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Perficient Inc (PRFT -1.51%)
Q3Â 2020 Earnings Call
Oct 29, 2020, 3:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Q3 Perficient earnings conference call. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Chairman and CEO, Mr. Jeff Davis. Thank you. Please go ahead, sir.
Jeff Davis -- Chairman and Chief Executive Officer
Thank you. This is Jeff Davis. With me on the phone today is Paul Martin, our CFO; Tom Hogan, our COO. I'd like to thank you for your time this morning. We've got, per usual, 10 to 15 minutes of prepared comments, after which we'll open the call up for questions. Before we proceed, Paul, will you please read the safe harbor statement.
Paul Martin -- Chief Financial Officer
Sure. Thanks, Jeff, and good morning, everyone. Some of the things we will discuss in today's call concerning future company performance will be forward-looking statements within the meaning of the securities laws. Actual results may materially differ from those discussed in these forward-looking statements, and we encourage you to refer to the additional information contained in our SEC filings concerning factors that could cause these results to be different than contemplated in today's discussion. At times during this call, we will refer to adjusted EPS. Our earnings press release, including a reconciliation of certain non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with generally accepted accounting principles, or GAAP, is posted on our website at www.perficient.com. We have also posted a slide deck which includes a reconciliation of certain non-GAAP guidance to the most directly comparable financial measures prepared in accordance with GAAP on our website under Investor Relations. Jeff?
Jeff Davis -- Chairman and Chief Executive Officer
Thanks, Paul. And once again, good morning, everyone. Thank you for joining. We're excited to be with you this morning to discuss our third quarter 2020 results. As we have on each call this year, I want to begin again by thanking both our colleagues and our customers for their perseverance and professionalism throughout 2020. Our colleagues are more enthusiastic and optimistic about Perficient's future than ever before. During the quarter, we completed our annual employee engagement survey and received participation and feedback from 98% of the company, which is really a remarkable response rate. And as I mentioned, our colleague's overall satisfaction is the highest it's ever been. That's certainly a key factor in the results that you're seeing here today. Our customers have been great as well. They're steadfastly focused on evolving their businesses and fully harnessing the power of digital. They're keeping plans and projects on track, and in many instances, restarting those that have been delayed or canceled and are making new and substantial investments as well. At a later time, we'll share some news around an important and meaningful win with a net new customer as well as some details around a proprietary tool we've built and deployed that is helping us strengthen customer relations and develop even more effectively -- delivering more effectively. Perficient has proven itself not only resilient but capable of thriving amid the current challenges. Paul will speak with the financial results shortly, but we were again pleased with the key performance metrics, including utilization and ABR.
The business is operating efficiently and is driving strong earnings growth, as you can see. We are also quite pleased with the progress made during the quarter, integrating PSL, the nearshore team of more than 600 colleagues that we added late in the second quarter. In fact, we've already started adding these new store team members to several existing proficient projects and accounts. By the end of the year, just a little over six months since the acquisition, we expect the team will have realized about 6% organic growth driven from Perficient legacy accounts alone. So they're driving their own growth, of course, but we've already added 6% to that by the end of the year. And we expect that, that's going to continue with that progress, and we expect it to accelerate in 2020 and beyond. Virtually, all of our enterprise customers are interested in understanding more about our new nearshore capabilities, and we're in many talks with customers beyond the ones I alluded to. Our legacy offshore teams are growing rapidly as well. In fact, during the quarter, organic offshore revenue was up 12%, and year-to-date, that number is 18.5%, strong all around. A couple of other notable developments during the quarter included the completion of a private offering of $230 million of convertible notes at attractive interest rate, which bolstered our already strong balance sheet, and retired substantially all of the converts that we'd offered a few years ago. We're also excited to announce the formation of Team Perficient in partnerships with three well-known professional golfers. We expect these relationships to help us grow brand awareness globally, provide unique experiences for our most important customers and ultimately lead to additional relationships, opportunities and wins.
With that, I'll turn the call over to Paul, who's going to share the financial results in more detail for the third quarter. Paul?
