Perficient: High Growth Through An Aggressive Marketing, But Margin Risk (NASDAQ:PRFT)

Funding thesis

Our present funding thesis is:

PRFT is a high-quality enterprise with good scope to realize MSD/HSD development within the coming years, as traits comparable to AI and Cloud computing contribute to constant company spending. The corporate clearly has distinctive qualities, owing to its superior income development, improvement of a high-ticket consumer base, and outsized margins. We’ve severe reservations as as to if that is ample to permit margins to stay flat. Given the dangers, we would favor to see clear proof of the corporate being undervalued, which doesn’t look like the case.

Firm description

Perficient, Inc. (NASDAQ:PRFT) is a number one digital consulting agency that gives providers to purchasers searching for digital transformation and expertise options. The corporate is headquartered in St. Louis, Missouri, and operates in North America, Europe, Asia, and different areas.

Share value

PRFT’s share value efficiency has been risky lately, though has broadly moved positively, outperforming the broader market. This has been pushed by fast monetary enchancment and a consolidation of its market place.

Monetary evaluation

Offered above are PRFT’s monetary outcomes.

Income & Business Components

PRFT’s income has grown at a powerful 11% CAGR over the past decade, with broadly constant YoY positive factors because the enterprise has executed an aggressive go-to-market technique. Margins have exceeded this, with EBITDA rising at 15%, that means incrementally accretive returns.

Enterprise Mannequin

PRFT is a consulting agency specializing in digital transformation. It offers a variety of providers to assist companies leverage expertise and information to reinforce buyer experiences, streamline operations, and drive development. The corporate boasts an end-to-end suite of providers, making certain that it may possibly each assist any transformational workouts, whereas additionally being positioned to assist a enterprise all through its operational journey.

PRFT’s providers fall beneath 6 main segments (see beneath), which positions the corporate to assist the “modernization” of its purchasers’ operations, be it entrance or again workplace. PRFT continues to “preserve its ears to the streets”, discovering and exploiting new applied sciences to additional develop the beneath providers providing. An instance of that is AI, with PRFT investing closely in its experience within the section. From a evaluate of its personnel, it seems PRFT is lively in poaching workers from comparable or bigger friends.

PRFT has deep business information and focuses on particular sectors, together with healthcare, monetary providers, retail, and manufacturing. This business specialization permits them to grasp distinctive challenges and ship tailor-made options. Additional, purchasers are extra prepared to decide on a service supplier the place they’re perceived as a specialist, incentivizing PRFT to deepen its experience by means of recruitment. Regardless of this, PRFT maintains a diversified income profile, making certain it isn’t prone to business traits.

PRFT is a worldwide enterprise, with front-line groups throughout the Americas, Europe and Asia, in addition to supply groups in India, and the Americas. The corporate operates in the same method to its friends, with most of the simplistic duties outsourced to low-cost places (comparable to India), whereas consumer relations, decision-making, and many others. made by the front-line group.

PRFT maintains strategic partnerships with expertise leaders comparable to IBM (IBM), Microsoft (MSFT), Adobe (ADBE), Salesforce (CRM), and AWS (AMZN). These partnerships present entry to market-leading instruments and assets, enhancing the providers the corporate can present. Additional, this offers PRFT with larger credibility, bettering its worth proposition when pitching for brand spanking new initiatives.

Lastly, PRFT will make the most of M&A to develop its experience or additional develop the enterprise inorganically. Throughout this final decade, there was a pattern towards consolidation within the consulting business, as small boutiques that specialize have been seen as a lovely goal to amass purchasers. Over the last decade, PRFT has spent near $500m of money to amass companies.

Digital Consulting Trade

PRFT faces competitors from different consulting corporations, each giant international corporations like Accenture (ACN), Deloitte (and the opposite B4), and IBM, in addition to smaller, specialised corporations that concentrate on particular industries or applied sciences.

The Digital Consulting business has seen a constant upward trajectory over the past 2 a long time, with an acceleration over the past one. We imagine the next traits are key worth drivers going ahead:

Technological revolution – The fast digitalization of all issues in society has contributed to a robust demand for digital capabilities, as companies search to use particular applied sciences to enhance their efficiency. This can be a broad pattern underpinning most of the elements we are going to subsequently talk about. This can be a pattern that we don’t see slowing down given the creation of recent applied sciences recurrently which have important potential. Spending on technological enhancements has constantly grown at double-digits lately (Supply: Administration). AI – The hype round AI is astronomical and in our view, rightly so. Gen AI particularly has the potential to be revolutionary, primarily as a result of it takes little or no to generate enchancment. We anticipate companies to more and more demand assist with AI integration within the coming years. Huge information – The emphasis on data-driven decision-making has led organizations to hunt experience in information analytics and enterprise intelligence, areas the place Perficient excels. Information has developed from a “good to have” to essential for all corporations, each internally and from their industrial segments. Cloud options – The cloud has been a revolutionary proposition for corporations, with a decline in prices permitting it to go “mainstream”. This pattern permits for a fast deceleration in prices, whereas supporting the massive information pattern. We take into account this the largest pattern within the final decade, with development nonetheless remaining given the uptake globally leaves ample upside. Core UX and CMS – Perficient affords providers associated to digital expertise, together with web site and software improvement, person expertise (UX) design, and content material administration system (CMS) implementation. These providers proceed to develop properly regardless of their relative maturity, as content material and e-commerce encourage a transition of client time to digital providers. CRM – Equally to the UX/CMS level, a “commonplace” service supplied that continues to develop properly is CRM implementation, pushed by effectivity and industrial advantages. Expertise Pool – Attracting and retaining high expertise within the consulting fields is essential to constantly attaining development, as this can be a relationship-driven business the place people have direct connections with corporates. PRFT recruitment has been constant, even in the course of the financial weak point of current years.

