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CIBER, Inc. (NYSE:CBR)

Q4 2012 Results Earnings Call

February 21, 2013 11:00 AM ET

Executives

Christian Mezger - Senior Vice President, Corporate Finance

Dave Peterschmidt - Chief Executive Officer

Claude Pumilia - Chief Financial Officer

Analysts

George Price - BB&T Capital Markets

Brian Kinstlinger - Sidoti

Vincent Colicchio - Noble Financial

Jeff Martin - Roth Capital Partners

George Price - BB&T

Operator

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2012 CIBER Earnings Conference Call. My name is Keith, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later on we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, today’s conference is being recorded for replay purposes. And with that, I would now like to turn the conference over to your host for today, Mr. Christian Mezger, Senior Vice President, Corporate Finance. Please go ahead, sir.

Christian Mezger

Thank you, Keith. Good morning, everyone. My name is Christian Mezger, Senior Vice President, Corporate Finance. Welcome you to our four quarter and full year 2012 earnings conference call. With me today are Dave Peterschmidt, our Chief Executive Officer; and Claude Pumilia, our Chief Financial Officer.

Before turning the call over to Dave, I will remind you that some of our prepared comments and responses to our questions will constitute forward-looking statements. These forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include, but are not limited to those factors set forth in today’s news release and discussed under the Risk Factors section of our quarterly reports on Form 10-Q and our annual report on Form 10-K, as well as other SEC filings.

Also during this call, we will reference certain non-GAAP financial measures that we believe provide useful information for investors. We have included reconciliations of those measures to GAAP measures in our news release and on Investor Relations section of our webpage ciber.com.

Today’s discussion will be on a continuing operations basis with results for our former Federal division and ITO business now being treated as discontinued operations. For your convenience and historical comparisons we have included annual and quarterly results for 2011 and 2012 on a continuing operations basis, as well as eight quarters of GAAP restated historical financials with our earnings release this morning and in the IR section of the website at ciber.com.

With that, it is my pleasure to turn the call over to Dave Peterschmidt. Dave?

Dave Peterschmidt

Thank you, Christian, and good morning, everyone. CIBER delivered much improved financial results in Q4 and for the full year. At the end of the third quarter, I said my objective was to exit 2012 with improved financials and a stronger operating margin exit rate, and we’ve done just that. Management’s strategy resulted in higher operating margins, sequential revenue growth and positive operating and free cash flow.

Building on what began in 2011 we made significant progress on many fronts in 2012. We bolstered our outstanding management team with additional industry-leading talent. We divested our Federal business and our ITO business, so we could focus on our core offerings.

We exited underperforming contracts. We streamlined operations and realign costs, improving our overall profitability through an announced restructuring, yielding $7 million in 2013 savings and $11 million in ongoing annual savings.

We delevered the balance sheet, including the renegotiated credit facility that better suits our needs, thus reducing interest expense by more than $4 million on an annualized basis, lowering our cost of capital and providing greater financial flexibility. We advanced our strategy to move into higher value markets by deepening our important strategic partnerships including SAP, Oracle, Infor and salesforce.com.

Our North American business is significantly healthier today than it was a year ago, an important demonstration of the successful implementation of our strategy and our International business is delivering improved results, which we believe provides momentum to capitalize on in the future. These accomplishments while just the beginning places on a firm foundation as we enter 2013.

We continue on a path to hone our strategy and improve our operating discipline, creating one global CIBER and strengthening our position as a leader in the IT services market. Two years ago, our first step was careful evaluation of the existing business and resources, so we could develop a strategic plan for future topline growth and margin expansion.

With a clear strategy in place we successfully moved to optimize and streamline our operations, ultimately shifting the business mix to drive greater focus and better return. Current results indicate we’ve made the right decisions and are moving in the right direction.

Now there is still a lot of work to be done and I believe the results we have assembled -- indicate that we have assembled the appropriate building blocks to move CIBER forward. We are now focused on the next phase, putting us on a path to drive margin improvement with growth and greater scale. The majority of our revenue base is stable in nature, giving us confidence and the opportunity for growth in the future.

