Q4 2019 Earnings Call
Greetings and welcome to the pen systems fourth quarter 2019 earnings Conference call. At this time, all participants are they listen only mode.
Question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host David Stobie head of Investor Relations. Thank you Sir you may begin.
Thank you operator, and good morning, everyone. By now you should have received a copy of the earnings release for the company's fourth quarter 29 tier results.
If you have not copies are available at <unk> Dot com and the Investor section with me on todays call or cut to adopt them CEO and president and Jason Peterson Chief Financial Officer before we begin I'd like to remind you that some of the comments made on today's call may contain forward looking statements. These statements are subject to risk.
Certainties as described in the company's earnings release and FCC filings.
Additionally, all references to reported results that are non-GAAP measures have been reconciled to GAAP and are available on our quarterly earnings materials located in the Investor section of our website.
With that said I'll now turn the call over to arc.
Thank you David and good morning, everyone. Thanks for joining us.
It's already since Investor and Analyst day in November 2019, we spent some time speaking about was a show and your so customers face well, including for the acuity to speeding up business results and increasingly competitive environment.
You talked about was a necessity for most of all customers to transforms itself into adaptive enterprises, because the way we see a Dutch business is it keep Basel this must be so in order to.
<unk>.
And then talking to visit list, but not all clients themselves unsold their challenges he understands it dupont used to be a fast global incurred adoptive organization itself.
Well, obviously most of all competitors, who both had been talking about transform it into mobile blips. They try to explain book in November why this is Bob is already well production well distributed gel delivery models includes collaborations why fabric teams brings extensive comes when you didn't practices disposition better.
Most to be successful in sold insecurities Blunden Chile.
How does it help wanting to do to make sure those goals I know just words, but the direction for an actionable efforts.
And practical investments.
No three months later, we consider our full year financial results as well as the visa civil once we talked with you about booking though.
We finished 2018 in strong fiscal position across several dimensions to know.
And then secondly, we landed at 2 billion 290.
<unk> million in the revenues, reflecting 25% year over year constant currency gross and non-GAAP earnings per share well five dollar 42 cents, the 23% increase or fiscal 2002.
Additionally, we generated Congress 82 million or free cash flow for the.
Well it people front we added.
65 Congress addition.
Two already bomb.
Oh headcount across all client facing team some corporate functions.
Also in 2018, we were focused on extend in Oakland engagement configured to just.
Through more robust sales and the cost management functions and establish a comprehensive consulting fortune.
Your loan you pump continue although Brent that integrates all capabilities and business technologies and experienced consultant.
You pump continue but one of his oakwood product engineering capabilities, but institute to the market an integrated approach to solving complex problems by engaging 18, we'll talk to source, that's going to respond to Chris multiple would get additional touch points to help all clients address the children yourselves adaptive unsurprisingly speeds energy.
In addition to loans you know consultant, who could inform what do you also saw an increase demand for companies the truly understand how to build you can see that business blood flow out of.
Best of breed components conducted through intelligent TPS.
We assume just completely go through that you get more traction is a market.
Isn't that a prices start to put into it from pure or was it shows models towards more product since the go to market and solutions to the issues.
Which is very much in line, there's a prediction wait five years ago religion, I noticed the organization, who stated the 20, 27% to 5% of digital enterprise applications. We built this was but.
They also clarified the is so it shows that when you companies already fairly new kind of deal that doesn't include Oh. It was the books ocean instead, it can be nice when the publication that component.
That's differentiated innovative and not stem the software as well as a highly customized solutions.
We will be increasing to adopt.
You Cinco de conversion eating DNA really help us to become five years ago much more relevant was a market because this threats.
We believe this intelligent copeland build capabilities will become even more important beyond 22, and speed and you see denunciation pressures continues to push our customers to change the way the lucozade technology business processes and organizations.
This is why in 20 and they tend to be expanded to novel focused strategic partner relationship to go far beyond just formal understanding was this critical components and creates a little bit with usable excluded those and very much advance Lu from GMP securities around zone for increased sputum literally.
I believe chose this complex than you've seen so you can build solutions.
It's specifically carbon such components, you know cloud first automation data and engagement practices.
In 2018 in addition to build in our capabilities organically you continue to illustrate as you have targeted competence driven acquisitions the support though purchases in data deftness circles, and though we will in consulting bookings, which extend it though expertise in cloud it immigration yeah with insights grow.
All sorts interest among others.
Just to name a few.
We also if it if you put quite old global presence was going client and delivery perspective, and the great now in more than so to Congress.
We also speak about all efforts at all to do creation and three is one of the key drivers for future School.
Yes, if all those downes's football, so internal and external audiences in terms of whole current and future employees.
But 2018 became a very important here for us. It's good to go into critical capabilities to new level of professionalism and now ready for the next level of investment in Syria is much more confidence in terms of Boston.
Last year's who although in its look for if somebody wants it to in order to boot camps and could have gotten so dedication and development efforts, but it wasn't 10000 people coconuts engage can develop oh on talent entering new exposed in our core delivered a mark.
And it's pretty broad effort from low Incheon, Oh, parlous mice to Insource things. He didn't program in eastern Europe to extend in Oh, two SAR indication effort to cross nitin cancers to reach more keys, so never before.
