| PERFICIENT INC Item 1A Risk Factors |
| You should carefully consider the following risk factors together with the other information contained in or incorporated by reference into this annual report before you decide to buy our common stock |
| If any of these risks actually occur, our business, financial condition, operating results or cash flows could be materially adversely affected |
| This could cause the trading price of our common stock to decline and you may lose part or all of your investment |
| Risks Related to Our Business Prolonged economic weakness in the Internet software and services market could adversely affect our business, financial condition and results of operations |
| The market for middleware and Internet software and services has changed rapidly over the last seven years |
| The market for middleware and Internet software and services expanded dramatically during 1999 and most of 2000, but declined significantly in 2001 and 2002 |
| Market demand for Internet software and services began to stabilize and improve throughout 2003, 2004 and 2005, but this trend may not continue |
| Our future growth is dependent upon the demand for Internet software and services, and, in particular, the information technology consulting services we provide |
| Demand and market acceptance for middleware and Internet services are subject to a high level of uncertainty |
| Prolonged weakness in the middleware and Internet software and services industry has caused in the past, and may cause in the future, business enterprises to delay or cancel information technology projects, reduce their overall budgets and/or reduce or cancel orders for our services |
| This, in turn, may lead to longer sales cycles, delays in purchase decisions, payment and collection, and may also result in price pressures, causing us to realize lower revenues and operating margins |
| If companies cancel or delay their business and technology initiatives or choose to move these initiatives in-house, our business, financial condition and results of operations could be materially and adversely affected |
| We may not be able to attract and retain information technology consulting professionals, which could affect our ability to compete effectively |
| Our business is labor intensive |
| Accordingly, our success depends in large part upon our ability to attract, train, retain, motivate, manage and effectively utilize highly skilled information technology consulting professionals |
| Additionally, our technology professionals are primarily at-will employees |
| We also use independent subcontractors where appropriate |
| Failure to retain highly skilled technology professionals would impair our ability to adequately manage staff and implement our existing projects and to bid for or obtain new projects, which in turn would adversely affect our operating results |
| Our success will depend on attracting and retaining senior management and key personnel |
| Our industry is highly specialized and the competition for qualified management and key personnel is intense |
| We expect this to remain so for the foreseeable future |
| We believe that our success will depend on retaining our senior management team and key technical and business consulting personnel |
| Retention is particularly important in our business as personal relationships are a critical element of obtaining and maintaining strong relationships with our clients |
| In addition, as we rapidly grow our business, our need for senior experienced management and delivery personnel increases substantially |
| If a significant number of these individuals stop working for us, or if we are unable to attract top talent, our level of management, technical, marketing and sales expertise could diminish or otherwise be insufficient for our growth |
| We may be unable to achieve our revenue and operating performance objectives unless we can attract and retain technically qualified and highly skilled sales, technical, business consulting, marketing and management personnel |
| These individuals would be difficult to replace, and losing them could seriously harm our business |
| 11 _________________________________________________________________ We may have difficulty in identifying and competing for strategic acquisition and partnership opportunities |
| Our business strategy includes the pursuit of strategic acquisitions |
| We may acquire or make strategic investments in complementary businesses, technologies, services or products, or enter into strategic partnerships or alliances with third parties in the future in order to expand our business |
| We may be unable to identify suitable acquisition, strategic investment or strategic partnership candidates, or if we do identify suitable candidates, we may not complete those transactions on terms commercially favorable to us, or at all |
| If we fail to identify and successfully complete these transactions, our competitive position and our growth prospects could be adversely affected |
| In addition, we may face competition from other companies with significantly greater resources for acquisition candidates, making it more difficult for us to acquire suitable companies on favorable terms |
| Pursuing and completing potential acquisitions could divert management’s attention and financial resources and may not produce the desired business results |
| We do not have specific personnel dedicated to pursuing and making strategic acquisitions |
| As a result, if we pursue any acquisition, our management could spend a significant amount of time and financial resources to pursue and integrate the acquired business with our existing business |
| To pay for an acquisition, we might use capital stock, cash or a combination of both |
| Alternatively, we may borrow money from a bank or other lender |
| If we use capital stock, our stockholders will experience dilution |
| If we use cash or debt financing, our financial liquidity may be reduced and the interest on any debt financing could adversely affect our results of operations |
| From an accounting perspective, an acquisition may involve amortization or the write-off of significant amounts of intangible assets that could adversely affect our results of operations |
