Q3 2023 Perficient Inc Earnings Call

Okay.

Good day and thank you for standing by welcome to the proficient third quarter 2023 earnings Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

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And I'd like to hand, the conference over to your Speaker today, Tom Hogan President and CEO. Please go ahead.

Thank you. Good morning, everybody. This is Tom Hogan proficient as president and CEO with me on the telephone today is Paul Martin our CFO I want to thank everybody for your time. This morning as usual will have some prepared comments after which we'll open the call up for some questions. Paul would you. Please read the safe Harbor.

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 FCC filings concerning factors that could cause those <unk>.

Also be different than contemplated in todays discussion.

Time during this times during this call we will refer to adjusted EPS and adjusted EBITDA in 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 dot proficient dot com.

<unk> 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. Thank you Paul once again good morning, everyone. Thank you for your time today as we discuss proficient third quarter results and our outlook for the fourth quarter before.

We get started I want to again, thank Jeff Davis for his over two decades of commitment and contribution to proficient.

Credibly excited about proficient future and it's because it's built on a foundation of integrity grit physical discipline and ambitious determination those are the qualities that Jeff infused into this business and it's a privilege and honor to now lead proficient through the next chapters in our unique and compelling global growth plans and aspirations.

And to be clear.

That is my expectation for this business growth significant profitable global growth.

It's been on a journey to build out our global footprint in depth, but we're just getting started we will scale in coming years to employ tens of thousands we will have meaningful presence throughout the world will be a top advisor and partner to the world's most innovative enterprises and biggest brands and proficient will be a household name.

This is what I, our executive leadership team and all are proficient we'll be working towards we can do it and we will.

My confidence in what professional will become stems from what proficient already is we're unique in the marketplace. The only firm in our space with true global depth across the United States Latin America, and India, we have the ability to provide our clients with a robust portfolio of class leading digital technologies.

Our deep and strong partnerships with the leading technology innovators in our industry, who like ourselves are on the forefront of digital transformation.

Yeah.

We're at Microsoft solutions partner that Microsoft highest partner designation.

And based on the work we've done we're a partner of the year finalists for Azure cloud native application development.

When Adobe platinum partner again, Adobe's highest partner designation and we were awarded their highest partner honor based on the work we've done.

2023 emerging digital experience partner of the year in the Americas.

Where salesforce summit partners Salesforce is highest partner tier and in the interest of time. We are currently designated in the top partner tier for a site core Informatica, one stream gabel, Google optimize Lee and Hcl Commerce and.

In addition to our technology expertise. We're also an industry thought leader with significant vertical market perspective.

As an example, we were named.

By modern healthcare as the fifth largest healthcare it consulting firm in the United States. We've also been featured in 28, Forrester and Gartner reports so far in 2023.

Finally, and perhaps most importantly for our clients, we're a destination for the world's top engineers and technologists to work and collaborate.

We've been named a top workplace in 11 different markets this year alone and.

In our recent annual colleague feedback program had 90% participation with nine out of 10 colleague standing proficient was a great place to work.

Now I'd like to discuss our current business trends, we began to rebound in the third quarter from the macro effect, we experienced in the second quarter I'm confident Q2 represented a bottom in terms of our performance specifically as it relates to profitability. We took steps during the third quarter to better align capacity with our needs and we substantially improved.

Elevation across every region and geography.

And our plan remains to run the business near 40% gross margins.

Bill rates remained solid during the quarter up one 4% another demonstration of our customers continuing to value the outcomes we're delivering.

Our transformation to a truly global entity remains underway nearly 30% of our revenue during the quarter was delivered with delivery teams outside of the United States the highest mark in our history.

As we scale globally and deliver projects with our global depth structure that mix will continue to shift to.

To accelerate our global depth expansion, we were excited to have recently announced the pending acquisition of aesthetics, we fully anticipate regulatory approval of the transaction by the Romanian government in the weeks ahead.

Some of this will bring not only a 175 amazing developers and engineers to proficient, but a new set of skills customer relationships in a geographic presence, we expect to serve as a base for larger expansion in the years ahead.

