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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Good morning, ladies and gentlemen, and welcome to the Q2 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 is being recorded. I would now like to turn the conference over to your host, Chairman and CEO, Mr. Jeff Davis.
Thank you and thanks everyone for joining. This is Jeff. With me on the call today is Paul Martin, our CFO. I want to thank you for your time. As always, we have about 10 to 15 minutes of prepared comments, after which we will open up the call for questions. Paul, would you please read the Safe Harbor statement.
Thank you, 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 Web-site 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 Web-site under Investor Relations. Jeff?
Thanks, Paul. Once again, good morning and thanks for joining us as we discuss our second quarter earnings results and outlook for the remainder of the year. As we mentioned in our news release this morning, we are pleased to report a third consecutive quarter of double-digit services growth and to deliver adjusted earnings above consensus and near the top of our own previously guided range.
We anticipated a slightly higher top line results but some early ramp-downs and delayed project starts, that we believe are temporary, precluded us from achieving those initial goals. That being said, despite those challenges, we did manage to drive the business to more than doubling of net income and GAAP earnings over the prior year quarter.
North American ABR was up modestly and we continue to believe we have material opportunities to drive those rates higher over time and close the rate gap that exist between us and our largest competitors. And internally, we're bringing significant focus to this metric with our sellers and [operating management] [ph] teams and I expect in coming quarters we'll see ongoing improvements which obviously will help drive margins higher.
We talked a little bit on the last call about the acquisition of Southport Services Group in the quarter – in the early of the quarter, start of the acquisition early in the quarter, and integration there is well underway. But I want to talk about something just a couple of weeks ago was just the acquisition of Stone Temple Consulting, a highly regarded and award-winning digital consultancy out of Boston focused on search engine optimization and content marketing services. That group has joined our Perficient Digital team and will play an important role as we continue to deliver the end to end customer experience solutions that our clients and clients to be are looking for.
More and more the market is realizing we have the strength and the scale to deliver the same work that majors do but at higher quality, more efficiently, and with quicker time and value. We are as good as and most times better than the biggest names and our approach is not only more thoughtful and collaborative but more comprehensive. That growing awareness is leading to a consistently strong pipeline, translating more regularly into wins, which builds our backlog and incrementally strengthening foundation will continue to build on.
Speaking of the backlog by the way, I'm excited to share that just last week Perficient closed its single largest deal ever, so multiyear commitment from a major healthcare organization that's well into eight-figures annually. And those types of deals that we are able to compete for and win now, we couldn't have just a few years ago. That win plus several other multimillion dollar deals during July have Q3 off to a great booking start.
With that, let me 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 third quarter and updated guidance for the year. Paul?
Thanks Jeff. Services revenues were $120.9 million for the second quarter of 2018, a 12% increase over the comparable prior year period. Services gross margin for the three months ended June 30, 2018 excluded stock compensation and reimbursable expenses decreased to 36.4% from 37.4% in the prior quarter.
SG&A expense excluding stock compensation increased to $25.3 million in the second quarter of 2018 from $23.9 million in the comparable prior year period. SG&A expenses excluding stock compensation as a percentage of revenues increased to 20.8% from 20.4% in the second quarter of 2017, primarily due to the change in the recognition of software part of the revenues on a net versus a gross basis.
EBITDAS for the second quarter of 2018 was $18.4 million or 15.1% of revenues, compared to $16.9 million or 14.4% of revenues for the second quarter of 2017. The second quarter included amortization expense of $4.1 million compared to $3.5 million in the comparable prior year quarter.
Our effective tax rate for the second quarter of 2018 was 26.2% compared to 68.4% for the second quarter of 2017. The lower effective tax rate for the three months ended June 30, 2018 was primarily due to the U.S. – the lowering of the U.S. tax rate from 35% to 21% related to the Tax Cuts and Jobs Act of 2017 as well as the one-time impact relating to the Company's determination that the foreign earnings of the Company's Chinese subsidiary were no longer permanently reinvested in 2017.
Net income increased 143% to $5.8 million for the second quarter of 2018, from or $2.4 million in the second quarter of 2017. Diluted GAAP earnings per share increased to $0.17 a share for the second quarter of 2018 from $0.07 in the second quarter of 2017. Adjusted earnings per share increased to $0.38 a share for the second quarter of 2018 from $0.29 in the second quarter of 2017. See the press release for a full reconciliation to GAAP earnings. Adjusted EPS is defined as GAAP earnings per share plus amortization expense, non-cash stock compensations, transaction costs, and the fair value adjustments of contingent consideration, and the impact of other infrequent or unusual transactions net of related taxes, divided by average fully diluted shares outstanding for the period.