Also in 2018 vibrato experience in developing and delivering integrated in productive assistants and three in platform to all Clive.
If you remember at some point they started to be of case study will and automotive client, who trust us to deliver program fuzzy employees.
Yeah, Hey, Peter just last week you found was one of 410 companies out of 400 that was recognized a dime newsgroups global so plus up.
The Innovation award was presented to Panflu program tailored to the data rates you team, we're helping them to transform their organization digital no.
No to conclude on 20 in 18 and to reach into 22 and.
Because all of this initiatives in mind in 22, and we will continue to focus our investment into real program that supports our ability to execute overdosed heritage.
As you can see some programs began in 2018, but when you focus on making continuous and sometimes significant upgrades, including consultant and industry expertise people develop went to do carry some good.
I think it's also important to do much Zambian using even driven company.
Still a key area of focus for us and we would love to stay for a third of the computation.
In addition to the nucleus monitoring and let's see we just mentioned before this also includes our investments in open source Blessed in gene for the QB two tools as well as internal global delivery infrastructure plus for the tier continuing to expand and the wolf to provide the higher level of collaboration knowledge management and deep understanding the following turn.
No and external data basically making those platforms have been more comprehensive and intelligent to support a dispute and scale opinion.
I seem to conclude my part I would provide a brief somebody who fall ambitions for 20 Twond.
It seems the ability to transform all self introduction to the price you visit real key to drive our future success.
And he understands that we need to continue to disrupt those sales in both.
It's accelerated pace to make it happen.
Too busy they need to become one of the questions or Wilton innovation and design consulting nucleation and social responsibility well continue to strengthen our quarter engineering people.
So we will have to continuously in the west and adapt to know if people platforms and processes into those that quickly respond to change leveraging our existing global induces distribute to deliver environment to build and bring to life. The bump digital platforms that connect our people and enables them to work seamlessly Mike.
Yes.
More efficient and effective in all that we do.
Opening up opportunities for transformation for everyone anywhere. So next gen delivery is those integration all social and innovation programs and lastly, extending our leadership across integrated consulting and engineering.
He realizes this on vicious goals and the growth goals before us even more challenging as we become a more global companies and dynamic organization.
So all in listening to continue to be focused and we continue to stress our ability to see and respond to change as a core Williams it goes back to pump or two days.
There's always this unwind and despite some wasn't micro level uncertainties.
We are constantly evolution and the region World. We are looking at 22 poignant optimistically. The believes that we can continue to didn't win relevant all global and divorce, Glenn Breeze through our ability to execute Leaseco digital transformation program and help them might as ambitions innovation program Scitor outage.
Total it over to Jason for a detailed financial update.
Last year no guidance for 2020.
Thank you arc and good morning, everyone.
I'll start with our fourth quarter financial highlights.
Paul with industry vertical performance and then touch on a few operational highlights ending with guidance for fiscal year 2020 in Q1.
Revenue for Q4 came in at 632.8 million.
A year over year growth of 25.3% on a reported basis or 24.8% growth in constant currency, reflecting a positive foreign exchange impact of 0.5%.
We saw higher than expected revenue for Q4, driven substantially by an uptick in demand in the second half for the quarter as well as stronger pool performance from a few of our acquired companies.
And FX benefit to the strengthening Russian ruble.
Growth in the quarter was broad based across our client portfolio. Some of the trends in growth include customer engagement ecommerce replatforming.
Scaling new models to drive clients future growth products and platform engineering and application modernization.
Regulatory activity data and data analytics and education.
Looking at our fourth quarter revenue growth across our industry verticals sulfur and high Tech grew 24.5% in the quarter.
Financial services delivered 21.8% growth.
Life Sciences in health care grew 20.3% in the quarter, reflecting a tougher year over year comparison, given the exceptionally strong performance in Q4 Applewhite team.
And traveling consumer grew 15.9%.
Rounding out our vertical performance, we saw very strong growth in both business information and media, which posted growth of 38% and our emerging vertical which delivered 36.3% growth driven primarily by clients and telecommunications and energy.
From a geographic perspective, North America, our largest region, representing 60.1% of our Q4 revenues grew 22.2% year over year.
Europe, representing 32.7% of our Q4 revenues grew 31.4% year over year was 31.7%.
In constant currency.
Yes, representing 4.9% over Q4 revenues grew 39.7% year over year.
In 27.7% in constant currency.
And finally, APAC grew 5.4% and now represents 2.3% of our revenues.
In the fourth quarter growth in our top 20 clients was approximately 22.1% and growth outside of our top 20 clients was approximately 27.7% compared to the same quarter last year.
Moving on the income statement, our GAAP gross margin for the quarter, 35.2% compared to 36.8% in Q4 last year.
Non-GAAP gross margin for the quarter was 36.7% compared to 37.7% for the same quarter last year.
GAAP EPS DNA was 19.8% of revenue compared to 19.3% in Q4 of last year and non-GAAP SGN eight came in at 18.1% of revenue compared to 17.7% same period last year.