<unk> specializes in designing and developing software that runs various medical devices. They have a long history of working with device manufacturers like Roche Merck and others.

Given our existing presence in the health care space and substantial roster of customers. We believe there is a nice opportunity to leverage <unk> capabilities in coming years for growth. We're also really excited about the ability to introduce the greater proficient capabilities to the <unk> legacy customer base.

Finally, we're excited about the potential for Romania to serve as a key hub as we build a stronger presence in EMEA in the coming years, we believe Romania can serve as a launch point as we build out our global team in the region on a scale closer to proficient operations in India and Latin America today.

Yeah.

We booked 37 deals greater than $1 million during the third quarter of 2023, that's flat year over year down negligibly from a 38, we booked in the second quarter of 2023.

Our net pipeline weighted and unweighted remains quite solid Q4, and Q1 bookings will be an important indicator for what 2024 growth will look like.

As I mentioned on many calls buying decisions have been drawn out. This environment continues. However in October we were able to come to agreement on a new multi year program with a client which will add hundreds of new proficient colleagues to the team around the world more.

More to come on this program as we work to scale the team, but this is one of the large large deals we've been alluding to.

We have many more programs to win but we are hopeful. This win is an indicator of other decisions to come.

As I've mentioned previously we have line of sight to many large opportunities we need to close them like this one we just did in October.

We continue to remain well diversified from a customer industry and platform perspective health care financial services remain the strongest verticals are also excited about momentum in both manufacturing and automotive.

As I mentioned on our last earnings call. We recently surveyed more than 1000 automotive customers and dealers to better understand the barriers and rationale to purchasing electric vehicles.

The results revealed a significant opportunity for legacy automakers and dealers to accelerate the adoption of evs by enhancing the car buying experience we have already been collaborating with several large brands on our E. V go to market initiatives. We are also seeing interest from automakers, we have not had the opportunity to engage previously.

Proficient continues to demonstrate expertise like these insights in the industry is taking note.

We're also just completed a project to focus on helping our utility company and implement an in house supply chain function to reduce costs and the installation time of EV charging sites.

I mentioned the launch of our regenerative AI global innovation Groupon per foot proficient as last quarter's call. This is an active community comprised of over 800 proficient strategists designers and developers from around the world each of whom brings unique perspectives and expertise degenerative AI opportunity.

This group is experiencing with applying Jenny I across all areas of business, including research design content development and digital marketing not to mentioned cogeneration and software testing approaches.

And are currently exploring more than 30 potential applications for generative AI. We are also continually working with clients to identify new AI use cases and develop POC is that will help them launch.

And achieve their goals alongside leading AI platforms like Google, Microsoft Salesforce and writer, we have delivered and deployed multiple AI solutions to clients that help them streamline operations create efficiencies and improve user experiences.

And we have dozens of additional POC is underway.

Want to close by mentioning a couple of other things I'm excited about.

The first is the structure of our executive organization going forward.

For many years proficient as had a CEO a CLO and CFO and then the next layer of executives responsible for various aspects of the business.

My plan for the foreseeable future is to operate without a CFO and I am instead of instead promoted seven executives with significant tenure at proficient and expertise to various disciplines to senior Vice president roles.

In addition, senior Vice President Susan out of mine has been promoted to principal accounting officer going forward myself, Paul Susan and the other senior Vice Presidents will service proficient senior executive team and I'm thrilled to work alongside each of them as we build proficient into the global brand we expect.

The area in the coming years to close the gap and get proficient more at bats, and more wins.

And finally I want to thank proficient colleagues across the globe for their recent supportive hunger action month. We believe strongly are proficient they were here to make a difference for our clients for our colleagues and for our communities and during September we did just that in conjunction with our giving your G colleagues from each of our offices.

As around the World rally together to help combat food and security through donations and volunteerism collectively proficient packaged and serve more than 5000 meals and donated more than 8000 pounds of food to those in need.

And with that I'll turn things over to Paul to speak to the financial results. Paul Thanks, Tom turning to the third quarter results service revenues, excluding Reimbursable expenses were $219 5 million in the third quarter, a 2% decrease over the prior year services gross margin, excluding reimbursable expenses and stock compensation was 37 three.

