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

Perficient, Inc. (NASDAQ:PRFT) Q4 2023 Earnings Call Transcript February 27, 2024

Perficient, Inc. misses on earnings expectations. Reported EPS is $0.99 EPS, expectations were $1.01. Perficient, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter 2023 Perficient Earnings 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. [Operator Instructions] Please be advised that today’s conference is being recorded. I would like now to turn the conference over to Tom Hogan, President and CEO. Please go ahead.

Tom Hogan: Good morning, everyone. This is Tom Hogan, Perficient’s President and CEO, and with me on the phone today is Paul Martin, our CFO. I’d like to thank you for your time this morning. As usual, we’ll have some prepared comments, after which we’ll open the call up for some questions. Paul, can you please read the safe harbor statement.

Paul Martin: Thanks, Tom, 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 these results to be different than contemplated in today’s discussions. 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 measures prepared in accordance with GAAP on our website under Investor Relations. Tom?

Tom Hogan: Thanks, Paul. Good morning again everybody. We appreciate your time as we discuss Perficient’s fourth quarter and full year results and share outlook for 2024. As we’ve previously discussed, the second half of 2023 was a challenge with extended sales cycles and a shift in client buying behavior. That said, several things have happened in recent weeks that give us optimism that in 2024 we will return to growth, particularly in the second half. First of all, we’re excited to have completed the acquisition of SMEDIX earlier this year. This team is incredibly skilled in development of software that runs medical devices and their joining Perficient makes us even more formidable provider in the healthcare and life sciences industries.

Almost all of the nearly 200 colleagues who joined Perficient are based in Romania. And with these new team members, nearly 60% of our billable head count is now located outside of the United States. As a reminder, we are unique in the marketplace. We’re the only firm in our space with true global depth across the United States, Latin America and India. And our intentions long-term are for Romania to become our hub in Europe, as we replicate there what we’ve already built in India and Latin America. Another data point contributing to our confidence for 2024 was Q4 bookings, up nearly double digits on an annual basis and even stronger sequentially. As we talked about on occasion on these calls over the years, there is a strong correlation between bookings realized and revenue recognized five to six months out.

The deals we won in Q4 will be ramped in driving revenue beginning in the second quarter. The Q4 strong bookings was driven primarily by larger deals. We booked 56 deals greater than $1 million during the fourth quarter of 2023, flat year-over-year, but sequentially up from 37% in the third quarter of 2023. While annual deal volume was flat, the size of the wins is what drove the near double-digit increase I mentioned earlier. A final point we’re sharing that underscores the momentum building is the update on the large project when I mentioned it on the last call. During October, we closed a multiyear program with a client that will require 100 Perficient colleagues to support their digital transformation initiatives. This program began to ramp in Q4 and we expect the team will be fully up by early second quarter.

This program is an example of what we believe will be several capacity model relationships will gain in coming quarters and years. These programs will help provide revenue consistency and serve as the foundation for continued project-based initiative growth. We continue to remain well-diversified from a customer, industry and platform perspective. Healthcare and financial services remain the strongest verticals, but we’re also excited about our momentum in both manufacturing and automotive. I will say clients across each of our industry verticals we’re expressing strong interest in our perspective and capabilities related to artificial intelligence, and this is a discipline we’ve had for nearly a decade. A subset of leaders within our Generative AI innovation group, which consists of more than 800 colleagues around the world, have been working in global, blended scrum teams developing multiple POCs, client demos and frameworks, both on behalf of clients and an exploration of efficiencies we can gain across internal operations.

Additionally, we’re engaged with our clients, delivering significant usable AI projects. I’m talking about applications which should provide personalized responses based on customer intent and natural language analytic, chat bots to help customer experience, analyze, understand and understand the customer sentiment. I’m extremely proud of the work we’ve been doing with one of the largest and leading pharmaceutical companies in the world providing AI capabilities to their clinical research teams. These AI capabilities provide researchers with data anomaly detection, natural language querying, generative narratives of data that can help predict critical items like study setup. All of these AI capabilities will help provide a major global impact on health incomes.

And finally, in January we launched our PACE framework, which provides a holistic approach to responsibility and approach to responsibly operationalizing AI across an organization and empowers organizations to unlock the benefits of AI, while proactively addressing risks. PACE addresses the key factors in responsible gen AI adoption, including company policies, adverse’, controls and enablement. Also exciting is the continuing progress being made to our proprietary Envision online platform. The business capability library module within the tool has grown to more than 700 defined capabilities, new capabilities were introduced for marketing and commerce, order management, customer service and product information management. The platform selection module now addresses more than 8,000 system requirements, 500 vendors and 80 different types of platforms across disciplines like order management, analytics, marketing automation, product information management, customer data platforms, personalization, BI reporting and many, many more.

