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PERFICIENT INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Statements made in this Form 10-Q, including without limitation this Management's Discussion and Analysis of Financial Condition and Results of Operations, other than statements of historical information, are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements may sometimes be identified by such words as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue" or similar words. We believe that it is important to communicate our future expectations to investors. However, these forward-looking statements involve many risks and uncertainties. Our actual results could differ materially from those indicated in such forward-looking statements as a result of certain factors, including but not limited to, those set forth under Risk Factors in our Annual Report on Form 10-K previously filed with the SEC and elsewhere in this Form 10-Q. We are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform these statements to actual results. For additional information, see the "Special Note Regarding Forward-Looking Statements" contained in this Form 10-Q. 14 --------------------------------------------------------------------------------Overview We are an information technology consulting firm serving Forbes Global 2000 and other large enterprise companies with a primary focus on the United States. We help our clients gain competitive advantage by using Internet-based technologies to make their businesses more responsive to market opportunities and threats, strengthen relationships with their customers, suppliers and partners, improve productivity, and reduce information technology costs. We design, build, and deliver business-driven technology solutions using third party software products. Our solutions include business analysis, portals and collaboration, business integration, user experience, enterprise content management, customer relationship management, interactive design, enterprise performance management, business process management, business intelligence, eCommerce, mobile platforms, custom applications, and technology platform implementations, among others. Our solutions enable our clients to operate a real-time enterprise that dynamically adapts business processes and the systems that support them to meet the changing demands of an increasingly global, Internet-driven, and competitive marketplace. Services Revenues Services revenues are derived from professional services that include developing, implementing, integrating, automating and extending business processes, technology infrastructure, and software applications. Most of our projects are performed on a time and materials basis, while a smaller portion of our revenues is derived from projects performed on a fixed fee basis. Fixed fee engagements represented approximately 10% of our services revenues for the three months ended March 31, 2013 and 2012. For time and material projects, revenues are recognized and billed by multiplying the number of hours our professionals expend in the performance of the project by the established billing rates. For fixed fee projects, revenues are generally recognized using an input method based on the ratio of hours expended to total estimated hours. Amounts invoiced and collected in excess of revenues recognized are classified as deferred revenues. On most projects, we are also reimbursed for out-of-pocket expenses such as airfare, lodging, and meals. These reimbursements are included as a component of revenues. The aggregate amount of reimbursed expenses will fluctuate depending on the location of our clients, the total number of our projects that require travel, and whether our arrangements with our clients provide for the reimbursement of travel and other project-related expenses. Software and Hardware Revenues Software and hardware revenues are derived from sales of third-party software and hardware. Revenues from sales of third-party software and hardware are generally recorded on a gross basis provided we act as a principal in the transaction. On rare occasions, we do not meet the requirements to be considered a principal in the transaction and act as an agent. In these cases, revenues are recorded on a net basis. Software and hardware revenues are expected to fluctuate depending on our clients' demand for these products. If we enter into contracts for the sale of services and software or hardware, management evaluates whether each element should be accounted for separately by considering the following criteria: (1) whether the deliverables have value to the client on a stand-alone basis; and (2) whether delivery or performance of the undelivered item or items is considered probable and substantially in our control (only if the arrangement includes a general right of return related to the delivered item). Further, for sales of software and services, management also evaluates whether the services are essential to the functionality of the software and has fair value evidence for each deliverable. If management concludes that the separation criteria are met, then it accounts for each deliverable in the transaction separately, based on the relevant revenue recognition policies. Generally, all deliverables of our multiple element arrangements meet these criteria and are accounted for separately, with the arrangement consideration allocated among the deliverables using vendor-specific objective evidence of the selling price. As a result, we generally recognize software and hardware sales upon delivery to the customer and services consistent with the policies described herein. Further, delivery of software and hardware sales, when sold contemporaneously with services, can generally occur at varying times depending on the specific client project arrangement. Delivery of services generally occurs over a period of time consistent with the timeline as outlined in the client contract. There are no significant cancellation or termination-type provisions for our software and hardware sales. Contracts for professional services provide for a general right, to the client or us, to cancel or terminate the contract within a given period of time (generally 10 to 30 days' notice is required). The client is responsible for any time and expenses incurred up to the date of cancellation or termination of the contract. 