Yes, Hey in Q4 reflected investments to create new capabilities expand infrastructure and introduce new lines of business.
GAAP income from operations was 84.7 million or 13.4% of revenue in the quarter compared to 78.3 million.
15.5% of revenue in Q4 last year.
Non-GAAP income from operations with a 107.6 million or 17% of revenue in the quarter compared to 93.1 million or 18.4% of revenue in Q4 of last year.
The year over year comparisons for both gross margin in income from operations reflect a lower level of utilization as a result of our decision to increase the rate of head count additions in the second half of fiscal year 19.
Our GAAP effective tax rate for the quarter came in at 12.1%, which includes a higher than expected level of excess tax benefit related to stock based compensation.
Our non-GAAP effective tax rate, which excludes the excess tax benefit was 20.7%.
In Q4, both GAAP and non-GAAP tax rates were favorably impacted by onetime adjustments related to prior years.
Diluted earnings per share on a GAAP basis was $1.29 and non-GAAP EPS was $1.51 cents, reflecting an 18.9% increase over the same quarter fiscal 2018.
In Q4, there were approximately 58 million diluted shares outstanding.
Turning to our cash flow and balance sheet cash flow from operations for Q4 was 124.6 million compared to 123.1 million in the same quarter for acquired team.
In Q4 F 18, DSL improved by eight days versus a three day improvement in Q4 0.9 team.
Free cash flow was 77.6 million compared to 113 million in the same quarter last year.
Resulting in a 88.9% conversion of adjusted net income.
DSO was 72 days compared to 75 days at the end of Q3 fiscal 2019, and 73 days in the same quarter last year.
The lower than average Dsos. This quarter was the result of our ongoing operational focus in this area.
Moving onto a few operational metrics, we ended the quarter with more than 32500 delivery professionals, a 21.7% increase year over year and a net addition of more than 1000 production professionals during Q4.
Total headcount ended at more than 36700 employees.
Nation was 77.9% compared to 80.2% in the same quarter last year in 76.1% in Q3.
Turning to the results for fiscal 2019.
Revenues for the fiscal year close to 2.29 billion.
For 24.5% reported growth over 2018 for a constant currency growth of 25.8%.
During fiscal 2019, our acquisitions contributed approximately 1.5% Turk rough.
GAAP income from operations increased 23.2% year over year and represented 13.2% of revenue for the year.
Our non-GAAP income from operations was 389.2 million an increase of 23.5% over the prior year and represented 17% of revenue.
Our GAAP effective tax rate for the year came in at 12.8%, excluding the impact of the excess tax benefits and certain one time adjustments our non-GAAP effective tax rate was 21.8%.
Diluted earnings per share on a GAAP basis was $4.53.
Non-GAAP EPS, which excludes adjustments for stock based compensation acquisition related costs was $5 in 42 cents.
Reflecting a 23.7% increase over fiscal 2018.
In fiscal 2019, there were approximately 57.7 million weighted average diluted shares outstanding.
In fiscal 2019 cash flow from operations was 287.5 million compared to 292.2 million for fiscal 2018.
And free cash flow came in at a 188.1 million.
Acting 60.2% adjusted net income conversion.
Now, let's turn to guidance starting with fiscal 2020.
Revenue growth will be in excess of 22% for both reported and constant currency.
Inorganic contribution for the full year is expected to be approximately 1%.
We expect GAAP income from operations to be in the range of 13% to 14%.
Non-GAAP income from operations to be in the range of 16% to 17%.
We expect to GAAP effective tax rate to be approximately 14% and our non-GAAP effective tax rate to be approximately 23%.
Earnings per share, we expect GAAP diluted EPS to be at least $5 in 56 cents for the full year and non-GAAP diluted EPS will be at least $6.30 for the full year.
In fact weighted average share count of 58.8 million fully diluted shares outstanding.
For Q1 of 520 revenues will be at least 642 million for the first quarter producing a growth rate of at least 23% for both reported and constant currency.
For the first quarter, we expect GAAP income from operations to be in the range of 12% to 13%.
Non-GAAP from operations to be in the range of 15% to 16%.
Expect our GAAP effective tax rate to be approximately 5% and non-GAAP effective tax rate will be approximately 23%.
Earnings per share, we expect GAAP diluted EPS will be at least $1.27 cents for the quarter and non-GAAP EPS will be at least $1.36 cents for the quarter.
We expect a weighted average share count at 58.3 million fully diluted shares outstanding.
Finally, a few key assumptions that support our GAAP to non-GAAP measurements stock compensation expense is expected to be approximately 74 million with 80 million Q1 $17 million in Q2, and 19 million in the remaining quarters.
Amortization of intangibles is expected to be approximately 11 million for the year evenly spread across each quarter.
The impact of foreign exchange is expected to be approximately a 9 million dollar loss for the year spread evenly across each quarter.
Tax effective non-GAAP adjustments is expected to be around 20.5 million for the year with 5.3 million in Q1, and approximately $5.1 million in each remaining quarter.
We expect excess tax that tax benefits to be around 34 million for the full year with approximately 14.5 million Q1 9.5 million in Q2, and 5 million in each remaining quarter.
