Perficient Inc (PRFT) Q4 2018 Earnings Conference Call Transcript


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Perficient Inc  (NASDAQ:PRFT)Q4 2018 Earnings Conference CallFeb. 26, 2019, 11:00 a.m. ET

Contents:
Prepared Remarks Questions and Answers Call Participants
Prepared Remarks:

Operator

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2018 Perficient Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this call will be recorded.

I would now like to introduce your host for today’s conference, Chairman and CEO, Jeff Davis. You may begin.


Jeffrey Davis — Chairman, President and CEO

Thank you and good morning. With me as usual on the call today is Paul Martin, our CFO, and I thank you for your time today. As is typical, we’ve got about 10 to 15 minutes of prepared comments, after which we will open the call for questions. Before we proceed, Paul, will you please read the safe harbor statement.

Paul Martin — Chief Financial Officer

Thanks, Jeff. 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 SEC filings concerning factors that could cause those results to be different than contemplated in today’s discussion.


At times during this call, we will refer to adjusted EPS. 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.perficient.com. We’ve also posted a slide deck, which includes a reconciliation of certain non-GAAP goals to the most directly comparable financial measures prepared in accordance with GAAP on our website under Investor Relations. Jeff?

Jeffrey Davis — Chairman, President and CEO


Thanks, Paul, and once again thank you for joining. We are pleased to share our fourth quarter and full year results with you, as well as provide a first look and expectations for 2019. As I’m sure most of you saw in the release, we had a strong finish to 2018. I couldn’t be more proud of the team and our performance, and I’m equally excited about how this year is already shaping up.

Paul will share the financial details shortly, but across the Board, we’re very pleased with the quarter and the momentum we’re building in our business and the market. We’re routinely winning big important long-term work in the largest enterprise and most recognizable brands in the market are engaging us on a daily basis. We’re doing all that by updating, out-hustling and outperforming competitors many times our size. We’re winning on multiple fronts.


In addition, to several months in a row of very solid bookings, our partners continue to recognize us with high profile awards and recognition, which further separates and elevates us from the competitors as we go to market. In fact, this month alone MicroStrategy named Perficient its North American Partner of the Year and IBM named Perficient its Watson Commerce Partner of the year. A few days later our partners at Twilio specifically called Perficient out as the partner, they’re seeing great success with on their earnings call. And on the last call we spoke about awards from importantly growing players like Red Hat, Sitecore and Pivotal.


Our extended leadership team is operating the business with tremendous dedication and discipline, and with a consistent collaboration that is driving real results. I’m optimistic, that’s going to translate into an increasingly impressive top-line performance this year and at the bottom-line improvements in 2018 are not an anomaly but sustainable. Perficient is growing bigger and better each and every day in many ways. And as I’ve said several times, our runway for growth here in years and decades, not months and quarters.

Investments we’ve made in recent years in our systems and our sales, marketing and delivery organizations are really coalescing right now to produce strong results. We’re continuing to build on those foundations and now bringing additional focus to our talent acquisition recruiting organization and strategies to ensure we have the capacity to support the demand we are now seeing.


We’ve got a great story to tell our candidates earlier this month as St. Louis Business Journal named us the best places to work finalists and the opportunities in career paths we are able to provide our colleagues are pretty unique in the marketplace due to our size and consistent growth and expansion. Investments we’ve made to expand our portfolio around high growth areas like cloud and digital are accelerating our performance as well and our market traction there is impressive. In fact, earlier this year, Forrester named Perficient Digital among the largest B2B agencies in North America and that’s high praise and great visibility from a respected thought leader in the industry.


Again, I can’t be more excited about where we’re at and where we’re headed, it’s only a matter of time before we double the size of the business again and cross the $1 billion revenue threshold, as the next major milestone we’re targeting in 2019 is when that journey really starts.

With that, I’ll turn the call over to Paul to cover financial results before I touch on a few additional items of note and our outlook for the first quarter of 2019. Paul?

Paul Martin — Chief Financial Officer

Thanks, Jeff. Services revenues were $130 million for the fourth quarter of 2018, an 11% increase over the comparable prior year period. Services gross margin for the three months ended December 31, 2018, excluding reimbursable expenses, stock compensation and tax-related bonus increased 90 basis points to 39.5% compared to the prior period.