Paul Martin -- Chief Financial Officer
Thanks, Jeff. Starting with the third quarter results. Services revenues, excluding reimbursed expenses, were $155.2 million for the third quarter of 2020, a 10.8% increase over the comparable prior year period. Gross margin for the quarter ended September 30, 2020, increased 40 basis points to 38.7% compared to the prior year period. SG&A expense was $34.6 million compared to $34.5 million in the comparable prior year period. SG&A expense as a percentage of revenue decreased to 21.9% from 23.9% in the third quarter of 2019. Adjusted EBITDA for the third quarter of 2020 was $31.1 million or 19.8% of revenues compared to $25.3 million or 17.5% of revenues for the third quarter of 2019. The third quarter included amortization expense of $7.2 million compared to $4 million in the prior year period. The increase is primarily associated with the 2020 acquisitions. Net interest expense for the third quarter of 2020 increased to $2.8 million from $1.9 million in the comparable prior year period, primarily as a result of the August convertible debt offering. Our effective tax rate for the third quarter of 2020 was 27.6% compared to 29.7% for the third quarter of 2019. The decrease in the effective tax rate was primarily due to higher estimated research credits net of uncertain tax positions compared to the three months ended September 30, 2019. Net income decreased 37% to $6.2 million for the third quarter of 2020 from $9.8 million in the third quarter of 2019, primarily as a result of a onetime loss on convertible debt extinguishment, increased amortization and an adjustment to fair value of contingent consideration on one of our acquisitions. Diluted GAAP earnings per share decreased to $0.19 a share for the third quarter of 2020 from $0.30 in the third quarter of 2019. Adjusted earnings per share increased to $0.67 a share for the third quarter of 2020 from $0.56 in the third quarter of 2019. You can see the press release for a full reconciliation to GAAP earnings.
I'll now turn to the year-to-date results through September. Services revenue, excluding reimbursed expenses, were $440.6 million for the nine months ended September 30, 2020, an 8.5% increase over the comparable prior year period. Gross margin for the nine months ended September 30, 2020, increased 50 basis points to 37.5% compared to the prior year period. SG&A expense increased $101.7 million for the nine months ended September 30, 2020, from $100.2 million in the comparable prior year period. SG&A expense as a percentage of revenue decreased to 22.6% for the nine months ended September 30, 2020, from 23.8% in the comparable prior year period. Adjusted EBITDA for the nine months ended September 30, 2020, was $81.3 million or 18.1% of revenues compared to $68.5 million or 16.3% of revenues in the comparable prior year period. The nine months ended September 30, 2020, included $15.6 million of amortization expense compared to $12.1 million in the prior year period. Again, the increase is related to the 2020 acquisitions. Net interest expense for the nine months ended September 30, 2020, increased to $6.8 million from $5.6 million in the comparable prior year period, primarily as a result of the August convertible debt offering. Our effective tax rate for the nine months ended September 30, 2020, was 24.2% compared to 25.9% in the comparable prior year period.
The decrease in the effective tax rate was primarily due to the increases in tax benefits recognized related to share-based compensation deductions as well as higher estimated research credits of uncertain tax positions compared to the nine months ended September 30, 2019. The net income for the nine months ended September 30, 2020, decreased 14.1% to $21.8 million from $25.3 million in the comparable prior year period, primarily as a result of a loss on the convertible debt extinguishment, adjusted to fair value of continued consideration and increased amortization associated with the 2020 acquisitions. Diluted GAAP earnings per share decreased to $0.67 from $0.79 in the comparable prior year period. Adjusted earnings per share increased to $1.74 per share for the nine months ended September 30, 2020, from $1.49 in the comparable prior year period. Our global headcount at September 30, 2020, was 3,788, including 3,531 global consultants and 257 subcontractors. Ending SG&A headcount was 612. Our outstanding debt, net of unamortized debt discount and deferred issuance cost as of September 30, 2020, was $187.7 million, and we also had $50 million in cash and cash equivalents as of September 30 and $124.8 million of unused borrowing capacity on our credit facility. Our balance sheet continues to leave us very well positioned to continue to execute against our strategic plan. Finally, days sales outstanding on our accounts receivable decreased to 73 days at the end of the quarter compared to 74 at the end of the third quarter of 2019.
I'll now turn the call over to Tom Hogan for a little more commentary behind the metrics. Tom?
Tom Hogan -- Chief Operating Officer
Thanks, Paul, and good morning, everybody. We realized another solid quarter for bookings, large wins with many existing net new customers and existing customers, booked 66 deals greater than $500,000 during the third quarter of 2020. That compares to 49 in the year ago period. I think that success really underscores our traction in the market and how well we're executing right now. We can't travel to meet customers and prospects. We're not even working on-site anywhere, yet large deal volume was up almost 35%. And that momentum has continued into the fourth quarter. In fact, we recently closed one of the largest deals in company history, well into eight figures. And this win was with a net new client we weren't even able to meet in person because of the pandemic, and it's typical we'd beat a handful of much larger firms to win the work. This five-year engagement for a financial services institution combines several Perficient disciplines across multiple platforms that will ultimately help our clients scale its existing platform to accommodate evolving digital needs and further support business innovation, economic growth and consumer protections. Winning work really is a testament to the culture we've created at Perficient, where our colleagues collaboration is truly the differentiator we bring to the market. Also aiding our success this year are several proprietary software tools and workflow processes we've developed and deployed, including one of which that is enabling us to build better, stronger customer relationships. We recently highlight perficient's strong customer satisfaction and repeat business rate in various forms. Building large and long-term client relationships has been and will continue to be the single most important contributor to our growth. And the heart of Perficient's customers and expanding accounts is the rigorous pursuit of delivery excellence. One of the things now helping us build upon our strong foundation of delivery excellence is a proprietary tool we designed, developed and deployed earlier this year, our Instant insights platform.
