Perficient, Inc. (NASDAQ:PRFT) Q4 2022 Earnings Call Transcript

Perficient, Inc. (NASDAQ:PRFT) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good day and thank you for standing by. Welcome to the 2022 Q4 Perficient Earnings Call — Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. Please be advised that today’s conference is recorded. I’d like now to hand the conference over to our speaker today, Jeffrey Davis, Chairman and CEO. Please go ahead. I apologize, everyone. We’ve been experiencing some technical difficulties with our Perficient call. We’re just going to wait one second here while we make sure that the call is being heard on the audio portion of the session.

Jeffrey Davis: Yes. Just to add to that, this is Jeff Davis, we will restart here in just a moment, once we confirm that our provider has everything working. It appears that we do. So I’m just going to go ahead and launch back into this. This is Jeff Davis, Perficient’s Chairman and CEO. With me on the call, as usual, is Paul Martin, our CFO; Tom Hogan, our President and COO. I want to thank you for your time this morning. We have 10 to 15 minutes of prepared comments per usual, but before we proceed I’m going to ask Paul to read the safe harbor statement. Again, we apologize for the technical difficulty this morning.

Paul Martin: 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 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 and adjusted EBITDA. 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 measure prepared with GAAP on our website under Investor Relations. Jeff?

Jeffrey Davis: Thanks, Paul. And again, once again, I apologize for the delay this morning. We certainly appreciate your time as we discuss the fourth quarter and full year performance and our continued growth and profitability. The fourth quarter capped another solid year of growth and increased profitability at Perficient with adjusted earnings per share up 14% and revenue up 8% during the period. We’re, of course, monitoring the macro environment, and sales cycles in some cases are extended somewhat based on the same. But there are a lot of positives of notes, and we’re confident that Perficient is well positioned as it’s ever been. And our business is performing well, actually relative to some others in the space. Services gross margin was up 30 basis points during the quarter.

Our profitability remains best of breed. It’s a direct result of our customers’ willingness to place a premium on the value we deliver, combined with our strong physical discipline. The ongoing success we’re having in our journey of transforming Perficient into a truly unique and unparalleled global force continues. We’re delivering more work offshore than ever before and commanding higher rates for that work than ever before. Rates, in fact, are materially higher than many of our competitors, by the way, again, reflecting the superiority of our fully integrated model and talent. And our culture and truly integrated model is helping us retain that global talent as well. Our attrition during the quarter was well in line with our targets. Overall, 2022 was a remarkably successful year in our global transformation.

We realized 68% growth in our total offshore revenue with organic accounting for half of that total at 34%. Tom will speak to bookings specifically in a minute. The large deal win value was again strong during the quarter, up meaningfully, sequentially and year-over-year. The pipeline remains strong. And while we do not forecast deals not yet closed, we remain in pursuit of several that if won could materially change the trajectory of the year. As I mentioned earlier, some clients are taking more timeout decisions, but we’re confident demand for our services will remain robust, and we’re poised for another year of solid growth. In fact, although we saw a modest expansion of sales cycles during the quarter, we’re actually seeing more urgency in terms of project time lines on large deals, meaning, those deals are more compressed than they have been historically.

And that will actually be a benefit certainly in the near term. Customers are more concerned, but there are some competition than ever before and more ambitious than ever before in terms of moving quickly once commitments have been made. As we mentioned on last quarter’s call, whether our clients are investing in growth or seeking to reduce cost by leveraging efficiency, Perficient is the answer. And a reminder on our strategy, we expect growth everywhere, but continue to believe our non-U.S. presence will scale disproportionately fast. And that this mix shift in the near term will help margins, but also pose a modest headwind to our overall top line growth. However, as we move forward, our long term — toward our long-term goal of a 50-50 revenue mix, that is, half of our revenue delivered domestically and half delivered globally, will reach an inflection point where the headwind becomes a tailwind and it accelerates the revenue growth.

With that, I’ll turn things over to Paul.

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Paul Martin: Thanks, Jeff. Services revenue, excluding reimbursed expenses were $228.8 million in the fourth quarter, a 9% increase over the prior year, and year-over-year organic services growth was 6%. Gross margin percentage increased 60 basis points to 39.4% in the fourth quarter compared to the prior year. And services gross margin, including reimbursable expenses and stock compensation was 40.8% in the fourth quarter compared to 40.5% in the prior year. SG&A expense was $43.7 million in the fourth quarter compared to $41.7 million in the prior year. SG&A expense as a percentage of revenues decreased to 18.8% from 19.4% in the prior year. Adjusted EBITDA was $54.3 million or 23.4% of revenues in the fourth quarter compared to $47.7 million or 22.2% of revenues in the prior year.

