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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.
Ladies and gentlemen, thank you for standing by and welcome to the Q4 Full Year 2019 Perficient Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jeff Davis, Chairman and CEO. Please go ahead sir.
Thank you very much. With me on the call this morning are Paul Martin, our CFO; Tom Logan, our COO. I want to thank you for your time and we look forward to our call. Obviously, we have about 10, 15 minutes of prepared comments, after which we will open up the call for questions. Before we proceed, Paul, will you read the Safe Harbor statement please?
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 discussions. 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 guidance to the most directly comparable financial measures prepared in accordance with GAAP on our website under Investor Relations. Jeff?
Thanks, Paul. Well, once again thanks for joining. We are pleased to be with you this morning to discuss our fourth quarter and full year 2019 results as well as provide an initial outlook on 2020. In many ways, 2019 which represented the 20th anniversary of our listing as a public company was a milestone year for Perficient, a broad expansion of several major client relationships and our success gaining large new customers drove a double-digit revenue growth and strong margin expansion that resulted in earnings that exceeded the high-end of our original expectations by 17%.
Our strategic focus on the continued rapid buildup and leveraging of our global delivery teams contributed to our performance. As you are likely aware, we more than tripled our space in India during the year and are hiring great talent aggressively there to meet that demand. In fact, our offshore revenue grew materially in every quarter during the year on both an annual and sequential basis. During the year, our offshore revenue increased more than 20% and in the fourth quarter was up greater than 30%, that’s a base matching or exceeding most of our more offshore oriented competitors. Tom will talk a little bit later about our success during the quarter winning large deals, then I will share now that December represented our largest bookings month ever, and in January, we exceeded the December number. So obviously, we are off to a great start in terms of bookings.
We are proud of the performance and all that we accomplished in 2019 and head into 2020 with a lot of momentum and optimism, because the world’s largest enterprise and biggest brands are embracing Perficient as the digital consultancy they can depend on, to imagine, create, engineer and grow their businesses. Our ability, nimbleness and flexibility differentiate us from competitors in our programmatic and practical approach delivers value quickly and that routinely enables us to expand with clients. We think big, start smart and move fast and customers love it.
Couple of examples I want to share with you. We continue work with a leading financial services provider to provide customers with a more connected investment experience. We have been involved in several innovative projects, including enabling conversational commerce through development and cross-platform integration of chatbots, which provides customers with timely information at their fingertips across multiple devices. We also recently extended our multiyear, multimillion dollar agreement with a private health insurance company to transform their mobile and member portal experience. The multi-faceted project includes a redesign and new mobile app and the integration of a sophisticated home delivery medication service that simplifies the process of order repurchasing, tracking and retailing medications. We also continue our decade plus partnership with leading global automotive manufacturer to develop and deliver innovative digital solutions across the business in its multiple divisions.
Most recently, we redesigned and re-platformed their global dealer portal, incorporating an enhanced search capability that improves the ability for dealers to find the information that they need. And while we continue to gain and grow relationships with the biggest and best enterprises on the planet, true economic engines of our domestic and global economies, we are also focused on expanding and enhancing our portfolio to support them. On that note, we are excited to have one acquisition complete this year. MedTouch, a great group, highly regarded one already helping us win additional work. And we are in later stage discussions with a couple of other firms that are hopeful some things we will be pretty excited about will come together here in the first half of 2020.
And with that, I will turn the call over to Paul who will share the financial results details for the fourth quarter and full year. Paul?
Thanks, Jeff. Services revenues were $143.8 million for the fourth quarter of 2019 and a 11% increase over the comparable prior year period. Services gross margin percentage for the fourth quarter of 2019, excluding reimbursable expenses and stock compensation, increased 40 basis points to 39.9% compared to the prior period. SG&A expense, excluding stock compensation, increased to $30.9 million in the fourth quarter of 2019 from $29.9 million in the comparable prior year period. SG&A, excluding stock compensation as a percentage of revenue, decreased to 21.3% from 22.7% in the fourth quarter of 2018. Adjusted EBITDA for the fourth quarter of 2019 was $26.5 million or 18.3% of revenues compared to $21.7 million or 16.4% of revenues in the fourth quarter of 2018. The fourth quarter included amortization expense of $4 million compared to $4.3 million in the prior period.