Percent in the third quarter compared to 41, 3% in the prior year SG&A expense was $42 1 million in the third quarter compared to $44 3 million in the prior year SG&A expense as a percentage of revenues decreased to 18, 9% from 19, 5% in the prior year the decrease in SG&A expense.

As a percentage of revenues was primarily related to decreases in bonus and bad debt expense, partially offset by increases in sales headcount and benefit costs adjusted EBITDA for the quarter was $45 8 million or 25% of revenues compared to $53 million or 23, 3% of revenues in the prior year amortization expense.

<unk> was $5 million in the third quarter compared to $6 1 million in the prior year.

Net interest income was immaterial in the third quarter compared to six to 600000 of net interest expense in the prior year, primarily due to 600000 of interest income in the current year, our effective tax rate for the third quarter of 2023, and 2022 was 29, 4% net income was 22.

6 million for the third quarter compared to $23 million in the prior year diluted GAAP earnings per share decreased to 63 cents a share compared to 64 cents a share in the prior year adjusted earnings per share decreased to 92 for.

For the third quarter from $1 11 in the prior year and you can see our press release for a full reconciliation to GAAP earnings now turning to the year to date results services revenues, excluding Reimbursable expenses were $676 4 million for the nine months ended September 32023% to 2% increase over the prior year services gross margin.

Excluding reimbursable expenses and stock comp was 38, 2% for the nine months ended September 32023, compared to 41% in the prior year period.

SG&A expense was $130 2 million for the nine months ended <unk>.

September 32023, compared to $127 $4 million in the prior period SG&A expense as a percentage of revenues increased to 19% from 18, 9% in the prior year adjusted EBITDA for the nine months ended September 32023 was $144 million or 21% of revenues compared to 100.

<unk> $51 5 million or 22, 5% of revenues in the prior year period Ammar.

Amortization was $16 4 million for the nine months ended September 32023, compared to $18 1 million in the prior year period net interest expense for the nine months ended September 32023 decreased $2.

$8 million from $2 3 million in the prior year, primarily due to $1 5 million additional interest income.

Effective tax rate was 26, 9% for the nine months ended September 32023, compared to 25, 2% in the prior year. The increase in the effective tax rate was primarily due to a decrease in tax benefits related to share based compensation deductions and research credits, partially offset by a decrease in the section 162 M compensation limitation.

And an increase in the tax benefits for acquisition adjustments compared to the prior year period.

Net income for the nine months ended September 32023 was $75 8 million compared to $77 $9 million in the comparable prior year period diluted GAAP earnings per share decreased to $2 11 for the nine months ended September 32023, compared to $2 17 for the prior year period adjusted earnings per.

<unk> decreased to $2 96 for the nine months ended September 32023 from $3 14.

In the comparable prior year period again, you can see the press release for a full reconciliation to the GAAP results are ending billable headcount at September 32023 was 5918, including 5616 billable consultants and 302 subcontractors ending SG&A head count was 947.

Our outstanding debt net of deferred issuance cost of September 32023 was $396 3 million. In addition, we had $80 1 million in cash and cash equivalents at September 32023, and $300 million of unused borrowing capacity on our credit facility, our balance sheet leaves us very well positioned to execute against it.

Our strategic plan finally, operating cash flows increased to $88 5 million for the nine months ended September 32023 from $71 4 million in the comparable prior year period, primarily due to cash inflows related to collection of accounts receivable I will now turn the call back over to Tom for the outlook Tom. Thank you Paul proficient.

The fourth quarter 2023 revenue to be in the range of $221 million to $226 million.

Fourth quarter GAAP earnings per share is expected to be in the range of <unk> 64 to 69.

Fourth quarter adjusted earnings per share is expected to be in the range of 98 to 103.

Proficient.

<unk> full year 2023 revenue to be in the range of 907 million to $912 million.

2023, GAAP earnings per share to be in the range of $2 74 to $2 79, and 2023 adjusted earnings per share to be in the range of $3 94 to.

<unk> to $3 99.

