PERFICIENT INC - Annual Report: 2016 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark one)

PERFICIENT, INC.

(Exact Name of Registrant as Specified in Its Charter)

555 Maryville University Drive, Suite 600

Saint Louis, Missouri 63141

(Address of principal executive offices)

(314) 529-3600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

The aggregate market value of the voting stock held by non-affiliates of the Company was approximately $707,703,819 based on the last reported sale price of the Company’s common stock on The Nasdaq Global Select Market on June 30, 2016.

As of February 17, 2017, there were 35,419,870 shares of common stock outstanding.

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Overview

Perficient is a leading digital transformation consulting firm serving Global 2000® and enterprise customers throughout North America. With a broad array of information technology, management consulting, and creative capabilities, Perficient and its Perficient Digital agency deliver vision, execution, and value with outstanding digital experience, business optimization, and industry solutions. Our work enables clients to improve productivity and competitiveness; grow and strengthen relationships with customers, suppliers and partners; and reduce costs. Our solutions include business intelligence and analytics, commerce, content management, custom applications, platform implementations, portals and collaboration, business integration and application program interfaces (“APIs”), management consulting, business process management, and customer relationship management, 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 a global, Internet-driven and competitive marketplace.

Through our experience in developing and delivering solutions for our clients, we believe we have acquired domain expertise that differentiates our firm. We use project teams that deliver high-value, measurable results by working collaboratively with clients and their partners through a user-centered, technology-based and business-driven solutions methodology. We believe this approach enhances return-on-investment for our clients by reducing the time and risk associated with designing and implementing technology solutions.

We serve our clients from locations in multiple markets throughout North America by leveraging a sales team that is experienced and connected through a common service portfolio, sales process, and performance management system. Our sales process utilizes project pursuit teams that include those of our information technology colleagues best suited to address a particular prospective client’s needs. Our primary target client base includes companies in North America with annual revenues in excess of $500 million. We believe this market segment can generate the repeat business that is a fundamental part of our growth plan. We primarily pursue solutions opportunities where our domain expertise and delivery track record give us a competitive advantage.

During 2016, we continued to implement a strategy focused on: expanding our relationships with existing and new clients; continuing to make disciplined acquisitions by acquiring substantially all of the assets of Bluetube, LLC, a Georgia limited liability company (“Bluetube”), in October; expanding our technical skill and geographic base by expanding our business with the acquisition of Bluetube; expanding our brand visibility among prospective clients, employees, and software vendors; leveraging our offshore capabilities in India and China; and leveraging our existing (and pursuing new) strategic alliances by targeting leading business advisory companies and technology providers. Approximately 98% of our revenues were derived from clients in the United States during each of the years ended December 31, 2016 and 2015 as compared to 99% for the year ended December 31, 2014. Approximately 95%, 96% and 97% of our total assets were located in the United States as of December 31, 2016, 2015 and 2014, respectively, with the remainder located in China, Canada, India and the United Kingdom.

We have been able to extend or enhance our presence in certain markets through an acquisition, as well as expand or enhance the services and solutions we are able to provide our clients. Our acquisition of Bluetube on October 12, 2016 enhanced and expanded the Company’s digital strategy, creative services, mobile and marketing expertise and added a market location in Atlanta, Georgia.

We provide services primarily to the healthcare (including pharma and life sciences), financial services (including banking and insurance), retail and consumer goods, automotive and transport products, electronics and computer hardware,  telecommunications, manufacturing, energy and utilities, business services, leisure, and media and entertainment markets, among others.

Our Solutions

We help clients gain competitive advantage by using technology to: make their businesses more responsive to market opportunities; strengthen relationships with customers, suppliers, and partners; improve productivity; and reduce information technology costs. Our digital experience, business optimization and industry solutions enable these benefits by developing, integrating, automating, and extending business processes, technology infrastructure and software applications end-to-end within an organization and with key partners, suppliers, and customers. This provides real-time access to critical business applications and information and a scalable, reliable, secure, and cost-effective technology infrastructure that enables clients to:

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give managers and executives the information they need to make quality business decisions and dynamically adapt their business processes and systems to respond to client demands, market opportunities, or business problems;

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improve the quality and lower the cost of customer acquisition and care through web-based customer self-service and provisioning;

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reduce supply chain costs and improve logistics by flexibly and quickly integrating processes and systems and making relevant real-time information and applications available online to suppliers, partners, and distributors;

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increase the effectiveness and value of legacy enterprise technology infrastructure investments by enabling faster application development and deployment, increased flexibility, and lower management costs; and

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increase employee productivity through better information flow and collaboration capabilities and by automating routine processes to enable focus on unique problems and opportunities.