Net interest expense for the fourth quarter of 2019 increased to $1.9 million from $1.8 million. Our effective tax rate for the fourth quarter of 2019 was 14.2% compared to 22% for the fourth quarter of 2018. The decrease in the effective tax rate was primarily due to increase in tax benefits recognized related to share-based compensation deductions compared to the prior year period. Net income increased 58% to $11.8 million for the fourth quarter of 2019 from $7.5 million in the fourth quarter of 2018. Diluted GAAP earnings per share increased to $0.36 a share for the fourth quarter of 2019 from $0.23 in the fourth quarter of 2018. Adjusted earnings per share increased to $0.58 a share for the fourth quarter of 2019 from $0.47 in the fourth quarter of 2018. See the press release for full reconciliation to GAAP earnings.
I will now turn to the full year results. Services revenues were $561.9 million for the year ended December 31, 2019, a 14% increase over the prior year. Services gross margin percentage for the year ended December 31, 2019 excluding reimbursed expenses and stock compensation increased 170 basis points to 39.2%. SG&A expense, excluding stock compensation increased to $122.9 million for the year ended December 31, 2019 from $108.3 million in the prior year. SG&A expense, excluding stock compensation as a percentage of revenues, was $21.7 million which is consistent with the prior year. Adjusted EBITDA for the year ended December 31, 2019 was $95 million or 16.8% of revenues compared to $76.5 million or 15.3 of revenues in the prior year, the year ended December 31 includes $16.2 million of amortization compared to $16.4 million in the prior year.
Net interest expense for the year ended December 31, 2019 increased to $7.4 million from $3.6 million in the prior year primarily due to non-cash amortization of debt discount and issuance costs related to the company’s convertible senior notes that were issued in September of 2018. Our effective tax rate for the year was 22.6% compared to 24.1% in the prior year. Net income increased 51% to $37.1 million for 2019 from $24.6 million in 2018. Diluted GAAP earnings per share increased to $1.15 for the year ended December 31, 2019 from $0.73 in 2018. Adjusted earnings per share increased to $2.07 or a 30% increase compared to $1.59 in 2018. Our earning billable headcount at December 31, 2019 was 3,138 including 2,904 billable consultants and 234 subcontractors and then the SG&A headcount was 515.
Our outstanding debt net of unamortized debt discount and deferred issuance cost as of December 31, 2019 was $124.7 million. We also had an additional $70.7 million of cash and cash equivalents as of December 31, 2019. And our balance continues to leave us very well positioned to execute on our strategic plan. Our days sales outstanding on accounts receivable was 71 days at the end of the fourth quarter, which is consistent with the fourth quarter of 2018.
I will now turn the call over to Tom Hogan for a little more commentary. Tom?
Thank you, Paul. Good morning, everybody. As Jeff mentioned earlier, great bookings recently on top of that, our pipeline remains strong. As quickly as we are winning work, we are finding and pursuing new opportunities. In fact right now, we are tracking more than a dozen opportunities larger than $5 million with a few of those having $10 million plus potential. And again, that’s on the yields of a strong fourth quarter bookings and a great January bookings. We booked 65 deals greater than $500,000 during the fourth quarter of 2019 that compares to 49 deals 500k greater during the fourth quarter of 2018. Additionally, deal sizes of those engagements, was up year-over-year, some more wins and larger wins. North American ABR was $149 for the fourth quarter consistent with third quarter results up $3 or 2% on an annual basis.