And with that operator, we can open up the call for questions.

Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.

To withdraw your question. Please press star one again, please stand by while we compile the Q&A roster.

Our first question comes from the line of <unk> Tandon with Needham. Your line is now open.

Thank you good morning, Tom and Paul I wanted to start Tom with just maybe some more thoughts on demand what are some of the areas youre seeing strength and what are some of the weaker spots and any early indications from your conversations with clients on budgets for next year. So basically trying to get a read on when do you think you might get the information.

Flexion point in growth based on your conversations with your current clients.

Sure from a demand perspective.

A lot of conversation back still on cost takeout and.

Operational efficiency, so that's where we're seeing a lot of organizations look from a data perspective from a customer perspective, and then quite honestly internally.

Looking to see what technology, they can use to leverage to lower some of their costs.

The business.

The demand cycle right now I would say is.

Reserved I think a lot of people are excited about 2024, but I think there is a concern about when is it going to kick in.

So still a lot of demand out there.

A lot of good conversations, but I think a lot of individuals are still thinking about 2024, I think we're still going to have a little slowing in the.

Beginning of 2024, and we have a couple of large programs, we're chasing right now.

With hopefully some nice turning as we get mid way through 2020 forward into 2025.

But I see some of these big deals coming in before it get over my skis too much there.

Got it and then any expectation on when you might start hiring organically I know this quarter. You mentioned that you were able to crank up utilization. That's good to see and then also the pricing tailwind, but when do you have any visibility on starting to hire organically so sort of going back to the question about when demand might.

Start to show some signals, where you would then need to actually ramp up your head count in anticipation of that.

Well a bit optimistic this program I just alluded to that we closed in October we'll be ramping that up thats going to be adding a couple of hundred folks superefficient.

It will ramp over the fourth and first quarter, but thats organic growth.

Organic couple hundred team members that'll be joining and more to come.

Just one housekeeping item, whereas utilization today and how much more room can you.

Expand utilization from hereon.

No we want to run the company at 80% has been our stated goal there'll be times that it might be in the low eighties, but thats going to be really situational based on a specific project potentially.

We're running the organization at that 80% number have some holidays and things like that coming up in Q4. So it will be right around 80%. So that's the that's where we are and that's where we intend to keep it.

Great. Thank you so much.

Yes.

Thank you.

Our next question comes from the line of Brian Kent Slinger with Alliance Global Partners. Your line is now open.

Great. Thanks, so much for taking my questions.

Follow up on demand, which you talked about beginning to see the signs of turning which industries are you seeing that strengthen and then particularly on that large contract win in October can you discuss which industry that was it.

Sure. The large one was in health care, we still see some nice.

Health care is continuing to see something we see some.

Some growth coming in financial services has been nice to bit lumpy, though the work we're doing in financial services right now has been more regulatory and compliance work, which can be rather lumpy at times a couple of programs that we're chasing there but.

But as those consent orders are then fulfilled.

There's a bit of a tail that happens there looking for the next order I'm looking to get back into more of a digital transformation work in that industry, Although right now it's a bit tepid.

Emotive and manufacturing we have some nice things going on there are some new conversations as I mentioned the EV program has started some nice new conversations with new manufacturers, we haven't historically worked with before.

And that those are the areas that continue to be great areas for us within financial services health care automotive manufacturing.

Great.

Then.

Your offshore head count in the third quarter as a percentage of the total is similar to the second quarter ratio.

And your head count was down 6% sequentially can you reconcile that with the gross margin, which was the lowest in several quarters and then what gets you back to that 40% of the moves you've made on the utilization side.

Yes, the utilization is a big factor in really what comes into that Brian is really the beginning part of Q3. So you see that we've offset the capacity we've gotten that back in check and that was around the world. So that's why you're also seeing those ratios in the U S.

As well as in Latin America and India.

But where we are looking right now from.

On a go forward perspective.

What would be at that 40% margin.

We will probably be in the high <unk>.

With the fourth quarter, and our intention to get back to that 40% margin and planning there. Yes. So we were running a little lower on utilization offshore. So as we made the adjustments to sort of 80% there was more of a head count impact in the quarter offshore but.