One last point on our business outlook, we expect the profitability profile of fiscal 2020 to be more similar to that experienced in fiscal 2018.
With lower utilization and profitability in the first half of the year with improvements in the second half of the year.
So in summary, our 2020 outlook reflects continued strong demand for services underpinned by the diverse set of industries, we serve which provide them with a broad range of growth opportunities.
Our investments across our people platforms and processes will equip and positioning Pam for future growth.
With that let's open the call for questions.
Thank you at this time, we will be conducting the question and answer session. If he would like to ask your question. Please press star one on your telephone keypad. The confirmation to indicate that your line is in the question Q you May press star too easy we'd like to move your question from the Q.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star Keith one moment. Please let me pull for questions.
Thank you. Our first question comes from Maggie Nolan with William Blair. Please proceed.
Thank you good morning.
Jason wanted to follow up on that last comment kind of the cadence as the year. Its first half first second half what is contributing to that lower utilization and profitability and one H.
Why is it going to improve in the second half of the year.
Sure. So the traditional pattern for the company is been higher profitability in first half and lower profitability in the second half in 2018, we ran with that very high utilization in Q1, which is which was 80% and we don't expect to run at that level utilization in Q1, and I'll talk about.
A couple of thanks. So first we you know we've got fewer available build days in the first half of the fiscal year than we have in the second half. So that generally has a the more build as he now has a positive impact on profitability. The other thing is we've got some some impacts in Q1 I think most of us will be aware of payroll taxes kicked back end to the extent that they've been capped.
Certain geographies, particularly the U.S. in Russia.
There are uncapped as you start Q1, so that has a significant impact on on costs in the first quarter relative to Q4.
Gathering we have as we have our we have are a significant amount of our compensation increases actually occur in Q2.
So both of those impacts tend to have a somewhat.
Todd moderating impact on profitability when we get into the second half we've got greater build as we begin to see more tapping of the payroll taxes.
And in generally what we expect to see as.
We're going to keep an eye on utilization.
With a focus on.
Keeping that.
Around the range, we're at now with some potential for improvement.
Okay, great. Thank you and and then Arcadia, you talked about continuing to be.
And on.
That adaptability is important.
I am wondering you know.
As you think about that concept there riskier that certain initiatives would cannibalize other opportunities that you already had in place.
For instance, the education capabilities and services that ever cannibalize your opportunity for other services with clients. How should we think about kind of that changing dynamic that you are.
Creating more adaptable organization.
Hopefully.
When people talking about it its means that weve tried to prove.
Speed to market.
Basically you what though what will your would change is our clients experiencing the they'll be able to change so we're seeing too.
Two covidien specific well you and doing this fast so I don't think it's about.
But typically one.
So in those Alico additional service is not really.
He is what's come premiums in our core capabilities so because.
For the last point of view when you do good clients. So you can eventually workers as clients much more efficiently.
Improve fluid will speak that's a real goal for us to either way as to the city of for example.
For any specific exam will probably we can do similar similar explanation on the rational.
Okay understood. Thank you.
Thank you.
Thank you. Our next question comes from Ashwin Shirvaikar with Citi. Please proceed.
Hi, Alex Hi, Jason.
Actually the good quarter.
I wanted to start as value of the question.
Yes, sure I wanted to start answering the question on margin so is the incremental push into consulting.
Also affecting the margin profile. This year has that become part of the baseline.
At this point and as consulting business should that affect your traditional financial model.
The ability to in larger deals do you expect certain Neil or target for on site percentage Anyones goes.
Any other comments would be great.
Yeah, I don't think that the consulting business itself has said this specific impact on profitability or the model and so I think it'd be the same answer we've talked about it it's a it's a modest evolution.
In a while it may.
Somewhat take up the on site percentage, you're not going up it's not that's not what showing up and let's say profitability year over year.
From a from a 2019 to 2020 bridge standpoint, which I think it's a question you're asking about you know we feel that we really need to continue to make investments in the business to continue to grow the company at a rate in excess of 20% and so I think one of the real advantages as.
Pam strategy or kind of direction over time has been to continue to evolve the business.
I think we've all seen companies that maybe offer us the same service a product and then over time that offers us stale emmis continue to evolve its offerings and I think thats why the company continues to grow at this industry, leading organic constant currency growth rate.
When I Wouldnt, we are beginning in this is maybe a little bit in new information, but we are beginning to think about what it means to to be a much bigger companies. So as we as we exit.
This fiscal year 2020 were guiding toward something approaching $3 billion in revenue and we're already be as we look at our success in the market and our position in a fast growing market. We are beginning to think about what it means to be a company that generates $5 billion in revenue and so we are trying to make certainly we're making the necessary investments and taking.
Evolutionary steps that support our longer term growth towards a bigger company.
Got it no that's good to hear.
And.
Yes, Ken itself up revenue growth it seems to me that isn't necessarily the.
Kevin said it should continue to be a steady.
No. Thank these hopefully approaching mid twentys type of growth would that.
Would you do you have meaning that.
That it can make comments that you might point.
So I.
Maybe clarify that you're saying, you're saying it doesn't appear or that it does appear I am not no I'm asking for the cadence of self revenue. That's what you look you expect it looks to me like their nonlinear from revenue growth perspective.