Now I'll turn to the six-month results. Services revenues were $241.1 million for the six months ended June 30, 2018, an increase of 14% over the comparable prior year period. Services gross margin for the six months ended June 30, 2018 excluding stock compensation and reimbursable expenses decreased to 36.3% from 36.8% in the comparable prior year period.
SG&A expense excluding stock compensation increased to $51.7 million for the six months ended June 30, 2018 from $47.2 million in the comparable prior year period. SG&A expenses excluding stock compensation as a percentage of revenues increased to 21.3% from 20.7% in the six months ended June 30, 2017, again primarily due to the change in the recognition of software and hardware on a net versus gross basis.
EBITDAS for the six months ended June 30, 2018 was $35.3 million, or 14.5% of revenues, compared to $31 million or 15.6% of revenues for the six months ended June 30, 2017. Six months ended June 30, 2018 included $8 million of amortization compared to $7.2 million in the comparable prior year period.
Our effective tax rate for the six months ended June 30, 2018 was 24.9% compared to 57.9% in the six months ended June 30, 2017. The lower effective tax rate for the six months ended June 30, 2018 was primarily due to the lowering of the U.S. tax rate from 35% to 21% as well as the Company determination that the foreign earnings of the Company's Chinese subsidiary were no longer permanently reinvested in 2017.
Net income increased 111% to $10.8 million for the six months ended June 30, 2018 from $5.1 million in the six months ended June 30, 2017. Diluted GAAP earnings per share increased to $0.32 a share for the six months ended June 30, 2018 from $0.15 a share for the six months ended June 30, 2017. Adjusted earnings per share increased to $0.72 for the six months ended June 30, 2018 from $0.52 in the comparable prior year period.
Our ending global headcount at John 30, 2018 was 2,671, including 2,436 billable consultants and 235 subcontractors. Ending SG&A headcount at June 30, 2018 was 443.
We ended the second quarter of 2018 with $56 million in outstanding debt and $10.4 million in cash and cash equivalents. 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 the second quarter, compared to 76 days at the end of the fourth quarter of 2017.
I'll now turn the call back over to Jeff for a few more comments. Thanks.
Thanks Paul. We sold a record number of large deals in the quarter, 59 deals north of $500,000. That compares to 54 in the first quarter of this year and 46 in the second quarter of 2017. So, 59 compared to 46 a year ago. Nice growth in large deal volume sequentially and on the prior year obviously.
During the quarter, the health sciences, financial services, retail and consumer goods, and manufacturing verticals combined to represent 62% of Perficient's revenue that breaks down as follows; health sciences at 27%; financial services at 14%; retail and consumer goods at 11%; and manufacturing at 10%.
So, as we mentioned in the past, the breadth, depth, and strength of our partnerships is a real competitive advantage for us. One of the developments during the quarter that we are particularly excited about was Adobe's acquisition of Magento. We're an Adobe Premiere partner and the [world-leading] [ph] Magento Enterprise partner and one of the few firms with deep expertise in both platforms. So, in fact we have more than 100 colleagues dedicated to each and have launched more than 400 projects in these platforms in recent years. So, as those two organizations come together, we're incredibly well-positioned as they offer a technology staff and allow enterprises to manage content and commerce in one place in an integrated fashion.
Overall, a solid quarter capping off a solid first half, and as we head into the latter half of the year, we are optimistic that we'll finish the year strong and start 2019 with a significant momentum.
Now turning our attention to the expectations for the third quarter and full year, Perficient expects its third quarter 2018 revenue to be in the range of $122 million to $127 million. Third quarter GAAP earnings per share is expected to be in the range of $0.18 to $0.21. Third quarter adjusted earnings per share is expected to be in the range of $0.38 to $0.41.
Perficient is narrowing its previously provided full year 2018 revenue guidance range to $490 million to $505 million, and adjusting its 2018 GAAP earnings per share range to $0.65 to $0.75. We're also slightly raising our adjusted earnings per share guidance to $1.45 to $1.55.
So, with that, operator, we can open up the call for questions.
[Operator Instructions] Your first question comes from the line of Mayank Tandon with Needham and Co. Your line is now open.
This is actually Kyle Peterson on for Mayank today. Just wanted to get a little more color on you guys with the kind of organic services revenue growth for the year. Obviously you guys mentioned you guys had some delayed project starts that weighed on this quarter and then the big deal win too. Just want to see how all the puts and takes you think are going to shake out on just the organic side.
I do think it's interesting. I have seen some of the other competitors out this morning with a similar situation. I was surprised by them actually because we continue to see decline that is quite strong. So these incidents in the quarter I think are pretty well isolated to a couple of customers from our perspective. What that means is, obviously we've got an opportunity to make some of this up in the second half.
