Perficient Broadens Scope While Tapping IBM Growth
The vaults of the blogosphere opened wide last month after IBM spent nearly $4 billion to acquire four software, primarily middleware-related companies. Bloggers and journalists jockeyed to interpret Big Blue's big-picture strategy.
According to some, the deals signaled a shift away from services and toward a more software-centric business model.
"The billions IBM is spending to expand its software portfolio make sense when you look at its bottom line," wrote Stacy Cowley with Computer Reseller News. "IBM's software division generates more profit than any other, including the much-larger (Global Services division)."
Others saw the investment as solidifying the Big Blue supply chain, grabbing more market share for its huge services segment
"IBM Software's mandate is to buy or build a tool set that it can hand off to Global Services in order to fuel that division's much higher profit margins," tech consultant Josh Greenbaum posted to his ZDNet Web site blog.
In either case, Austin, Texas-based Perficient (NASDAQ:PRFT - News) has a leggy horse in the race.
The nine-year-old Internet technology consulting services firm will earn more than half its estimated $153 million in revenue this year by implementing IBM programs called middleware, which tie together the scads of computer programs that drive complex, global businesses.
Perficient Chairman and Chief Executive Jack McDonald says the IBM acquisitions confirm the future outlined by Larry Ellison, founder and chief executive of Oracle (NASDAQ:ORCL - News): The software industry will mature, consolidate and revolve around fewer and larger players.
"(This consolidation) is not only going to continue; it is going to accelerate," McDonald said. "You are going to see more and more action centered around the four horsemen: IBM, Microsoft (NASDAQ:MSFT - News), Oracle and SAP (NYSE:SAP - News)."
The prophecy has certainly held true for Perficient. The dot-com era startup cut its teeth as a subcontractor, working primarily on implementation contracts managed by IBM and others. The company went public in 1999, elbowing its way into a space crammed with similarly ambitious contractors just as tech spending was about to hit the skids.
Perficient immediately began making acquisitions, spending more than $1 billion in combined cash and stock deals to acquire five companies through 2002.
At the same time, the shakeout that began in 2000 was driving many competitors to failure or to sell at fire-sale prices. Analyst Peter Heckman with A.G. Edwards says Perficient avoided the mistakes made by many.
"The primary thing was, they didn't ramp up debt. That's what caught a lot of them off guard," Heckman said. "And when earnings slowed down, the others suffered."
Perficient wasn't immune to the market slowdown. The company lost money in 1999, 2000 and 2002. But revenue grew steadily beginning in 2001. In 2003, earnings followed.
Another saving grace was Perficient's ties to IBM. In 2003, more than 80% of Perficient revenue arrived directly through IBM.
But McDonald says his company was already shifting its business model. Today, he describes that move as a six-year transition, from a subcontracting model to a direct solutions sales model.
The move has hinged on the company's direct sales force. Each member of the 40-person crew now generates $3 million to $4 million a year in sales, 94% of the company's 12-month run-rate revenue.
In its new form, Perficient works directly for end-market customers that include WachoviaWB, Anheuser-Busch (NYSE:BUD - News) and EMC (NYSE:EMC - News).
McDonald's figures show 85% of Perficient revenue over the last five years came from repeat customers. That return business, he says, is tied directly to the new, direct-sales angle of attack.
"That is the real growth platform," he said, "because ultimately, in our business, that value comes from owning the client relationship."
Perficient's revenue from IBM is at around 50%. Very little of that, McDonald says, comes from subcontract work.
In the second quarter, Perficient's earnings jumped 71% to 12 cents a share. Revenue was $37.5 million, up 73%. First Call analysts forecast a 71% increase in earnings this year to 48 cents a share.
Perficient projects can range into $5 million to $8 million territory. Most are below $3 million, averaging just below $500,000.
The company aims to pass $500 million in revenue by 2010. That would move it closer to competitors Keane (NYSE:KEA - News) and Sapient (NASDAQ:SAPE - News), and possibly beyond Ciber (NYSE:CBR - News) and AnswerThink (NASDAQ:ANSR - News).
A third of growth comes from existing operations, two-thirds from acquisitions.
But its debt remains below $10 million, and McDonald says the company has a solid track record of pushing revenue and earnings growth of acquired operations into double digits in the first year of ownership.
Perficient has acquired eight companies since 2004, three of them since April.
Among them, Bay Street Solutions is a customer relations software specialist, and Insolexion focuses on business integration suites.
In July, the company expanded its reach in the Southeast by buying the Energy, Government and General Business (EGG) division of Digital Consulting & Software Services. EGG's customers include Northrup Grumman (NYSE:NOC - News), Schlumberger (NYSE:SLB - News) and Chevron (NYSE:CVX - News).
What about the dependence on IBM? If Big Blue is acquiring software makers only to boost services operations, doesn't that put Perficient's mainstay at risk?
Colin Gillis with Canaccord Adams says it's not likely: IBM's third party, value-added reseller relationships will remain vital.
"IBM software is a best-of-breed software channel," he said. "So they are always going to have an incentive to keep a third-party (value-added-reseller) channel alive."
Alan R. Elliott