Yes. So we're we're our use the language to exceed 22%, which is slightly different than at least and that was intentional.
So yes, we continue to feel good about the demand environment and continue to expect to grow.
Revenue certainly in excess of 27 sort of.
Yes, so as I said started to exceed a 22% growth right.
Got it thank you.
[laughter].
Thank you. Our next question comes from Ramsey El Assal of with Barclays. Please proceed.
Hi, Thanks for taking my question.
Just wondering if you could give it a little color on their re acceleration in growth and the travel and consumer segment.
Just talk about the drivers there.
Yes, so we've seen a slowdown.
In the in that segment and it was across and couple of customers and so one what the north American retail or any other to be honest was a range or retail and consumer goods customers in UK and in Europe in what we're beginning to see as we think at certain degree a stabilization in the in the UK market.
And and then at the same time, we're beginning to see what we think could be some really interesting opportunities in the branded consumer goods space and so I think you're seeing some I think you're still going to be in the <unk> you know in something south of 20% growth rate in the coming quarter, but youre beginning to see some improvement because we see some stabilization and we're beginning to guess.
Interesting new opportunities and branded consumer goods.
That's that's great and maybe that dovetails into my follow up question, which is given the geographic diversity you guys called out.
Can you give us your general read on the demand environment are you seeing I mean, it sounded like they think things in the UK at least for you may be looking good and specific segment any impact you're seeing from geopolitical issues. It's obviously, we have enough from development in Asia with credit virus or other other situations.
It's your general view of the global kind of demand environment.
I assume clearly trying to.
Show view is though.
Kind of guidance for 220.
So as the same time, there is some level of unpaid the ability to each.
I guess, we all understand like for example, which was hoping and then hey, Bulkers no. There is some direct.
But very minimal impact victory as soon as this poor, but indirectly who knows what you'll be fair plan is indexed couple of quarters and it was specific loans. This market reach Jason that show like could you tell a luxury goods because that's my visit was.
Well level, but of course.
Oh market so.
But in general easily as we mentioned the looking as this pre too optimistic Louis research analysts, who is going to exceeded 22% gross beaches pretty too.
Okay, but optimistic view Isaac.
So again, we continuously strong growth in the West Coast High Tech.
We've had extremely strong growth and in business information and media and we expect to see that type of growth in the future.
You know continue to see exciting opportunities in in clients that were not doing business with in life Sciences, and healthcare space and then from a Europe standpoint.
What we continue to see is that slowdown in European banking demand, but we've got a lot of interesting demand and things like Neal banks payments, we've talked about.
As as we've said before insurance is growing very rapidly. So excited about those opportunities and now I'm going to take one quick opportunity to remind people of the European growth rate and so we talked about this and I just want make certain that it's still still on People's minds is that.
We have a large customer that has been a historic QEPM customer in the business information and media space and it's split into two customers.
And when it's split into two customers one after the business is now the decision making is is out of the UK and so that customer then became a European customer and it was not a European customer in 2018 and so.
So we've had very strong growth in that particular business and information media customer the growth rate in Europe would have been sub 20% in in.
In Q4 without the with without the change in that customer and the growth rate in North America would have been somewhat higher if that really is kind of geographic reclassification had not occurred.
Okay, great. Thanks, so much as super helpful.
You bet. Thanks.
Thank you. Our next question comes from Jason Kupferberg with Bank of America. Please proceed.
Hey, good morning, guys how are you.
Good good thanks.
So just wanted to start with kind of a high level question around just when we think of trade offs between growth and margins as a general theme, where do you guys stand on that I mean, do you think its plausible to have both accelerating topline growth and margin expansion simultaneous.
Lastly, or are we always going to generally be in more of a trade off status.
Between those two I and I asked just because it looks like maybe 2020 is the case in point, where topline forecast looks terrific you talked about some of the investments that you need to make in some of the utilization dynamic. So maybe margins are going to be kind of flat to down. So just wanted to see how you're thinking about that on a longer term.
Conceptual basis, and then if you can detail some of the reinvestment a little bit more for 20.
I would be great. Thanks.
I think its a.
The whole life was a trade also to the same growth and profitability.
Too so I assume gross for us as a.
Brian Muddy primary goal, but profitability is a very important flatter and I think it's a good invoice and.
Youre right like we're talking about specific investments because we go and look if you see look.
Like.
Eight years ago when they did.
Hey fuel so it towards one company is very different profiles and today. It was like three congressmen and plus company today, we are approaching 3 billion. So.
Well this is this investment as well.
But simple simple stood in the worst month in changing.
Necessary.
I assume.
We were talking about it all the time when we were actually performing loans. This and if you saw well lets you did see even though profitability as well so I.
As soon as you mentioned 2020 for US we will be the investment here. We saw it actually is a plus to you will be it.
Investment is well, but we were able to run.
But other than we expected Q4 cuda when we started doing the was because we feel that we can do.
And the Q1 further you'll be continues its very difficult and I know, maybe and look exactly what though it will go into here, but it's very difficult to predict exactly result doses. That's why the looking into this.