Amortization expense was $6.5 million in the fourth quarter compared to $5.8 million in the prior year. The increase in amortization expense was primarily the additional intangibles from our two acquisitions in 2022. Net interest expense for the fourth quarter decreased to $0.8 million from $3.9 million in the prior year, primarily as a result of adopting the new accounting standard for convertible debt in the first quarter. Our effective tax rate was 28% in the fourth quarter compared to 476.5% in the prior year, the decrease in the effective tax rate was primarily due to the convertible debt transactions impact on the prior year. Net income increased to $26.5 million for the fourth quarter from $4.5 million in the prior year, primarily due to the loss from extinguishment of debt of $28.7 million in the prior year and improved operating performance.

Diluted GAAP earnings per share increased to $0.74 a share for the fourth quarter from $0.13 in the prior year. Adjusted earnings per share increased to $1.14 or 14% for the fourth quarter from $1 in the prior year. You can see the press release for a full reconciliation to GAAP earnings. I’ll now turn to the full year results. Services revenue, excluding reimbursable expenses were $893.1 million for the year ended December 31, 2022, a 19% increase over the prior year. Year-over-year organic services growth was 13%. Gross margin presented for the year ended December 31, 2022, increased 50 basis points to 38.9% compared to the prior year. Services gross margin, excluding reimbursed expenses and stock compensation for the year ended December 31, 2022, was 40.2% compared to 40% in the prior year.

SG&A expense for the year ended December 31, 2022 was $171.1 million compared to $152.4 million in the prior year. SG&A expense as a percentage of revenues decreased to 18.9% from 20% in the prior year. Adjusted EBITDA for the year ended December 31, 2022, was $205.8 million or 22.7% of revenues compared to $162.9 million or 21.4% of revenues in the prior year. The year ended December 31, 2022, included amortization of $24.5 million compared to $23.5 million in the prior year. Net interest expense for the year ended December 31, 2022, decreased to $3.2 million from $14.1 million in the prior year, again, primarily as a result of adopting the new accounting standard for convertible debt at the beginning of the year. Our effective tax rate was 25.9% for the year ended December 31, 2022, compared to 16.6% in the prior year.

The increase in the effective tax rate is primarily due to a decrease in stock compensation deductions and the decrease in research part of benefit compared to the prior year. Net income for the year ended December 31, 2022, was $104.4 million compared to $52.1 million in the prior year, primarily as a result of higher revenues, lower costs as a percent of revenues, lower interest expense and loss from extinguishment of debt of $29 million that was included in the prior year. Diluted GAAP earnings per share increased to $2.90 for the year ended December 31, 2022, compared to $1.50 in the prior year. Adjusted earnings per share increased to $4.28 for 2022 from $3.50 in the prior year. Our ending global headcount as of December 31, 2022, was 6,321 including 5,944 billable employees and 377 subcontractors.

I think SG&A headcount was 949. Our outstanding debt net of deferred issuance costs as of December 31, 2022, was $394.6 million. In addition, we have $30.1 million in cash and cash equivalents as of December 31, 2022, and $199.8 million of unused borrowing capacity on our credit facility. Our balance sheet continues to leave us very well positioned to continue to execute against our strategic plan. I’ll now turn the call over to Tom Hogan for a little more commentary. Tom?

Thomas Hogan: Thank you, Paul. And good morning, everybody. We booked 56 deals greater than $1 million during the fourth quarter of 2022, which compares to 43 in the fourth quarter of 2021 and 37 in the third quarter of 2022. Again, that’s 56 deals greater than $1 million in the fourth quarter of 2022 compared to 43 in the fourth quarter of 2021 and 37 in the third quarter of 2022. We’re still winning big deals and we won more of than ever before in Q4. Our net pipeline weighted and un- weighted range very strong. A couple of recent wins to highlight. We’re working with a multinational pharmaceutical corporation on a nearly $8 million — excuse me, 8-figure engagement to improve their patient data flow. Our unified team of global experts are delivering a custom built clinical data review and cleaning environment that provides an accurate real-time view of clinical studies, which allows the enterprise to holistically monitor progress and drive critical decision-making.