It's a mechanism for capturing and reacting to customer feedback constantly throughout project life cycles and providing the visibility to our leadership and executive teams immediately, and we do this at scale. Obviously, our consulting teams are receiving and collecting feedback constantly throughout a project. But what the Instant Insights tools does is automate the solicitation and capturing of confidential feedback on many topics, whether it be the overall project progress, team effectiveness or commentary on individual deliverables or colleagues. The vast majority of the feedback is always very positive. But what really we want is that we can address it quickly and grow the customer satisfaction. It respond immediately if and when there is concern. We're not waiting for the verdict at the end of the engagement. Instant Insights actively solicits feedback routinely and then disseminates it immediately to the proper leadership and executive teams. In practice, what this means is that if a customer at 2:00 p.m. on a Tuesday shares a concern with us, all the key stakeholders who can resolve that issue are made immediately aware of the feedback. And five to 10 minutes later, we're collaborating on a solution. This platform has been leveraged hundreds of times by our customers already this year. As I mentioned earlier, in those rare instances where we have a customer satisfaction issue to solve, this proprietary process and tool is enabling us to quickly and positively address those concerns and strengthen the customer relationship and the process. Being able to react in real-time to hundreds of accounts and thousands of projects become a competitive advantage and differentiator for Perficient and a challenge we're solving with the implementation of the custom and proprietary Instant Sights tool. In recent quarters, we've been developing and deploying software tools across a variety of process areas in addition to Instant Insights, and each designed to help our business scale. And we're seeing the confluence of those efficiencies and improvements in culmination of rapid growing bottom line.
And with that, I'll turn things back over to Jeff to discuss the remainder of the year.
Jeff Davis -- Chairman and Chief Executive Officer
Well, thanks, Tom. Just quickly here, turning to the fact that we -- I'm sure you saw in the press release that we're reinstating guidance for the fourth quarter and the full year. Perficient expects fourth quarter 2020 revenue to be in the range of $156 million to $161 million. Fourth quarter GAAP earnings per share is expected to be in the range of $0.36 to $0.39. Fourth quarter adjusted earnings per share is expected to be in the range of $0.68 to $0.71. And Perficient expects its full 2020 revenue -- full year 2020 revenue to be in the range of $606 million to $611 million. 2020 GAAP earnings per share guidance to be in the range of $1.20 to $1.05, and 2020 adjusted earnings per share guidance to be in the range of $2.42 and $2.45.
So with that, operator, we can open up the call for questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from the line of Maggie Nolan of William Blair.
Maggie Nolan -- William Blair -- Analyst
I wanted to ask about the strong gross margins in the quarter. I'm assuming that PSL is going to help the margin structure. And I'm wondering if you can disaggregate that, how much of it is structural changes from the addition and integration of PSL versus how much is coming from kind of cost-cutting measures that you may have taken in light of the pandemic that will return to the cost structure basically next year.
Jeff Davis -- Chairman and Chief Executive Officer
Yes, good question. There's certainly -- PSL is certainly accretive to gross margins. They're running about 50 -- a little over 50%. However, in the overall scheme of things, they're not that large. So some of that is that contribution. We thankfully have really not had to do really any cost-cutting to speak of. We've not contracted throughout this whole period, and we're actually seeing growth return now. So no, I think that's a sustainable number. I think it's mostly driven by the mix shift to offshore and nearshore. So I mentioned earlier that our own offshore grew organically 12% in the quarter, and it's almost 20% year-to-date. We're running over 50% as well. So those are the major contributors. And of course, you saw that ABR is up and utilization has been sustained around 80% consistently. So no, I think that continues. I don't think we're going to see any decline in gross margin next year.
Maggie Nolan -- William Blair -- Analyst
Great. And then good to see that there's enough visibility to provide some guidance. I'm wondering what your confidence level is on the ranges that you provided. And I know it's early and uncertain in terms of 2021, but can you at least give us an idea of maybe the trajectory of some of the key metrics as we start to enter the first couple of quarters of 2021?