| Despite the investment of these management and financial resources, and completion of due diligence with respect to these efforts, an acquisition may not produce the anticipated revenues, earnings or business synergies for a variety of reasons, including: • difficulties in the integration of the technologies, services and personnel of the acquired business; • the failure of management and acquired services personnel to perform as expected; • the risks of entering markets in which we have no, or limited, prior experience; • the failure to identify or adequately assess any undisclosed or potential liabilities or problems of the acquired business including legal liabilities; • the failure of the acquired business to achieve the forecasts we used to determine the purchase price; or • the potential loss of key personnel of the acquired business |
| These difficulties could disrupt our ongoing business, distract our management and colleagues, increase our expenses and materially and adversely affect our results of operations |
| The market for the information technology consulting services we provide is competitive, has low barriers to entry and is becoming increasingly consolidated, which may adversely affect our market position |
| The market for the information technology consulting services we provide is competitive, rapidly evolving and subject to rapid technological change |
| In addition, there are relatively low barriers to entry into this market and therefore new entrants may compete with us in the future |
| For example, due to the rapid changes and volatility in our market, many well-capitalized companies, including some of our partners, that have focused on sectors of the Internet software and services industry that are not competitive with our business may refocus their activities and deploy their resources to be competitive with us |
| 12 _________________________________________________________________ Our future financial performance will depend, in large part, on our ability to establish and maintain an advantageous market position |
| We currently compete with regional and national information technology consulting firms, and, to a limited extent, offshore service providers and in-house information technology departments |
| Many of the larger regional and national information technology consulting firms have substantially longer operating histories, more established reputations and potential partner relationships, greater financial resources, sales and marketing organizations, market penetration and research and development capabilities, as well as broader product offerings and greater market presence and name recognition |
| We may face increasing competitive pressures from these competitors as the market for Internet software and services continues to grow |
| This may place us at a disadvantage to our competitors, which may harm our ability to grow, maintain revenue or generate net income |
| In recent years, there has been substantial consolidation in our industry, and we expect that there will be significant additional consolidation in the near future |
| As a result of this increasing consolidation, we expect that we will increasingly compete with larger firms that have broader product offerings and greater financial resources than we have |
| We believe that this competition could have a significant negative effect on our marketing, distribution and reselling relationships, pricing of services and products and our product development budget and capabilities |
| Any of these negative effects could significantly impair our results of operations and financial condition |
| We may not be able to compete successfully against new or existing competitors |
| Our business will suffer if we do not keep up with rapid technological change, evolving industry standards or changing customer requirements |
| Rapidly changing technology, evolving industry standards and changing customer needs are common in the Internet software and services market |
| We expect technological developments to continue at a rapid pace in our industry |
| Technological developments, evolving industry standards and changing customer needs could cause our business to be rendered obsolete or non-competitive, especially if the market for the core set of eBusiness solutions and software platforms in which we have expertise does not grow or if such growth is delayed due to market acceptance, economic uncertainty or other conditions |
| Accordingly, our success will depend, in part, on our ability to: • continue to develop our technology expertise; • enhance our current services; • develop new services that meet changing customer needs; • advertise and market our services; and • influence and respond to emerging industry standards and other technological changes |
| We must accomplish all of these tasks in a timely and cost-effective manner |
| We might not succeed in effectively doing any of these tasks, and our failure to succeed could have a material and adverse effect on our business, financial condition or results of operations, including materially reducing our revenue and operating results |
| We may also incur substantial costs to keep up with changes surrounding the Internet |
| Unresolved critical issues concerning the commercial use and government regulation of the Internet include the following: • security; • intellectual property ownership; • privacy; • taxation; and • liability issues |
| Any costs we incur because of these factors could materially and adversely affect our business, financial condition and results of operations, including reduced net income |
| A significant portion of our revenue is dependent upon building long-term relationships with our clients and our operating results could suffer if we fail to maintain these relationships |
| 13 _________________________________________________________________ Our professional services agreements with clients are in most cases terminable on 10 to 30 days’ notice |
| A client may choose at any time to use another consulting firm or choose to perform services we provide through their own internal resources |
| Accordingly, we rely on our clients’ interests in maintaining the continuity of our services rather than on contractual requirements |
| Termination of a relationship with a significant client or with a group of clients that account for a significant portion of our revenues could adversely affect our revenues and results of operations |
| If we fail to meet our clients’ performance expectations, our reputation may be harmed |
| As a services provider, our ability to attract and retain clients depends to a large extent on our relationships with our clients and our reputation for high quality services and integrity |