Our broad spectrum of digital experience and business optimization solutions, delivered through both Perficient and our Perficient Digital agency, include the following:

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Business Intelligence and Analytics. We design, develop, and implement business analytics solutions that allow companies to interpret and act upon accurate, timely, and integrated information. Business analytics solutions help our clients make more informed business decisions by classifying, aggregating, and correlating data into meaningful business information. Our business analytics solutions allow our clients to transform data into knowledge for quick and effective decision making and can include information strategy, data warehousing, and business analytics and reporting.

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Commerce. Driven by customer insights, we gather and analyze data to determine the best approach for implementing a successful omni-channel commerce strategy. With a deep understanding of business needs and extensive technical capabilities, our commerce solutions embrace the power of digital transformation to encompass multiple channels, providing a seamless and efficient experience across the entire enterprise. Our solutions include: commerce transformation consulting; strategy, roadmaps, and program management; customer journeys, user experience and prototypes; content management; and product configuration.

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Platform Implementations. We design, develop, and implement technology platform solutions that allow our clients to establish a robust, reliable Internet-based infrastructure for integrated business applications which extend enterprise technology assets to employees, customers, suppliers, and partners. Our platform services include application server selection, architecture planning, installation and configuration, clustering for availability, performance assessment and issue remediation, security services, and technology migrations.

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Portals and Collaboration. We design, develop, implement, and integrate secure and scalable enterprise portals and collaboration solutions for our clients and their customers, employees, suppliers, partners, members, patients and others. These include searchable data systems, collaborative systems for process improvement, transaction processing, unified and extended reporting, commerce, content management and more. Our award-winning work includes multiple portal types built on many vendor platforms and features integration with a variety of technologies, social capabilities, and mobile sites.

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Business Integration and APIs. We help clients integrate fragmented, non-integrated systems and processes with a coherent architecture on which to rationalize and modernize legacy systems, automate and optimize business processes, and improve data quality and accessibility. We specialize in service-oriented architecture, APIs, business process management, event-driven architecture, complex event processing, master data management, and enterprise application integration, often using these technologies together to modernize legacy application architecture and support multi-channel user experiences such as portals, B2B (business to business) APIs, social media and mobility applications.

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Management Consulting. Our management consulting experts communicate in a language that makes sense at all levels of the organization, translating corporate strategy into operational results by bridging the gaps that often exist between business and technology. Technology investments can be a critical piece of an overall strategic business plan, and we’re able to translate that in business terms. We help our clients manage enterprise change, which is frequently in the context of large technology innovations and transformations. We offer services in many areas including: organizational change management; business analytics; project management; process excellence; and more.

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Business Process Management (“BPM”). BPM combines people, process and technology to improve organizational performance and customer value. We design, develop, and implement BPM solutions that allow our clients to quickly adapt their business processes to respond to new market opportunities or competitive threats by taking advantage of business strategies supported by flexible business applications and information technology infrastructures.

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Customer Relationship Management (“CRM”). We design, develop, and implement advanced CRM solutions that facilitate customer acquisition, service and support, and sales and marketing by understanding our clients’ needs through interviews, requirements-gathering sessions, call center analysis, developing an iterative prototype-driven solution, and integrating the solution to legacy processes and applications.

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Enterprise Performance Management (“EPM”). EPM, also known as corporate performance management, provides executive decision makers access to the integrated information they need in order to truly focus on profitability and performance. We make the difference with solutions that link financial data to ensure clients have visibility into all their business drivers and can effectively make critical business decisions based on real-time information. We do this by providing solutions that support budgeting and forecasting, financial consolidations, reporting and analytics, compliance, and more.

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Enterprise Mobile. Enterprise mobile is transforming the way the world does business. Consumers and workforces alike are never far from a device, which is why we believe in connected experiences. Our Perficient Digital agency creates mobile solutions that enable sales teams, mobilize the workforce, and engage with users on a deeper level. We are experts in enterprise and consumer mobile apps, IoT (Internet of Things), wearables, virtual and augmented reality, POC (proof of concept) and prototypes, and enterprise systems integrations.

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Digital Marketing. We leverage client insights and analytical customer data to deliver exceptional results that allow our clients to stay ahead of the competition and to remain at the forefront of everything related to digital marketing. Our expertise, largely delivered by our Perficient Digital agency, includes: search engine marketing (including search engine optimization and pay-per-click advertising); user experience and design; and conversion rate optimization.

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Competitive Strengths

We believe our competitive strengths include:

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IBM Beacon Award - Outstanding Enterprise Cloud Solution;

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Microsoft Cloud Partner of the Year - East Region;

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Microsoft National Solution Provider Partner of the Year – West, Central, and East Regions; and

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Salesforce Partner Innovation Award in Healthcare and Life Sciences.

