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Good morning, ladies and gentlemen. And welcome to the Q4 2017 Perficient Earnings Conference Call. At this time, all participants are in 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 turn the call over to your host, Chairman and CEO, Jeff Davis. You may begin.
Thank you. This is Jeff Davis. Thank you for your time this morning. With me on the call is Paul Martin, our CFO. As typical we have got about 10 or 15 minutes of prepared comments, after which we will open 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 security laws. Actual results may maturely differ from those discussed in the 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 have also posted a slide deck, which includes a reconciliation of certain non-GAAP to the most directly comparable financial measures compared in accordance with GAAP on our website under Investor Relations. Jeff.
Thanks, Paul. Once again, good morning and thanks for joining. We are excited to be with you to share our fourth quarter and full-year 2017 results as well as our Company outlook on 2018.
As we mentioned in our news release this morning, fourth quarter results were strong and as the New Year decelerate Perficient’s business is firing on all cylinders. Performance across all key indicators is accelerating that you can see in our full-year outlook we believe Perficient is poised for double-digit services revenue growth and earnings growth in 2018.
Our optimism stems for many things, but most important variable that we continue to gain share by building broader and deeper relationships and winning larger longer term enterprising work. In 2017, revenue from our top 50 accounts averaged $5 million in fees. That number was $3.9 million just three years ago and stood at $2.9 million six years ago. So that’s a clear evidence that our expanding and increasing our influence impact with our most important customers.
The breadth and depth of our portfolio is resonating strongly in the market and we are uniquely positioned the firm big and strong enough to deliver the same work that majors do, more efficiently at higher quality and with quicker time to value. Some of these firms who are routinely beating are 50 to a 100 times our size from a revenue and market cap perspective. So our runway for growth is not months or quarters but years and decades ahead.
Looking into second half of 2017 were very strong and year-to-date 2018 have been solid as well. I attribute a meaningful portion of that to the investments we have made in our sales organization in recent years. We have discussed this pretty intensively over the last couple of years and we have design and implemented prescriptive model which drives focus on key customers while substantially increasing sales capacity with more feet on the street.
All of this is driving momentum right now and we will benefit not only in terms of growing pipeline, but also remain focus on extending margins by gradually growing ever to bill rate and closely management utilization and Paul will talk to you later on how 2017 Tax Cuts and Jobs Act as it will continue to positively impact provision but we expect a favorable benefit that’s proportionate to the benefit it may have for most of our competitors.
There is really quite a bit of wind sales right now, I can’t understate that. The economy is strong, consumer confidence is high and all of that translates into enterprises, industry creator propensity to invest and growing their businesses and driving in digital transformation. In the midst of the environment or brand continues to strengthen and grow and more customers are realizing as I mentioned before that provision can be their primary partners in those journeys.
With that, I’m going to turn the call back over to Paul to cover the financial results before I touch on a few additional items of note and our business outlook. Paul.
Thank you, Jeff. Total revenues for the fourth quarter of 2017 were $133.5 million, a 12% increase compared to the year-ago quarter. Services revenues were $114.4 million for the fourth quarter of 2017, excluding reimbursable expenses, an increase of 17% compared to comparable prior year period.
Services gross margin for the three months ended December 31, 2017, excluding stock compensation and reimbursable expenses and the tax-related bonus increased to 38.6% from 36.6% in the comparable prior year period.
SG&A expenses, excluding stock compensation increased to $25.1 million in the fourth quarter 2017 and $22.2 million in the comparable prior year quarter. SG&A expenses, excluding stock compensation bonuses as a percentage of services revenues decreased to 21.9% from 22.7% in the fourth quarter of 2016.
EBITDA excluding tax related volumes fourth quarter 2017 was $20.7 million or 15.5% of revenues compared to the $15.4 million or 12.9% of revenues in the fourth quarter of 2016. The fourth quarter included amortization expense of $3.9 million compared to $3.4 million in 2016.
An Adjustment of $4 million was recorded during the three months ended December 31, 2017, which represents the impact of the fair value adjustment to the clarity, revenue and earnings space contingent consideration liability to reflect clarity performance in excess of original assets.
Our effective tax rate for the fourth quarter 2017 was minus 44.2%, compared to 40.5% from the fourth quarter of 2016. Lower effective rate for the three months ended December 31, 2016 was primarily due to revalue in the Company’s deferred income tax liability to reflect the lowering of U.S. tax rate 35% to 21% related to the Tax Cuts and Jobs Act of 2017.