CIBER’s improved cost structure and refocused operating model allow us to pursue opportunities that will grow the topline and increase profitability. In the past quarter, we won a number of important deals including the largest community college system in the United States which selected CIBER to implement its ERP system based on CIBER’s qualifications in higher education, as well as our position as an Oracle Certified Partner.

In the U.K., CIBER expanded its footprint in the financial services market with Dynamics CRM, securing multiple new contracts and extensions at six major banks and insurance companies.

And CIBER was selected by one of the fastest growing wireless handset manufacturers to assist with migration from a previous parent company, as well as for a three-year managed services contract where CIBER’s manage significant IT functions for this innovative company.

These wins include new customers and expanded relationships are aligned with our goal of coupling margin improvement with revenue expansion resulting in higher value for our clients, CIBER and its shareholders. With the stable core we can grow our position in the IT services business organically and through partnerships building a well-balanced future looking portfolio.

Our strategy centers on three areas of opportunity, the first is to continue to successfully execute our core ADM business. It is stable and low risk, with moderate growth and strong margins, providing a platform from which to expand our footprint within major accounts.

The second area of opportunity is to accelerate higher growth higher value services by intelligently partnering with ISVs to complement CIBER. Through our partnerships with SAP, Oracle, and Infor, CIBER provides differentiated high-value services. Our ISV practices enable CIBER to solve our client’s most challenging strategic issues, including cloud, mobility, analytics and social media.

And our third area of focus is to expand our position as a leader in high growth, high margin full life cycle support of our clients environments through CIBER managed services offering. Managed services and cloud represent a growing annuity revenue stream with margins that are accretive to our core business.

Clients in our target market are increasingly asking for this capability as these offerings are natural extension of our client’s relationship and area of growing expertise for CIBER.

We were recently cited as a visionary and Gartner’s Global Magic Quadrant for SAP application managed services, an important and gratifying validation of our capability in this space. Gartner describes CIBER is having a clear vision for the fundamental SAP applications maintenance business.

To accelerate our managed services and cloud initiatives we have created a global managed services practice that will leverage both our global delivery capabilities in our country specific expertise in one centrally managed services.

Scale and topline growth are key to driving further margin improvement, supported by ongoing financial disciplines, which include managing costs and optimizing operations to run CIBER efficiently, a discipline capital allocation approach and optimal asset utilization to maximize cash flow from operations and value creation.

In summary, while there is work to be done. We have made very important strides. 2012 was an important year for CIBER. It was a year we dedicated to building operational excellence. We’ve accomplished our goals and positioned ourselves for the next phase expanding margins.

With changes we made put the company in a significantly better financial position and stage us well to expand margins. We believe the continued implementation of our strategy will lead to topline growth and sustainable margin expansion.

Thank you. Now let me turn it over to Claude, so we can discuss the financials with you. Claude?

Claude Pumilia

Thanks, Dave. Good morning, everyone. As a reminder, the results presented here are on a continuing operations basis with both Federal and ITO removed from the current and historical periods.

For the full year and fourth quarter of 2012, CIBER delivered improved revenue, operating income and cash flow from operations. Full year 2012 financial highlights demonstrate meaningful progress.

Revenue totaled $884.4 million, a 1.8% decrease, up 1.4% in constant currency from 2011. In 2012, operating income before restructuring charges totaled $22.4 million versus a loss of $8.8 million in the previous year.

Operating margins of 2.5%, a 350 basis point improvement from 2011 reflects streamlining efforts and improved client delivery. With our restructuring, this is a solid rate to build on in 2013.

Adjusting for restructuring charges, net income from continuing operations for the year totaled $4.2 million, or $0.05 per share versus a loss of $50.7 million or $0.71 per share. We improved our financial flexibility in 2012, lowering debt by $41 million to $26 million at year end and reducing interest expense by $4 million on an annualized basis.

