourth quarter that averaged $1.3 million and 49 in the first quarter of 2017 that averaged $1.4 million. So nice growth in large deal volumes, sequentially as well as year-over-year, where we realized strong bookings as well. So top comp there. During the quarter, the health sciences, financial services, automotive and retail/consumer goods verticals combined to represent 60% of revenue with health care -- health sciences at 26%; financial services at 14%; and automotive and retail/consumer goods each representing 10%. Health sciences and retail consumer goods revenue were each up 21% over the prior year quarter.
From a platform perspective, Microsoft and Adobe were particularly strong in the quarter, both up substantially year-over-year. And sticking to platforms, we're very bullish on Pivotal. As our news release yesterday indicated we're making meaningful investments not only in anticipation of demand in the future but for opportunities we have right now. Google, as they more aggressively go after the enterprise cloud market is also a partnership we're optimistic about. The breadth, depth and strength of our partnerships is a real competitive advantage for us. We've mutually beneficial relationships with virtually all the major players, and they continue to recognize our work with awards and accolades, and reward our commitment and contributions. Just last week, Magento recognized Perficient Digital with a couple of high-profile awards. And during the first quarter, IBM named Perficient its 2018 Watson Customer Engagement Partner of the Year for Commerce.
So as we mentioned in the release, our momentum is continuing into the second quarter. We expected 2018 to be a very strong year. And today, we are optimistic as we've ever been. We're pleased today be able to raise both our revenue and earnings guidance ranges for the year. Perficient expects its second quarter 2018 revenues to be in the range of $123 million to $127 million. Second quarter adjusted earnings per share is expected to be in the range of $0.36 to $0.39. Company is raising its previously provided full year 2018 revenue guidance range to $485 million to $510 million and nearing its 2018 GAAP earnings per share guidance range to $0.67 to $0.79, and raising its 2018 adjusted earnings per share guidance range to $1.44 to $1.54.
So with that, Operator, we can open the call up for questions.
[Operator Instructions]. Our first question comes from Mayank Tandon with Needham & Co.
This is actually Kyle Peterson on for Mayank, today. I was wondering if you guys can talk a little bit about kind of some of the key verticals, kind of where you're seeing some of the strength -- and where -- in demand? And where kind of demand might be lagging there?
I'd say that we're seeing generally positive demand across verticals. However, as I mentioned, health sciences continues to be a strong spot for us. We're well positioned there. So we're bullish on that space, and retail consumer goods is rebounding nicely as well. So again, I think kind of a tide lifting all boats. The only weakness I see out there right now is sort of in the oil and gas and energy sector, which we really don't participate in very much. I think it's about 3% of sales.
Okay, great. And then, notice also that -- it looks like the management kind of consulting revenue, looks like it's -- was very strong this quarter. I'm wondering if you could maybe comment a bit on that?
Yes. We've added quite a bit of management consulting capability, both organically and through acquisition over the last couple or three years. And the intent there was to get more on the front of these relationships with clients and help them drive strategy and obviously, back that up then with delivery. So that's resonating very well. We're getting good transaction with the management consulting capability, and that's where I see it coming from, I think, that's going to continue. Again, that was our intent, and that's being well positioned right now. I think right now, literally I have to say, they're fully utilized, last I heard.
All right. And then last one from me. Just wanted to kind of get an update on kind of the talent hiring pool, the environment you guys are facing there, especially in some of the kind of emerging verticals such as Pivotal?
Yes. A great question. I would say the general hiring point has not changed dramatically. It's probably a little tighter. I always answer this question with this fact, it's always hard to find good people. I don't care what the macro situation is. But I'd say, we're successfully recruiting the folks we need, but specifically Pivotal, I'm glad you asked that. The reality is we're hiring people for that skill set or for that position that have solid Java development skills, and actually doing our own training. So one of the things we mentioned in the press release yesterday, we've been certified as a Train-the-Trainer partner with Pivotal. So we're actually running our folks through our own training sessions that get them certified on the platform.
Our next question comes from Frank Atkins with SunTrust.
I wanted to get, first some color on the Southport Services Group acquisition. Can you give us any color on the growth trajectory or margins relative to the core business?
Yes. We don't typically provide those specifics, but I will tell you that the growth rate is at or better than the companies. I want to say, they're probably low double-digits, somewhere in that range and margins likewise. The margins that they brought on table are slightly accretive to ours. So they are a little bit -- I think we're running at about 36% , 37%. They're going to a tick, 50 or 100 bps above that.
Okay, great. That's helpful. And then what was organic growth for the quarter? And it seems like that's trended more positively, where is that coming from? And how are you able to get more consistent organic growth relative to prior period?
Good question. It was about 7%, 7.5% for the quarter, and that was on the heels of a similar result in Q4. I want to say, it was about 6.5% or 7%. And for the year, the midpoint of our guidance is about 7% organic, which I think is a solid projection. And I'm going to attribute a couple of things to that acceleration. One is the investments that we made over the last 2 to three years really in a number of areas of the business, but in particular, I've spoken about this before is within the sales group, both the organization structure as well as compensation structure and actually adding significant capacity in sales. And I think we're starting to see some dividends from. As I mentioned earlier, the macro environment, I think, is helping as well. We are seeing, again, a generally positive environment across most sectors, most industries. And so I think that's helping also. But I do attribute the majority of it to those investments that we made earlier, which I think signals sustainability.