Net income increased 74% to $6.4 million for the fourth quarter 2017 from $3.7 million in the fourth quarter of 2016. Diluted GAAP earnings per share increased $0.19 a share for the fourth quarter compared to $0.11 in the fourth quarter of 2016.
Adjusted GAAP earnings per share increased to $0.37 a share for the fourth quarter of 2017 from $0.27 in the fourth quarter of 2016. Adjusted GAAP earnings per share plus amortization expense non-cash stock compensation transaction cost in the fair value adjustment of contingent consideration and the impact of other infrequent or unusual items net related taxes divided by average diluted shares outstanding for the period. Running global headcount at December 31 2017 was 2,572, including 2,350 billable consultants and 222 subcontractors, and the SG&A headcount was 452.
I will now turn to the full-year results. Revenue for the 12 months ended December 31, 2017, were $485.3 million, a decrease of less than 1% over the comparable period last year. Services revenue for the 12 months ended December 31, 2017, excluding reimbursable expenses were $434.3 million, an increase of 4% over 2016.
Services gross margin for the 12 months ended December 31, 2017, excluding stock compensation, reimbursable expenses and tax-related bonuses, increased to 37.4% from 35.9%, 150 basis point improvement. SG&A expense, excluding stock compensation and tax-related bonus increased to $97.2 million for 2017 from $92.4 million in the comparable prior year period.
SG&A expense, includes stock compensation and tax-related bonus, as a percentage of revenues, was 22.4% for 2017 compared to 22.1% in 2016. EBITDAS excluding tax-related bonuses for the 12 months ended December 31, 2017, was $70.8 million or 14.6% of revenues compared to $64.2 million or 13.2% of revenues in 2016.
12 months ended December 31, 2017, included amortization of $15 million compared to $13.4 million in 2016. The increase in amortization expense was due to the addition of intangible assets from the 2017 acquisitions.
An adjustment $3.2 million was recorded during 2017, which represents the impact of the fair value adjustments of the Clarity, RAS and Bluetube revenue and earnings based contingent consideration liability in addition to accretion of the fair value estimates for the revenue in earnings based consideration led to related to these acquisitions.
Our effective tax rate for the 12 months ended December 31, 2017 was 31.5% compared to 32.9% for the 12 months ended December 31, 2016. The decrease in the effective tax rate is primarily due to revaluing Company's deferred tax - from income tax liability reflect the lowering of the U.S. tax rate. Partially offsetting the benefit was a full charge on accumulative foreign earnings imposed by the 2017 taxes.
Net income for the 12 months ended December 31, 2017, decreased $18.6 million from $20.5 million. Diluted GAAP earnings per share was $0.55 in 2017 compared to $0.58 in 2016. Adjusted GAAP earnings per share increased to $1.23 for 2017 compared to a $1.08 in 2016.
We ended the fourth quarter of 2017 with $55 million in outstanding debt, an increase of $23 million from 2016. The increase was primarily due to acquisition of RAS and Clarity and 36.8 million of share purchase partially offset by operating cash flows. Our balance sheet continues to leave us extremely well positioned to execute on our strategic plans.
Our day sales outstanding on accounts receivable were 76 at December 31, 2017, compared to 79 at the end of 2016.
I will now turn the call back over to Jeff. Jeff.
Thanks, Paul. So a little more on bookings. We sold 48 deals during the fourth quarter, north of $0.5 million each, they averaged $1.3 million. That compares to 32 in the third quarter at $1.9 million and 40 in the four quarter of 2017 and averaged $1.1 million. So 20% growth in large deal volume and 18% growth in large deal size versus the prior year quarter.
During the quarter, health sciences, financial services, automotive and retail, consumer goods verticals represented 58% of revenue. Healthcare at 28%, financial services at 13%, automotive at 9% and retail consumer goods at 8%. We reiterated on last quarter’s call that we anticipate the strong second half from the health sciences vertical and revenue there was indeed up 18% year-over-year.
Q4 health science’s bookings were quite strong as well up 28% year-over-year. We also saw a strength in bookings and retail and consumer goods, up 44%, financial services up 41% and sales kind of up 55%. Strategically going forward we are 4% things by increasing the leverage of our global and domestic development centers. I expect that through 2020 those will grow even been faster pace in our overall businesses.
We are also remaining nimble and ready to fit through M&A as well as by building partnerships in anticipation of where we see the market headed for example and there will be more news on this in coming weeks but we are investing significantly, Pivotal strengths insert by hundreds on our team support the future we see here.
We also continue to make significant investments in many other areas not the least of which is FFDC where we enjoyed 20% growth in 2017. So the entire organization is rallying, focus on subset of fee accounts where we determine we have no significant growth opportunity.