But it's also reflected in the narrowing of our guidance range. The midpoint remaining the same but we of course added some revenue from an acquisition. Basically, the early wind-downs and delayed starts that I referred to represent about $10 million in the year, and that guidance reflects the fact that we think we can make up about half of that still this year.
Okay. And then I guess just how much of that of I guess the $5 million that you recoup from that kind of in the back half, about how much of that is from Stone Temple kind of versus just kind of existing wins?
The make-up of the $5 million that I was referring to would be new organic business. So, it's simple, we'll add about $4 million to the second half of the year.
Okay. And then I guess just last one for me, then I'll hop out, just kind of in terms of the new deal wins, you guys mentioned the one healthcare win and just kind of some other good trends early in the third quarter, are there any kind of recurring themes in terms of verticals that are standing out besides healthcare or kind of what are you guys seeing in terms of client demand right now?
So, I can't under-state healthcare, but we are seeing good demand, and really I'd say kind of a resurgence in retail, particularly around commerce. So, we have got good business there. But I'd say really up, the automotive, manufacturing, and retail, are all quite strong for us right now. And of course fin serv is a meaningful part of our business, not quite as strong as some of the other sectors, but still [solid] [ph]. But I would say, again, standouts, you have to say it's healthcare for us for sure, but then those others are doing well also.
All right. Thanks guys.
Your next question comes from the line of Frank Atkins with SunTrust. Your line is now open.
Want to ask first, what was organic growth in the quarter and could you give us a quick update on the sales force in terms of how well you are staffed, how well they are performing, and productivity as you see it there?
Good question. The organic growth in the quarter was about 2% year-over-year. In terms of the sales team, we are running probably about the highest staff level we have ever had, a little bit over 100, and our goal for the year is to get to about 115 I believe, full time sales folks. And yes, the productivity is improving there. I think the macro environment is improving some, so that's contributing.
But I do think, and Frank, you know the history, that the work that we have done over the last couple of years, and particularly bringing these new people on, many of them are coming up now on kind of their one-year anniversary where they are really starting to contribute. So, I think we are seeing some boost from there.
Our pipeline right now is the strongest it's ever been. The bookings we had last quarter on organic year-over-year basis I think have been the strongest probably in years. So, despite the setbacks, like I said, we're going to [replace] [ph] a lot of that and I still am optimistic about the outlook going forward as that sales team continues to mature.
Okay, great. That's helpful. And then you mentioned a large deal in healthcare. Can you talk about why you think you won that, where did you differentiate yourself in the process? And then also, could you give us the average deal size for the quarter?
So, we won that [like an] [ph] existing relationship really. We have proven ourselves time and again with this customer that we have very, very long-term relationship, I want to say going back 10 years, and they have been our #1 customer for the last at least four or five. And so, this is a continuation, an ongoing engagement around digital transformation for their entire business. And so, getting that commitment, that [indiscernible] commitment obviously, it helps us to receive revenue but also shows, I think reflects the trust that they have given us and the work that we have done for them. And then average deal size in the quarter?
So Frank, it was just a little under 300,000 and it was about 265,000 in Q1, so a little bit increase in the average deal size.
And by the way, that excludes this big deal in July obviously.
That will be second quarter.
Yes, that will be a Q3 deal, right.
Okay, that's helpful. And the last one from me, can you talk a little bit about the environment for kind of acquiring and retaining talent? We continue to have very little unemployment. It seems like things are getting very competitive here. Have you seen any change there and what are you doing to make those investments to keep and keep good skilled people?
That's a great question, I'll answer this in the way that I always do, because it's true. No matter kind of what the economy is doing, in this industry it truly is always hard to find good people, particularly with skills that are in high demand, and that's never not the case in this industry or maybe you have to go back to 2001. So, it's always a challenge.
We got a very formidable talent acquisition team. We also focus very much on minimizing attrition or obviously retention of our employees in many ways. One is obviously competitive compensation and benefits, but also a sense of belonging and creating a collegial culture where people want to be here, and I think it's worked very well for us. Our attrition rates are a little below industry averages over the last 12 months and we are seeing still good opportunities to hire people. It's definitely tighter, and as so, we've been kind of ramping up our – or have been ramping up, I should say, our talent acquisition capacity. And I think we have got a model that's very scalable, so we should be able to deal with it as we go forward.
Okay, great. Thank you very much.
I'm showing no further questions at this time. I would now like to turn the conference back of Jeff Davis.
Thank you all very much. I appreciate your time today and I am very much looking forward to speaking to you again in one quarter. Thank you.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may now disconnect.