Jeff Davis -- Chairman and Chief Executive Officer
Yes. So Q4, the range we have out there, very, very confident. There's not a lot of time left in the year, so we've got very good visibility. We had very strong bookings last quarter, and right now have a very active pipeline and a good-sized pipeline. So as we look forward to 2021, we're optimistic that we're going to be rebounding from a growth perspective. Too early to say how much, obviously, we'll have our sights set on getting back to double-digit organic growth next year. But certainly, the dust seems to have settled, remains what impact the election might have. But so far, we're not able to detect anything material there. So I think once we're past that, to me, the dust just continues to settle and things continue to improve. And that's what we've really seen since kind of the May time frame. So we're optimistic about 2021.
Operator
Your next question comes from the line of Mayank Tandon of Needham.
Mayank Tandon -- Needham -- Analyst
Jeff, going back to the margin question that Maggie asked. I just wanted to talk about the EBITDA level. So what about any cost savings that you instituted on the SG&A line that you might not flow through into '21. So I just want to get a better feel for also the EBITDA margin trajectory in next year?
Jeff Davis -- Chairman and Chief Executive Officer
Yes. It's been our long-standing goal, as you've heard in the past to try to get EBITDA to about 20% or adjusted EBITDA, I should say, to about 20%. We're closing in on that target. I think that will be a reasonable goal for us to strive for next year. And to your question on SG&A, there are some things there that might tick back up a little bit next year. I don't think it will have -- certainly won't have a negative impact. It might slow the expansion that we're seeing a little bit. But I think we'll be either at that 20% or right around it. So we'll be working toward that, obviously, as we go forward. But back to the SG&A, we are saving a little bit in travel expense that's nonreimbursable. And a little bit on marketing, although we've actually gone virtual with most of our marketing activities, and the spend there isn't down as much as you might think. So travel, yes, which, by the way, when we talk about does that cost return next year, I don't see that happening, right? I don't think -- two things. One, I'm not sure how long it will be before we're back to whatever the new norm is. I say back to we're at a new norm. And I suspect that, that new norm won't involve as much travel as we were doing pre-COVID because I think people have realized, customers alike and us alike, have realized that we can absolutely do a lot of -- accomplish a lot of what we need to remotely in using virtual tools.
Mayank Tandon -- Needham -- Analyst
That's helpful, Jeff. And then just one follow-up here. In terms of revenue growth in '21 and beyond, actually more like '21 for now, how should we think about utilization? How much more room do you have on that front? And then does hiring sort of become the key driver behind top line growth if you can't expand utilization? And then tied into that would be any conversation around pricing you're having with clients, and how is that trending?
Jeff Davis -- Chairman and Chief Executive Officer
Pricing is good. We've made conscious decisions proactively, in some instances, to encourage clients to move forward with things that maybe they were kind of waffling on. So we've made some concessions. You're seeing that now. I think ABR was maybe down slightly sequentially but still up year-over-year. And in terms of pricing going into next year, we're not seeing enormous pressure at this point. So I actually expect that -- those concessions that we made that I alluded to, by the way, were all temporary. So we didn't put anything permanently in place. So in most cases, they have like a time line of six months on them. So actually, I expect that ABR will tick back up going into next year. Utilization is probably about the best it's going to get. I think that's the best-of-breed number, consistently holding 80%, 80% plus. I think it's about as well as anybody can do. And of course, the balance of that isn't people sitting around. They're actually actively working on pursuits and education and other activities, administrative activities. So I think going into next year, I think we can plan for 80% utilization. We can plan for at least some slight ABR increase. And our continued mix to offshore. I want to emphasize, again, we're growing offshore even in this environment, double digit. And now, including PSL, that applies to nearshore as well. We see a lot of demand for the nearshore and really more and more demand for our offshore. So we're going to continue to see that mix shift. That mix shift will be a bit of a drag on top line. Although not too much as most of it is incremental. So this is not work that we're doing in the United States today that we're going to ship offshore. It's actually increasing our offshore business incrementally in addition to the work that we're doing onshore.
Mayank Tandon -- Needham -- Analyst
That's very helpful as well. Just one final housekeeping item. Jeff, I don't know if you mentioned this or Paul did. What is the organic growth in 3Q and what's implied in the 4Q and the full year guide?
Jeff Davis -- Chairman and Chief Executive Officer
It was about one point. And I think Q4, the range is like 0 to 2. So I think the midpoint of guidance is about one point as well. And again, we're seeing that improve, but we wanted to be conservative for Q4. We hope there's some upside there.
Operator
We have a question from the line of Brian Kinstlinger of Alliance Global.
Brian Kinstlinger -- Alliance Global -- Analyst
For that large financial services customer, I'm curious when you expect that to ramp, when you expect it might be at peak run rates and how many years you mentioned that 8-figure contract is contracted to be?
Jeff Davis -- Chairman and Chief Executive Officer
Tom, do you want to take that?