SG&A expense, excluding stock compensation and tax-related bonus increased to $29.9 million in the fourth quarter of 2018 from $25.1 million in the comparable prior year quarter. SG&A expense, excluding stock compensation and tax-related bonus as a percentage of total revenue increased to 22.7% from 18.8% in the fourth quarter of 2017, primarily due to the change in software and hardware recognition from gross to net and increased bonus expense.

EBITDAS, excluding tax-related bonus for the fourth quarter 2018 was $21.7 million or 16.4% of revenues, compared to $20.7 million or 15.5% of revenues in the fourth quarter of 2017. The fourth quarter included amortization expense of $4.3 million, compared to $3.9 million in the comparable prior year period. Interest expense for the fourth quarter of 2018 increased to $1.8 million from $0.4 million in the comparable prior year period, primarily due to non-cash amortization of debt discounts and issuance costs related to the Company’s convertible senior notes, which were issued in September of 2018.


Our effective tax rate for the fourth quarter of 2018 was 22%, compared to a negative 44.2% for the fourth quarter of 2017, which was impacted by revaluing the Company’s deferred income tax liability to reflect the reduction of the federal corporate tax rate. Net income increased 16% to $7.5 million for the fourth quarter of 2018 from $6.4 million in the fourth quarter of 2017. Diluted GAAP earnings per share increased to $0.23 for the fourth quarter of 2018 from $0.19 in the fourth quarter of 2017. Adjusted earnings per share increased to $0.47 for the fourth quarter of 2018 from $0.37 in the fourth quarter of 2017.


You can see the press release for a full reconciliation to GAAP earnings. Adjusted EPS is defined as GAAP earnings per share plus amortization expense, non-cash stock compensation, acquisition costs, amortization of debt discounts and issuance costs, the fair value adjustments of consideration, tax-related bonus and the impact of other infrequent or unusual transactions not related to taxes, divided by average fully diluted shares outstanding for the period.

I’ll now turn to the full year results. Services revenues were $494 million for the 12 months ended December 31, 2018, an increase of 11% compared to the prior year. Services gross margins for the 12 months ended December 31, 2018, excluding reimbursable expenses, stock compensation and tax-related bonuses increased 10 basis points to 37.5% compared to the prior year.


SG&A expense, excluding stock compensation and tax-related bonus increased to $108.3 million for the 12 months ended December 31, 2018 from $97.1 million in the prior year. SG&A expense, excluding stock compensation and tax-related bonus as a percentage of revenues increased 21.7 from 20% for the 12 months ended December 31, 2018, primarily due to the change in software and hardware recognition and gross to net increased bonus expense.

EBITDAS, excluding tax-related bonus for the 12 months ended December 31, 2018 was $76.5 million or 15.3% of revenues, compared to $70.8 million or 14.6% of revenues for the 12 months ended December 31, 2018. The 12 months ended December 31, 2018 included amortization of $16.4 million, compared to $15 million in the prior year. Interest expense for the 12 months ended December 31, 2018 increased to $3.6 million from $1.8 million in the prior year, primarily due to the non-cash amortization of debt discounts and issuance costs related to the Company’s convertible senior notes issued in September of 2018.


Our effective tax rate for the 12 months ended December 31, 2018 was 24.1%, compared to 31.5% in 2017. The lower effective tax rate for the 12 months ended December 31, 2018, was primarily due to the reduction in the federal corporate tax rate beginning in 2018. Net income increased 32% to $24.6 million for the 12 months ended December 31, 2018 from $18.6 million in 2017. Diluted GAAP earnings per share increased to $0.73 in 2018 from $0.55 in the prior year. Adjusted earnings per share increased to $1.49 for the 12 months ended December 31, 2018 from $1.23 in 2017.


Our earning billable headcount at December 31, 2018 was 2,795 including 2,556 billable consultants and 239 subcontractors. Ending SG&A headcount was 504. Our outstanding debt net of unamortized debt discounts and deferred issuance costs at the end of 2018 was $120.1 million, compared to $55 million at prior year end. The increase in — was due to the issuance of the convertible senior notes during the third quarter of 2018. We also ended 2018 with $45 million in cash and cash equivalents and our balance sheet continues to leave us very well-positioned to execute on our strategic plan. Finally, our day sales outstanding on accounts receivable was 71 days for the fourth quarter of 2018, compared to 76 days in 2017.


I’ll now turn the call back over to Jeff for a little more commentary. Jeff?