As we have routinely mentioned on these calls, we believe opportunity remains for us to continue to increase rates gradually over time closing the gap that exists between Perficient and some of our larger competitors. Utilization during the quarter was 78%, a bit lower than we would like, but it was something we anticipated given the Christmas holidays fell on Wednesday last year, which of course influences not only our colleagues’ planning decisions, but oftentimes our client availability as well. As you know, we are very active monitoring that metric and we seek to manage the business closer to 80% utilization.
While our diversification across the industries has been a strategic contributor to our success, it has mitigated concentration risk over the years. Our deep strength in health sciences, which represents 32% of revenue during the quarter, has routinely and certainly enabled us to build deep routes and strong reputation in that vertical. And while we are technically a Q1 2020 event as Jeff mentioned, we are thrilled to add our capabilities with their early January addition of MedTouch. It’s a great firm focused on patient acquisition, customer experience, patient acquisition and loyalty and physician marketing. And as Jeff mentioned, integration began immediately collectively. We have already won significant work we might otherwise not have. The business has strong momentum right now. We are out-thinking, out-hustling, outperforming others in the space and we are gaining share.
And with that, I will turn things back to Jeff for the first quarter and full year 2020 outlook.
Well, thanks Tom. So in summary, we continue to fire on many cylinders and succeed on several fronts. As we have highlighted, we are running new logos, gaining share and systematically building a much larger and more powerful business. We feel great about the future and our trajectory.
Perficient expects its first quarter 2020 revenue to be in the range of $143 million to $149 million. First quarter GAAP earnings per share is expected to be in the range of $0.25 to $0.28. First quarter adjusted earnings per share is expected to be in the range of $0.49 to $0.52. Perficient is issuing a full year 2020 revenue guidance range of $610 million to $640 million, a full year 2020 GAAP earnings per share guidance range of $1.36 to $1.51, and a full year 2020 adjusted earnings per share guidance range of $2.30 to $2.45.
With that, we can open up the call for questions. Operator?
Thank you. [Operator Instructions] Our first question comes from Maggie Nolan with William Blair. You may proceed with your question.
Hi, thank you. So I wanted to understand how you came into the year for the initial 2020 guidance, is there any level of conservatism baked into the guidance related to macro events or any broader slowdown, any change in kind of how you put that together versus 2019 and then what is the organic component embedded within that expectation as well?
Sure. So some of the basis for it is the breakdown that we experienced last year so and we expect that, that growth trajectory is going to continue throughout the year. The guidance implies that. The organic range on this guidance is for Q1 is….
For Q1, it’s 5% to 10% for the year.
5% to 10% for the year. So, we are – I would say there is a little bit baked in there as well for what we are seeing as it relates to corona, but really not much, we are not really been impacted by it. So for the most part, it’s a typical seasonality. A lot of clients did delay their starts to the year. So that’s reflected here as well.
Okay, thank you. And then on the margin side of things, you have talked about the various levers that you have. We have talked about kind of that normalized utilization range that we should be expecting. What are you expecting in the way of expansion at the adjusted EBITDA level kind of on a go-forward basis and where is that really coming from in the business when you look at gross margin versus what you can do at the SG&A level?
Yes. I think the guidance implies like 100 to 200 basis point expansion this year of EBITDA and some of that will come from rate improvement as we had last year, our goal is going to be similar to the 3% rate increase. We did manage to achieve 2% across the year last year. But the other major factor that I do want to talk about and highlight is offshore. And as I mentioned in the earlier part of the call, our offshore grew over 20% last year, 21% across the year and it actually grew over 30% in the fourth quarter. We enjoy over 50% gross margin in that work and we are going to continue to emphasize that growth, even though it may represent a little bit of the headwind to top line revenue. It’s the right thing to do for the business and we have got an advantage there and then we have been digital offshore, I think actually ahead of a lot of our competitions, that’s why again you can see us growing that piece of our business at a pace at or above most of our competition there that drives offshore.
Thank you.
Thank you.
Thank you. Our next question comes from Mayank Tandon with Needham. You may proceed with your question.