And finally, we’re excited about the launch of Perficient’s fourth employee resource group, LiveWell, which is a global colleague community focused on supporting our colleagues with physical, emotional and financial curriculum and content. LiveWell joins women in technology, giving and cultural connections as forums for our global colleagues to connect, collaborate and make a difference around topics and cause that passionate about. We continue to focus on investing in programs our colleagues expressed desire for, which results in an enthusiastic and engaged workforce and leads to even greater outcomes for our enterprise customers. And with that, I’ll turn things over to Paul to speak to the financial results.

Paul Martin: Thanks Tom. Let me start with the fourth quarter results. Services revenue including reimbursable expenses were $216.5 million in the fourth quarter, a 5% decrease over the prior year. Services gross margin, excluding reimbursable expenses and stock compensation was 37.7% in the fourth quarter compared to 40.8% in the prior year. SG&A expense was $40.3 million in the fourth quarter compared to $43.7 million in the prior year. SG&A expense as a percentage of revenues decreased to 18.3% to 18.8% in the prior year. The decrease in SG&A expense as a percentage of revenues was primarily due to lower bonus expense and bad debt recoveries that occurred in the fourth quarter. Adjusted EBITDA was $46.7 million or 21.1% of revenues in the fourth quarter compared to $54.3 million or 23.4% of revenues in the prior year.

Amortization expense was $4.3 million in the fourth quarter compared to $6.5 million in the prior year. Net interest income was $0.4 million in the fourth quarter compared to $0.8 million of net interest expense in the prior year, primarily due to $1.2 million increase in interest income resulting from higher cash balances and higher interest rates. Our effective tax rate was 29.5% in the fourth quarter compared to 28% in the prior year. Net income was $23.2 million for the fourth quarter compared to $26.5 million in the prior year. Diluted GAAP earnings per share decreased to $0.65 a share compared to $0.74 in the prior year and adjusted earnings per share decreased to $0.99 a share for the fourth quarter from $1.14 in the prior year. Please see the press release for a full reconciliation to GAAP earnings.

Now turning to the full year results. Services revenue including reimbursable expenses were $892.9 million for the year ended December 31, 2023, essentially flat compared to the prior year. Services gross margin, excluding reimbursable expenses and stock comp was 38% for the year ended December 31, 2023 compared to 40.2% in the prior year period. SG&A expense was $170.6 million for the year ended December 31, 2023 compared to a $171.1 million in the prior year period. SG&A expense as a percentage of revenues decreased to 18.8% from 18.9% in the prior year. Adjusted EBITDA for the year ended December 31, 2023 was $190.7 million or 21.4% of revenues compared to $205.8 million or 22.2% of revenues in the prior year period, which continues to exceed the peer group average.

Amortization expense was $20.6 million for the year ended December 31, 2023 compared to $24.5 million in the prior year. Net interest expense for the year ended December 31, 2023 decreased to $0.4 million from $3.2 million in the prior year primarily due to a $2.7 million increase in interest income. Our effective tax rate was 27.5% for the year ended December 31, 2023 compared to 25.9% in the prior year. The increase in the effective tax rate was primarily due to a decrease in research credit benefit and an increase in the impact of stock compensation, partially offset by a decrease in the effective acquisition costs compared to the prior year. Net income for the year ended December 31, 2023 was $98.9 million compared to $104.4 million in the prior year.

Diluted GAAP earnings per share decreased to $2.76 for the year ended December 31, 2023 compared to $2.90 in the prior year. Adjusted earnings per share was $3.95 for the year ended December 31, 2023 compared to $4.28 in the prior year. Our ending billable headcount at December 31, 2023 was 5,849 including 5,578 billable consultants and 271 subcontractors. Ending SG&A headcount was 969. Our outstanding debt, net of deferred issuance costs as of December 31, 2023 was $396.9 million. We also had $128.9 million in cash and cash equivalents and $300 million of unused borrowing capacity under our credit facility. Our balance sheet continues to leave us very well positioned to continue to execute against our strategic plan. Operating cash flows increased to $103 million (ph) in 2023 from $118.1 million in the prior year, primarily due to increased cash inflows related to accounts receivable.

I’ll now turn the call back over to Tom for the outlook. Tom?

Tom Hogan: Thank you, Paul. Perficient expects its first quarter 2024 revenue to be in the range of $212 million to $218 million. First quarter GAAP earnings per share is expected to be in the range of $0.31 to $0.35. First quarter adjusted earnings per share is expected to be in the range of $0.74 to $0.79. Perficient expects its full year 2024 revenue to be in the range of $925 million to $965 million. Expects its 2024 GAAP earnings per share to be in the range of $2.64 to $2.77, and expects its 2024 adjusted earnings per share to be in the range of $4.05 to $4.20. And with that, operator, we can open up the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question comes from Jesse Wilson with William Blair. Your line is open.

