Mapping a new strategy: How Perficient is going to meet its goal of becoming St. Louis’ next $1B company
(St, Louis Business Journal)
January 20, 2022 (Nathan Rubbelke)
Perficient is used to being on the hunt for acquisitions.
Since its founding in 1998, the St. Louis-based digital consulting firm (NASDAQ: PRFT) has used M&A as a vehicle to expand. But just a few years ago, it appeared Perficient might find itself on the other end of a deal.
Thanks to its broad domestic footprint and consolidation within the information technology sector, analysts in 2014 speculated Perficient could be an acquisition target for a global company looking to strengthen its U.S. operations.
“At that point, it would have been a very digestible midsized acquisition for several, much-larger software integration firms,” said Peter Heckmann, a former analyst with Nashville-based Avondale Partners who followed Perficient at the time.
Even Perficient Chairman and CEO Jeff Davis figured buying his company, which had $373 million in 2013 revenue, would have been a logical move for one of its larger competitors.
“I think it would have been really wise for one of those guys to do that back then,” Davis said, “but I’m glad they didn’t.”
That’s because, in recent years, Perficient has flipped the narrative. Rather than being a target of an acquisitive global company, it decided to become one itself, thanks to massive organic growth in India and a recent buying spree in South America.
Mapping out expansion
Fittingly, Davis joined Perficient through an acquisition.
He served as chief operating officer of St. Louis-based web developer Vertecon when Perficient — then headquartered in Austin, Texas — acquired it in 2002. Davis became Perficient’s CEO in 2009 and soon after relocated its headquarters to St. Louis, where it had nearly all of its corporate operations already based.
While technology consulting can include a wide arrange of services, Perficient’s primary mission is helping major companies integrate different software and technology tools into their systems. That can range from consumer-facing initiatives, like a new e-commerce platform Perficient developed for Ford Motor Co., to internal projects such as a data management system it created for insurance giant Geico.
Under Davis, Perficient continued its growth-through-acquisition strategy, mostly targeting small to midsized U.S. technology companies as a way to expand its toolbox of digital transformation services.
“Those acquisitions allowed them to enter new geographies, hire consultants with additional capabilities they didn’t have yet or in some cases just add additional consultants with capabilities they already had but needed more of,” said Heckmann, the analyst, who now works for D.A. Davidson.
Even with those acquisitions, Perficient remained strictly focused on the U.S. market. Davis long believed that doing so was a benefit, allowing it to better serve a client base that was predominantly based in the U.S. and, in addition to Ford, includes major brands like Mastercard and Caterpillar. Meanwhile, Davis contends that until about a little more than a decade ago, IT providers mostly used offshore operations to provide simple technology services that didn’t align with Perficient’s hands-on approach.
“It really just wasn’t a fit,” he said.
Still, the company didn’t shy away from global expansion. In 2007, it acquired a global development center in Hangzhou, China, and within four years expanded its facility there and doubled its headcount to more than 200 employees.
But it became clear that China wasn’t going to become the company’s global launchpad. Some customers expressed concerns about doing business in China, particularly around protection of intellectual property. Also, Hangzhou became home to several other technology companies, making competition for talent and wage inflation a challenge for Perficient to expand further there.
While Perficient still maintains a team of more than 100 employees in China, it decided to look elsewhere for global growth.
Finding its footing
Around the same time Perficient expanded into China, it acquired a consulting recruitment office in Chennai, India. Initially, it used that office to recruit workers eligible for H1-B visas that it could sponsor and bring to the U.S. Then one of the employees Perficient inherited in that acquisition suggested that, rather than using its presence in India as a means of exporting talent, that it instead open a software development center there.
“We got behind that idea and he’s still running it,” Davis said.
Perficient initially kept its footprint in India small. By 2012, after five years in the country, it had just 38 employees in India. But by 2015, its Indian workforce had grown to more than 500 employees and has since exceeded 1,500 across three locations.