Fourth quarter results exemplify management’s commitment to moving CIBER forward. 4Q revenues of $225.3 million grew 2% year-over-year or 3% in constant currency and were up over 4% sequentially. Sequential revenue improvements in International were offset by typical seasonality in North America.

We exited the year with solid gross margins of 26.1% in the fourth quarter, up 80 basis points sequentially as we improved utilization and product mix.

Excluding the restructuring charges, operating income was $5.2 million for the quarter, an increase of 21% year-over-year and 13%, sequentially. The resulting operating margin of 2.3% reflected streamlining initiatives and improved delivery. In 2013, we expect further margin expansion as a result of additional efficiencies realized from restructuring and ongoing improvements in our delivery capabilities.

Net income from continuing operations before restructuring charges of $1.3 million, or $0.02 per share before restructuring charges, compared to $1.6 million, or $0.02 per share in a year ago quarter.

Fourth the quarter, CIBER posted a net cash balance of $33 million, cash flow from continuing operations of $35 million and positive free cash flow of $34 million. Before I get into the segment details, I’d like to update you on where we stand with the restructuring initiatives announced at the end of the third quarter.

Our originally announced restructuring charge of $14 million has been reduced to $13 million, $8 million taken in the fourth quarter of 2012, compared to $9 million we originally estimated and $5 million expected in 2013. The resulting benefits are unchanged. We are on track with your expectation for savings of $7 million in 2013 and $11 million annually thereafter.

As a reminder, the restructuring is part of our commitment to deliver a more streamlined efficient CIBER. The restructuring includes consolidation of office space, as well as organizational changes designed to simplify business processes, move decision-making closer to the marketplace and create operating efficiencies. Approximately two-thirds of the impact and future benefit affect our International business, with the balance of North America.

Looking at segment performance, International and North America fourth quarter revenue contributions were essentially equal. International exited 2012 on a high note, fourth quarter revenues were up year-over-year and sequentially, a sequential increase in fourth quarter gross margins along with lower SG&A resulted in significantly improved operating margins.

For the full year, revenue in the International division was $453 million in 2012, representing a year-over-year decrease of 4%, but an increase of 2% in constant currency. Revenue performance was led by Germany, Norway and the U.K., which combined comprised approximately 50% of the International division revenue.

Fourth quarter International revenues of $118.2 million were up 1.2% year-over-year or 3.2% in constant currency and 10.7%, sequentially. Fourth quarter is typically a seasonally stronger quarter in Europe helping our sequential comparison. Our sequential revenue improvement was led by Germany and Norway.

Internationally, gross margins benefited from improved utilization and a better product mix. Our strategy to improve our delivery capability and grow higher margin, higher value managed services offerings in our International markets is beginning to show positive results. Gross margins reached 24.5% in the fourth quarter, up from 23.5% last quarter and in line with 4Q ‘11 margins of 24.9%.

International operating margins totaled 5.5% for the year. Fourth quarter operating margins increased to 6%, up 20 basis points year-over-year and 200 basis points sequentially. Meaningful sequential margin improvement reflected better gross margins and managing SG&A down to 18.5% in the quarter.

Our International initiatives are delivering improved results. We are experiencing topline growth in local currency and believe we have an opportunity to continue the momentum. By partnering with our customers and providing them with differentiated high-value services we are deepening existing relationships and expanding new areas of opportunity, including our ISV practices, managed services and cloud.

At the same time, our cost restructuring is aimed at improving gross and operating margins. Key to the strategy is reducing delivery costs and ensuring that we right size SG&A.

As I referenced earlier, two-thirds of our announced restructuring initiatives are directed at our International operations. As you would expect, continued improvement is not necessarily going to be linear as each country has its own unique operational challenges and opportunities.

As Dave mentioned, our North America segment is significantly healthier today than it was a year ago, and is an important demonstration of our effective execution of necessary changes to successfully achieve our strategy.