Okay. And last one from me. Can you comment a little bit on utilization trajectory going forward as well as the current pricing environment?
Yes. Good question. So utilization was about 78% North American in the quarter. I expect that, that level will continue, if not higher. Our target across the year is about 80%. So we're working to get there. That's a little bit aggressive, but we're working on it. However, again, 78%-plus is solid as well. So we're -- I expect that, that will continue throughout the year. As well as -- yes, the competitive environment. We're definitely seeing competition on rates as we moved up market into these larger deals, however. Our ABR for the quarter was up about 1.5% year-over-year. And again, our goal for the year will be to push it 2% to 3%. I believe that's doable, in spite of the fact that we do see some competition. In fact, the matter is a lot of our portfolio is so unique that we've got still some pricing power. And I think we're still well below the kind of major firms, the big brands.
[Operator Instructions]. Our next question comes from Brian Kinstlinger with Alliance Global Partners.
So can you update us where you are in the ramp up the investments in Pivotal sales force and consultants? Obviously, we saw the press release, should we expect material increases to SG&A throughout the year? And then you mentioned a higher utilization rate throughout the year, I might have thought otherwise as you hire people and start to train them. So maybe color on that would be great.
Yes. The training is about a two week program. So we're able to roll them out after that two weeks. So the bench time isn't too great. We're anticipating demand, we'll move them off the bench right after their [indiscernible] actually. So I don't think there'll be too much of a debt, still at 78%-plus range, I think, is what we can do. The SG&A impact over the training, et cetera, in those investments is pretty well baked into our Q2 guidance. I think that only improves beyond Q2. As we kind of tip the scales towards incremental revenue and incremental margin from those different resources. And right now, we've got 60 people deployed in Pivotal delivery.
So we should expect to see a little bit of an increase in SG&A 2Q to Q1, which normally may happen anyway?
Yes, slightly. Yes.
Yes. Okay. And then you talked about health sciences and retail and consumer goods being two areas, where I think I gather those industries will grow faster than the overall company growth rate. Can you highlight any trends that are driving those particular growth rates in those 2 businesses? Is it macro? Is it something you've done particularly on the business? Or is there regulation that's impacting that?
Yes. I'd say it's for health sciences, it really continues to be primarily digital transformation. It is the paradigm shift that's occurring and it's still occurring, I think, with a long tail of -- a focus on patient is consumer and consumerism in health care, both on the payer and the provider side. We've positioned ourselves right in the middle of that. And I would argue we're the leader in that industry in terms of helping our clients adapt to that new environment. And again that's a lot of patient-consumer facing applications, mobility, web, enrollment, service, et cetera, as well as digital marketing. We're actually managing digital marketing spend for a few of our health sciences customers. And that's where that demand is coming from. I think it'll be sustainable indefinitely honestly.
And then retail customer?
Retail consumer, yes, it's more commerce. We're seeing a lot of commerce order management. But also, again, I'll come back to agency, mobility, consumer-facing applications that are leveraging our digital agency capability under Perficient Digital. So I think, that's going to continue as the brick-and-mortar continue to fall away. You see the continued rise of online retail. Many of whom may be niche, competing with Amazon in that fashion, but again we seek a demand there and expect that to continue.
Great. Finally, can you talk about the M&A pipeline in terms of size of the companies? And what your top priorities are in terms of what you're hoping to gain from a business standpoint from M&A?
Yes, absolutely. The short answer is more digital. And by that, I think, software was a great example. And it was a good size, $15 million to $20 million is a good size. I would love to see us finding businesses that are $25 million to $40 million. Of course, the scarcity increases as you move up those numbers. So -- and what they brought to the table absolutely was more data and more data capabilities, in this case, MicroStrategy. We certainly saw a demand within our existing customer portfolio and of course, they brought great demand as well. So the acquisition pipeline is strong. We've got deals in various stages of analysis that are in the works. And the size of those, again, probably in that same range $15 million to $40 million, I think, is doable. We've got some at the higher end of that. We've got more at the lower end.
I guess, I have one more on the M&A side. As it relates to Pivotal, are there many Pivotal shops? And then where you can look at, where -- and with the prices probably being pretty high given the growth rates, is it worth it to buy a Pivotal focused shop versus higher Java-based guys and train them for 2 weeks?
Yes. I think, more jobs are going to stay with the greenfield organic approach The thing is, your first question is, there really aren't very many pivotal shops as you might imagine. It's more or less in the earlier stages of its adoption. So by the way, I think our timing is quite good. And to your point, we've made these investments and worked out a plan here and a strategy to do this completely greenfield organically, and that's our plan. I don't see us doing any acquisitions on the Pivotal space, at least, not in the near future.
We have no further questions at this time. I would now like to turn the call back over to Jeff Davis for any further remarks.
All right. Well, thank you all for your time today, and we look forward to talking about our excellent Q2 in 90 days. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.