Jesse Wilson: Hi. Good morning, guys. This is Jesse on for Maggie. So for my first question, I wanted to talk about bookings. What have you seen in the first two months of this year and how do you see the cadence of revenue growth for the full year, given your comments about the second half and due to the fact that you probably have more visibility to the second quarter at this time?

Tom Hogan: Hi. Good morning, Jesse. So the pipeline continues to be very robust. January was a good solid booking month for us. We have a number of months to go here in the quarter. Pipeline continues to be there. We continue to see the delay though in our bookings we saw in Q4 and still number of deals we’re still going after that, we still have a couple of months left or a month left here in the quarter with some big deals we’re still chasing. As far as revenue, per my comments, you really see it ramping towards the second half of the year. I think there’s a lot of great conversations. We definitely see a tone from our clients shifting from the cost take-outs and talking more about some of that discretionary spend that were definitely a favorable environment for Perficient in the past, and we’re seeing some nice trends that should give — that give us some indication that we should have some nice second half ramping.

But the first two quarters here and the bookings are going to really dictate what that ramp looks like and the pace of the ramp throughout the year.

Jesse Wilson: Okay. That’s helpful. And then for my follow up, can you talk about your expectations for gross margin and utilization throughout the year. I’m trying to understand what might be causing the headwinds to profitability this year.

Tom Hogan: Sure. So from a utilization standpoint, the January timeframe, December is challenging with the holidays with January usually a little slower to the ramp of some projects, but we ramp-up to be 80% we expect for the quarter, and we’ll continue to run the business at 80% throughout the year. Gross margins in the first quarter are always challenging as we have some reset to taxes and the likes. So margins are challenging in the first half. But we plan to ramp the gross margins to the 40% by the end of the year.

Paul Martin: Jesse, margins are generally lower in the first quarter. This year in particular, we’ve had some higher benefit costs that will impact Q1. But our overall strategy you’re talking about, as we continue to ramp faster offshore, which has higher margins. We’re going to continue to see some improvement from that, that we’ll get us fairly close to this year’s margins are a little higher for the full year.

Jesse Wilson: Okay. Thank you, both. I’ll hop back in the queue.

Tom Hogan: Thank you.

Operator: Please stand by for the next question. The next question comes from Mayank Tandon with Needham. Your line is open.

Mayank Tandon: Thank you. Good morning, Tom and Paul. I wanted to double click on the second half recovery. What is the level of visibility today? I only ask because you’ve had so many head picks across the industry. So I’m just trying to get maybe some more data points, more color in terms of our client budget set. Have they committed to certain projects? So just wanted to gauge your level of confidence on that second half recovery that’s implied in the guidance.

Tom Hogan: Yeah. I think, Mayank, what you’re seeing is a couple of things which I alluded to in the comments. First, the bookings in Q4 were quite strong. We see — it’s typically about five to six months out, where we start seeing that really start to ramp. So that applies for some nice second half ramp. The large program that we kicked off in Q4 should be ramped in Q2, which should have some nice ramp as well for the year. We’re also seeing a number of projects we were able to kick off here at the beginning of the year. One project actually was a mid-to-low eight-figure deal that was brought down to a seven-figure deal that we continue and are very hopeful that we’ll continue to ramp throughout the year, which will give us some nice second half ramping as well.

We also have a number of deals we’re chasing, like we were for the deal related in October. We’re hopeful to have one of those deals also done here by mid of the year, which will give us some ramp for the second half. Not to mention as alluded to earlier, we definitely see a different conversation with our clients of budgets opening up here and having conversations now about second half projects that are more in line with spending for the discretionary side versus just cost takeout. So all those things together is what really gives us the insight to what the second half looks like. Now the question ultimately is what that ramp looks like. Is it the ramp that we see at the top-end of our range for the second half of the year, which will give us a really nice growth number for the year I think compared to our peer group or is it going to be a little bit more waivered as we saw in 2023 time period, and quite honestly, time will tell, but in a couple of quarters.

Mayank Tandon: Got it. That’s very helpful color. And then as a quick follow-up, I wanted to get a sense of the conversations you’re having with your clients around pricing and then that ties into sort of the revenue trajectory from what you can push on the utilization side. I think you mentioned, Tom, 80%, but just wanted to get a sense if that’s the number for the full year or is that what you’re progressing towards? And then last but not least, are you actually hiring organically today or is the head count increase that we saw in the fourth quarter all driven by the acquisition?