North America revenues remained stable. We ended the year with $433 million in revenue, up 0.8% from 2011. In the fourth quarter, we delivered revenue of $107.5 million, up 2.1% from a year ago, resulting from growth in existing clients as well as the addition of new customers

Sequentially, revenues were down slightly, resulting from typical seasonality in the quarter. We continued to improve utilization and benefit from better project oversight in North America. As a result, gross margins improved to 27.6% in the quarter, bringing our full-year margins to a solid 27.5%.

We ended the full year with operating margins of 7%, compared to 2.9% a year ago. Our strong performance in 2012 was aided by 7.2% margins in the fourth quarter, on the heels of a similar performance in the third quarter. Margins continued to benefit from the gross margin improvement I just described and initiatives that held SG&A at 20.4% of revenue in the quarter.

Looking at below the line items, we improved our financial flexibility this year, a $1.7 million reduction in quarterly interest expense over fourth quarter 2011, resulted from our credit line renegotiation and lower average debt outstanding. The average cost of debt outstanding at 2.9% is down approximately 160 basis points from a year go.

We expect interest expense in 2013 to remain stable at about $1 million per quarter, and we should reiterate that we feel comfortable about meeting our covenants in 2013. 2013 taxes are expected to be in the range of $13 million to $14 million versus $11.4 million in 2012 and $32.5 million 2011.

We want to remind you that our tax situation results primarily from our recent history of domestic tax losses. As a result, we cannot report a U.S. tax benefit when we incur additional tax losses. In addition, we must report deferred tax expense related to goodwill, regardless of our U.S. tax position.

The combination results in an unusual blended, global book tax rate relative to our normal cash tax rate. And while this non-cash deferred tax expense has no impact on our cash flow or the ability to operate our business, it negatively impacts our reported EPS. It is also worth noting that the deferred tax expense for goodwill amortization increases our U.S. tax loss and creates more NOLs for future possible cash tax benefits. Our domestic NOLs are approximately $40 million as of December 2012.

Cash flow from operations was positive for the quarter and for the year, as we benefitted from seasonality and DSO improvement as well as the maximization of European receivables and payables. Cash flow generated from continuing operations was healthy at $35 million in the quarter and $1.3 million for the year.

Given our moderate CapEx requirements, we were able to generate strong quarterly free cash flow of $34 million and approach break-even for the year. The primary contributors to cash flow were increased net income and improvements in accounts receivable of $15 million, driven by a decrease in unbilled accounts receivable and good collections.

DSO of 61, compared to 66 last quarter demonstrate that we are successfully moving towards our 60-day goal. CIBER has historically experienced seasonality in its cash flows. They are typically negative in the early part of the year, improving as the year progresses and we expect a similar pattern in 2013.

In summary, I couldn’t say it better than Dave said earlier. Current results indicate we made the right decisions and are moving in the right direction. We exited 2012 with a stronger, more stable and streamline the company. Because of the efficiencies, we are realizing from our restructuring and improvements, we continue to make in our delivery capability.

We are positioned for further margin improvement in 2013 and the years to come. We have improved our financial flexibility, reducing our long-term debt and corresponding interest expense and enhancing our cash flow.

With that, I will turn it back to Dave.

Dave Peterschmidt

Thanks, Claude. Operator, let’s go ahead and open it up for questions, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of George Price with BB&T Capital Markets. Please go ahead.

George Price - BB&T Capital Markets

Hi. Good morning, guys.

Dave Peterschmidt

Good morning.

George Price - BB&T Capital Markets

Thanks very much for taking my questions and nice quarter. I guess the first thing I wanted to ask about, Europe seemed surprisingly strong perhaps relative to the headlines that continue to be out there. I wondered if maybe you could give a little bit more color on what drove the business performance there and how sustainable you see that going forward. And I guess in that context, maybe an update on that client transition that was going on there.

Dave Peterschmidt

Yeah. I’ll let, Claude talk to the client transition in a minute, George. Look, Europe had good revenue numbers. There is no doubt about it. Unlike North America though, Europe doesn’t yet have the type of predictability, George that I want to see in it and it’s going to be a little lumpy going forward but I’m confident we’ve got a lot to build on in Europe.