| We also believe that the importance of reputation and name recognition is increasing and will continue to increase due to the number of providers of information technology services |
| As a result, if a client is not satisfied with our services or does not perceive our solutions to be effective or of high quality, our reputation may be damaged and we may be unable to attract new, or retain existing, clients and colleagues |
| We may face potential liability to customers if our customers’ systems fail |
| Our eBusiness integration solutions are often critical to the operation of our customers’ businesses and provide benefits that may be difficult to quantify |
| If one of our customers’ systems fails, the customer could make a claim for substantial damages against us, regardless of our responsibility for that failure |
| The limitations of liability set forth in our contracts may not be enforceable in all instances and may not otherwise protect us from liability for damages |
| Our insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims |
| If we experience one or more large claims against us that exceed available insurance coverage or result in changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, our business and financial results could suffer |
| The loss of one or more of our significant software partners would have a material adverse effect on our business and results of operations |
| Our partnerships with software vendors enable us to reduce our cost of sales and increase win rates through leveraging our partners’ marketing efforts and strong vendor endorsements |
| The loss of one or more of these relationships and endorsements could increase our sales and marketing costs, lead to longer sales cycles, harm our reputation and brand recognition, reduce our revenues and adversely affect our results of operations |
| In particular, a substantial portion of our solutions are built on IBM WebSphere platforms and a significant number of our clients are identified through joint selling opportunities conducted with IBM and through sales leads obtained from our relationship with IBM Revenue from IBM was approximately 9prca, 17prca and 35prca of total revenue for the years ended December 31, 2005, 2004 and 2003, respectively |
| The loss of our relationship with, or a significant reduction in the services we perform for IBM would have a material adverse effect on our business and results of operations |
| Our quarterly revenue, expenses and operating results have varied in the past and may vary significantly in the future |
| In addition, many factors affecting our operating results are outside of our control, such as: § demand for Internet software and services; § customer budget cycles; § changes in our customers’ desire for our partners’ products and our services; § pricing changes in our industry; § government regulation and legal developments regarding the use of the Internet; and § general economic conditions |
| 14 _________________________________________________________________ As a result, if we experience unanticipated changes in the number or nature of our projects or in our employee utilization rates, we could experience large variations in quarterly operating results and losses in any particular quarter |
| Our services revenues may fluctuate quarterly due to seasonality or timing of completion of projects |
| We may experience seasonal fluctuations in our services revenues |
| We expect that services revenues in the fourth quarter of a given year may typically be lower than in other quarters in that year as there are fewer billable days in this quarter as a result of vacations and holidays |
| In addition, we generally perform services on a project basis |
| While we seek wherever possible to counterbalance periodic declines in revenues on completion of large projects with new arrangements to provide services to the same client or others, we may not be able to avoid declines in revenues when large projects are completed |
| Our inability to obtain sufficient new projects to counterbalance any decreases in work upon completion of large projects could adversely affect our revenues and results of operations |
| Our software revenue may fluctuate quarterly, leading to volatility in our results of operations |
| Our software revenue may fluctuate quarterly and be higher in the fourth quarter of a given year as procurement policies of our clients may result in higher technology spending towards the end of budget cycles |
| This seasonal trend may materially affect our quarter-to-quarter revenues, margins and operating results |
| Our overall gross margin fluctuates quarterly based on our services and software revenue mix, which may cause our stock price to fluctuate |
| The gross margin on our services revenue is, in most instances, greater than the gross margin on our software revenue |
| In addition, gross margin on software revenue may fluctuate as a result of variances in gross margin on individual software products |
| Our stock price may be negatively affected in quarters in which our gross margin decreases |
| Our services gross margins are subject to fluctuations as a result of variances in utilization rates and billing rates |
| Our services gross margins are affected by trends in the utilization rate of our professionals, defined as the percentage of our professionals’ time billed to customers divided by the total available hours in a period, and in the billing rates we charge our clients |
| Our operating expenses, including employee salaries, rent and administrative expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated variations in the number or size of projects in process |
| Any resulting non-billable time may adversely affect our gross margins |
| The average billing rates for our services may decline due to rate pressures from significant customers and other market factors, including innovations and average billing rates charged by our competitors |
| Also, our average billing rates will decline if we acquire companies with lower average billing rates than ours |
| To sell our products and services at higher prices, we must continue to develop and introduce new services and products that incorporate new technologies or high-performance features |
| If we experience pricing pressures or fail to develop new services, our revenues and gross margins could decline, which could harm our business, financial condition and results of operations |