Directionally and quarter by quarter, what we will need to do in how we will need to change.
If you were talking about specific investment I think the rights to we tried to capitalize those specifically we took in both consultancy, but importantly, we're talking about our traditional investment in renewed in quality because its a.
Kind of skeleton of our operation and our differentiation.
You're talking about our location because it's a scalability from one point of view and improving productivity really essentially disclosures from another point.
And we're talking about digital platforms because.
We become public again eight years ago is 7000 people now the this year, we will be operation for 2000 people. So we need to assume call to turn ourselves too.
Potentially in near future to 5 billion.
Revenue company.
So.
Probably little bit more extended sort of Sun way view and Pfizer.
It is and you.
Well to anticipated what.
That's a reflection of reality IL 12 is fit.
I know that's very it's very helpful. Just a quick follow up I think the growth in the top five customers accelerated and I was just wondering whether there was any change in the composition of those top five clients and is this exit rate for 2019 in that top five bucket expected to be sustained.
In a bone 2020.
Okay.
There is very initial competition across all our clients to be number one number two and obviously so what are some changes there.
Okay.
And also mentioned that on those Oh top clients split into in both of them continuously grow and why that wasn't working very aggressively.
So I think there is no really changes in top five budgets.
In total, but I mean, like because the position of each of them going down that up.
Dependent on given quarter, so years and clearly there are some new new faces in our top 10 looked up toward it.
Thank you.
Thank you our next thank you.
Our next question comes from Bryan Bergin with Cowen. Please proceed.
Good morning, Thank you.
Wanted to ask on the Niobec integration can you can you give some detail there it sounded like the contribution may have been stronger than you expected.
Yes, it was a little bit stronger than we expected buckets. So also in.
In kind of the same range as some of them and it is very very new for us. So just second quarter I believe when a scoping and so it's too early and one good projects could and this is relatively small.
Deal So one big project can change.
As a whole parameters, so I think it's doing better than.
We anticipated.
So when could we go to in 12 months to to talk about it but.
Its a.
Got it very much in light of is our expectation on capabilities for it and what does bring into us and caused scope us.
Okay.
And just a follow up on margin here. So can you talk about how you think about longer term as generic leverage potential I get a sense, you're making the investments here now as you think about the needs of a 5 billion revenue entity, but but assuming relatively stable gross margin level. Just curious how we should be thinking about the model from our ability to drive leverage elsewhere.
Yes, so what weve been guiding two is this kind of 18% to 19% range on M&A as a percentage of revenue.
And I think probably.
In 2020, and maybe even into the next year, you'll continue to see the type of investments that it takes to transform and make it Pam the adaptive organization or the increasingly adaptive organization that arc referred to but I think that's probably what.
Maybe a multi year cycle with an opportunity for some improvement potentially after that so as our instead of kind of goes in waves. So I think this is going to be a bit as an investment year you might still sees more of that in 2021, and then as we continue to ramp revenue at a $5 billion company you do have a potential to sort of look at Andrea.
Yes your model.
Okay. Thanks, guys.
Thank you. Our next question comes from surrender thing with Jefferies. Please proceed.
Hi, good morning, gentlemen.
Just a quick question on terms of just generally to the way that you guys are thinking about revenues and guidance.
Are there any risks are things that youve accounted for in your guidance related to may be.
Let's see election related activity in the U.S., depending on how that recent falls or are there other events or things that we should be thinking about that might potentially impact the numbers there.
Especially in the probably doesn't it.
Right.
I will simply to kind of so if we assume can the volatility in park.
Well be talking about.
[music].
And if the if you're talking about election, that's also very difficult questions any click to.
Just think about elections.
But even when any geographies as well.
But we generally clearly looking into our experience.
Political situations in different geographies with.
I got ways to know understand that experience.
Just.
So that's healthcare so the visibility continues to be in the let's call it the 80% to 90% range.
We've guided as arc said.
With with our assessment of the the near term kind a direct impact of what's going on in Asia Pac. So we have kind of model that you know a little bit of a slowdown in our business at Hong Kong in China.
We havent necessarily modeled.
More substantial sort of global growth.
No.
Slowdown, but we clearly have been kind of prudent and we don't David and I spent a lot of time doing sort of channel checks and working with each of the individual business units.
Consistent with what I said with one of the earlier questions as we continue to see very strong demand.
The license and health care space, we can continue to see interest interesting and very exciting opportunities and aiotv.
We've got a whole series a different types of financial services opportunities that are outside the traditional kind of banking environment, which is why you see our financial services practices performed the way it does relative to maybe some of our peers.
We continue to see that very strong growth that we've talked about in business information and media and so but again and then finally, we've you know we continue to have a lot of growth and our west coast High Tech clients and so we feel good about them about the business and again the thing that I think I'm always comforted by is that our demand is broad.
Based across a wide range of industry verticals are not dependent on growth from one or two customers are one specific vertical to make our 22% or it can access at 22% growth right.
That's helpful and then in terms of.
Just kind of thinking about your cash levels.
I guess, there's this business to talk about M&A for awhile is now.
Any additional color you can provide there in terms of pipelines are the quality of targets that are out. There is simply that you guys are having a challenge finding the right fit right cultural fit.