I mean, I think Europe offers a lot of opportunity for us to continue to expand the topline and grow margins. The challenge we’ve got in Europe right now is we’ve got to grow the margins there and we clearly know how to do that. We know exactly what we have to do. We’ve got the programs in place.

I think, Europe, quite frankly is not going to be dependent on macroeconomics of Europe. It’s going to be us and as I’ve said before that’s well inside our control. So, yeah, I like the revenue line of Europe and it was good that they did it. But as you look at that, you can tell the margins they’ve got to improve. And again, I think it’s pretty clear to us what we have to do. We are doing the very same things in Europe now that we did in North America. So, I don’t see any downward pressure in Europe because of the European economy.

George Price - BB&T Capital Markets

Claude, if I could, before, just to follow up on that. Dave, do you -- I guess where would you place where you are in Europe now in the context of your process to get North America to where it is now? I know Europe didn’t start out in the same spot, obviously, as North America did and maybe you can kind of frame it in the North American context.

Dave Peterschmidt

Yeah. I think we’ve got two quarters of work in Europe. To get Europe to the level of predictability and consistency that we now see in North America, and I think we’ll move through those gates fairly quickly.

Claude Pumilia

Go ahead. Sorry. I was going to answer your question about client transition. I was also just going to add to what, Dave said a little bit on Europe and kind of the macro environment versus our performance. I think what you do see though as Dave said on the Q3 call, right.

We took the Q3 result in Europe seriously and we focused our efforts on kind of how we would orchestrate the recovery from that result and our teams in Europe did a very good job of that, right. But to Dave’s point, there is a couple of quarters of work still to get to where we really would be satisfied with the consistency and discipline. In terms of client transition, I’m happy to tell you that client transition issue is behind us and it’s not something that we need to be focused on or talk about stabilized.

George Price - BB&T Capital Markets

Yeah. I guess just to follow up on that, is there going to be a year-over -- based on the run rate that you have now, I assume coming into the year is how much of like a year-over-year negative comparison is that going to be?

Dave Peterschmidt

Yeah. Good question, George. We don’t anticipate there being a year-over-year drag in that regard. So, again, that’s why we are comfortable saying that’s stabilized. We think our teams have done an excellent job of responding to situation, shoring up CIBER’s position in that account and for 2013 versus 2012, stable means flat or maybe even an opportunity to grow.

George Price - BB&T Capital Markets

And was that -- I know there was a lot of uncertainty at one point around that. Were you able to do that in terms of largely keeping the business? I guess how are you able to accomplish that? How did that resolution kind of finally come down?

Dave Peterschmidt

Yeah. George. Basically what -- the management team did an excellent job here. Long-standing client, vendor consolidation process and what we’ve been able to demonstrate is that because of our 15-year relationship, the client basically said what, the CIBER expertise in our business is so strong that we want to continue to maintain a pretty balanced approach going forward with CIBER.

And that fundamentally is what happened. In fact in that particular client, we are actually now seeing new projects that are actually being initiated outside of Europe with us. So we believe that we have a very stable environment now with our client and it’s based on, quite frankly 15 years of knowing that client’s business.

George Price - BB&T Capital Markets

Right. Okay. And let me just ask one more around margins, and then I’ll turn it over and get back in queue. Do you -- is the expectation still that the restructuring cost benefits, the benefits from the restructuring, are going to drop to the operating line in entirety in 2013?

Claude Pumilia

Yeah. George. The answer to that question is yeah. As we talked about it when we announced in Q3, right, we laid out kind of the savings that will drop to the bottom line for 2013 and how that will play out. And again, we are reaffirming in here that this restructuring is on track and we will deliver the $7 million in savings in 2013 that will drop to the bottom line.

George Price - BB&T Capital Markets

And do you think that there is any -- I guess I don’t want to get you to step out any further than you want to, sooner than you want to. But is there the potential for any incremental benefit from the prior actions that you’ve taken in terms of operationally, efficiency, changing the mix of the business on top of that or is it kind of too early to go there?