Tom Hogan -- Chief Operating Officer
Sure. Brian, we're starting the ramp now. It will really be probably Q1, late Q4, early Q1 before really start to see that ramp coming on. It's about a 5-year program. It will probably ramp up through 2021 and from there -- sustain there for a couple of years as we continue through the program.
Brian Kinstlinger -- Alliance Global -- Analyst
Great. And maybe if you can discuss the broader bookings trends in the third quarter outside of this deal as well as the early stages of the fourth quarter.
Jeff Davis -- Chairman and Chief Executive Officer
Yes. We -- as you know, we don't disclose specifics, subject to too much misinterpretation. But what we typically will disclose, and I will now, is that we were up organically double digits, low double digits year-over-year. So we're really happy actually with that result. And year-to-date, solid. And Q4 so far in October here is looking good. And as I mentioned earlier, we've got a really strong pipeline. So we've got to convert that. And there's always -- Q4 is always a big bookings quarter as the year is back-end loaded, and clients are lining up projects for the start of next year. And of course, the quarter itself is back-end loaded. So December typically is our big bookings month. So it's a little early to comment on that, but we're optimistic.
Brian Kinstlinger -- Alliance Global -- Analyst
Great. Health care looks -- as I look at your numbers and back of the envelope, healthcare looks to be, obviously, the primary growth driver, while financial services dropped and while telecom and autos are smaller, they also seem to drop. So I'm curious, as you look at your bookings and your pipeline, also notwithstanding this large financial one-off services contract that's pretty large, do you see those segments returning to growth next year? Or are challenges any of them facing going to make some of those verticals difficult?
Jeff Davis -- Chairman and Chief Executive Officer
No. I think we will. I think financial services, we're already seeing some improvement in. We've got some strong accounts there that we're targeting very heavily. And I think we'll move the meter there. I do think much of what you're looking at there is kind of more on a relative basis. We acquired almost $60 million of revenue this year. And in many instances, those portfolios simply didn't cover some of the verticals that appear down. And -- but to say they're not slightly, but that probably shows a little more dramatically due to those acquisitions.
Brian Kinstlinger -- Alliance Global -- Analyst
Okay. Lastly, with your consultants working from home, I'm curious about the deployment of offshore resources on new projects. I know you've been talking about this and focusing it. But in the past, customers have wanted some domestic resources, given they were on-site and the customer could see them. I mean, this is years ago. But I'm wondering how working from home, and you're not seeing the consultant anyway is impacting their interest in offshore mix or how you are changing decisions on fixed-price contracts to the degree that you have some.
Jeff Davis -- Chairman and Chief Executive Officer
Yes. Fixed price, by the way, is relatively small. It's less than 10%. It's round about 8% now. And so certainly, in many of those instances where we have total control, we would obviously opt to deliver some of that work from offshore. And I think you're raising a good point, but I would emphasize that, particularly in the digital space, where there's a lot of high-touch interaction with our client, and in many cases, our clients' customer that the skills that the onshore folks possess maybe nontechnical, more cultural, etc., business attitude or acumen, I think are still critical. And so we're still seeing clients looking for a blend, even where we're introducing offshore. With some exceptions. As I mentioned earlier, we're taking on larger offshore engagements now that again are incremental. But if we look out in the future, I do think offshore and nearshore is going to outpace onshore growth, but I don't think it's going to displace it. That is to say that I think onshore is still going to grow at a good clip. Not as fast as offshore, but again, on a combined basis, we'd like to see that get at least over 10% and maybe in the mid-teens or higher in total.
Operator
Our next question comes from Surinder Thind of Jefferies.
Surinder Thind -- Jefferies -- Analyst
Jeff, I was hoping you could talk a little bit about maybe the evolution of your sales strategy over the past six months or so kind of in the COVID environment where maybe in the past, there's a lot more reliance on conferences and so forth? And what you guys are now doing to kind of go and look for new clients and how that's impacting your ability to find new clients?
Jeff Davis -- Chairman and Chief Executive Officer
Yes. We're doing a lot of field marketing virtually. So we're setting up a lot of different activities, both educational as well as, frankly, kind of virtual events, wine tasting, sort of fun things for new and existing clients. And certainly, in many instances, still working with our partners. We do a lot of that activity often in conjunction with one of the vendors that we work with, one of the software vendors. So there's been a good response to that. I've been really impressed. I do think that's an area that once it's safe to, I think that will return to a live event going forward. But we're finding ways to get it done now. And in terms of the sales structure and focus and strategy, I'm going to ask Tom to comment on that. The sales reports at the time, and there's been a lot of work there that he can articulate it.
