Q3 2022 Perficient Inc Earnings Call
After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone.
Dan here, an automated message advising your hand is right.
Please be advised that today's conference is being recorded.
I'd now like to hand, the conference over to your Speaker today, Chairman and CEO , Jeff Davis.
Go ahead.
Thank you and good morning, everyone with me on the telephone today is Paul Martin Our CFO , Tom Hogan, our President and C. O M liked.
I'd like to thank you again for your time. This morning, we have about 10 to 15 minutes of prepared comments, after which well open up the call for questions.
Before I proceed Paul would you please read the safe Harbor statement.
Thanks, Chuck and good morning, everyone.
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 results to be different than contemplated in todays 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.
In accordance with generally accepted accounting principles or GAAP is posted on our website at www dot proficient.
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.
Good to be with you today as we discuss our third quarter performance and our continued growth and profitability.
Adjusted earnings per share increased 26% during the period with revenue up 18%.
North American average bill rates were up four 4% year over year accelerating to an all time high.
Gross margin also reached an all time high at 41% or 41, 3% on an adjusted basis. The pipeline remained strong back larger than ever.
And we're pursuing several eight figure deals and now we are seeing a modest increase in sales cycles with some customers deliberating a little longer given the given the macroeconomic inputs.
Because our work primarily involves mission critical projects in which enterprises must invest and do prioritize we're not overly concerned at this point.
The breadth and depth of our portfolio ensure proficient delivers material value in environments of strength or weakness, whether our clients are investing in growth or seeking to reduce cost by leveraging efficiency proficient as the answer.
Organic growth revenue.
<unk> offshore revenue grew 32% in the quarter in overall offshore revenue grew 72% on an apples for apples basis that component of our business is growing as fast as anyone in the industry.
Our fully integrated global delivery model continues to resonate with clients who value the combination of our local and global approach. We continue to scale in both Latin America and in India. In fact that the Q3 acquisition of inflection point systems in Mexico, and the acquisition closed earlier this month of <unk> technologies in India.
Increased our head count in those regions by more than 600 colleagues.
As we've long discussed.
We are uniquely positioned due to our two decades of presence and strength in the United States. We've now built and continue to build meaningful global depth in Latin America, and India with tremendous talent or teams in those regions are not in bolt ons staff augmentation resources. They are true experts peers on par with our senior leaders in the United.
<unk>.
And our fully integrated approach is what customers want and ensures we can deliver meaningful value from anywhere in the world.
We've also discussed many times that this mix shift in the near and medium term will expand margins, but also pose a modest headwind to our overall top line growth. Eventually however, it will prove an accelerant to both.
We just reported adjusted earnings per share of $1 11 for the third quarter three years ago in the third quarter of 2019, we reported 56 cents.
Essentially a doubling of earnings while the world entered and emerged from the pandemic.
Just for perspective revenue was up 57% during that same time period.
Clearly investors, who value earnings continued profitability growth and strong margins will continue to appreciate proficient as a consistent best in class performer, so with that I'll turn the call back to Paul for some more color on the numbers.
Let me turn to the third quarter results service revenue, excluding reimbursed expenses were $224 9 million in the third quarter, an 18% increase over the prior year year over year organic services revenue growth was 12% services gross margin, excluding reimburse expenses and stock compensation was 41 three <unk>.
In the third quarter compared to <unk> 43 in the prior year.
G&A expense was $44 3 million in the third quarter compared to 39 three.
$3 million in the prior year SG&A expenses as a percentage of revenue decreased to 19, 5%.
From 24% in the prior year adjusted EBITDA was 53 million or 23, 3% of revenues in the third quarter compared to $41 $5 million or 21, 5% of revenues in the prior year amortization expense was $6 1 million in the third quarter compared to $4 3 million in the prior year the increase in amortization expense primarily.
Due to the additional intangibles from acquisitions $2 2021 and 2022.