As we move forward as we continue to increase the mix of the work done offshore that's also going to be a driver of increased gross margins.

Great last question I have it's great to hear the bill rates are up a little bit over 1% can you break that down offshore and on site or are they both around 1% is one.

Area are stronger than the other one pricing.

It's a little higher offshore a larger percent increase I think that a lot of thats. The nature of the work that we're doing there.

Yes.

Slightly below the one 4% onshore.

Great. Thanks, guys.

Thank you.

Our next question comes from the line of Surinder <unk> with Jefferies. LLC. Your line is now open.

Good morning.

Tom can you expand on that.

The comment that you made at the beginning of the call about being confident that Q2 was the bottom for profitability is that as a result of just the scale of the large deal win at that point and how would that comment hold up if you were to take out the large deal win.

The large deal win it would still hold up so that's going to be organic growth to the business that large win when my comment really comes from their surrender is that.

We took the action we need to take in Q3 to adjust the capacity where we are.

And seeing that demand, where we are right now I think we have a good line of sight for capacity.

And I don't see us going backwards to that to that element obviously the work is.

If we have to get it closed and keep moving forward, but we definitely made some actions happen in Q3 that got more of an alignment to get utilization back where it needs to be.

That's really where it comes from is seeing what we're seeing for demand <unk>. Our current head count is seeing capacity adjustments we made.

Around the world I feel very confident that we've made the decisions we had to make in the third quarter and move forward.

That's helpful and then on the branding initiatives.

Obviously, that's something our journey that you guys have been on for a number of years now just any color on when you talk about expanding those initiatives.

And then maybe how do you measure it in terms of the return that Youre getting.

Sure.

So a couple of things on that we have been on NIH journey, there when it comes to our brand.

We're excited to announce in the third quarter, we came to terms with the Minnesota Timberwolves to another great market for us to have some more brand awareness.

And we always look at it market by market and what's going to get the return for US we have a dedicated team that is constantly looking at the impressions and what we're doing from our perspective. There are a lot of it's about branding and making sure people are aware of of who we are and making sure that we are showing ourselves as our presence in the given geographies <unk> demand that we want to play with the <unk>.

Keeping in mind that we are on this track I don't want to lighten up what we need to do there and it's also not going to overly all increased spend it's just a matter of prioritizing where we are spending is the intention there and we have a we have a pretty robust marketing team.

That really does track and we have actually leads and wins that have come specifically from those branding efforts and we do track this.

Got it and then the final question.

It sounds like.

You spoke about Romania, and using that as a jumping off point so is the idea.

If I understand it correctly.

Internationally, we grew international push at this point or how should we think about the longer term trajectory there.

Sure. So firstly, when we work with our customers they're looking for the best talent independents are where they are around the world and their burden of our customers that are looking for an eastern European perspective from proficient U S based customers that have a presence in eastern Europe and looking for us to provide services for them. So that's going to be the jumping off point for it.

Primarily as U S based customers with a presence in Europe. In addition to that there is also the ability to provide U S based.

Clients with eastern European talent, as we do with India, and Latin America overtime over the coming years, we will look at going after more aggressively into the European market, but right now it's really to service our U S based clients with a European presence.

Got it. Thank you that's it for me.

Thank you.

Our next question comes from the line of <unk> <unk> with Scotiabank. Your line is now open.

I just wanted to discuss a little bit Paul you mentioned.

The SG&A. This year, obviously came in this quarter came in at around 18, 9% and obviously you've provided some color on the utilization side of things, but on a go forward basis. How do you think we can model this on a quarterly or a or from an annual standpoint.

You should run relatively consistent with where it is now we talk about in general 40, 40% ish gross margins and 20% EBITDA margin. So it's going to run in the high teens.

It'll vary somewhat quarter by quarter based on <unk>.

Based on business performance and revenue growth, but we have continued to reduce fixed costs office costs and other things over time and I think.

I think we're well positioned to to maintain and gets some slight SG&A leverage as we move into 'twenty four.

That's helpful.

Business front I have a generic question so.