Competition

The market for the services we provide is competitive and has low barriers to entry. We believe that our competitors fall into several categories, including:

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small local consulting firms that operate in no more than one or two geographic regions;

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boutique consulting firms, such as Prolifics and Avanade;

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national consulting firms, such as Accenture, Deloitte Consulting and Publicis.Sapient;

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digital consulting firms/entities such as Accenture Interactive, Deloitte Digital and SapientRazorfish;

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in-house professional services organizations of software companies; and

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offshore providers, such as Infosys Technologies Limited, Cognizant and Wipro Limited.

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Employees

Sales and Marketing. As of December 31, 2016, we had a 109-person direct solutions-oriented sales force. We reward our sales force for developing and maintaining relationships with our clients, seeking follow-up engagements, and leveraging those relationships to forge new relationships in different areas of the business and with our clients’ business partners.  Approximately 85% of our services revenues are executed by our direct sales force.  In addition to our direct sales team, we also have 46 dedicated sales support employees, 28 general managers and 8 vice-presidents who are engaged in our sales and marketing efforts.

We have sales and marketing partnerships with software vendors including IBM, Microsoft, Oracle, Salesforce, Magento and Adobe, among others. These companies are key vendors of open standards-based software commonly referred to as middleware application servers, enterprise application integration platforms, business process management, cloud computing applications, business activity monitoring and business intelligence applications, and enterprise portal server software. Our direct sales force works in tandem with the sales and marketing groups of our partners to identify potential new clients and projects. Our partnerships with these companies enable us to reduce our cost of sales and sales cycle times and increase win rates by leveraging our partners’ marketing efforts and endorsements.

General Information

Our stock is traded on The Nasdaq Global Select Market under the symbol “PRFT.” Our website can be visited at www.perficient.com. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information contained or incorporated in our website is not part of this document.

Financial Information about Segments and Geographic Areas

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Our results of operations could be adversely affected by volatile, negative or uncertain economic conditions and the effects of these conditions on our clients’ businesses and levels of business activity.

Volatile, negative or uncertain economic conditions in the markets we serve have undermined, and could in the future undermine, business confidence and cause our clients to reduce or defer their spending on new technologies or initiatives or terminate existing contracts, which would negatively affect our business. Growth in markets we serve could be at a slow rate, or could stagnate, in each case, for an extended period of time. Differing economic conditions and patterns of economic growth and contraction in the geographical regions in which we operate and the markets we serve have affected, and may in the future affect, demand for our services. A material portion of our revenues and profitability is derived from our clients in North America. Weakening demand in this market could have a material adverse effect on our results of operations. Ongoing economic volatility and uncertainty affects our business in a number of other ways, including making it more difficult to accurately forecast client demand beyond the short term and effectively build our revenue and resource plans, particularly in consulting. This could result, for example, in us not having the level of appropriate personnel where they are needed or having to use involuntary terminations as means to keep our supply of skills and resources in balance.

Economic volatility and uncertainty is particularly challenging because it may take some time for the effects and resulting changes in demand patterns to manifest themselves in our business and results of operations. Changing demand patterns from economic volatility and uncertainty could have a significant negative impact on our results of operations.

We provide services to various clients participating in the healthcare market. In connection with the change of administrations in the U.S. federal government, certain cuts in government healthcare programs and other changes have been proposed and discussed. These cuts and changes may result in reduced expenditures by our healthcare customers on information technology projects, which could materially and adversely affect our business, results of operations or financial condition.

Our business depends on generating and maintaining ongoing, profitable client demand for our services and solutions, and a significant reduction in such demand could materially affect our results of operations.

Our revenue and profitability depend on the demand for our services and favorable margins, which could be negatively affected by numerous factors, many of which are beyond our control and unrelated to our work product. As described above, volatile, negative or uncertain global economic conditions have adversely affected, and could in the future adversely affect, client demand for our services and solutions. In addition, developments in the markets we serve, which may be rapid, could shift demand to services and solutions where we are less competitive, or might require significant investment by us to upgrade, enhance or expand our services and solutions to meet that demand. Companies in the markets we serve sometimes seek to achieve economies of scale and other synergies by combining with or acquiring other companies. If one of our current clients merges or consolidates with a company that relies on another provider for its consulting, systems integration and technology, or outsourcing services, we may lose work from that client or lose the opportunity to gain additional work if we are not successful in generating new opportunities from the merger or consolidation. Many of our consulting contracts are less than 12 months in duration, and often contain 10 to 30 day termination provisions. If a client is dissatisfied with our services and we are unable to effectively respond to its needs, the client might terminate existing contracts, or reduce or eliminate spending on the services and solutions we provide. Additionally, a client could choose not to retain us for additional stages of a project, try to renegotiate the terms of its contract or cancel or delay additional planned work. When contracts are terminated or not renewed, we lose the anticipated revenues, and it may take significant time to replace the lost revenues or we may be unsuccessful in our attempt to recover such revenues. Further, if the contract was structured as a fixed fee arrangement and is terminated early, the cost of services performed prior to the termination of the contract may be disproportionate to the revenue actually received with respect to such contract. Consequently, our results of operations in subsequent periods could be materially lower than expected. The specific business or financial condition of a client, changes in management and changes in a client’s strategy also are all factors that can result in terminations, cancellations or delays. It could also result in pressure to reduce the cost of our services.