| If we fail to complete fixed-fee contracts within budget and on time, our results of operations could be adversely affected |
| Under these contractual arrangements, we bear the risk of cost overruns, completion delays, wage inflation and other cost increases |
| If we fail to estimate accurately the resources and time required to complete a project or fail to complete our contractual obligations within the scheduled timeframe, our results of operations could be adversely affected |
| We cannot assure you that in the future we will not price these contracts inappropriately, which may result in losses |
| We may not be able to maintain our level of profitability |
| Although we have been profitable for the past eleven quarters, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future |
| We cannot assure you of any operating results |
| In future quarters, our operating results may not meet public market analysts’ and investors’ expectations |
| If this occurs, the price of our common stock will likely fall |
| 15 _________________________________________________________________ If we do not effectively manage our growth, our results of operations and cash flows could be adversely affected |
| Our ability to operate profitably with positive cash flows depends largely on how effectively we manage our growth |
| In order to create the additional capacity necessary to accommodate the demand for our services, we may need to implement a variety of new and upgraded operational and financial systems, procedures and controls, open new offices or hire additional colleagues |
| Implementation of these new systems, procedures and controls may require substantial management efforts and our efforts to do so may not be successful |
| The opening of new offices or the hiring of additional colleagues may result in idle or underutilized capacity |
| We periodically assess the expected long-term capacity utilization of our offices and professionals |
| We may not be able to achieve or maintain optimal utilization of our offices and professionals |
| If demand for our services does not meet our expectations, our revenues and cash flows will not be sufficient to offset these expenses and our results of operations and cash flows could be adversely affected |
| We have recorded deferred offering costs in connection with the conversion of our registration statement into a shelf registration statement, and our inability to net these costs against the proceeds of future offerings from our shelf registration statement could result in a non-cash expense in our Statement of Operations in a future period |
| We initially filed a registration statement with the Securities and Exchange Commission on March 7, 2005 to register the offer and sale by the Company and certain selling stockholders of shares of our common stock |
| Due to overall market conditions during the second quarter, we converted our registration statement into a shelf registration statement to allow for offers and sales of common stock from time to time as market conditions permit |
| To date, we have recorded approximately dlra942cmam000 of deferred offering costs (approximately dlra579cmam000 after tax, if ever expensed) in connection with the offering and have classified these costs as prepaid expenses in other non-current assets on our balance sheet |
| If we sell shares of common stock from our shelf registration statement, we will be allowed to net these accumulated deferred offering costs against the proceeds of the offering |
| If we do not raise funds through an equity offering from the shelf registration statement or fail to maintain the effectiveness of the shelf registration statement, the currently capitalized deferred offering costs will be expensed |
| Such expense would be a non-cash accounting charge as all of these expenses have already been paid |
| The Public Company Accounting Oversight Board, or PCAOB, is conducting an annual inspection of our external auditors BDO Seidman, LLP The PCAOB is a new private agency established to oversee the auditors of publicly held companies |
| In 2005, the PCAOB conducted an annual inspection of BDO Seidman, LLP (BDO), as they do with all other large public accounting firms that audit the financial statements of publicly held companies |
| The PCAOB inspected BDO’s audits of a number of BDO clients, including BDO’s audit of our financial statements for the year ended December 31, 2004 |
| The PCAOB staff has told BDO they differ with our accounting for forfeitable shares of stock issued in connection with one of our acquisitions in 2004 and has referred this matter to its Board |
| We and BDO believe that our accounting for this acquisition is correct |
| If it were ultimately determined that different accounting should be used for this acquisition, we estimate the resulting accounting impact would be a non-cash expense of approximately dlra600cmam000 per year after taxes over a period of three years from the date of the acquisition and a reduction in the acquisition’s purchase price of dlra3dtta1 million reflected on our balance sheet as reductions in goodwill and stockholders’ equity as of the acquisition date |
| The PCAOB’s inspection of BDO is ongoing and there can be no assurance as to its final scope or completion |
| SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements contained in this annual report that are not purely historical statements discuss future expectations, contain projections of results of operations or financial condition or state other forward-looking information |
| Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements |
| The “forward-looking” information is based on various factors and was derived using numerous assumptions |
| In some cases, you can identify these so-called forward-looking statements by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words |
| You should be aware that those statements only reflect our predictions |
| Actual events or results may differ substantially |
| Important factors that could cause our actual results to be materially different from the forward-looking statements are disclosed under the heading “Risk Factors” in this annual report |
| 16 _________________________________________________________________ Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements |
| We are under no duty to update any of the forward-looking statements after the date of this annual report to conform such statements to actual results |