The right group of people or is it or is there some valuation issue considerations here, how should we think about.
Your M&A stuff, you probably could be all the above but I think that for us we have done let's I think a larger number of kind of smaller acquisitions in fiscal year 2019.
There is more open mindedness based on some of the success that we've had with those acquisitions for deals that could be about other somewhat larger size I think you might seem some of that in 2020.
But as you indicated I think in our most important filter really is this sort of cultural fit whether it's a business, it's going to bring something to the Pam and whether the management team.
It was still motivated and.
As excited about the opportunity to jointly Pam and continue to grow our collective organizations and so what a lot of times I think thats, probably the filter, where where we sort of might might step away from a transaction because we want to make certain that now that the pit is good and it is going to produce positive outcomes for the employees of both companies.
Thank you.
Thank you. Our next question comes from our next question comes from Darrin Peller with Wolfe Research. Please proceed.
Hey, Good morning, guys. This is Andrew.
And.
Wanted to hone in on the count cohorts with regards to the revenue size look the the 57% growth you saw on 2019 in the 20 million plus it's really impressive I guess I'm trying to parse out.
What is the the clients there just graduating from the lower tiers and versus incremental wins and then my follow up would be.
The platform strategy over the last couple years is clearly working in the market and how should we think about spend curve with regards to the second derivative of spend within those accounts be it in the product development technology and engineering.
You guys.
Could you go visit for squishy over the first so so in the case of the I guess the transition of the cohorts is that it's kind of a combination of things is what we've talked about over time, where we do have.
Many of our clients, who may or May look small on our charts are actually you know large global corporations that have significant wallet opportunities free Pam and we continue to grow inside those those opportunities. So what we've always talked about as we grow from existing relationships and we also grow.
Due to the introduction of new relationships. So you've got some some of.
Growth within companies that had been CPM customers for lever for purity years. Then what you also have is a couple of companies where you had this real rapid growth we talked about the business information media in in Europe.
We've also had some another.
Very significant grower in the business information and media space in the United States and so it's kind of a combination of a couple new customers and this growth.
So hopefully that answers that question and then arc.
As the second question, if I understand correctly. It was about our involvement in growth in building platforms is that correct.
Yeah, that's right I mean, it it's just obviously that seems to be the tip of the spirit in some circumstances and I'm just curious on how that how you've seen that translate into incremental spend in the other offerings that you have the.
For those clients.
Well first of all the will definitely.
Ambition to be.
Let's go straight or for this type of programs with clients need it and I assume could you explain is what we do believes that we have right experience right capabilities for this specifically comment from a product engineering background in new solutions and helping.
Kind of digital weren't companies to build the internal products internal platform. So they understand the news for scalability flexibility.
Complexity builders and that's what we actually trying to.
Good to go to derive participation level from consultancy.
From business perspective to just knowledge and experience perspective.
To.
Being very strong continues to it and I think because it works for us because a portion of this type of deals is increasing that very soon.
It is strong demand for these capabilities, specifically in what traditional corporate market or.
People says to move to this direction to Protex, OLED, which say they fit.
So.
I don't know exactly what you tried to lets does but I think it's a proportional increase in.
Part of our business.
Well basically our way and goal how to become a leader in just quit.
No. That's helpful. Congratulations on another impressive year thanks, guys.
Thank you very much appreciate it.
Thank you. Our next question comes from Arvind Ramnani with Keybanc capital markets. Please proceed.
Okay, Great your line I wasn't it.
Yes.
Just a quick question on hearing I had given your expanded services and consulting.
Yes, you are seeing increased visibility and downstream revenues.
And also for this increased consulting are you seeing a different set of competitors.
[noise] does sinks, who we see significant change in.
Competitors landscape, because we were like all of larger players they have multi functional areas. So we work has beaten the reserve just in different segments. Let's now we've got Peterson in more kind of high value chain component of this as well so and.
Visibility is a very difficult difficult question, we clearly now.
Yes.
Getting into the programs where we.
Potentially see is.
Opportunities from.
Different perspective, and to me away can impact on declined to different perspective, so if it's given us.
But the predictability I assume cookware. So the numbers you can see that we.
Probably is very similar position as before but there oh.
<unk> addressable market and now scale is increasing so as soon because proportionally working well for us because all of this capability improvement and all investments we should do it it's.
Conforming limit our ability to grow 20 plus percent as a that's important.
Great Great and and.
Turning to guidance is very strong for 20, but I wonder to clarify is that all organic is any inorganic component to to what the writing too.
Yes, no thats a great question and so again, what we're saying is we will exceed 22% growth, which as I said earlier as is slightly different language and intentional versus the at least we've used in the past and we believe about blood based on the acquisitions that we have today about 1%.
We would would be from yes for from.
The inorganic kind of component.
And then just kind of weaken reconfirming the profitability guidance.
In a 16% to 17% range that we intend to operate in the range rather than at the top of the range. The way we did in 2019.
Perfect. Okay look what we need to any.
Thank you so much thank you.
Thank you. Our next question comes from James Friedman with Susquehanna Financial Group. Please proceed.