If we are unable to keep our supply of skills and resources in balance with client demand and attract and retain professionals with strong leadership skills, our business, the utilization rate of our professionals and our results of operations may be materially adversely affected.

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The market for the information technology consulting services in which we operate is highly competitive, and we might not be able to compete effectively.

The market for the information technology consulting services we provide is competitive, ever evolving, and subject to rapid technological change. Our competitors include: large multinational providers that offer some or all of the services that we do; offshore service providers in lower-cost locations that offer services similar to those we offer, often at highly competitive prices and on more aggressive contractual terms; niche solution and service providers or local competitors that compete with us in a specific geographic market, industry segment or service area, including companies that provide new or alternative products, service or delivery models; accounting firms that are expanding or building their capabilities to provide certain consulting services, including through acquisitions; and in-house departments of large corporations that use their own resources, rather than engage an outside firm for the types of services we provide.

Many of the larger regional and national information technology consulting firms have substantially longer operating histories, more established reputations and potential vendor relationships, greater financial resources, sales and marketing organizations, market penetration, and research and development capabilities, as well as broader product offerings, greater market presence, and name recognition.

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 software and services industry that are not competitive with our business may refocus their activities and deploy their resources to be competitive with us.

Our future financial performance is largely dependent upon our ability to compete successfully in the markets we currently serve. If we are unable to compete successfully, we could lose market share and clients to competitors, which could materially adversely affect our results of operations.

We are dependent upon information technology networks and systems to process, transmit, and store electronic information and to communicate among our locations and with our partners and clients. Security breaches of this infrastructure could lead to shutdowns or disruptions of our systems and potential unauthorized disclosure of confidential information. In providing services to clients, we are also required at times to manage, utilize, and store sensitive or confidential client or employee data. As a result, we are subject to numerous laws and regulations designed to protect this information, such as various U.S. federal and state laws and foreign laws governing the protection of personally identifiable information. If any person, including any of our employees, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to monetary damages, regulatory enforcement actions, fines, and/or criminal prosecution. Unauthorized disclosure of sensitive or confidential client or employee data, whether through systems failure, employee negligence, fraud or misappropriation could damage our reputation and cause us to lose clients. Similarly, unauthorized access to or through our information systems or those we develop for our clients, whether by our employees or third parties, could result in negative publicity, significant remediation costs, legal liability, and damage to our reputation and could have a material adverse effect on our results of operations. In addition, our liability insurance might not be sufficient in type or amount to cover us against claims related to security breaches, cyber-attacks and other related breaches.

We might not be successful at identifying, acquiring, or integrating other businesses.

International operations subject us to additional political and economic risks that could have an adverse impact on our business.

Furthermore, there are risks inherent in operating in and expanding into non-U.S. regions, including, but not limited to:

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political and economic instability;

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global health conditions and potential natural disasters;

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unexpected changes in regulatory requirements, including immigration restrictions, tariffs, and other trade barriers and tax regulations, the enforcement of such requirements by applicable governmental authorities and other legal uncertainty;

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limitations on our ability to repatriate cash from our international operations;

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complexities and additional costs in effectively managing our international operations;

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international currency controls and exchange rate fluctuations;

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reduced protection for intellectual property rights; and

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additional vulnerability from terrorist groups targeting U.S. interests abroad.

Any one or more of the factors set forth above could have a material adverse effect on our international operations and, consequently, on our business, financial condition, and operating results.

Immigration restrictions related to H1-B visas could hinder our growth and adversely affect our business, financial condition and results of operations.

Our results of operations could materially suffer if we are not able to obtain favorable pricing.

If we are not able to obtain favorable pricing for our services, our revenues and profitability could materially suffer. The rates we are able to charge for our services are affected by a number of factors, including, but not limited to:

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general economic and political conditions;

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the competitive environment in our industry, as described below;

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our clients’ desire to reduce their costs;

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our ability to accurately estimate, attain, and sustain contract revenues, margins, and cash flows over the full contract period; and

The competitive environment in our industry affects our ability to obtain favorable pricing in a number of ways, any of which could have a material negative impact on our results of operations. The less we are able to differentiate our services and solutions and/or clearly convey the value of our services and solutions, the more risk we have that they will be seen as commodities, with price being the driving factor in selecting a service provider. In addition, the introduction of new services or products by competitors could reduce our ability to obtain favorable pricing for the services or products we offer. Competitors may be willing, at times, to price contracts lower than us in an effort to enter the market or increase market share. Further, if competitors develop and implement methodologies that yield greater efficiency and productivity, they may be better positioned to offer services similar to ours at lower prices.