Jeffrey Davis — Chairman, President and CEO

Thanks, Paul. We sold 49 deals north of $0.5 million each during the quarter that compares to 45 in the third quarter of 2018 and 48 in the fourth quarter of 2017. During the quarter, the health sciences, financial services, retail/consumer goods, automotive and manufacturing verticals combined to represent 76% of revenue, healthcare was at 30%, financial services at 15%, retail/consumer goods at 11% and automotive and manufacturing each representing about 10% of revenue. So we’re seeing a strength across the Board. From our perspective, the market seems quite strong in addition to really solid bookings in recent months, our pipeline remains very healthy on both the gross and probability region bases.


I mentioned this on the last call, but I feel it is worth reiterating, Fortunate 1000 firms are realizing we have the strength and scale to deliver the same work that majors do, but at higher quality, more efficiency — more efficiently and with quicker time to value. We are as good as and most of the time better than the biggest names in the industry and our approach is not only more thoughtful and collaborative but more comprehensive. I frequently hear from our customers that Perficient is a breath of fresh air when expressing their perception around our uniqueness and the value we deliver.


So things are going very well, as I mentioned in the release, I’m as optimistic as I have ever been. So moving on to the future, we are excited to issue our first quarter and full year 2019 guidance. Perficient expects its first quarter 2019 revenue to be in the range of $129 million to $133 million. First quarter GAAP earnings per share is expected to be in the range of $0.15 to $0.18. First quarter adjusted earnings per share is expected to be in the range of $0.38 to $0.41. Perficient is issuing a full year 2019 revenue guidance range of $515 million to $545 million, our 2019 GAAP earnings per share guidance range of $0.74 to $0.86 and our 2019 adjusted earnings per share guidance range of $1.65 to $1.77.


With that, we can open up the call for your questions. Operator?

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Surinder Thind with Jefferies. Your line is open.

Surinder Thind — Jefferies Financial Group — Analyst

Good morning. I’d like to kind of start with the top-line here and guidance. When I look at the high and low range between the $515 million to $545 million, can you talk a little bit about what maybe get you to the high end and what the differences between the low end, and maybe break that down in terms of organic growth versus your expectations for maybe any increase in the average billing rate?


Paul Martin — Chief Financial Officer

Yeah. The organic growth in there — I’ve got to start to be at the end, the organic growth there is 1% to 7%. But I want to reiterate again, I talked about this in the past that, that’s revenue. We continue to experience well a result there — what resulted in positive impact to margins but a mix shift to offshore. So, while it’s 1% to 7% organic growth on top-line revenue, that translates into roughly 4% to 10% or 4% to 11% organic growth on hours billed.

Billable rate, our target, our goal for the year is an increase of about 1.5%. We were more or less flat last year. We had a goal to increase and we’ve done some tweaks and put some changes in place this year around some compensation plans to help with that. So I’m optimistic we’ll be able to achieve that. But in spite of being relatively flat last year, another factor to point out is that, again we have the offshore driving gross margins substantially above offshore — onshore — offshore we are about 55% gross margin. And the other factor is that as we take on these larger engagements, we’re able to build out more of the base of the pyramid. So the average base salary of our consultants in 2018 actually dropped throughout the year by about 1.5% that helped with some margin expansion as well.


And then, back to what can drive us to the high end of that range versus the low, I would tell you that it’s the continued momentum that we have now, if this momentum continues and all indicators are that it well, but if it continues I think we would be at the high end of that range or even beyond it. Of course, it’s early in the year. So we wanted to be as reasonable as we could in terms of that guidance. I don’t expect that there is much that would drive to the low end, with the exception of something that’s completely unknown, cancellation or something like that. No reason to believe any of that will happen. We’ve got no indicators of that, but you always have to be focus.


Surinder Thind — Jefferies Financial Group — Analyst

Understood. That’s very helpful. And then maybe just related to that, there was obviously some volatility in the fourth quarter. I’m assuming that was — it just happened to quickly, meaning the rebound, but was there any change in discussion or maybe a hint that clients might have been started to get a little bit more cautious on the way that they were thinking about it or did it just happened too fast?

Jeffrey Davis — Chairman, President and CEO

Yeah. We didn’t see that. I know there is a talk about it, but we had a strong Q4. You could argue our bookings are always lumpy and it’s impossible to know what drives that. We had a tremendous Q3, Q4 maybe was quite a strong, but it’s still very strong and then we start off the year with kind of gangbusters. So the way you positioned, I think, is correct, if there was anything in there, it was almost too quick to really realize much. And like I said, right now, things look very good.