15 --------------------------------------------------------------------------------Cost of revenues Cost of revenues consists primarily of cash and non-cash compensation and benefits, including bonuses and non-cash compensation related to equity awards. Cost of revenues also includes the costs associated with subcontractors. Third-party software and hardware costs, reimbursable expenses and other unreimbursed project-related expenses are also included in cost of revenues. Project-related expenses will fluctuate generally depending on outside factors including the cost and frequency of travel and the location of our clients. Cost of revenues does not include depreciation of assets used in the production of revenues which are primarily personal computers, servers, and other information technology related equipment. Gross Margins Our gross margins for services are affected by the utilization rates of our professionals (defined as the percentage of our professionals' time billed to clients divided by the total available hours in the respective period), the salaries we pay our professionals, and the average billing rate we receive from our clients. If a project ends earlier than scheduled, we retain professionals in advance of receiving project assignments, or if demand for our services declines, our utilization rate will decline and adversely affect our gross margins. Gross margin percentages of third-party software and hardware sales are typically lower than gross margin percentages for services, and the mix of services and software and hardware for a particular period can significantly impact our total combined gross margin percentage for such period. In addition, gross margin for software and hardware sales can fluctuate due to pricing and other competitive pressures. Selling, General, and Administrative Expenses Selling, general and administrative ("SG&A") expenses are primarily composed of sales-related costs, general and administrative salaries, stock compensation expense, recruiting expense, office costs, bad debts, variable compensation costs, and other miscellaneous expenses. We work to minimize selling costs by focusing on repeat business with existing clients and by accessing sales leads generated by our software vendors, most notably IBM, Oracle and Microsoft, whose products we use to design and implement solutions for our clients. These relationships enable us to reduce our selling costs and sales cycle times and increase win rates through leveraging our partners' marketing efforts and endorsements. Plans for Growth and Acquisitions Our goal is to continue to build one of the leading independent information technology consulting firms by expanding our relationships with existing and new clients and through the continuation of our disciplined acquisition strategy. Our future growth plan includes expanding our business with a primary focus on customers in the United States, both organically and through acquisitions We also intend to further leverage our existing offshore capabilities to support our future growth and provide our clients flexible options for project delivery. When analyzing revenue growth by base business compared to acquired companies in the Results of Operations section below, revenue attributable to base business is defined as revenue from an acquired company that has been owned for a full four quarters after the date of acquisition. Results of Operations Three months ended March 31, 2013 compared to three months ended March 31, 2012 Revenues. Total revenues increased 14% to $84.9 million for the three months ended March 31, 2013 from $74.7 million for the three months ended March 31, 2012. Explanation for Increases Over Prior Year Financial Results Period (in thousands) (in thousands) Increase For the Three For the Three Attributable to Months Ended Months Ended Total Increase Over Acquired Increase Attributable to March 31, 2013 March 31, 2012 Prior Year Period Companies Base Business Services Revenues $ 73,567 $ 66,167 $ 7,400 $ 7,387 $ 13 Software and Hardware Revenues 7,844 4,614 3,230 13 3,217 Reimbursable Expenses 3,524 3,917 (393) 173 (566) Total Revenues $ 84,935 $ 74,698 $ 10,237 $ 7,573 $ 2,664 16-------------------------------------------------------------------------------- Services revenues increased 11% to $73.6 million for the three months ended March 31, 2013 from $66.2 million for the three months ended March 31, 2012. The increase in services revenues is primarily due to the acquisitions during 2012, as shown in the table above. Software and hardware revenues increased 70% to $7.8 million for the three months ended March 31, 2013 from $4.6 million for the three months ended March 31, 2012 primarily due to an increase in initial and renewal software license sales. Reimbursable expenses decreased 10% to $3.5 million for the three months ended March 31, 2013 from $3.9 million for the three months ended March 