So I give you the stats on our top 50, we are going to be talking more and more about what we call the growth 50. This will be of course somewhat of a fluid list, but our marketing, sales and delivery teams are all aligned and collaborating to drive an increased business in that group of customers that we have.
As we report successful quarters and years going forward, I expect the accounts that comprise the Growth 50 will be very key contributors. Again in closing, we are as optimistic as we have been in many years, our colleagues are executing incredibly well against the strategy that’s put in place and existing as well as new customers are increasingly concluding that Perficient is the partner of choice when it comes to transforming their business for the future.
So turning our attention to expectations for the first quarter, the end full-year, Perficient expects its first quarter 2018 revenue to be in the range of $115 million to $119 million. First quarter adjusted earnings per share is expected to be in the range of $0.32 to $0.35.
The Company is issuing its full-year 2018 revenue guidance range of $470 million to $500 million and its GAAP earnings per share range of $0.68 to $0.82 and 2018 adjusted earnings per share range of $1.40 to $1.52. The midpoint represents annual service growth of about 11% and earnings growth of 19%. Bear in mind that with accounting regulation changes, we no longer book to top-line of software revenue. So we are focused primarily on services now and that’s what these numbers represent. Operator.
[Operator Instructions]. Your first question comes from the line of Mayank Tandon from Needham & Company. Your line is open.
Thank you, good morning. Jeff, could you talk a little bit about the client budgets this year versus say 12 months going when you entered 2018 versus 2017. And then just in terms of size and scope of opportunity that you are seeing. And specifically within the banking segment a lot of your peers have called out banking as a vertical that’s seeing higher spend levels on digital, because they are benefiting from tax reform and of course less regulatory pressure as well that’s freed up IT budgets at banks. May be you could reference that as well? Thanks.
Sure absolutely, thanks Mayank. Yes, I would say what we are seeing is sort of a tide lifting all boats, but to your first question, there is definitely improved spending, I would say pretty much across all segments compared to what we were seeing a year ago or prior.
So I think there is an improved segment. I do think that we will see that continue and probably accelerate as some of tax reform kicks in. I know for us we are making investments with that and I’m sure that what we are hearing from our customers is they plan to as well.
Specifically to the financial services, we saw a nice improvement there in the second half of the last year, particularly a significant improvement in bookings which is a leading indicator of exactly what you are talking about. And we have got a particular opportunity, most of the business that we do and serve are I would say may be 50% or better is management consulting.
So we see still got an opportunity to further penetrate on the technical side and in fact we are making investments around our corporations to further penetrate that with things like high thrust and other investments in our own environment. So we certainly anticipate growth there. But again I would say we are seeing growth fairly broad base.
Got it. And then how would you categorize the pricing environment. I know in the past you have talked about there being plenty of headroom for you to increase rates just based on the disparity between where you are at versus some of your peers. So maybe you could give us some perspective on your expectations on the pricing increments in 2018?
Yes absolutely. So we managed to move rates up a little over 2% last year. Our goal this year would be the same thing, something in the 2% to 3%. I do think as I say we pointed out that gap between us and the big guys is great enough that that can continue for a long time. But at the same time we want to keep up pace that will be disruptive or create a headwind for our sale gains.
So 2% to 3% is what we are driving for this year and again rather than kind of rush that and run the risk of pricing ourselves out of anything that’s probably the pace that I would expect for the foreseeable future. If the market tightens, I think that pace increases, but 2% to 3% for this year and I still think we have got another 20%, 25% to go from where we are now. And as the market changes that obviously could increase going forward.
Great. One final question on margins. I think I may have missed this. But what is your expectations on margin expansion both on the services line and also on operating or EBITDA margin? And then what are some of the puts and takes we should be considering as we build out the model for margins?
So on gross margins this year I would say a 100 bps plus. One of the reasons that’s may be a little below where we were last year is we have got a little tougher comp but also it’s the investments I alluded to I mentioned around Pivotal. So may be some investments there, we will reach a breakeven point on that likely in the second quarter. And so we will experience more expansion in the second half than we will in the first, but year again say 100 bps plus. And then likewise EBITDA, EBITDA is probably in the 100 to 200 range. So may be 150 is a midpoint on that.
Alright. That’s helpful, thank you for the color. Good luck.
Thanks Mayank.
[Operator Instructions]. Your next question comes from the line of Brian Kinstlinger from Maxim group. Your line is open.