Net interest expense for the third quarter decreased $1 6 million from $3 5 million in the prior year, primarily as a result of adopting the new accounting standard for convertible debt in the first quarter of 2012.
Our effective tax rate was 29, 4% for the third quarter compared to 28, 1% in the prior year net income increased 32, 3% to $23 million for the third quarter from $17 4 million in the prior year, primarily as a result of higher revenues higher gross margins and lower SG&A as a percent of revenue dilutive.
Diluted GAAP earnings per share increased to 64 cents a share for the third quarter from 48 cents a share in the prior year adjusted earnings per share increased to $1 11, or 26% for the third quarter from 80.
<unk> such a share in the prior year you can see the press release for a full reconciliation to the GAAP earnings I'll now turn to the year to date results services revenue. Excluding Reimbursable expenses were $664 2 million for the nine months ended September 32022, or 24% increase over the prior year year over year organic services revenue growth was 16.
Percent services gross margin, excluding reimbursed expenses and stock up for the nine months ended September 32222 was 41% compared to 39, 8% in the prior period.
G&A expense for the nine months ended September 32022 was 127 4 million compared to $110 7 million in the prior year SG&A expense as a percentage of revenues decreased to 18, 9% from 23% in the prior year.
Adjusted EBITDA for the nine months ended September 32022 was $151 5 million or 22, 5% of revenues compared to $115 1 million or 21, 1% of revenues in the prior year. The nine months ended September 32022 included amortization of $18 1 million compared to $17.
7 million in the prior year net.
Net interest expense for the nine months ended September 32022 decreased to $2 3 million from $10 1 million in the prior year again, primarily as a result of adopting the new accounting standard for convertible debt in the first quarter of 2022, our effective tax rate was 25, 2% for the nine months ended September 32022, compared to 25 three <unk>.
<unk> in the prior year net income for the nine months ended September 32022 was $77 9 million compared to $47 6 million in the prior year increased primarily as a result of higher revenues gross margins and lower SG&A expense.
As a percent of revenues.
Diluted GAAP earnings per share increased to $2 17 for the nine months ended September 32022, compared to $1 39 in the prior period adjusted earnings per share increased to $3 14 for the nine months ended September 30, 22 from $2 49 in the prior year against to the press release for a full reconciliation.
So the GAAP earnings are any global headcount at September 32022 was $59 59, including 5605, billable consultants and 354 subcontractors and the SG&A headcount was 880 <unk> our outstanding debt net of deferred issuance costs at September 32022 was 390 <unk>.
$4 1 million, we also had $2 8 million in cash and cash equivalents.
At September 32022, and $199 8 million of unused borrowing capacity on our credit facility our balance balance sheet continues to leave us very well positioned to execute against our strategic plan I'll now turn the call over to Tom Hogan for a little more commentary Tom Thanks, Paul and good morning, everybody. We booked 30 70 illustrated in a $1 million during the third.
Our 2022, which compares to 40 in the third quarter of 2021 as Jeff already mentioned, we did see some clients stretch negotiation cycles as they navigate the plans currently.
Deals ongoing window, just taking a bit longer to close our net pipeline weighted unweighted is larger than it's ever been and continues to grow daily.
A couple of recent winter highlights for the quarter, we have entered into a new phase of our work with the global architectural corporation to improve their existing cloud platform. This win is an extension of our work to modernize defined supply chain technology as part of the ongoing partnership our trusted global team of experts are consolidating 12 legacy applications into a single software.
<unk> cloud.
With primary focus to continue building enhanced declined formulation product with.
We recently won work with a new client.
<unk> provides information management services to deploy ERP and supply chain management platform throughout Asia Pacific South America, Europe , the Middle East Africa, our proven track record of delivery of similar projects and a reputation of quality talent and our ability to support the deployment onshore Ashford prompted the enterprise to switch.
From their previous provider to fruition just a great example of our trifecta of the United States Latam in India team.
All perceived as a superior alternative to their end comment.