31, 2012. We do not realize any profit on reimbursable expenses. Cost of Revenues. Cost of revenues increased 14% to $59.4 million for the three months ended March 31, 2013 from $52.1 million for the three months ended March 31, 2012. The increase in cost of revenues is primarily related to costs associated with software and hardware sales, which increased 87% to $7.2 million for the three months ended March 31, 2013 from $3.9 million for the three months ended March 31, 2012, as a result of increased software sales at lower margins. Cost of revenues related to services also increased due to an increase in the average number of professionals, including subcontractors, performing services to 1,500 for the three months ended March 31, 2013 from 1,456 for the three months ended March 31, 2012. Gross Margin. Gross margin increased 13% to $25.5 million for the three months ended March 31, 2013 from $22.6 million for the three months ended March 31, 2012. Gross margin as a percentage of revenues decreased slightly to 30.0% for the three months ended March 31, 2013 from 30.3% for the three months ended March 31, 2012 due to an increase in employment-related taxes. Services gross margin, excluding reimbursable expenses, increased to 33.8% or $24.9 million for the three months ended March 31, 2013 from 33.1% or $21.9 million for the three months ended March 31, 2012. The increase in services gross margin is primarily a result of a higher average bill rate. The average bill rate for our professionals, excluding subcontractors, increased to $121 per hour for the three months ended March 31, 2013 from $117 per hour for the three months ended March 31, 2012, primarily due to improved pricing opportunities. The average bill rate for the three months ended March 31, 2013 excluding offshore resources was $132 per hour compared to $127 per hour for the three months ended March 31, 2012. Selling, General and Administrative. SG&A expenses increased 21% to $17.9 million for the three months ended March 31, 2013 from $14.8 million for the three months ended March 31, 2012. SG&A expenses, as a percentage of revenues, increased slightly to 21.0% for the three months ended March 31, 2013 from 19.8% for the three months ended March 31, 2012. General and administrative salaries increased as a percentage of revenues due to the promotion of billable personnel to management positions, which resulted in a reclassification of the associated cost. In addition, professional fees increased as a percentage of revenues related to the research and development tax credit study, and bonus expense increased compared to the prior year period based on Company performance against 2013 goals. Depreciation. Depreciation expense increased 48% to $0.7 million for the three months ended March 31, 2013 from $0.5 million for the three months ended March 31, 2012. The increase in depreciation expense is mainly attributable to the addition of fixed assets from acquisitions during 2012. Depreciation expense as a percentage of revenues was 0.8% for the three months ended March 31, 2013 and 0.6% for the three months ended March 31, 2012. Amortization. Amortization expense increased 14% to $1.8 million for the three months ended March 31, 2013 from $1.6 million for the three months ended March 31, 2012. The increase in amortization expense is due to the addition of amortization related to acquired intangible assets during 2012. Acquisition Costs. During the three months ended March 31, 2013, the Company recognized a benefit in acquisition-related costs of $25,000 representing the finalization of various acquisition-related items. Acquisition-related costs were $0.7 million for the three months ended March 31, 2012. The acquisition-related costs incurred during the first quarter of 2012 were related to the acquisition of PointBridge. Acquisition-related costs were incurred for legal, accounting, and valuation services performed by third parties. Adjustment to Fair Value of Contingent Consideration. An adjustment of $0.2 million was made during the three months ended March 31, 2012 for the accretion of the fair value estimate for the earnings-based contingent consideration related to the Exervio acquisition. No adjustment to the fair value of contingent consideration was recorded during the three months ended March 31, 2013. Provision for Income Taxes. We provide for federal, state and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses. Our effective tax rate decreased to 21.5% for the three months ended March 31, 2013 from 40.1% for the three months ended March 31, 2012 due mainly to the research and development tax credit for 2012 and 2013, which was enacted for both years in January 2013. 17--------------------------------------------------------------------------------Liquidity and Capital Resources Selected measures of liquidity and capital resources are as follows (in millions): As of As of March 31, December 31, 2013 2012 Cash, cash equivalents and investments $ 4.1 $ 5.8 Working capital (including cash and cash equivalents) $ 60.0 $ 52.3 Amounts available under credit facilities $ 43.8 $ 47.2 Net Cash Provided By (Used In) Operating Activities Net cash used in operating activities for the three months ended March 31, 2013 was $0.5 million compared to net cash provided by operating activities of $1.9 million for the three months ended March 31, 2012. For the three months ended March 31, 2013, the primary components of operating cash flows were net income of $4.1 million plus non-cash charges of $5.4 million, offset by investments in working capital of $10.0 million. The primary components of operating cash flows for the