Surinder Thind — Jefferies Financial Group — Analyst

Understood. And then — and one final quick question. Obviously, again a solid number on the number of large deals that were booked over 500,000. Can you talk a little bit about maybe the average size of the deals? I haven’t seen those numbers in the last couple of releases in terms of the average size? And when I look over, maybe a longer period of time, it looks like they were just biased down slightly and so are there structural changes that are maybe going on in terms of — you guys are winning more deals, but clients themselves are only doling out maybe more bitesized projects and so they want more projects, maybe they can get the completion quicker and they are offering more of those?


Jeffrey Davis — Chairman, President and CEO

Yeah. It’s a good question. I don’t think there’s a fundamental change. In fact, if anything, our average has increased across a long period of time. As I said, bookings are lumpy, so to isolate any given period, I’m not sure it tells you a lot to be honest. But I would say over time, the average deal size has increase, and in fact, the average deal size in those deals over $0.5 million was $1.1 million in the quarter. And again, I would tell you that the buying patterns of the customers are in long-term thinking I would say as we have seen.


Some procurement organizations operate in the way that you described and sort of meter things out on the quarterly basis even in some cases, even our largest customer does that. But others — and by the way even with that we’ve got a blueprint that we are working with them toward, it has been placed for years. So that customer I am referring to that don’t left contract that way, is that a customer for five, six years. And so I would say that this — the sustainability or reliability, visibility is good there despite the fact the way the — the way that their procurement organizations choose to left contracts.


Surinder Thind — Jefferies Financial Group — Analyst

Okay. Well, thank you very much. I’ll get back in the queue for follow-ups. Thank you.

Jeffrey Davis — Chairman, President and CEO

Yeah.

Operator

Thank you. Our next question comes from Frank Atkins with SunTrust. Your line is open.

Francis Carl Atkins` — SunTrust Robinson Humphrey, Inc. — Analyst

Thank you for taking my questions. It was a bit early last quarter but wanted to ask again, are you seeing impact from the IBM, Red Hat and what you’re hearing from your clients and what’s demand around some of those areas?


Jeffrey Davis — Chairman, President and CEO

Yes. Demand around platform-as-a-service both Red Hat, as well as OpenShift, as well as Pivotal Cloud Foundry is really strong. There’s a ton of interest in it. I think we’re just actually kind of crossing over into higher demand for that. Right now there’s a lot of clients that we’re working with that are in the planning stages still. But a lot of them that are actually taking on the transition there. So certainly our relationship with IBM and the previous relationship we had with Red Hat is an absolute benefit to us. There is a lot of discussion and activity with IBM and how we can help them accelerate growth around Red Hat. I would say, we haven’t realized a ton of that just yet, as you said it’s early, but the early indicators, again just based on the activity and the discussions we’re having with them is that we should be in the capital received there and I know that IBM is going to put a lot behind driving that growth.


Francis Carl Atkins` — SunTrust Robinson Humphrey, Inc. — Analyst

Okay. That’s helpful. I wanted to ask a quick numbers question, what was organic growth in the quarter and the year?

Jeffrey Davis — Chairman, President and CEO

Organic growth in the quarter was about 4%, 4.5% and for the year it was around 3%.

Francis Carl Atkins` — SunTrust Robinson Humphrey, Inc. — Analyst

Okay. And then as we think about revenue visibility going into this year, is it roughly the same as last year or do you think there is improvement in the visibility of revenue?


Jeffrey Davis — Chairman, President and CEO

No. It has definitely improved. I think each year that’s true. Again, we take on this longer term engagements. We have more backlog rolling into the subsequent year and even where we don’t have it booked contractually, we have better visibility each year as well. Just in terms again in this relationship where we’re working hand-in-hand with the client on their strategy. We know what they’re going to spend even if it’s not booked yet. So it’s still a project-based business. So there is always a little bit of uncertainty in the later months, but we’ve got a super solid backlog starting here.


Francis Carl Atkins` — SunTrust Robinson Humphrey, Inc. — Analyst

All right. Great. Thank you very much.

Jeffrey Davis — Chairman, President and CEO

Thanks, Frank.