Tom Hogan -- Chief Operating Officer
Yes. We've turned a lot with our vendor partners. As you know, we partner with some of the largest software brands out there, and they're constantly looking for insights to help, and we continue to leverage that. But I'll also say is we have a very strong portfolio. And I mentioned Instant Insights as a way to lean into our current customer base. And we'll continue to add new customers, but we have a lot of runway within our current customers as well. And a lot of initiative is bringing in new customers, but also leading into our current customer base, which you'll see a lot more of in 2021 and beyond. And I think that's a big competitive advantage for us is that with the amount of runway in the current client base, we're not beholden to just bring in new customers for growth. We have a lot of growth we can get from our current customers, and you'll see a lot of that in 2021. So a lot of our strategy has obviously been bringing in new customers, working with our vendor partners, but also turning that sales team internal to the current customer base and cross-selling portfolio, so our current clients can buy more of that portfolio, that's where there's a tremendous amount of upside for us for growth in 2021 and beyond.
Surinder Thind -- Jefferies -- Analyst
Understood. And then as related to that, can you maybe provide a little bit more color on your brand strategy? Is that part of the bigger strategy as well here? Obviously, it seems like you're getting or trying to build out relationships within the sports arena, whether it was the St. Louis Blues earlier. You're now kind of involved in the golf scene. Is that kind of a reflection of where you believe the firm is in terms of its scale and ability to reach new audiences at this point? Or how should we think about that tying in with the earlier sales strategy?
Jeff Davis -- Chairman and Chief Executive Officer
Yes, that's exactly right. Go ahead, Tom. Go ahead, Tom.
Tom Hogan -- Chief Operating Officer
Well, I was going to say, I think there's an amount there, though, as well. It's also getting to larger presence. When you look at the brand, we've done a lot within markets. So we've done things in Dallas, done things in St. Louis. And that obviously goes outside of those individual markets. Going to the golf sponsorship was to amplify the brand even more. I think that's a good buyer demographic for us. I think it's a place for us to lean into. But really, it's about brand amplification to really get that brand out there, really making people aware of it. And I think it's a great global presence as well. We were selective of where we went with the PGA and the golfers. We wanted to make sure we were tying success with our brand, and I'm pretty excited about where that's going as far as amplification. But it's to make sure we're doing it beyond just markets. We have a global presence, so we want to make sure we amplify that brand globally.
Surinder Thind -- Jefferies -- Analyst
Understood. And then a follow-up on the average billing rate. Obviously, you guys provided some color around the decline sequentially and the idea that these are kind of temporary cost concessions. But can you maybe provide some color on how the clients are thinking about what it is to kind of get them over the hump to make the investment? Is it that they're willing to kind of take on shorter projects, but it's the bigger projects that they're a little bit hesitant on? Or how should we think about where the client is maybe relative to where the client was last quarter? I'm assuming there should be an improvement in sentiment, but again, we're -- there's an election occurring and there's near-term macro uncertainty, and then obviously, budgets are being established at this point. Any kind of color there would be helpful.
Jeff Davis -- Chairman and Chief Executive Officer
Yes. I think I mentioned earlier that we're not expecting and not currently, as we're closing these bookings that Tom covered earlier, not experiencing a lot of rate pressure or any I should say rate pressure outside the norm. And you guys know this is a very competitive industry, so there's always rate pressure. There's always competition. But I would say, I've been really pleasantly surprised with what we've seen throughout this period. And we're not really seeing our competitors or the industry in general kind of running to the bottom, which tells me that it actually held up better than I expected anyway. And so I don't expect that going into next year. I think we're going to continue to try to drive to our goal of about 2% to 3% ABR increase annually, really basically offsetting of cost of living adjustments for our employees. At the same time, we are -- as we're growing and taking on these larger engagements. And of course, I've mentioned offshore, and you appreciate the margins there. But as we're hiring more onshore, we are able to hire more toward the base of the pyramid. And really, we're experiencing some nice leverage there as well. So the net of that is that if we can get 2% or 3% ABR increase and only spend one or two net in their increase, then obviously, we've got some margin opportunity there. Combined with offshore, our ultimate goal on gross margins has been for a long time adjusted gross margin to get to 40%. We're very, very close to that. We'll be very close to that this quarter. And I think going into 2021, we'll kind of be right there. Q1, seasonal, due to the reset of payroll -- local and payroll taxes, etc. So we'll see a little bit of a tick down there seasonally as always, but overall, I'm expecting margins to hold and probably expand somewhat in 2021.
Surinder Thind -- Jefferies -- Analyst
Understood. And then obviously, there was some good color on kind of bookings trends. And -- but if I was to take a step back in terms of just, again, from the client's perspective, what does your visibility look like, let's say, two quarters out, three quarters out at this point relative to maybe how it was a year ago under a more normalized condition -- conditions?