Hey, good morning. This is actually Kyle Peterson on for Mayank. Thanks for taking my questions. Just want to talk a little bit on M&A, I know you guys have closed MedTouch already you guys mentioned that you have some stuff kind of in the hopper here in discussion. Is there anything particularly you guys are looking for, whether it’s additional capabilities? I think in the past you guys have talked a little bit about potentially pursuing near-shoring options. Just kind of want to see what you guys are looking at prioritizing from M&A?
Yes, good question. I think everything that we target in terms of acquisition is going to have some digital element to it. So that’s thing one. But you touched on another area that we are really excited about and have been working for sometime on finding a good fit and that’s near-shore. So we do have some things in the hopper in both digital and near-shore that hopefully will get done here in the next couple of months. It’s very possible that by the end of the first half, we could have already achieved our goal for the year which is about $50 million of run-rate revenue.
Great. That’s helpful. And then just one quick follow-up, I know you guys have been scaling on digital and your offshoring efforts, just want to see how the talent acquisition and retention is trending? Are you seeing any increased competition, changes in attrition rates or are things pretty stable on that front?
It’s – we enjoyed great retention. Overall, for the company, I think we are in the high-teens which is about where we like to be. We like it below 20%, but frankly 15%, I think is actually a healthy number, so somewhere in 15% to 20% range. But I will tell you offshore, our retention rates are phenomenal far better than our competitors. Our offshore attrition is about 15% which is I think a half roughly or at least a competition is in the mid 20s. So we are having great success both in terms of attracting talent and retaining it in all of our locations in India.
Alright. That’s helpful color. Thanks guys.
Thank you.
Thank you. Our next question comes from Surinder Singh with Jefferies. You may proceed with your question.
Good morning. I would just like to revisit the guidance for roughly 5% to 10% organic growth. Can you provide a little bit more color on the bottom end of that range versus the high end in the sense that when I look over previous commentary, my impression was that the firm would be able to generally consistently generate closer to the high end of that range?
Yes, that’s our goal. And I just contrast this against last year’s guidance, initial guidance as well, where I believe the midpoint of our organic growth was around 6%. We ended up delivering almost 11% or right around 11%. So first and foremost, I would say the guidance reflects our typical approach of working hard to under-promise and over-deliver and again, the 10%, 10% plus sustainably remains our goal, but we want to be judicious in how we are going.
Understood. And then you mentioned that potentially there is some consideration of either global events or perhaps any other considerations as well in that guidance for example maybe in evolution in the domestic political landscape in the back half of the year?
No, that’s a great question. And I think it’s again other than the statement I just made about our general conservative approach to guidance, I would hope sort of encompasses any risk there, but I will tell you we mentioned bookings in December and really, the fourth quarter in total and how bookings have started this year and we are not seeing any issue as it relates to demand. I mean, our pipeline continues to refill. Our current weighted pipeline right now is as large as it’s ever been in spite of the fact that we just did 2 back to back months of record bookings. So the climate that we are in right now that we are seeing is actually quite positive. We were affected very minimally by corona here in the first quarter, primarily in January, where we actually had some of our folks quarantined in their houses, but that’s pretty much fastest now and they are back in the office. And so we see things fairly normal. Outside of things, we obviously can’t predict.
That’s helpful. And then one quick follow-up on the quarter, when I kind of look at the number of subcontracts that you guys are using, it’s been suddenly declining as the year has progressed. Any shift in strategy or is it specific to maybe certain projects or types of projects that the contractors were being used for? Any color there would be appreciated?
Yes, absolutely. We continue to have a strategy of leveraging subcontractors, but as demand has picked up frankly, we are more comfortable bringing people on as employees. So we are feeling less reliant sort of on that flexible capacity work and essentially kind of driving that down that margins that we get on subs obviously are little lower than we get with employees. And we would rather have them as employees anyway. So yes, we are probably reducing or we certainly are reducing that headcount a little bit, but it will still be a factor as we move forward.