Dave Peterschmidt

George. In Q3, we also said that, right. We do feel like that the efforts we have underway from a delivery perspective and the operational activities that we are engaged in both geographies, we will deliver some margin expansion on top of that.

George Price - BB&T Capital Markets

Okay. All right. Just clarifying that. Thank you very much.

Dave Peterschmidt

Thanks, George.

Operator

Your next question is from the line of Brian Kinstlinger with Sidoti. Please go ahead.

Brian Kinstlinger - Sidoti

Great. Thanks so much. Hi, guys.

Dave Peterschmidt

Brian.

Claude Pumilia

Hi, Brian.

Brian Kinstlinger - Sidoti

The first question I had, revenue surprised by a wide margin I think in the fourth quarter to the upside, posting 4% sequential growth. However, if you look at SG&A, it increased 7% sequentially, and my understanding over the last two years is that we would see strong leverage or at least flow-through on the gross margin expansion that you saw to the operating margin line. So maybe take us through what happened, when you look at the third quarter results with the fourth-quarter results, it looks like maybe on the corporate side, why we didn’t see the operating leverage as great or even close to the gross margin leverage?

Claude Pumilia

Brian, one the things about Q4 is the fact that you have a whole set of compensation expenses that roll into there in terms of how you are looking at your quarter and there is a natural seasonality of how that occurs. While there’s a sequential increase in the SG&A, right, there is an overall expansion in kind of a business and with the efforts we’ve talked about in terms of the restructuring and other kind of operational disciplines are underway. We will continue to see more leverage on the SG&A line. But frankly that SG&A expansion didn’t surprised us and was part of the model that we had planned for Q4.

Brian Kinstlinger - Sidoti

And so how much of the costs in the fourth quarter for the corporate side of the business are fourth quarter in nature, if you will or seasonal, whereas we’ll see, what kind of drop into the first quarter maybe?

Claude Pumilia

Given kind of where we are with disclosing different kinds of line of the P&L, that’s not an issue we want to get that detailed on. I think I’d rather leave it, Brian with the notion that 2013 is year of margin expansion and you can continue to expect that.

Brian Kinstlinger - Sidoti

Can you maybe give us a sense of the type of expansions you are talking about? Are we talking 50 basis points, are we talking 100? I mean…

Claude Pumilia

We won’t answer that question, Brian. We always appreciate your persistence on that. But I think we’ve kind of laid out a pretty clear position for the management team here and what we are committed to and we want to stick to how we’ve described it.

Dave Peterschmidt

Brian, this is Dave. Let me put some color around that. My expectations from an operational standpoint, I mean, Claude already talked to you about the benefit of restructuring. My expectations around the operational side of is -- I expect we will continue to see North America demonstrate improvement in margin expansion. So both will add the gross profit line and also at the operating line.

I think that Europe, our International business as I indicated has got six months of some work they’ve got to get done, get kind of what I call the sustainable predictable performance that we are now seeing in North America. But having said that, I expect them by the second half of the year to start demonstrating margin expansion and I expect them to end the year with margin expansion for the year, so that’s kind of -- if you will, the macro view of what we are doing here.

Brian Kinstlinger - Sidoti

Now, from the SG&A standpoint and the $7 million that George was asking about, will we actually see -- because there is going to be increases to your cost basis. Will we actually see the total SG&A number declining from where we see. If you annualize the second half of the year, since you’ve announced that over the total dollar number be lower?

Claude Pumilia

Brian, I want to clarify one thing, first, right. The restructuring we announced, as we’ve, kind of, consistently describe it. It has both direct cost and SG&A components. So you can isolate that $7 million simply to SG&A.

Get to your question, I think you just asked will we see absolute SG&A dollars decline. Since we don’t have guidance out, I don’t want to answer that question too specifically. But what you will see is continued margin expansion, right, which would include a scale effect on the SG&A line. So if you have growth in revenue, you can expect to see SG&A as percentage of revenue decline.