We continue to remain well diversified from a customer industry and platform perspective healthcare financial services remain the strongest industries during the quarter automotive also remain strong as well.
In recent quarters about the internal and external investments we've made to improve our colleagues work lives, but also making.
The increased impact and the global communities, where we operate.
And we're seeing our colleagues value these investments as more and more with the already below industry average attrition slowing even further and our feedback about the colleague experience is as highest sovereign debt.
And our most recent.
Our colleague engagement survey nearly 90% of our colleagues responded and 90% of them expressed that they recommend proficient as a great place to work for.
The first time ever we engaged an external partner to administer our engagement survey as well non partner, but the other provides us with cross market benchmark data and data specific to our industry, enabling us to glean additional insights from our colleague feedback.
Their findings were that proficient server results materially exceeded the benchmarks across virtually every category surveyed.
Our colleagues are telling us that the value of the investments we've made and we will continue to make in total rewards programs and community efforts like bright path.
<unk> internal products, we've built and into the internal initiatives like our women in technology and Glenn traffic grew giving employee resource groups, a lovely collectively and individually proficient and his colleagues are making so many positive differences in the world.
And most of all what they valued the collaborative culture.
The permission and without silos or orders based on geography at proficient each and every day. The vast majority of our colleagues are working across time zones countries and continents to deliver world class solutions for our customers, which results in a world class experience for our colleagues and with that I'll turn things back over to Jeff to discuss the fourth quarter and our major.
2022.
Thank you Tom proficient expects its fourth quarter 2022 revenue to be in the range of $233 million to $239 million.
Fourth quarter GAAP earnings per share is expected to be in the range of <unk> 69 to 74 cents.
Fourth quarter adjusted earnings per share is expected to be in the range of $1 11 to $1 16 provision.
Provision is updating its full year 'twenty two revenue guidance to a range of $905 million to $911 million updating its 22 GAAP earnings per share guidance to a range of $2 85 to $2 90, and narrowing its 22 adjusted earnings per share guidance to a range of $4 25%.
430, now with that we can open up the call for questions.
Okay. Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.
Our first question comes from my Yang Hannon of Needham. Your line is now open.
Thank you good morning, Jeff I, just wanted to first start with <unk>.
Last quarter, you had mentioned.
The impact from cancellations and delays.
Did that play a role in your revised guidance I see a little bit of a downtick in terms of organic growth that's embedded in your <unk> numbers. So maybe if you could just speak to that and then on a related note. If you could also just give us the organic growth numbers for <unk> that you're building into your expectation.
<unk>.
Yes, sure, yes, I would say that.
The cancellations we experienced.
Tad still impacted the quarter's carried over into Q3.
And youre seeing that reflected somewhat in the Q4 guidance as well.
Was it really a matter of how quickly we're able to build that back.
Also keep in mind everybody knows.
That when large health care accounts.
That we exited this year that represented about $30 million in revenue last year. It's about five this year. So that was a headwind again that I think is a unique situation and thats now lapsed.
And of course, Q4 was a tough comp.
Obviously, we had a really really strong Q4 last year.
So that's factored in as well.
On the.
Organic growth for the fourth quarter I want to say the mid points at about 8% is that right.
Yes, it was seven 8% at the midpoint.
Got it.
And then maybe I could just piggyback off that Jeff and Paul So I know youre not going to give guidance for next year, but just given what youre seeing in the market right now I'm sure. Our clients are going through the budgeting process and then the <unk> organic growth expectations that you just laid out is that a good baseline on how we should think about at least the early part of 2023 as we're building our model.
So to set realistic expectations in this current uncertain macro.
Yes, I think Thats fair.
I think a lateral would be revealed.
Now and the end of the year on a macro sense.
Without obviously, there's no crystal ball, so, but yes, I think thats a good a good starting point.
And then just one housekeeping item. So just in terms of the revenue contribution in the fourth quarter from your two recent acquisitions could you just size that for us. So again, we have a good handle on the impact yes, I think its about somewhere between $8 million to $9 million.