Jeff Davis -- Chairman and Chief Executive Officer
It's probably a little less just because the sales cycles are a little less predictable, I think, than they were a year ago. I would tell you, I don't think it's profound. I think, as I said before, I think the worst is behind us. We were impacted this year by cancellations. We actually had a bankruptcy client go bankrupt. Although they're coming back around after coming out of bankruptcy, and we're working with them again. But it's kind of slowly building back up. So many of those that were canceled or delayed are coming back around, and I think we'll see the impact of that in the first half of next year. But I would say the climate is maybe cautious as a word to describe it. But it seems to me, specific to your question, how does it feel compared to a year ago. I think it's getting close to being similar to what it was a year ago, at least for us. And a number of these deals that Tom talked about earlier, specifically the ones that are with new clients -- and I'll come back to that in a second, too. But specifically the ones that are with new clients tend to start small and then ramp up in the overall relationship. That's our model. And we've got a lot of new logos that we think will be meaningfully providing some meaningful growth next year. And lastly, as Tom mentioned, too, a lot of runway still in existing accounts. So keep in mind that in any given year, over 90% of our revenue comes from clients we serve the prior year and typically, before it's even earlier than that. So those things combined, I think, give us a decent amount of visibility. And again, we're pretty optimistic with what we're seeing.
Surinder Thind -- Jefferies -- Analyst
That's helpful. And then final question on the -- any color on the kind of the future deal pipeline and stuff in terms of relative to historical?
Jeff Davis -- Chairman and Chief Executive Officer
Yes. Actually, you're talking about M&A?
Surinder Thind -- Jefferies -- Analyst
M&A, yes.
Jeff Davis -- Chairman and Chief Executive Officer
Yes. I'm glad you brought that up, actually. So we intentionally took a break. Like I said, we had accomplished our -- we typically have a -- start each year with a goal of three to four deals, $50 million plus of run rate revenue. So we exceeded that goal by the middle of the year and given the -- again, the backdrop of COVID. So we basically kind of concluded that the deals that we had in-flight when COVID came up, took a pause, but we are actually actively back in the hunt now. So it's our goal to be in diligence with a shop target by the end of the year, looking to close sometime by, say, mid Q1.
Operator
Your next question comes from the line of Vincent Colicchio of Barrington Research.
Vincent Colicchio -- Barrington Research -- Analyst
Yes, Jeff, the overall healthcare client base, things are going well there, obviously. Just curious, I think last quarter, you said there's a pressure on the industry and some uncertainty. Just wondering if any of your larger healthcare clients are cautious right now and any cause for concern?
Jeff Davis -- Chairman and Chief Executive Officer
It's interesting. The short answer is no, anecdotally and based on what we're both anecdotally, what we're hearing as well as actually empirically in how they're spending. So it's interesting. We've established a lot of C-level relationships within that industry. That was a goal that we had for the year and managed to establish a lot of those. And what we're hearing from those contacts is that they had planned. They pretty well could model what was going to happen, that actually the result was better than I think anybody expected, right? If you remember what they were saying four or five months ago and running out-of-hospital space and all that. So electives are returning and the like. So we're hearing optimism exactly how I would describe it. The last few calls I've had with CIOs at some of the Blues and some others, they're optimistic that things didn't get as bad as they could have, and they were prepared for that. And that actually probably frees up some opportunities, and many of them are starting their planning right now. In fact, they're even ahead of the curve. One of them was telling just yesterday. So it's -- the climate there was much better than I feared it could be. And in fact, as I said, it's been remarkably resilient.
Vincent Colicchio -- Barrington Research -- Analyst
Nice to hear that change. Pre COVID, one of the themes for growth was, you've got a lot of opportunity. You're adding salespeople. I've asked you this before, but curious if some of the new guys are sort of evolving or if they've been completely stunted by the pandemic.
Jeff Davis -- Chairman and Chief Executive Officer
No. Actually, they've had good success. People adjusted, including on the client side and even the prospective client, right? So we have opened up a number of new relationships this year. And some of that -- or a lot of that is actually being accomplished by the newer team. The established guys have these large anchor accounts that they tend to focus on. So there's a little more white space with the newer folks, and they're achieving good success there. So we've been optimistic -- or we've been, again, happily surprised or happy with the results from not only what those folks are doing and how they're coming online and moving along. But actually, our ability to recruit. So we've actually hired a number of new sales folks still. It's kind of an ongoing process. And we found some really great folks. And again, I think poised really well going into 2021.
Vincent Colicchio -- Barrington Research -- Analyst
And Tom, I missed the number. How many large deals that were added in the quarter?
Tom Hogan -- Chief Operating Officer
66 greater than $500 million compared to 49.