As the next traits counsel, the business is very profitable. There are quite a few segments rising properly, with PRFT properly established inside all. With spending within the low double-digits and the business comfortably over 20%, the long-term worth is substantial. This largest subject, and the explanation the consulting business is just not at this development price, is competitors. This can be very troublesome to distinguish and much more so to create a tangible moat. The actual fact PRFT can offshore a lot of the work illustrates the replicability of the work supplied. Because of this, the benefits corporations can generate are relationships throughout the business, popularity, and funding in personnel (each service suppliers and gross sales people). Because of this, we stress that PRFT’s efficiency has been good and the long run does look vibrant however it isn’t assured that the corporate can keep its trajectory.

Business KPIs

PRFT is doing job of bettering its foundational place, in order to make sure it may possibly get pleasure from a proportionate share of the business development within the years to return.

The corporate’s common income has grown at a powerful CAGR of 12.4%, larger than its top-line income, implying larger ticket wins. Additional, buyer satisfaction and repeat enterprise are at a powerful ~95%, underpinning its recurring income potential and scope for cross-selling. This can be a reflection of its broad service providing and high quality of personnel.

The scope for future buyer wins additionally seems constructive, with 50% of its vendor profile “simply getting began”. Many of those will inevitably be common or underwhelm, however the expectation is that improved recruitment and a much bigger model ought to enable for extra people to widen the highest bracket’s income contribution.

Lastly, PRFT believes its go-to-market method differentiates it from its competitors. With extra centered groups, flexibility, and a commercially-minded method, PRFT believes it affords a compelling, differentiated providing.

Margins

PRFT’s margins are spectacular, with an EBITDA-M of 19% and a powerful upward trajectory. This can be a reflection of the corporate’s deal with high-value providers, in addition to a top quality advertising and marketing method. Though that is extraordinarily good, it does make us nervous that these ranges are unsustainable, primarily because of the degree of competitors throughout the market. It’s unrealistic to anticipate margins to stay excessive when the enterprise is offering a (partially) generic service.

PRFT’s robust margins are immediately translated for FCF, which suggests with scale, direct shareholder returns might be substantial.

Quarterly outcomes

Present financial circumstances are doubtless weighing on the enterprise, with diminished company spending in response to a diminished demand atmosphere. Within the firm’s final 2 quarters, development has declined from double-digits to +3.1% and +4.9%. Additional, margins have barely declined.

As the next illustrates, the variety of offers has declined YoY and QoQ. Our view is that the enterprise will proceed to expertise tender demand, though an enchancment from Q2-24 onwards ought to be a goal.

Outlook

Offered above is Wall Avenue’s consensus view on the approaching 5 years.

Analysts are forecasting a decline within the firm’s development price, alongside flat margins. Apparently, we disagree on each counts. We anticipate development to stay robust, though barely dip beneath its 10Y given the smaller base from which the corporate has grown. This means an MSD/HSD price. Additional, we anticipate margins to pattern down incrementally, wholly as a result of competitors.

Trade evaluation

Offered above is a comparability of PRFT’s development and profitability to the typical of its business, as outlined by Searching for Alpha (20 corporations).

PRFT efficiency relative to its friends is powerful. The corporate has achieved spectacular development throughout each income and profitability, no matter the timeframe. That is due partly to acquisitions and its smaller measurement, but additionally a profitable method with the business. Its deal with advanced transformational initiatives, in addition to its robust partnerships have supported development.

Additional, PRFT has noticeably higher margins than the business common, regardless of being a smaller enterprise. This reiterates our considerations round margin erosion over the approaching years, as the vast majority of these friends might simply develop/enter PRFT’s key segments and contribute to a laddering down of costs.

Valuation

PRFT is presently buying and selling at 14x LTM EBITDA and 13x NTM EBITDA. This can be a low cost to its historic common on an LTM foundation. Apparently, the LTM/NTM common differs directionally relative to historicals, illustrating the sudden slowdown the corporate has confronted.

Our view is that parity with its historic common is justifiable, owing to the continued business tailwinds driving income development and ample protection of the dangers related to margin erosion. If we have been to regulate PRFT’s EBITDA-M all the way down to the business common EBITDA-M, its a number of rises to 17.5x, implying it’s buying and selling at truthful worth.

Additional, PRFT is buying and selling at a small low cost to its peer group. We might anticipate this low cost to be bigger, owing to the chance of margins and development declining additional.

Closing ideas

PRFT is a high-quality enterprise, owing to its engaging business publicity, robust go-to-market technique, deep experience, and profitable advertising and marketing method. We suspect good development can proceed within the coming years, notably pushed by AI and Cloud computing. Robust competitors will prohibit the power to realize materially outsized returns however the market is sufficiently giant for all to learn.

Our concern, though appreciating that there’s restricted proof to counsel this may happen, is margin erosion. We don’t see ample proof to counsel PRFT has a moat or aggressive benefit that can defend its margins within the medium to long run. We suspect competitors will constantly erode this. Nonetheless, PRFT has the potential to be a lovely funding, notably in the event you imagine Wall St. analysts. We might counsel the corporate is buying and selling round its truthful worth, supported by a NTM FCF yield consistent with the typical.