Understood. And then just one final question on the M&A, you have provided some good color on the pipeline and the targets that you are pursuing, is there consideration around the timing itself in the sense your capacity to take on multiple acquisitions at the same time or is the idea to try and space things out ideally?
Yes, that’s really not as much of a factor given the size of the acquisitions that we tend to target. Now, there is some larger ones out there if you do the math but then I alluded to, but these smaller acquisitions in the say 10 to 15 or even 10 to 20 range are integrated relatively quickly. We have got a great team in place, great management infrastructure, prepared to scale the business through $1 billion and beyond obviously organically and through acquisitions. So we have got good capacity and ability to manage and integrate acquisitions simultaneously actually.
Okay, thank you for the color. I appreciate that.
Thank you.
Thank you. Our next question comes from Brian Kinstlinger with Alliance Global Partners. You may proceed with your question.
Hey, guys. Thanks for taking my questions. Clearly, everyone is talking about the coronavirus, I want to follow-up on that. It may not have been apparent and as talked about in January, when your bookings were at a record. So I am curious if you have seen a slowdown in bookings in February clearly you were at a record, so any meaningful impact? Have customers tones changed in conversations as enterprises get nervous about the global impact to their business related to what’s going on in China?
No, I mean, bookings so far in February are I think it will be up again pretty nicely, making another record, but should be a strong month in our projected bookings through at least April and into the second quarter are very strong as well as I mentioned on the weighted pipeline. We are not hearing any feedback anecdotally from really any of our clients in terms of the coronavirus impacting their decisions to move forward to delaying anything directly. We’ve heard nothing to that effect. And of course, we have actually got clients – one of our major clients. We are doing a big project for actually in China and its full steam ahead on that engagement.
Interesting. So you touched on something I wanted to ask about long time that you made an acquisition. We haven’t talked about that was China-based delivery, what percentage of your offshore delivery is China versus India versus other countries? And can you remind us where you are located in China?
We are in Hangzhou, which is about couple of hours Southwest of Shanghai. And we have got about 90s – 80 employees there compared to 700 total offshore. So it’s a little more than 10%.
Great. That’s helpful. And then the 4Q bookings as well as January, that was so strong, does that mimic the mix of your business in terms of verticals or are there any outlier verticals that are seeing – that may see share gains in your business over the course of the year?
No, it’s consistent with the current breakdown. So health sciences leads the way, followed by financial services, automotive, retail etcetera is pretty much the same breakdown. So it’s a tide lifting all boats from a vertical standpoint.
Great. Last question I have is it appeared demand from your Adobe related services is outpacing other platforms, do you see that continuing and if so what are the driving factors for that?
I do. Well, I think it’s an Adobe’s share. I also think it’s the expansion of software that they have already sold. It’s very robust that the marketing manager component of their business is what I am talking primarily about. And I think it’s a testament to that being a very robust tool, with lots of different modules and capabilities that not everybody implements initially. So I would say one, they continue to take great share in that space, but two, there is also a lot of our clients that are now that are coming back around for a sort of around 2 or 3 to drive further enhancements and implement further enhancements around those installations.
Great. Thanks so much.
Thanks, Brian.
Thank you. Our next question comes from Vincent Colicchio with Barrington Research. You may proceed with your question.
Yes. Jeff, you had mentioned that the offshore growth is very robust, should we expect to see double-digit growth this year as well or will there be a slowing in that growth?
I believe we will. I think it will be similar to last year, might even be stronger and recall that last year was about 21%.
It sounds like you continue to add a large number of relatively pieces of new business, I am curious is your top 10 concentration changing, what does it look like year-over-year and sequentially?
I would say, it’s probably flat as a component. Paul is going to double check the specific number. But I think it’s flat on a relative basis right. So as a percent of revenue, it’s probably staying about the same.
It has. So Vince, it was 32% or top 10 with 32% of revenues in 2019 and fourth quarter, it was 31% in 2018, so essentially stayed the same.