If our negotiated fees do not accurately anticipate the cost and complexity of performing our work, then our contracts could be unprofitable.

We negotiate fees with our clients by utilizing a range of pricing structures and conditions, including time and materials and fixed fee contracts. Our fees are highly dependent upon our internal forecasts and predictions about the level of effort and cost necessary to deliver such services and solutions, which might be based on limited data and could turn out to be materially inaccurate. If we do not accurately estimate the level of effort or cost, our contracts could yield lower profit margins than planned, or be unprofitable. We could face greater risk when negotiating fees for our contracts that involve the coordination of operations and workforces in multiple locations and/or utilizing workforces with different skill sets and competencies. There is a risk that we will underprice our contracts, fail to accurately estimate the costs of performing the work, or fail to accurately assess the risks associated with potential contracts. In particular, any increased or unexpected costs, delays or failures to achieve anticipated cost savings, or unexpected risks we encounter in connection with the performance of services, including those caused by factors outside our control, could make these contracts less profitable or unprofitable, which could have an adverse effect on our profit margin.

Our business could be materially adversely affected if we incur legal liability in connection with providing our services and solutions.

Our results of operations and ability to grow could be materially negatively affected if we cannot adapt and expand our services and solutions in response to ongoing changes in technology and offerings by new entrants.

The loss of one or more of our significant software vendors could have a material and adverse effect on our business and results of operations.

Our services could infringe upon the intellectual property rights of others.

We have only a limited ability to protect our intellectual property rights, which are important to our success.

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Our ability to attract and retain business may depend upon our reputation in the marketplace.

We believe the Perficient brand name and our reputation are important corporate assets that help distinguish our services from those of our competitors and also contribute to our efforts to recruit and retain talented employees. However, our corporate reputation is potentially susceptible to material damage by events such as disputes with clients, information technology security breaches or service outages, or other delivery failures. Similarly, our reputation could be damaged by actions or statements of current or former clients, employees, competitors, vendors, as well as members of the investment community and the media. There is a risk that negative information could adversely affect our business. Damage to our reputation could be difficult and time-consuming to repair, could make potential or existing clients reluctant to select us for new engagements or cause existing clients to terminate our services, resulting in a loss of business, and could adversely affect our recruitment and retention efforts. Damage to our reputation could also reduce the value and effectiveness of the Perficient brand name and could reduce investor confidence in us, materially adversely affecting our share price.

Our profitability could suffer if our cost-management strategies are unsuccessful.

Changes in our level of taxes, audits, investigations and tax proceedings, or changes in tax laws or their interpretation or enforcement could have a material adverse effect on our results of operations and financial condition.

We are subject to income taxes in numerous jurisdictions. We calculate and provide for income taxes in each tax jurisdiction in which we operate. Tax accounting often involves complex matters and requires our judgment to determine our corporate provision for income taxes and other tax liabilities. We are subject to ongoing tax audits in various jurisdictions. Tax authorities have disagreed, and may in the future disagree, with our judgments, or may take increasingly aggressive positions opposing the judgments we make. We regularly assess the likely outcomes of these audits to determine the appropriateness of our tax liabilities. However, our judgments might not be sustained as a result of these audits, and the amounts ultimately paid could be different from the amounts previously recorded. In addition, our effective tax rate in the future could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities and changes in tax laws. Tax rates in the jurisdictions in which we operate may change as a result of macroeconomic or other factors outside of our control. Increases in the tax rate in any of the jurisdictions in which we operate could have a negative impact on our profitability. In addition, changes in tax laws, treaties, or regulations, or their interpretation or enforcement, may be unpredictable and could materially adversely affect our tax position. Any of these occurrences could have a material adverse effect on our results of operations and financial condition.

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If we do not effectively manage expected future growth, our results of operations and cash flows could be adversely affected.

If we are unable to collect our receivables or unbilled services, our results of operations, financial condition, and cash flows could be adversely affected.

Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. We evaluate the financial condition of our clients and usually bill and collect on relatively short cycles. We have established allowances for losses of receivables and unbilled services. Actual losses on client balances could differ from those that we currently anticipate and as a result we might need to adjust our allowances. We might not accurately assess the credit worthiness of our clients. Macroeconomic conditions could also result in financial difficulties for our clients, including bankruptcy and insolvency. This could cause clients to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations to us. Recovery of client financing and timely collection of client balances also depends upon our ability to complete our contractual commitments and bill and collect our contracted revenues. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our results of operations and cash flows could be adversely affected. In addition, if we experience an increase in the time to bill and collect for our services, our cash flows could be adversely affected.