Operator

Thank you. Our next question comes from Mayank Tandon with Needham & Company. Your line is open.

Kyle Peterson — Needham & Company, LLC — Analyst

Hey. Good morning. This is actually Kyle Peterson on for Mayank today. Thanks for taking the questions. I just want to see if you guys could touch a little bit more on vertical growth and strength and kind of what verticals you guys are positive on heading into 2019 is driving some of this growth?


Paul Martin — Chief Financial Officer

Yeah. Absolutely. It’s really the one I touched on in the prepared remarks as, certainly, health sciences as we continue to be very bullish on it. We’re super well-positioned there and have additional opportunities coming down the pipe and the different approaches that we are taking to that industry. Financial services actually is improving from where it was for us a year or two ago. So we’re seeing some strength there. And of course, retail for us and when I refer to retail I’m referring to primarily online sales whether it’s B2B or B2C continuous to be strong as well particularly around commerce, as well as a lot of our digital experience capability.


And then automotive and manufacturing, once again are strong for us. It’s interesting and I said this in the prepared statement as well, some of the reason for that is, we had actually managed to position ourselves very strategically with these clients. When you think of manufacturing and one of our largest customer is struggling a little bit, a major industry heavy equipment manufacturer, but they view digital as key to their future. So, they’re stepping up and really focusing strategically on those investments, which has been obviously I think benefit to us and I think in the long-term.


Kyle Peterson — Needham & Company, LLC — Analyst

All right. Great. And then maybe shifting a little bit over to kind of hiring trends, kind of war for talent. I know you mentioned you’re working on flattening the pyramid out a little bit, which has helped actually decrease some of the consultant salaries a little bit. But just if you exclude some of that noise. Are you guys seeing any uptick in wage inflation pressures or attrition or any of that, and how would that flow into margins?

Paul Martin — Chief Financial Officer


Yeah. It’s a great question. Honestly, not, I think, we expect probably the same result. There are certainly our merit increased pool. It is going to be the same as last year and we used third-party, a couple of the third-party services that help us evaluate that. So we’re seeing it roughly the same as last year. Attrition for us is actually down. Our attrition in the fourth quarter as an example was the best experience sometime, it’s just over 15%. Like I said, it’s 16%, 16.5%, which as this client, we are really pleased with. The competition for resources is probably a little tougher. But I would say that it always is, honestly. I know this sounds cliche, but the type of people that we hire. They have always been difficult to find and not enough of them in the market. So we’ve actually had great success. It’s been less an attrition issue and even less a competitive issue. And then frankly keeping up with our own demand, and as I said earlier, we’re scaling our talent acquisition group to do that. But that’s — the biggest change for us is we’re seeing some nice growth here and some increased demand.


Kyle Peterson — Needham & Company, LLC — Analyst

All right. Great. And then last one for me and then I’ll hop out. Just wanted to get a taste of kind of how the M&A pipeline is looking right now. I know you guys often kind of look for a couple of tuck-in deals a year. Just wanted to see if there’s any capabilities you guys are looking for or staffing advantages or geographies or just kind of how that was shaping up as we headed into 2019?

Jeffrey Davis — Chairman, President and CEO

Yeah. Absolutely. I would say the pipeline is good, but there’s a lot of ongoing activity right now. We don’t necessarily have something in late stages. We do have a few things that are in later stage. So pipeline remains strong, valuations remain reasonable. We’re confident that we’ll be able to get at least a couple of deal done this year, we did three last year. My hope would be not necessarily in terms of numbers of deals, but a goal of acquiring about $50 million in run rate, tough to do, it’s an aggressive goal, but I think it’s possible, and again, we’ve got the pipeline to do it. In terms of areas of interest, obviously, digital remains an important one around our digital experience capability. But there are also Pivotal, other technologies, including some of the long-standing business optimization capabilities, such as Oracle, ERP and other offering like that. So there is still a broad portfolio there and we’ll be pursuing that as the year marches on.


Kyle Peterson — Needham & Company, LLC — Analyst

All right. Great. Thanks for the color. Nice quarter guys.

Paul Martin — Chief Financial Officer

Thank you, Kyle.

Operator

Thank you. Our next question comes from Brian Kinstlinger with Alliance Global Partners. Your line is open.

Brian David Kinstlinger — Alliance Global Partners — Analyst

Hi. Good morning, guys.