Okay. And then I missed what you said in terms of EBITDA margin expansion expected for this year, what was that?
I think 100, 200 bps if you look at our guidance that’s implied in there. And I feel good about that. We have got a lot of levers still to pull. We achieved about 2% rate increase last year across the year against the backdrop by the way of net cost increases for employees of only about 7.0%, so obviously some expansion driven there as well as the substantial mix shift through offshore where gross margins are north of 50%.
Okay, thanks for answering my questions.
Thanks, Vince.
Thank you. Our next question comes from Jack Vander Aarde with Maxim Group. You may proceed with your question.
Hey, guys. So total billable headcount was up about almost 1% Q-over-Q, North American headcount that was flat Q-over-Q, I don’t know can you just provide any additional color around that dynamic? Is there a reason for this or am I just looking into it too much and where do you see this trending I guess throughout 2020? Will it continue to increase?
Yes. Your question is related to the difference between offshore and onshore, so onshore flat and offshore growing.
That’s right. North American headcount seems to have been flat from last quarter on a quarter end basis?
Yes. And that’s by design, managing seasonality of Q4 and working to maintain a solid level of utilization. We always try to slowdown on hiring, particularly domestically. And I would say during normal period we might even slowdown a little bit offshore. However, given the demand that we are seeing there and the growth that pace that we are enjoying here we are actually hiring quite a lot there and in fact hiring a little bit to the bench where our costs are lower and we are able to do that.
And we saw accelerating growth offshore and the fourth quarter was actually our strongest year-over-year quarter offshore and I would have – when we get into the first quarter 2020 with the acquisition that’s closed and potentially up you will see a lift in the North American headcount.
Got it, okay. That’s helpful. And then so with the number of – the number of and the dollar value of the large deals being pretty strong this quarter after kind of dipping a little bit last quarter, although last quarter was still up year-over-year, just wondering if you are seeing any changes with regard to the largest competitors of yours in terms of their pricing strategy, are they doing any changes there? And then is there any impact in your win rates and where you see win rates going in the future?
Actually, I would say, no. The competitors are behaving kind of the same where they always have and they are formidable and they are happy to go compete on price. So it’s not just a price differential, it really comes down to skills as well. So I think that’s going to continue going forward. I am not concerned about anything new sort of on the competitive front. What was the second part of your question?
Where do you see those win rates going forward, but it sounds like you answered that?
Yes, win rates are as strong as they have ever been mid-60s and interestingly enough, because I expected them to go down as we increase our sales capacity. We are getting more best and you can see the results of that, you revealed in our sales. I actually thought our win rates maybe come down a little bit again as we are out there swinging more, but the reality is they are staying pretty solid in the mid-60s. So they are a good indicator.
Okay, excellent. Thank you. That’s it for me.
Thanks, Jack.
Thank you. [Operator Instructions] Our next question comes from Allen Klee with National Securities. You may proceed with your question.
Yes, hi, I am not sure if you have this at this moment, but can you tell us for fourth quarter what operating cash flow and CapEx were?
Yes, the Q should – I am sorry, the K should be out later today. So yes, that will be on the next hour or two where we will be happy to provide that.
Okay. And then is it reasonable to assume that working capital will not have a material impact on based on what you know today on 2020 operating cash flow?
Yes. So the biggest driver of working capital for us is AR. We expect the days sales outstanding to stay relatively inline with the 71 days we had in the fourth quarter. So working capital needs will essentially scale with growth. And so the cash flow provided by operating activities was $78 million and the combination of PP&E and capitalization of internally developed software cost, looks like, is about $9.2 million.
Okay, great. And then I might have missed this, but did you say what your organic growth rate was in the fourth quarter?
Yes, fourth quarter was about 9%.
Great. Alright. Thank you so much.
Thank you.
Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Jeff Davis for any further remarks.
Alright. Well, thank you all for your time today. We appreciate it and look forward to talking to you again in a couple of months.
Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.