Our stock price has fluctuated in the past and could continue to fluctuate in the future in response to various factors. These factors include:

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changes in macroeconomic or political factors unrelated to our business;

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general or industry-specific market conditions or changes in financial markets;

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announcements by us or competitors about developments in our business or prospects;

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projections or speculation about our business or that of competitors by the media or investment analysts; and

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our ability to meet our growth and financial objectives, including with respect to our overall revenue growth, revenue growth for our priority emerging markets and earnings per share growth.

Our results of operations have varied in the past and could vary significantly from quarter to quarter in the future, making them difficult to predict. Some of the factors that could cause our results of operations to vary include:

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the business decisions of our clients to begin to curtail or reduce the use of our services, including in response to changes in macroeconomic or political conditions unrelated to our business or general market conditions;

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periodic differences between our clients’ estimated and actual levels of business activity associated with ongoing work, as well as the stage of completion of existing projects and/or their termination or restructuring;

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contract delivery inefficiencies, such as those due to poor delivery or changes in forecasts;

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our ability to transition employees quickly from completed to new projects and maintain an appropriate headcount in each of our workforces;

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acquisition, integration and operational costs related to businesses acquired;

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the introduction of new products or services by us, competitors or partners;

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changes in our pricing or competitors’ pricing;

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our ability to manage costs, including those for our own or subcontracted personnel, travel, support services and severance;

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our ability to limit and manage the incurrence of pre-contract costs, which must be expensed without corresponding revenues, which are then recognized in later periods without the corresponding costs;

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changes in, or the application of changes in, accounting principles or pronouncements under U.S. generally accepted accounting principles, particularly those related to revenue recognition;

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currency exchange rate fluctuations;

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changes in estimates, accruals or payments of variable compensation to our employees;

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global, regional and local economic and political conditions and related risks, including acts of terrorism; and

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seasonality, including number of work days and holidays and summer vacations.

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Our officers, directors, and 5% and greater stockholders own a large percentage of our voting securities and their interests may differ from other stockholders.

It may be difficult for another company to acquire us, and this could depress our stock price.

In addition to the voting securities held by our officers, directors, and 5% and greater stockholders, provisions contained in our certificate of incorporation, bylaws, and Delaware law could make it difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. Our certificate of incorporation and bylaws may discourage, delay, or prevent a merger or acquisition that a stockholder may consider favorable by authorizing the issuance of “blank check” preferred stock. In addition, provisions of the Delaware General Corporation Law also restrict some business combinations with interested stockholders. These provisions are intended to encourage potential acquirers to negotiate with us and allow the Board of Directors the opportunity to consider alternative proposals in the interest of maximizing stockholder value. However, these provisions may also discourage acquisition proposals, or delay or prevent a change in control, which could harm our stock price.

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Unregistered Sales of Securities

Issuer Purchases of Equity Securities

Prior to 2016, our Board of Directors authorized the repurchase of up to $100.0 million of our common stock. On May 3, 2016, our Board of Directors authorized the expansion of our stock repurchase program by authorizing the repurchase of up to an additional $10.0 million of our common stock for a total repurchase program of $110.0 million and extended the expiration date of the program from June 30, 2016 to December 31, 2017. On February 21, 2017, our Board of Directors authorized the expansion of our stock repurchase program by authorizing the repurchase of up to an additional $25.0 million of our common stock for a total repurchase program of $135.0 million and extended the expiration date of the program from December 31, 2017 to December 31, 2018. The program could be suspended or discontinued at any time, based on market, economic, or business conditions.  The timing and amount of repurchase transactions will be determined by our management based on its evaluation of market conditions, share price, and other factors.

Since the program’s inception on August 11, 2008, we have repurchased approximately $102.4 million (10.6 million shares) of our outstanding common stock through December 31, 2016.

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(1) Working capital is total current assets less total current liabilities

Overview

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Services Revenues

Software and Hardware Revenues

Software and hardware revenues are derived from sales of third-party and internally developed software and hardware. Revenues from sales of third-party software and hardware are generally recorded on a gross basis provided that we act as a principal in the transaction. Revenues from sales of third-party software-as-a-service arrangements where we are not the primary obligor 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 whether there is 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.

Cost of Revenues

Gross Margins

Selling, General, and Administrative Expenses

Plans for Growth and Acquisitions

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Results of Operations

The following table summarizes our results of operations as a percentage of total revenues:

* Services and software and hardware gross margins are based on their percentage of respective revenues.