Jeffrey Davis — Chairman, President and CEO

Good morning, Brian.

Brian David Kinstlinger — Alliance Global Partners — Analyst


Organic growth has been trending very well. However, in the past a growth year like 2018 would have made it — made for difficult comps given revenue churn. So I’m curious today what the average duration of a project is, especially in digital transformation? And then when that project ends, what’s the follow-on opportunity?

Jeffrey Davis — Chairman, President and CEO

Yeah. That’s a good question. I would say — let me take the step back and define project to qualify my answer. So for us a project isn’t necessarily a contract. So a contract, it’s probably averaging $300,000 in six months. However, that contract is typically one of many that we will be receiving along the same journey or same projects, same strategy and those tend to go on for many, many years. Our top 50 customers, the average tenure of those relationships is over a year now and those aren’t all, of course, the exact same journey or strategy, there is multiple, multiple projects in there. But, again, I would say, the answer is that they are extending and growing, and particularly, if you look at what we refer to the engagement, which is a portfolio of projects.


Brian David Kinstlinger — Alliance Global Partners — Analyst

And then in terms of digital transformation and what inning do you think we are in terms of this demand trend? Is it still multi-year growth opportunity for Perficient and the entire industry? Are we talking two to three years? Are we talking to still five years of growth opportunity? How do you kind of think about that?

Jeffrey Davis — Chairman, President and CEO

Yeah. It’s a great question also. It’s hard to say. As I sit here today, I would say, we’ve got a very, very long runway and to use the baseball metaphor, honestly, second, third inning, that’s the beauty of this industry as digital become a lot more than what digital was a few years ago, I think that’s going to continue and behind digital it’s going to be something else that we probably don’t even quite understand yet, whether it’s AI, more IoT devices, et cetera. But the dynamics of the industry are what keeps it running, that’s why I love it so much.


Brian David Kinstlinger — Alliance Global Partners — Analyst

Okay. And then, Jeff, I’m sure you can appreciate for many years, I’ve asked you about volume growth and now volume growth is trending in the right direction, and it’s been for a little bit. And I’m wondering if Perficient going to have both volume growth, as well as pricing growth and you mentioned 1.5% bill rate growth in 2019 is your expectation. What was the inhibitor in the last year or two to bill rate growth? And then what’s different do you think this year in terms of the last year or two?


Jeffrey Davis — Chairman, President and CEO

We’re talking about this really beginning probably three years ago. We made a lot of changes to the sales organization and sales compensation and the like. And one of the reasons we did that was actually to shift away from the significance focus we had on margin and margin only. So we wanted to bring that back into balance, I would say that drove some of the tepid or flat growth in bill rates. And I do think that we made adjustments to that this year to drive and stack up. However, I still see this driving margin expansion, even if we’re flat again this year, I still expect we’ll be able to drive margin expansion through the factors I mentioned, one, the growth that we’re putting up now is going to drive a little higher, sustainably higher utilization, and then, of course, the offshore does drive substantial margin improvement as well. So I think the — yeah, go ahead.


Brian David Kinstlinger — Alliance Global Partners — Analyst

Is that bill rate improvement in 2019 a function of new — contributions from new customers, existing customers or is it the acquisitions, I know in the past when you were much smaller you’d acquire a company, they have slow — lower bill rates and you go to those customers and say, you’re part of a bigger opportunity and better value-added services opportunities, you were able to increase those prices. What is it this year that you sort of change from last year? What do you think that reason is that you see that bill rate growth opportunity?


Jeffrey Davis — Chairman, President and CEO

I do think that we have an opportunity with the existing customers, just simply through negotiating around cost of moving adjustments. It’s as basic as that, but also we have got a lot of emphasis on new logos as well, where we will have an opportunity, I think, to demonstrate an additional value and compete more freshly, if you will, against competitors that are charging higher bill rates.

Brian David Kinstlinger — Alliance Global Partners — Analyst

Great. Last question I have — I may have missed it, but can you talk about on an organic basis maybe the booking trends in the December quarter and then maybe year-to-date are you off to a strong start year-over-year, is it about flat, can you just maybe touch on that if you could? Thanks.


Jeffrey Davis — Chairman, President and CEO

Yeah. We don’t disclose the specifics in the quarters just because of the lumpiness I referred to earlier. But I can tell you that the trailing 12 months or for the year was actually low double-digit year-over-year organic and we’re starting off the year on every bit of that strength and a little more.