three months ended March 31, 2012 were net income of $3.0 million plus non-cash charges of $4.9 million, offset by investments in working capital of $6.0 million. The decrease in cash from operating activities is primarily related to the change in other assets, which was the result of recording a large insurance receivable in the first quarter of 2013. Our days sales outstanding as of March 31, 2013 decreased to 75 days from 78 days at March 31, 2012. Net Cash Used In Investing Activities During the three months ended March 31, 2013, we used $0.5 million for acquisition-related costs and $2.5 million to purchase property and equipment and to develop certain software. During the three months ended March 31, 2012, we used $14.4 million for acquisition-related costs and $0.4 million to purchase property and equipment and to develop certain software. Net Cash Provided By Financing Activities During the three months ended March 31, 2013, we received proceeds of $21.9 million from our line of credit and we realized a tax benefit related to vesting of stock awards and stock option exercises plus proceeds from the exercise of stock options and sales of stock through the Employee Stock Purchase Plan of $0.3 million. We made payments of $18.7 million on our line of credit and used $1.4 million to repurchase shares of our common stock through the stock repurchase program and $0.3 million to remit taxes withheld as part of a net share settlement of restricted stock vesting. For the three months ended March 31, 2012, we received proceeds of $26.0 million from our line of credit and we realized a tax benefit related to vesting of stock awards and stock option exercises plus proceeds from the exercise of stock options and sales of stock through the Employee Stock Purchase Plan of $0.3 million. We made payments of $19.8 million on our line of credit and used $0.4 million to repurchase shares of our common stock through the stock repurchase program and $0.2 million to remit taxes withheld as part of a net share settlement of restricted stock vesting. Availability of Funds from Bank Line of Credit Facility On May 23, 2011, we renewed and extended the term of our Credit Agreement (the "Credit Agreement") with Silicon Valley Bank ("SVB"), U.S. Bank National Association, and Bank of America, N.A. The Credit Agreement provides for revolving credit borrowings up to a maximum principal amount of $50.0 million, subject to a commitment increase of $25.0 million. The Credit Agreement also allows for the issuance of letters of credit in the aggregate amount of up to $1.0 million at any one time; outstanding letters of credit reduce the credit available for revolving credit borrowings. As of March 31, 2013, the Company had an outstanding letter of credit in the amount of $0.2 million to secure an office lease. Substantially all of our assets are pledged to secure the credit facility. All outstanding amounts owed under the Credit Agreement become due and payable no later than the final maturity date of May 23, 2015. Borrowings under the credit facility bear interest at our option of SVB's prime rate (4.00% on March 31, 2013) plus a margin ranging from 0.00% to 0.50% or one-month LIBOR (0.20% on March 31, 2013) plus a margin ranging from 2.50% to 3.00%. The additional margin amount is dependent on the level of outstanding borrowings. As of March 31, 2013, we had $43.8 million of maximum borrowing capacity. We incur an annual commitment fee of 0.30% on the unused portion of the line of credit. At March 31, 2013, we were in compliance with all covenants under the Credit Agreement and we expect to remain in compliance during the next 12 months. 18 --------------------------------------------------------------------------------Stock Repurchase Program Prior to 2013, our Board of Directors authorized the repurchase of up to $70.0 million of our common stock. The repurchase program expires December 31, 2013. From time to time, we establish a written trading plan in accordance with Rule 10b5-1 of the Exchange Act, pursuant to which we make a portion of our stock repurchases. Additional repurchases will be at times and in amounts as the Company deems appropriate and will be made through open market transactions in compliance with Rule 10b-18 of the Exchange Act, subject to market conditions, applicable legal requirements, and other factors. Since the program's inception on August 11, 2008, we have repurchased approximately $61.4 million of our outstanding common stock through March 31, 2013. Lease Obligations There were no material changes outside the ordinary course of our business in lease obligations or other contractual obligations in the first three months of 2013. Conclusion Of the total cash and cash equivalents reported on the condensed consolidated balance sheet as of March 31, 2013 of $4.1 million, approximately $3.4 million was held by the Company's Chinese operations and is considered to be indefinitely reinvested in those operations. The Company has no intention of repatriating cash from its Chinese operations in the foreseeable future. We believe that the currently available funds, access to capital from our credit facility, and cash flows generated from operations will be sufficient to meet our working capital requirements and other capital needs for the next 12 months. Critical Accounting Policies Our accounting policies are fully described in Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012. We believe our most critical accounting policies include revenue recognition, accounting for goodwill and intangible assets, purchase accounting, accounting for stock-based compensation, and income taxes. |