Great. Thank you so much thanks.
Thanks, Mike.
Thank you very much.
One moment. Please our next question.
Our next question comes from Surinder <unk> of Jefferies. LLC. Your line is now open.
Hi, good morning.
Jeff I would like to start with a question around the <unk>.
<unk> environment and more specifically it seems like there's increasing desire for continued offshore work relative to onshore work and that seems to be impacting the top line can you talk about that is.
Is that explicitly being driven by clients concerned about cost and so they'd rather continue with current projects, but rather have them offshore or are there just other considerations here because.
It just seems like that's a continuing headwind at this point for the top line.
Yes, I think thats right and its a combination of both so we have.
Our top 50 accounts have an average tenure of 10 years. So we have a lot we've evolved a lot over that long period of time as have day in and particularly our offshore and nearshore capabilities have evolved a lot of that around the digital space we're completely.
Digitally native and our offshore and near shore.
Delivery centers and that really didn't exist anywhere for the most part five years ago. So so all of these things have evolved to <unk>.
Definitely a higher pace growth for our offshore nearshore and certainly.
A lot of the motivation for that is the value that it brings so it is definitely a cost factor.
I don't know any clients that arent always cost sensitive when it comes to services.
Fair enough and then is there.
<unk>.
What I would call internal realignment of declines as well as consensus I'm, assuming most of the new work is that primarily offshore and then what about existing projects.
<unk>.
Our clients transitioning existing projects offshore as well or is that or is it generally when there's a new cycle for a new project to work shifts to offshore yes. It's a good question. It's generally a new cycle and there are still a number of clients who prefer the onshore.
Experienced so there are still clients that are sticking with 100% onshore, but most clients of transition I mean, a great example, on an industry basis is health care. So I kind of mentioned the five year cycle five years ago, No health care companies that we work with with touch offshore and now I can't think of one that isn't leveraging it in some way or another.
And Thats, just a competitive necessity.
Got it.
And then one related one more related question to the offshore at this point in time about what percentage of revenues are generated by your offshore team teams.
It's approaching 30% is probably a little below 30 with these latest acquisitions, though it should be right around 30%.
I'm looking forward to us getting to what I referred to as a tipping point of 50% by the way I think thats the point, where we'll really see.
Offshore or nearshore, helping to contribute to accelerated topline growth. In addition to the contributions they are already making to gross margin.
Understood and then my final question here is your earlier comment about the increase in the sales cycle.
Any color on that is that is that clients simply.
Delaying existing projects or are they starting to maybe change the nature of the types of projects that they're asking you to focus on we've heard commentary.
From let's say competitors about well, maybe there is a bit more focus on cost, but how does that impact you or what are you guys, particularly seeing.
Yes, I wouldn't say that.
The mix of.
The drivers has really changed much.
It's still primarily.
Customer acquisition, and new products and services customer support et cetera of course, Theres a lot of work around efficiency gains as well I don't think that that mix has changed much so far and in terms of the sales cycles extending I do think it's the climate that we're in.
Great Oversimplification to say, maybe they are waiting for the mid terms I do think there is a factor there as well. So I think we're just at a stage.
This year's evolution, where people are taking a little more cautious approach, we do know of some clients that are.
Going through re prioritization.
In those cases the projects that we're working on.
Tend to move forward.
And.
I expect that will continue but do you still have to go through that prioritization process, which introduces some delay.
Got it that's very helpful. Thank you that's it for me. Thank you.
Thank you please standby Sir our next question.
Our next question comes from Jonathan Lee of Morgan Stanley . Your line is now open.
Hey, guys. Thanks for taking my question last quarter, you signaled some of the softness skewed given change in client priorities not necessarily at the macro environment and I want to build on some prior questions. So how has that evolved over the last few months of what's contemplated in your outlook from a macro perspective.
Yes, we've definitely taken a little more conservative approach.
On guidance.
Understandably I think.
Given the given the current climate.
I would also say that what we saw.