Brian David Kinstlinger — Alliance Global Partners — Analyst

Great. Thank you so much.

Jeffrey Davis — Chairman, President and CEO

Thanks, Brian.


Operator

Thank you. Our next question comes from Vincent Colicchio with Barrington Research. Your line is open.

Vincent Alexander Colicchio — Barrington Research Associates, Inc. — Analyst

Yeah. Thanks for taking my questions guys. Most of them are asked. I’m sorry if I missed this, Jeff, what was the billing rate increase in the quarter and how is it tracking in the first quarter so far?

Jeffrey Davis — Chairman, President and CEO

It was flat in Q4. The — and it’s really too early to measures so far in this quarter. We do track booked ADR or bill rates, which doesn’t necessarily translate to the realized bill rate, there are — there is some leakage there. However, the trend at least in the book-to-bill rate is up a little bit, probably, about 1% over the last couple of quarters. So we’re optimistic, we will see that translate into increased realized bill rate. And like I said, probably, too early really to comment much on the first quarter.


Vincent Alexander Colicchio — Barrington Research Associates, Inc. — Analyst

And then on the healthcare side, is your optimism based on a concentrated, a small number of clients or is it more broad based, I know you added a very large contract in recent quarters?

Jeffrey Davis — Chairman, President and CEO

Yeah. We have one large — one of our largest customers is in the healthcare space, but I will tell you beyond that it’s very diversified. We’ve got — looking at that revenue, probably, 80% of their revenue is coming from 25 or more clients.


Vincent Alexander Colicchio — Barrington Research Associates, Inc. — Analyst

Okay. And your utilization rate, it was pretty healthy based on historical numbers 80%. Could you remind us at what level you’re comfortable moving up to on that side?

Jeffrey Davis — Chairman, President and CEO

Yeah. I think if we’re growing and our — we talked about our guidance at the midpoint 4%, 5% organic, top-line revenue and obviously increasing the offshore as well. So driving some increased utilization there which we had certainly in the fourth quarter. But overall, let’s just talk about North American for the moment, I think in that kind of a growth environment sustaining 5% plus organic growth, probably, in the 80% to 81% range. And we had pretty close to that for the year last year and the way that will unfold by the way is a little bit lower in the first quarter and the fourth quarter typically, although, we were able to lock that sometimes if we are ramping up and then higher in the second and third quarters, the typical seasonal pattern just because of the holidays.


Vincent Alexander Colicchio — Barrington Research Associates, Inc. — Analyst

And then the non-digital side of your business, do you — could you provide a percent for that in the quarter and has there been any change in the drag from that side. And also, what kind of a drag are you looking for the year, is there any change there versus say what you did in 2018?

Jeffrey Davis — Chairman, President and CEO

No. Actually, we — it’s probably about 20% or 25% and declining, not so much because it’s a drag. It’s probably not going to experience the growth as the digital piece has. But I would attribute some of that back to the one cancellation we have talked about many times at the end of the second quarter right here. However, that business has rebounded nicely and new relationships that we have with partners like OneStream as an example, that really fits in that category, but I think we are very innovative with CPM and the cloud and offerings like that. We expect to still see good things will come for their business and I expect to see some growth from this year.


Vincent Alexander Colicchio — Barrington Research Associates, Inc. — Analyst

Okay. Nice quarter guys. Thank you.

Thanks, Vincent.

Operator

Thank you. Our next question comes from Allen Klee with Maxim Group. Your line is open.

Joshua Goltry — Maxim Group LLC — Analyst

Hi. This is Joshua Goltry in for Allen Klee. Most of my questions were answered as well. But I just wanted to get some more information on whether the new customers that you’ve acquired in the past quarter were attributable to recent acquisitions or ones you’ve obtained yourself?


Jeffrey Davis — Chairman, President and CEO

It’s a combination of the two, certainly, but, I think, most of what you’re seeing is actually organic and ones that we’ve obtained ourselves. We certainly gained some customers through acquisitions. But a lot of the larger ones are newly acquired organically. Certainly in combination or in collaboration with the skills that we’ve acquired, often cases those can be a turning point or an opportunity to win those new deals.

Joshua Goltry — Maxim Group LLC — Analyst


Right. And just also building off of the industries that you see as a strong growth avenues like retail and automotive and manufacturing, do you have a sense of the revenue growth from those industries specifically or the average contract size from those industries?