Hi, Thank you and let me echo the congratulations I just wanted to ask 'em two things.
Arc in your prepared remarks, you really were.
Emphasizing the product development conversation I realize that that has been.
Then quarter the company since your origins, but when you made the comment that your clients are more interested in building versus buying.
Their technology I was just hoping you could frame that in the context of the cloud I'm sorry to ask that but is it like our clients building more because of the cloud or is there something else going on and then.
Let me just asked my second one I get it either way the fixed price did increase as a percentage of revenue and its higher now than I can remember.
Is that due to the same thing or is there something else going on there.
So the first let me answer the.
Let me answer. These your question first which is fixed fee and I'll, let art deal with a complicated topics and so the improved the increase is primarily due to growth in a in a couple of larger accounts, where we've got these fee structures that are.
That adjusted based on team size, and so theres kind of a fixed monthly fee based on the composition of the team if the team size changes up or down it changes the fixed monthly fee, okay, and that's why you're seeing this sort of shift towards higher sort of fixed fee, but it's not a classic.
Multiyear fixed fee, where we committed to do something for $20 million over a time period. So it's much less risky.
And again if in month to the team size is taken up then the fixed fee goes up so it said I would call kind of at acetyl variant on a on a time and materials, but we've chosen to classify it as fixed fee.
Yes on the first part of the question.
So build versus buy so I think.
This kind of.
Direction started to become much more visible.
The company has started to compute not on.
Efficiency over the workforce a separation, but also on that issue since you're off engagement and basically.
Consumer or client oriented part of the digital ecosystem and when you go into your clients and compete.
For this market you need to differentiate ourselves watch much stronger than and we're cautious on the Houston system.
So ideally was plus would be very well could isn't it.
And.
[music].
Finally started to talk about important of this system of engagement differentiation flexibility and cost update.
Times you go that's what I mentioned that exists report of from 2015.
So and whether its corporations and you can adjust uses a standard enterprise.
Breakage software you have to customize it too very big extent and sometimes it's customization.
Even doesn't make sense. So you need to look to us multiple components into new builds into the system as this blood foreign correctly as any unique look to integrate this component constraints you were to be replaced the world because technology changes in the next couple years. This component will be obsolete and somebody will get an advantage and that's what we're talking about.
Well, we mentioned build versus.
Bye.
So.
That's a new but two to two do it you need to have very strong.
Engineering for the continuing with route it's not just configuration, it's not just.
Susan Sabo.
Check the boxes.
So a nice I assume.
Why you're aware performances are where we perform and unions are lost.
Well, it's like years was due to this engineering capabilities and who don't want to lose it but we also need to do so well because differentiation is also coming from experience that from business models.
And all this.
Together for US is it built.
Got it. Thank you. Thank you both Oh, probably yes, okay you bet.
Thank you our final question for today comes from Joseph Crazy with Cantor Fitzgerald. Please proceed.
Hi, I'll make sure it's a short given how on the call is.
Just a couple of quick ones, one we talked a lot about the verticals that are doing well, but I'm curious what transformation product for.
Transformation.
He is our customers most.
Interested in these days I know in digital began holds a lot about.
Consumer, but I'm wondering what you're doing from sort of a product development perspective, and then I have just one quick follow up.
Uh huh.
This is a big Croatia, reinsure I don't know how to answering.
Kind of 30 seconds of two minutes because unfortunately is answer it would be very very dramatic.
We will be talking about analytics and data and potentially.
Okay ancillary t. and.
Uh huh.
Clouds are so basically the zone. So it will be to do we need to Kansas in this teresa unless we feel real conversation.
Yeah. So let me ask a different way how has the type of transformation changed since you were.
300 million dollar company and and my follow up would be.
Are you finding the proper skill sets for that type of change.
I assume from 300 million company to current state then it'll honestly, we will be very similar to what I was given like several minutes ago because this.
A notional system of engagements as well do a 300.
Million Company River, mostly product engineering extension well clients.
So right now we build into core solutions, where we Brians is differentiation and that's why on top of engineering skills, we need all this additional lives.
And.
Let some way in driver in the main goal for us to with William Blair. So that's the biggest difference incorporating all this new technology changes like.
Uh huh.
Very very quickly.
Got it and then you feel like you have the skill set particularly on the outer edge is where you're looking at more.
That's yeah and that's part of this wave send the this is part of the training because that's why we're talking about indication and.
And why the typical are sort of doing all this quarter source no. There is no enough skills, but we find is a way to train and build them because we also.
But interested in fundamental knowledge of our employees. So it's not just.
People, who trend for three months assumptions a.
We sell for talent, which we are able to retrain or they're reacting.
Direct in the right kind of.
Area.
Too good to get new skills and again this was booked two or the occasional trading books.
Okay. Thank you.
Thank you. This concludes our question and answer session for today's I'd like to turn the floor back over to management for any additional concluding comments.
So thank you. Thank you everybody as usual we are pleased to though 2018 results.
We continue to grow we can afford them in our ability to to to grow at the extent of 20%.
Thank you to do your support and so in Cotwo.
So to 6000 people globally and.
Let's talk in three months.
Thank you.
Thank you ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.