Hey great. Thank so much. Great to see this all organic growth. You mentioned some priorities in terms of investments you are making into growth are there new groups being added or they are hirers being created to address higher growth rate areas? Is that what is happening or are you investing to expand the skill set of your employee based? And then I couldn’t write it down fast enough, you mentioned one or two areas of growth in terms of applications and growth areas. If could you just repeat those I couldn’t get them down?
Yes. Absolutely Brian. Thanks. Pivotal is a key area. I mentioned, sales force as well again we continue to make investments there. And enjoyed great growth there last year 20%. But Pivotal Cloud Foundry, which is Platform as a Service is where we see a big opportunity, we have developed the strong relationship with them, really just under recent months, probably over the last six months. And yes, we intend to hire pretty substantially into that.
That is not reflected by the way in any of our guidance as it’s still early on in the process, but we are making those investments now both in terms of training and creating certified Pivotal developers and of course and hiring those resources.
Our intent and expectation around that is that most of that revenue will be incremental and will be incremental to the guidance that we have provided now. So we want to be cautious, but I can tell you that things are off to a great start and so that’s one that we are certainly excited about expect to see some upside around.
Is the market for Pivotal such that as you have new employees trained or new employees with those skill sets that there are so much demand that can be immediately placed or how long will that ramp take once you have that employee base or consultant base to fill requisites?
It’s a great question. We will go right out. We have a substantial pipeline around that, a lot of companies are adopting their primary process and platform for development. Big companies like GE, Ford, Express Scripts here in St. Louis and a number of other large companies that we have engaged with.
Also through our relationship with Pivotal and their experiencing of significant searching growth, they’re looking more and more to partners for delivering the services as their focusing more on enablement. So we are super excited about it and yes directly to your questions, pretty much as soon we have got a set of training, they are going to be available.
Great. And then looking at the offshore delivery mix. You talk about that inhibitor growth on the top-line, but also plan of investment. But it looks like stabilize for the last quarter, the offshore delivery mix or maybe talk about some short-term and long-term goals of offshore delivery capabilities and percentage maybe of your mix?
Yes. I think long-term, I think, mix could rise 25% ultimately on revenue, which would be substantial change here and again, I think that’s pretty long-term. But I expect that even thought, we might have been more in lock step the overall business, I think that’s partly, because the overall business did pretty well in Q4. But I still think that business will outpace the overall business by about five points.
So we are growing 10%, U.S. is growing 10%, I expect that 10%, between the DDC, which by the way is technically in Lafayette, Louisiana and also our GDCs in India and China. So we are expecting that kind of growth there. By the way Pivotal could be a part of that. So we are going to be gearing up for offshore delivery with Pivotal as well and I think we will see a lot of demand there at those attractive pricing points.
Great. Last question I have, a few times in the past when you guys more recently in the more recent years have provided a solid top-line outlook by today’s solid organic growth. You have been tripped up unfortunately by a large healthcare customer. I think it’s happened twice. So may be insight into that customer’s demand, its plans for growth today. Is it a larger customer as we thought it could be, I just want to understand that customer concentration from that customer I think a few times?
Yes, absolutely, actually I would tell you that things are very, very stable there. Based on the rating we see in all of our top 50 right now, we are seeing really good stability. The progress they are making on their program which is where we kind of get caught up before if it wasn’t necessarily the areas where we were working. It was more dependencies. But that has been resolved and I would say things are going very smoothly for their program overall and our delivery is going well. Our relationship with them is very strong. And Paul what is the concentration that’s on right now?
Yes so just for accounts 16% of revenue and I think the largest one itself is about four or five.
Yes, so it’s down to 4% to 5% concentration. I would tell you an absolute basis the revenue is close to our highest run rate there. So the good news is the rest of top 50 had kind of risen around it and diluted it which is great from a risk standpoint. It’s of course hard to anticipating at those kind of issues but we are pretty dumb confident we are not going to see any of that.
Great. Thanks so much guys.
Thanks Brian.
Your next question comes from the line of Michael Martin from Michael J. Martin. Your line is open.
Good morning and congratulations. Just one question. What kind of income tax rate are you assuming for this year?
Yes for 2018 we are expecting the GAAP rate to be around 27%, 28% and the adjusted rate would be few points below that.
Okay. Thank you so much.
Thank you.
Your next question comes from the line of Mayank Tandon from Needham and Co. Your line is open.
All my questions have been answered. Thank you.
[Operator Instructions]. I’m showing no further questions at this time. I will turn the call back over to Jeff Davis.
Alright. Well thank you all. As you can see a great end or finish to 2017 and we have got a wonderful outlook and really actually anticipating some upside potential for the year going forward and beyond. Thank you.
Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day. You may all disconnect.