Paul Martin — Chief Financial Officer

I think the — so healthcare, of course, is our largest and I do you believe it is going to continue to lead the way in terms of growth. I want to say organically it is up in high single digits year-over-year and I think that’s going to continue. We are doing a lot of digital transformation work in that sector and in the industry and we expect that, again, we are still in the early stages of that, so we will continue to see that and in fact build on it. But I would also say that we’re kind of seeing a tide lift all boats here, even in industries that may be aren’t performing as well as others in this market and I alluded to earlier, our spending on digital transformation, it’s sort of a must-have and we are positioned very well for that. So we continue to focus on those industries as well. We are making partnerships there with many clients and they’re continuing to spend, and I think, they will continue to.


Joshua Goltry — Maxim Group LLC — Analyst

Got it. All right, guys. Thank you.

Operator

Thank you. And we have a follow-up from Surinder Thind with Jefferies. Your line is open.

Surinder Thind — Jefferies Financial Group — Analyst

Thank you for taking the follow-up. I just wanted to follow up on one question about the IBM Red Hat deal, maybe more of a big picture question in terms of when a transaction like that goes down, when you’re partners with both sides. Can you talk a little bit about the timeline and the types of conversations you have in the sense that, is there maybe a little bit of a pause in activity upfront as the deals kind of being worked through and integrated and then maybe you’ve seen acceleration toward the tail-end or are you guys kind of continues throughout and it actually builds or how should we think about the opportunity? Is it more after deal close in terms of timeline?


Jeffrey Davis — Chairman, President and CEO

Good question. Every partner is unique. I would tell you, you specifically referenced IBM Red Hat. So, I’ll tell you, it’s been our experience we’ve been a partner with IBM for a couple of decades now. And our experience is they integrate quickly, they hit the ground running and we are already seeing that at least in activity. And we’re seeing good demand. We were seeing good demand on our OpenShift before the announcement and we have strong relationship with Red Hat. And again in our experience when IBM puts their sales machine behind something, they could drive a lot of results, and that’s what we expect. And I think it will be fairly quick. In fact, as I said, they acquired Red Hat at a time, to me, it was already growing pretty swiftly and I think this will only accelerate it. So right now we’re still seeing great opportunities in the pipeline and strong demand around Red Hat.


Surinder Thind — Jefferies Financial Group — Analyst

Understood. And then maybe more of a modeling question, perhaps, on the services gross margin, obviously, very strong for the quarter. Can you talk a little bit about the delta versus — I mean, was there some true-up activity that was involved there, may be some seasonality, obviously, you put out a long-term target out there, but just how we should think about it near-term, and obviously, it was different than the full year number?

Paul Martin — Chief Financial Officer


Sure. Surinder, this is Paul. So a couple of things in there. There were more onetime, including a positive benefits experience for our employee healthcare plan along with we had some incentives from the State of Louisiana on our domestic development center. But, generally, we’re looking at a goal of 50 basis points to 100 basis points improvement in gross margin in 2019, and probably, our guidance isn’t probably quite as aggressive as our top end of that, that’s what we are marching to and have been obviously focused on.

Jeffrey Davis — Chairman, President and CEO

That’s right. Just to add to that, as Paul just mentioned, our guidance or our model for guidance is probably flattish in gross this year, year-over-year. But we expect to be able to do better than that.

Surinder Thind — Jefferies Financial Group — Analyst

Okay. That’s it from me guys. Thank you so much.

Jeffrey Davis — Chairman, President and CEO

Thank you.

Operator

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back to Mr. Jeff Davis for any closing remarks.

Jeffrey Davis — Chairman, President and CEO

Well, once again, thanks, everybody, for their time today and we look forward to speaking to you in a couple of months.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

Duration: 43 minutes

Call participants:

Jeffrey Davis — Chairman, President and CEO

Paul Martin — Chief Financial Officer

Surinder Thind — Jefferies Financial Group — Analyst

Francis Carl Atkins` — SunTrust Robinson Humphrey, Inc. — Analyst

Kyle Peterson — Needham & Company, LLC — Analyst

Brian David Kinstlinger — Alliance Global Partners — Analyst

Vincent Alexander Colicchio — Barrington Research Associates, Inc. — Analyst

Joshua Goltry — Maxim Group LLC — Analyst

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