So Tom if you could provide some color broadly speaking what is the trend that youre seeing on the cloud migration front, because when I when we speak to a lot of other corporate.

Clients out there.

We hear a lot more about cloud optimization, but given such a significant part of the business has historically been.

Cloud migration, where do you see that trending on a go forward basis across the industry that you are growing.

Cloud optimized well it depends on how you divide those two terms up a cloud optimization and cloud migrations.

Say a lot of the work we're doing is on the cloud Titan necessarily say that we're doing a lot of on Prem Takeouts and cloud migration work, it's really new product development, new product scale in the cloud there is definitely some op apps.

Baroness modernization work happening.

But that's not necessarily a migration effort it's really.

Understanding of.

The infrastructure that a lot of these organizations have and they have hundreds and thousands of applications that are on prem and or even in the cloud and they're looking at rationalizations of those applications to get better cost takeout as well as better applications for customer experience perspective, as well as just a lot of tech debt out in the environment, So not necessarily a migration to the <unk>.

Cloud, but really an understanding of how are they are modernizing their platforms and utilizing the cloud to do so.

So you do see some stabilization when it comes to our balance between on Prem and on cloud network and the hybrid infrastructure is here to stay is what I get from your response there.

I think the hybrid infrastructure is here to stay but I think every organization is looking to maximize their cloud presence that's.

That's helpful. Just one last question here on the automation discussion that you did during your.

Your comments there could you provide a little bit more color on exactly the kind of work that you're doing for the EV sector and the automation sector specifically.

There's a lot there so from a customer perspective.

We're doing a lot around e-commerce, the dealer experience the everything from allocations to understanding how to configure we're doing in car technology. We're also working on infrastructure as I mentioned, the EV networks and the recharging networks for a number of sub brands. We're also working downstream RASM generative AI tools and in risk.

Supply chain management, there is a tremendous amount we're doing in that industry.

That's exciting thanks, a lot for your comments.

Yes.

As a reminder to ask a question at this time. Please press star one one or intestine telephone. Our next question comes from the line of Vincent Colicchio with Barrington Research. Your line is now open.

Yes, Tom.

Curious.

Bill rates.

Should we expect them to continue at the rate you saw in the quarter.

Or are you seeing any growing pressure there.

Not necessarily growing pressure the bill rate both from the U S and from Latin America, and India, I think we will continue to see moderate.

Growth there as we continue to offset costs that happened in the business I think there is some room to grow AVR, but thats not the overall attention I want to drive growth. So I'm, okay with the AVR staying where it is if we're getting larger deals and larger wins to make sure we're competitive.

Being said, we're not losing based on price Vince. So I think there is some room against the big guys to take on some more AVR, but really when we look at AVR is making sure we're maintaining margin and making sure. We're offsetting the increases we have for salaries et cetera.

I think theres, a little bit of room, there, but I would not expect substantial AVR increases thats not the intention that we're looking across the board.

And one big picture question.

When do you expect coding efficiencies from generative AI to have a meaningful impact on your business.

Yes, that's a great question Vance and they were playing with a lot of different POC is and how we leverage that I think cogeneration is a long way I think quite honestly that is something that will not have a meaningful impact for years. I think there are elements around the software development lifecycle that we will see some efficiencies.

Specifically testing.

I think as far as requirement gathering maybe creating some assets around content and I think those efficiencies, we're already seeing and we'll continue to see throughout 2024 in the foreseeable future, but generating code. We have a lot of conversations specifically with the <unk> and the challenges around cogeneration.

That's still a ways off.

Thank you and congrats again on your new role.

Thank you Vince.

Thank you.

Our next question comes from the line of Jesse Wilson with William Blair. Your line is now open.

Jesse Wilson your line is open please check your mute button.

And I'm currently showing no further questions at this time I'd like to hand, the call back over to Tom Hogan for closing remarks.

Alright, well. Thank you everybody for your time today I look forward to getting back together in the first quarter to discuss our fourth quarter and full year and then 2024 expectations. So thank you everybody have a great day.

This concludes today's conference call. Thank you for participating you may now disconnect.

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