We also expanded our partnership with a leading automotive manufacturer, supporting the global CRM rollout for their commercial focused vehicle services and distribution business. As part of the engagement, our team of architects will migrate the manufacturer’s legacy platform and developed a global roll-up road map that includes their existing commercial and retail expenses. We also recently launched a new employee website for the same leading auto manufacturer. Our global team worked with the automaker to deliver a next-generation employee experience, featuring advanced personalization options, threads comments and an updated search function with more features planned in the coming months. The new site now serves more than 180,000 employees, including and receives more than $1 million business per week.

We continue to remain well diversified from a customer, industry and platform perspective. Health care and financial services led the way from a revenue and bookings perspective. We’re particularly excited about the accelerating momentum we have in the financial services industry, where our revenue has grown materially in recent years. Jeff mentioned some lengthening in sales cycles and the macro certainty, but let’s be clear, digital transformation is going nowhere. The work we’re delivering for our clients is, in many cases, imperative, mission critical and core to their competitive success. And with that, I’ll turn things back over to Jeff to discuss the first quarter and 2023 full year outlook.

Jeffrey Davis: Thanks, Tom. All right. Perficient’s expects its first quarter 2023 revenue to be in the range of $227 million to $233 million. First quarter GAAP earnings per share is expected to be in the range of $0.67 to $0.73. First quarter adjusted earnings per share is expected to be in the range of $1.01 to $1.06. Perficient expects its full year 2023 revenue to be in the range of $945 million to $985 million, 2023 GAAP earnings per share to be in the range of $3.24 to $3.40, and 2023 adjusted earnings share to be in the range of $4.60 to $4.75. And with that, operator, we can open up the call for questions.

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Q&A Session

Operator: Our first question comes from the line of Surinder Thind from Jefferies. Go ahead, Surinder.

Surinder Thind: Thank you. I’d like to start with a high-level question of kind of where demand sits at this point in the client decision-making process. If we were to rewind maybe a year ago, the thought was that there was perhaps a new elevated level of demand across the industry. So not just for yourselves, but more broadly, including your peers. Fast forward to today, it seems like that wasn’t quite the case, right? There’s — obviously, long-term demand is still intact, but clients are making more short-term decisions. So can you help us understand that disconnect or what you’re seeing at clients at this point and their willingness to push off projects? And if there is a further deterioration, should we expect continued weakness, I guess, for the foreseeable future?

Jeffrey Davis: Yes, it’s a good question. And I’ll start and ask Tom to add some color as his seat fit. So obviously, yes, the year didn’t ended the way it started, to your point. I think that from what we’ve seen, the pipeline as well as recent bookings even in this year so far is that — that seems to be moving behind us. In other words, things seem to be improving now from where they were, say, six months ago in terms of within bookings and pipeline. I think there is a number of contributing factors to that. Certainly, again, we were overly optimistic on the macro environment. And I do think that sentiment shifted, but I had no crystal ball. But it seems to be improving. And as for Perficient stand-alone, as Tom mentioned and I alluded to on the call, we actually have quite a number of large new opportunities and some in existing accounts, but maybe more importantly at new accounts, that have the potential to be very, very meaningful for us, even within the year.

So I think the general environment, while it did sort of stall or slow, seems to be improving. Now no crystal ball, but I think there’s reason for optimism. Tom?

Thomas Hogan: I agree. I think also, as we moved to larger deals that also compounds . The market is still very rich with opportunity. There’s definitely some caution in buying behavior. However, I’ll also say, the deal size is larger. So there’s definitely a level of stringency that executives are going through that historically they didn’t have to go through as we continue to see larger deal sizes as representative of our Q1 bookings that has had a little bit of a headwind for us specifically, not necessarily to the industry.

Surinder Thind: That’s helpful. And then as we kind of look at the year ahead, two related questions. One is, it sounds like the project time lines themselves are compressing. So I just understood that comment correctly that clients are still signing on for work, but they want that amount of work done to be quicker. So that would suggest like cost takeout projects? Or is the focus materially shifted in some of the projects that you’re working on? And then in terms of just the guide itself, is the vast majority of the growth — it sounds like its offshore, which it has been in the past or more recently as well. What is your outlook for onshore or U.S. growth look like?

Jeffrey Davis: Yes. Good question. So yes, you heard that correctly in terms of the large deals, specifically the large deals and those compressed time lines. I would say the majority of our work is actually not based on cost reduction. It’s based more on new products and services, and time to market is critical as ever. So I think that’s what’s driving a lot of that. Some of that also is — they’re catching up now, right? So where — some of these deals I’m talking about are from clients who were in that slow sales cycle. But then once they got through that, made that commitment, they’re like, okay, we’re behind now, so what can we do to accelerate this, right? So I think the majority of it is coming from that primarily. And — what was the other question?