At the same time, the company’s total revenue nearly tripled, growing from $218 million in 2007 to $612 million in 2020, as its deals grew larger and more complex. Thanks to its ability to provide services outside the U.S., Perficient found itself better positioned to win bids against larger competitors like Accenture and Deloitte.
“In order for us to complete those, we really had a need to start adding more offshore to get the rate to a competitive level,” Davis said.
Another key pillar to its offshore expansion was greater receptivity from health care clients — which account for about 30% of Perficient’s customer base — who Davis says until about five years ago were hesitant to engage with offshore consultants. A 2016 report from the Wall Street Journal noted that, while other industries embraced global technology consultants, health care providers “viewed offshore outsourcing as too risky” due to patient privacy regulations. However, amid “ever-mounting pressure to reduce costs,” those health care organizations in recent years have eyed ways to hire offshore teams while also ensuring data protection.
As more Perficient customers began to utilize its offshore services, the company began to hear interest about expanding its footprint closer to the U.S. Davis began to plot out a strategy to create a “nearshore” segment that could provide a workforce with better English skills and an easier time zone to navigate.
In June 2020 the company acquired Colombia-based Productora de Software S.A.S., which gave it about 600 employees in Latin America. It’s a deal that came after company management spent about a year and a half scouting for the right partner there. In the past two months, it more than doubled its presence in South America, buying two other software development firms, one in Uruguay and another in Colombia, creating a Latin America division that counts 1,475 employees.
Sticking to a strategy
In early December, Perficient President and Chief Operating Officer Tom Hogan traveled to Colombia to meet with the leaders of its three recently acquired South American companies. It marked the first time all three met in person and Hogan left that summit with a key takeaway about Perficient’s Latin America leadership.
“The part that is pretty amazing is how quickly they’re integrating, how quickly they are thinking about the future and Perficient and quickly identifying themselves as Perficient,” Hogan said.
That rapid integration in South America and the company’s overall global expansion in recent years highlights what its leadership says is an ability to pivot quickly to drive revenue and earnings growth. It operates in a sector where the technology and tools businesses are asking it to help with constantly change. That puts flexibility at the forefront of the company.
“That’s just the name of the game in the industry in general,” Davis said.
But while retaining its agile mindset, Perficient expects its growing offshore model to be a key component of growth for years to come. Davis told analysts last year that he wants Perficient to generate 50% of its revenue from international business within three years.
Perficient’s expansion into South America comes amid an 11-quarter run of increased revenue, with the company projecting it would finish 2021 with between $749 million to $755 million. Its stock price had also had a rapid jump, climbing 538% since the start of 2017.
Ithiel Turrado, an analyst with Argent Capital Management Research, said Perficient’s financial results have eased any concerns investors might have had about about whether offshore growth would reduce its consulting strength or narrow its customer base.
“As Perficient has been expanding, it has only proven they can retain the customer base and the product quality can stay good,” he said. “They can just grow faster and the margin expansion is happening. They’re executing very well. I think investors grow comfortable with that, their risk level goes down and therefore their willingness to pay a higher multiple goes up.”
Perficient’s growth has it inching closer to a long-stated goal of becoming a $1 billion company and it expects its offshore operations to be a key pillar in achieving that mission. Much like with India before it, Perficient believes its deals in South America provide a foundation for rapid organic growth there, with Davis saying nearly two dozen of the company’s legacy clients began utilizing its workforce on the continent for consulting projects. It’ll remain open to more acquisitions there too, though their size may differ from past deals.
“Going forward, we will probably focus on doing some smaller deals if we could find them and tuck them in and they wouldn’t overlap,” Davis said.
In the U.S., Perficient says it’s expanding too, with its headcount growing more than 10% in the first half of 2021. It believes its India and South America operations, coupled with its U.S. footprint, create a combination of offshore, nearshore and domestic capabilities competitors can’t tout.
“I don’t think there’s one project we do now that isn’t global,” Hogan said.
And with its global footprint, any speculation about Perficient being bought by one of its competitors has quieted.
“That’s behind us now,” Davis said. “It would be a pretty mega deal if someone was to acquire us now. I think Perficient is probably going to be independent for at least the foreseeable future.”