Primarily kind of macro in Q2.
I think admittedly is revealing itself to be a little more macro than we thought.
And as I've alluded to earlier in the prepared comments so.
I do think it's a little softer environment not dramatic, though like I said.
We're still we're still putting up good results I think the guidance is really solid although I will say that we've tried to be quite conservative in this guidance and feel very confident in hitting that midpoint.
That's helpful color and then one more if I may can you talk us through the current pricing environment, just given some of the macro headwinds that you may be seeing and sort of what's contemplated in your outlook as it relates to you being able to take up price.
Yes, thats pretty interesting.
In spite with intuition might tell you.
We have.
Managed to move rates up pretty nicely and we mentioned in the earlier part of the call four 4% for U S. North America and the fact that matter is actually near shore has been about 15% in India has been similar.
So we've got decent there I would say quite good pricing power and Thats really just based on results. So.
Once once clients make the decisions to move ahead and make those commitments we successfully negotiate what we believe is a.
Appropriate price for what the market will bear and again I think the fact that we've been able to move <unk> been able to move rates up as much as we have.
Support staff now.
If.
Moving forward into the maybe medium term.
I don't know mid late next year that might change.
But as of right now I think that momentum looks like it's going to continue.
Helpful color. Thanks, guys.
Please standby for our next question.
Our next question comes from Puneet Jain of Jpmorgan. Your line is now open.
Yes, hi, thanks for taking my question.
I wanted to ask about margins given the two recent acquisitions.
How should we think about pro forma margins for the entire company on going forward basis.
I think.
Two acquisitions are going to be somewhat neutral and thats not uncommon.
I mentioned the price improvement that we've made in and near shore in particular.
But as we drive more demand from our existing client base into those newly acquired businesses I expect that the margins will expand.
So I think we're going to see similar results next year to this year and I started this year, saying gosh I think it's going to be maybe 50 basis points in gross margin and I would probably say the same thing about next year, depending what the macro environment holds in store, but I want to reiterate.
We're not trying really to drive higher gross margins in terms of margin expansion, we're really more focused on EBITDA. So.
I want to see the price increase increases going to offset cost increases right wage inflation.
And.
And also us being able to leverage that offshore.
And to maintain and drive competitive pricing versus letting it also flow through and I think.
The results that we're seeing right now are exactly the results of that I am very pleased with we may end up closer to 100 bps on gross margin, but we're going to put up a couple hundred bps of.
EBITDA expansion this year and I think that's what I.
I would encourage investors to focus on.
Got it got it and then how should we think about use of cash priorities given rising certain alignment.
Specifically.
As it relates to M&A as potential M&A is to further increase that offshore mix to 50% of revenue over the medium term.
Yes, absolutely. So the two primary uses of cash for us of course, our M&A and stock buyback.
So on the M&A front.
We do have some some things still in the pipeline.
That they're going to continue to work on we may slow the pace a bit.
As we again keep a close eye on that macro primarily here over the next couple of months and again I do think the mid terms.
Hey.
Determined some direction there.
But in terms of the buyback I think it was in our press release that we actually just expanded.
The board just approved an expansion to the to the buyback program of additional $60 million. So I want to say with that we've got about $70 million in dry powder.
Approval for a buyback so we'll certainly be pursuing that certainly it certainly at these levels of the stock price.
I think it's a great use of cash is certainly accretive.
Got it and let me quickly follow up on that how often.
You addressed a cutoff for organic investments or for M&A, whether it's.
Buyback internally.
In terms of moderate.
I didn't quite catch that Paul did you get that.
Would you mind repeating.
Yeah.
So the cutoff grade that can use.
Use of cash.
The seasons in Germany.
Do you, how often you adjust berkeley.
We look at those annually.
Based on the environment based on interest rates.
Based on the macro we evaluate annually royalty as part.
Part of our budget process.
Got it thank you.
Thank you.
Thank you Anne standby our next question.
Our next question comes from Vincent Colicchio of Barrington Research. Your line is now open.