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

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Software and hardware revenues increased 7% to $50.0 million for the year ended December 31, 2016 from $46.6 million for the year ended December 31, 2015 primarily due to acquisitions. Reimbursable expenses increased 19% to $18.4 million for the year ended December 31, 2016 from $15.5 million for the year ended December 31, 2015. The increase in reimbursable expenses is primarily due to the acquisition of Enlighten in which media buy expenses are passed through to customers.  We do not realize any profit on reimbursable expenses.

Cost of Revenues. Cost of revenues increased 5% to $335.7 million for the year ended December 31, 2016 from $318.4 million for the year ended December 31, 2015.  The increase in cost of revenues is primarily related to costs associated with services revenues which increased 5% to $273.7 million for the year ended December 31, 2016 from $261.7 million for the year ended December 31, 2015 due to an increase in revenue as noted above. Software and hardware costs increased 6% to $43.6 million for the year ended December 31, 2016 from $41.2 million for the year ended December 31, 2015, as a result of the increase in software license sales.

Gross Margin. Gross margin decreased 3% to $151.3 million for the year ended December 31, 2016 from $155.2 million for the year ended December 31, 2015. Gross margin as a percentage of revenues decreased to 31.1% for the year ended December 31, 2016 from 32.8% for the year ended December 31, 2015 primarily due to lower average bill rates and an increased mix of lower margin software and hardware sales and reimbursable expenses. Services gross margin, excluding reimbursable expenses, decreased to 34.6% or $144.9 million for the year ended December 31, 2016 from 36.4% or $149.8 million for the year ended December 31, 2015 primarily driven by a lower average bill rate in addition to higher salaries and subcontractor costs. The average bill rate for our professionals decreased to $127 per hour for the year ended December 31, 2016 from $134 per hour for the year ended December 31, 2015, primarily due to the impact of a higher mix of lower bill rate offshore resources combined with a 1% reduction in the North American employee bill rate.

Provision for Income Taxes. We provide for federal, state, and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses. The effective income tax rate increased to 32.9% for the year ended December 31, 2016 from 29.9% for the year ended December 31, 2015. The increase in the effective rate is primarily due to an additional research and development tax credit recorded during the year ended December 31, 2015 related to the finalization of the Company’s 2014 research and development tax assessment. The increase in the effective rate year ended December 31, 2016 was partially offset by an additional research and development tax credit related to the current year and a favorable impact related to the early adoption of Accounting Standards Update (“ASU”) No. 2016-09. See Note 2, Summary of Significant Accounting Policies-Recent Accounting Pronouncements, in the Notes to Consolidated Financial Statements for additional information regarding the adoption of ASU No. 2016-09.

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Liquidity and Capital Resources

Selected measures of liquidity and capital resources are as follows (in millions):

(1) The balance at December 31, 2016 includes $8.3 million held by our Chinese subsidiary which is not available to fund domestic operations unless the funds were repatriated.  We currently do not plan or foresee a need to repatriate such funds.

(2) Working capital is total current assets less total current liabilities

Net Cash Provided By Operating Activities

Net cash provided by operating activities for the year ended December 31, 2016 was $63.3 million compared to $44.7 million and $34.0 million for the years ended December 31, 2015 and 2014, respectively. For the year ended December 31, 2016, the components of operating cash flows were net income of $20.5 million plus non-cash charges of $34.9 million and net working capital reductions of $7.9 million, primarily driven by reductions in accounts receivable. The primary components of operating cash flows for the year ended December 31, 2015 were net income of $23.0 million plus non-cash charges of $31.9 million and net working capital investments of $10.2 million. The primary components of operating cash flows for the year ended December 31, 2014 were net income of $23.2 million plus non-cash charges of $27.5 million and net working capital investments of $16.6 million.

Net Cash Used in Investing Activities

Net Cash Provided By Financing Activities

For the year ended December 31, 2016, we received proceeds of $208.5 million from our line of credit and $0.2 million in proceeds from the sales of stock through the Employee Stock Purchase Plan. In 2016, we made payments of $232.5 million on our line of credit, used $18.0 million to repurchase shares of our common stock through the stock repurchase program and used $3.7 million to remit taxes withheld as part of a net share settlement of restricted stock vesting. We also used $2.1 million to settle the contingent consideration for the purchase of Zeon and paid $0.2 million in fees related to our credit facility. For the year ended December 31, 2015, we received proceeds of $266.5 million from our line of credit and we realized a tax benefit of $1.4 million related to the vesting of stock awards and stock option exercises plus $0.3 million in proceeds from the exercise of stock options and sales of stock through the Employee Stock Purchase Plan. In 2015, we made payments of $264.5 million on our line of credit, used $5.0 million to remit taxes withheld as part of a net share settlement of restricted stock vesting, used $2.8 million to repurchase shares of our common stock through the stock repurchase program and paid $0.2 million in fees related to our credit facility. For the year ended December 31, 2014, we received proceeds of $265.1 million from our line of credit and we realized a tax benefit of $2.6 million related to the vesting of stock awards and stock option exercises plus $1.5 million in proceeds from the exercise of stock options and sales of stock through the Employee Stock Purchase Plan. In 2014, we made payments of $230.1 million on our line of credit, used $7.7 million to repurchase shares of our common stock through the stock repurchase program, used $6.6 million to remit taxes withheld as part of a net share settlement of restricted stock vesting, and used $1.2 million to settle the contingent consideration for the purchase of Clear Task.