Operator
And your final question comes from the line of Jack Vander Aarde of Maxim Group.
Jack Vander Aarde -- Maxim Group -- Analyst
Jeff, Paul, Tom. To one of the questions has been asked. So I'll try to avoid being redundant. So I guess we'll start with the question on the backlog and pipeline, not M&A pipeline, but backlog of orders. That has been strong on a weighted basis. I think last quarter, you guys mentioned it was the largest it's ever been on a -- maybe on a weighted dollar basis. Wondering if you -- I know others have talked about the pipeline or ask questions on it, but can you speak to maybe how the backlog or pipeline at the end of the third quarter, maybe how that ranks in the context of how you describe 2Q's pipeline?
Jeff Davis -- Chairman and Chief Executive Officer
Yes, it's definitely better. I mean, I mentioned the bookings that certainly contribute and build up the backlog. Bookings were a little slower in Q2. We talked about that. They were still solid, but they had slowed a little -- that was the heart of all this stuff hitting, right? So we definitely had a slower kind of April, May, as I said, I think May was the bottom. But -- and so during that period of time, I would tell you, the backlog, I'm sure got somewhat depleted. But we've built it right back up in Q3, and I think we'll be adding to it even more in Q4. So it's probably maybe down a little more than typically would be, obviously, without COVID. But again, we had a really nice bookings in Q3. And so it's building back up rapidly.
Jack Vander Aarde -- Maxim Group -- Analyst
Okay. Great. And then so I heard a few good stats on organic growth rates for the offshore business. And then as for the overall organic growth rate that is embedded in your fourth quarter revenue guide, I think you said somewhere around 1% to 2%. I guess, first, did I hear that correctly, 1% to 2% is kind of rough ballpark?
Jeff Davis -- Chairman and Chief Executive Officer
Yes.
Jack Vander Aarde -- Maxim Group -- Analyst
Okay. And I know historically, you guys have been very transparent in upfront and communicating kind of your -- during 2020, it was COVID. You've been very transparent in communicating your kind of cautious optimism in your informal revenue comments and outlook over the past few quarters. Would you say that your revenue guidance for the fourth quarter holds true to that sort of cautiously optimistic perspective that I feel you've demonstrated in the recent quarters?
Jeff Davis -- Chairman and Chief Executive Officer
Yes, absolutely. No doubt about it. I think, again, an abundance of caution also because we were in the middle of that convert, we opted not to reinstate guidance last quarter, we probably could have. But certainly, we feel very confident about what we have out there right now. And again, with even some potential upside to it. The business is recovering quickly. And I would be optimistic, certainly comfortable with what we've got out there and optimistic we may come in more near the top end.
Jack Vander Aarde -- Maxim Group -- Analyst
Okay. Fantastic. And then just as kind of a follow-up to that, given questions on the pipeline strength and obviously, the overall extension of sales cycles throughout the year as well due to COVID. Are there any maybe other underlying assumptions you can maybe share that are embedded into your 4Q, fourth quarter revenue guide, maybe in the context of do you assume maybe the same level of extended sales cycles and conversion rates that have occurred in Q3? Was there any sort of embedded improvement of that? Or are you kind of just keeping it even keeping flat price assumption there?
Jeff Davis -- Chairman and Chief Executive Officer
No. Yes. I would say it's probably fairly conservative. The -- keep in mind that at this point, pretty much substantially all of Q4 is actually backlog, right? So what we've got in that range around there is some potential downside if a project gets canceled or what something happens with the client. But the upside, I think, does come through additional bookings. We do tend to pick up revenue. In the fourth quarter, there's often some budget flush and things like that, that is not baked in here. So if that happens, and we see a more normal return to that experience, then I think that's where the upside could come from. But we've also been cautious and left room for potential downside, which we don't anticipate.
Operator
There are no further questions at this time. I would now like to turn the call back over to Mr. Jeff Davis for closing remarks.
Jeff Davis -- Chairman and Chief Executive Officer
All right. Well, thank you, everyone, for your time today. Appreciate it, and glad to be here. Looking forward to talking again with our year-end wrap up that I'm very optimistic about. And so we'll talk to you in late February or early March. Thank you.
Operator
[Operator Closing Remarks]
Duration: 49 minutes
Call participants:
Jeff Davis -- Chairman and Chief Executive Officer
Paul Martin -- Chief Financial Officer
Tom Hogan -- Chief Operating Officer
Maggie Nolan -- William Blair -- Analyst
Mayank Tandon -- Needham -- Analyst
Brian Kinstlinger -- Alliance Global -- Analyst
Surinder Thind -- Jefferies -- Analyst
Vincent Colicchio -- Barrington Research -- Analyst
Jack Vander Aarde -- Maxim Group -- Analyst