Yes, Jeff.
The year over year decline in <unk>.
Plus deals I'm curious.
The pipeline, you said, which is healthy.
Deal sizes.
Climbing in the pipeline.
Actually the deal sizes are pretty consistent.
The number of deals and I kind of chalk that up more to just the lumpy nature of the business.
That's how bookings tends to tends to flow.
But but again, that's why we talked about the fact that we had seen some delays we expect we'll be able to pick some of those up again still in the fourth quarter.
But I think it does reflect some of the.
Slower decision time Timeframes that we're experiencing.
And I'm curious.
Didn't hear short deals you did 21 <unk> in overactive.
Are you hitting on the cross sell objectives there.
Your existing base.
Yes, yes, they have been.
Really really strong.
<unk>.
Customers are I'd say near shore.
Component, that's highest in demand right now and I don't think thats going to end anytime soon.
And just the time zone alone is such a benefit.
And maybe one last one you had a sequential decline.
In health care.
<unk> had for the reason you mentioned.
Year over year declines.
Declines with a big client.
When do you expect that to return to sequential growth.
We've got a lot of deals out there I do think that.
It's probably going to take that.
The better part of the at least the first half of next year.
For us to kind of rebuild that but we do have a lot of the.
New opportunities new logos in the pipeline in the works.
And so I think we'll see that turn again sometime in the first half of next year.
The good news is we've got a lot of.
A big head of steam coming on in other industries, particularly financial services.
Thanks, Jeff Thank you.
Okay. Our next question comes from.
Brian I am sorry, our next question will come from Brian Ken Slinger.
And then at Alliance global.
For <unk>.
I'm sorry. The next question will come from Brian <unk> of Alliance Global.
Your line is now open.
Hi, there this is <unk> on for Brian . Thanks for taking my question at the very beginning of the call you.
You mentioned that your pipeline still remains strong and that you are pursuing multiple eight figure deals could you allude to.
Eight figure deals what industry, they're in whether it's health care financial services et cetera.
It's both.
Can you sort of have a heavy shifts in one direction.
Yes, I would say, there's not a heavy shift other than like I mentioned.
Financial services is accelerating.
Probably beyond in terms of demand probably beyond or close similar to healthcare right now.
But it's a good cross section I would say across.
A number of industries those two in particular.
Standouts.
We'll have a lot of great relationships and work going on in automotive and manufacturing as well.
Alright. Thank you thank.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
Please standby for our next question.
Our next question comes from Maggie Nolan of William Blair.
Hi, Thanks for taking my question.
Lynn.
So I wanted to start off talking a little bit more about the offshore wells with a stronger than expected for the quarter and was it a factor in the guidance change.
Or would the sales cycle and create a bigger factor.
Yes, I would say it was a contributor but I take the <unk>.
Sales cycle increases probably the major factor.
But it was probably in line.
Maybe a little bit accelerated again.
And our expectations, which of course I think is a positive.
So it's been it's been strong and looks to be strong going forward.
Okay.
Thank you.
Yes.
And you expected hiring originally to ramp up in the second half.
That still hold true as we look to year end.
Certainly, it's a little slower in the U S is with this mix shift going on.
So I think we were up a couple percent organically on hiring in the U S that were.
Definitely hiring a lot faster than that.
Both offshore and near shore.
I want to say Paul your time have the net on that what was the net organic on.
Offshore nearshore head count.
Yes. So this has the acquisition and it but without it.
It was definitely up sequentially I think three.
Three or 4%, maybe a little bit higher than that.
Okay, great. Thank you.
Thank you.
At this time I would like to turn the conference back over to Jeff Davis for closing remarks.
Alright, well. Thank you all once again, another great quarter for proficient.
I appreciate your time today and look forward to speaking to you in about 120 days about what I'm confident will be a great quarter of the fourth quarter. So thank you all for your time.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
The conference will begin shortly.
As Johan during Q&A, you can dial star one one.
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