On July 31, 2013, we renewed and extended the term of our credit agreement with Silicon Valley Bank (“SVB”), U.S. Bank National Association, Bank of America, N.A. and Wells Fargo Bank, National Association.  As renewed, the credit agreement provided for revolving credit borrowings up to a maximum principal amount of $75.0 million, subject to a commitment increase of $25.0 million. The Company and the lenders entered into a first amendment to the credit agreement, effective as of May 7, 2014, pursuant to which the Company and the lenders increased the amount of available borrowing capacity thereunder by $15.0 million, allowing for revolving credit borrowings up to a maximum principal amount of $90.0 million. The Company and the lenders entered into a second amendment and consent to the credit agreement, effective as of January 2, 2015, pursuant to which the Company and the lenders increased the amount of available borrowing capacity thereunder by $35.0 million, allowing for revolving credit borrowings up to a maximum principal amount of $125.0 million, subject to an additional commitment increase of $50.0 million. The Company and the lenders entered into a fourth amendment to the credit agreement (as amended, the “Credit Agreement”), effective as of June 24, 2016, pursuant to which the Company and the lenders, among other things, extended the maturity date for all amounts due and payable under the Credit Agreement from July 31, 2017 to July 31, 2018, reduced the applicable margin for certain borrowings by 0.25% and increased the thresholds for acquisitions by the Company permitted under the Credit Agreement.

The Credit Agreement also allows for the issuance of letters of credit in the aggregate amount of up to $10.0 million at any one time; outstanding letters of credit reduce the credit available for revolving credit borrowings.  As of December 31, 2016, the Company had no outstanding letters of credit. Substantially all of our assets are pledged to secure the credit facility.

Borrowings under the Credit Agreement bear interest at our option of the prime rate (3.75% on December 31, 2016) plus a margin ranging from 0.00% to 0.50% or one-month LIBOR (0.77% on December 31, 2016) plus a margin ranging from 1.75% to 2.25%.  The additional margin amount is dependent on the level of outstanding borrowings. As of December 31, 2016, we had $93.0 million of maximum borrowing capacity.  We incur an annual commitment fee of  0.20% on the unused portion of the line of credit.

At December 31, 2016, we were in compliance with our covenants under the Credit Agreement and we expect to remain in compliance during the next 12 months.

Stock Repurchase Program

Contractual Obligations

We have incurred commitments to make future payments under contracts such as leases and the Credit Agreement. Maturities under these contracts are set forth in the following table as of December 31, 2016 (in thousands):

Conclusion

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

Revenue Recognition and Allowance for Doubtful Accounts

There are no significant cancellation or termination-type provisions for the Company’s software and hardware sales. Contracts for professional services provide for a general right, to the client or the Company, 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.

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Goodwill, Other Intangible Assets, and Impairment of Long-Lived Assets

Purchase Accounting

Accounting for Stock-Based Compensation

Income Taxes

Recent Accounting Pronouncements

Off-Balance Sheet Arrangements

Exchange Rate Sensitivity

Interest Rate Sensitivity

As of December 31, 2016, there was $32.0 million outstanding and $93.0 million of available borrowing capacity under our credit facility. Our interest expense will fluctuate as the interest rate for the line of credit floats based, at our option, on the prime rate plus a margin or the one-month LIBOR rate plus a margin. Based on the $32.0 million outstanding on the line of credit as of December 31, 2016, an increase in the interest rate of 100 basis points would add $320,000 of interest expense per year, which is not considered material to our financial position or results of operations.

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See accompanying notes to consolidated financial statements.

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PERFICIENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

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PERFICIENT, INC.

(In thousands)

See accompanying notes to consolidated financial statements.

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PERFICIENT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(In thousands)

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PERFICIENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.

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PERFICIENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

1. Description of Business and Principles of Consolidation

Certain prior period financial statement amounts have been reclassified to conform to current period presentation. This reclassification primarily relates to certain costs being reclassified from project personnel costs to other project related expenses within total cost of revenues in the Consolidated Statement of Operations.