Brian Kinstlinger - Sidoti

Okay. And then you may have said, I think that cash flow from operations, was it slightly negative for the year? I didn’t get to see that. If so, you’re talking about stronger net income and you’re talking about book taxes being much higher than cash taxes. So take us through cash flow this year. Why it was so much lower maybe than net income?

Then also when you look to next year, what kind of target would you expect to net income. One times net income, higher, lower, maybe give us some targets based on how the year would play out?

Claude Pumilia

Again, I want to keep it kind of at the level that we’ve kept things in terms of not getting guidance. But first-off, $1 million positive in terms of free cash flow or operating cash flow, excuse me. And in terms of 2013, what you can expect is more positive operating cash flow than that number. But that’s -- we said before and we’re keeping to that.

Brian Kinstlinger - Sidoti

And what offsets that book tax is that you should be doing better from a cash flow standpoint to net income because it seems taxes are inflated from a book standpoint. So take us through why we should not necessarily expect other than collections of better cash flow number than income. What are the other moving parts?

Claude Pumilia

The other moving parts, yeah, I think to walk through that in detail, if you look at the changing current liabilities is one area. But Brian that’s one -- I think I’d like to just keep it, kind of, at the high level where we are rather than walk through these details. We’re comfortable that cash flow will expand in 2013.

We’re comfortable that with the margin expansion you see, you’ll see comparable increase in cash flow. And in addition, you’ll have some effective just the efforts we have underway to make cash collections more efficient, use working capital more effectively and those will fall down to kind of provide benefit to the cash flow line.

Brian Kinstlinger - Sidoti

Okay. Thank you.

Operator

Your next question is from the line of Vincent Colicchio with Noble Financial. Please go ahead.

Vincent Colicchio - Noble Financial

Yeah. Dave, I was curious, the sales pipeline for North America and International. How does that change sequentially?

Dave Peterschmidt

The way I would describe it is the bookings rate continues to increase in North America. And we’re seeing a similar pattern now evolving in International as well. So the book-to-bill ratio continues to get stronger and overall bookings quarter-on-quarter continue to grow in absolute terms. So it looks just like a very healthy pipeline, if you will, coming into 2013?

Vincent Colicchio - Noble Financial

And you had mentioned in your prepared comments, managed services and emerging technologies, if you will, cloud computing and social media as being important growth areas. Are you -- can you give us a sense for how large a contribution you are getting now from those businesses?

Dave Peterschmidt

We’re not ready to do that yet but I’ll tell you that it’s becoming a substantial part of our business. It’s having -- it’s large enough to have impact on the business and be accretive to it. And what we’re seeing in managed service is quite interesting. I think the cloud is clearly not a marketing term any more. It is clearly a substantive part of the technology landscape.

And that in turn is driving the managed services requirements. Remember that our target market and our strategy is company’s annual revenue from $1 billion to $10 billion. And that category of company today is moving more and more to smaller in-house IT capability and moving to cloud-based services and more managed services.

So we think we’re in the right spot. We think that is going to be a continued growth area for us. And what that also does is it’s not just about being accretive, it further de-risk the business and gives us better predictability because where our ADM contracts maybe 12 to 18 months in length, our managed services contracts are minimally three years. And we’re now seeing some of those go up to five years. So it’s adding an annuity revenue stream to the business.

Vincent Colicchio - Noble Financial

Another question on the different geographies. What verticals were most important to you in the quarter in North America and Europe, respectively?

Dave Peterschmidt

Well, I think we continue to see in North America for us, the one is higher education. And we’re really seeing that marketplace pick up and we’re seeing good results there, also telecommunications industry. We continue to see a lot of buying in those patterns.

As we go over into International, we see the financial services sector, a very strong sector for us continuing to grow. We’re also seeing telecommunications in International as another factor. Retail surprisingly is growth area in International. And it has been a strong area for us for a quite a while but it remains very strong, even with some of the macroeconomic indicators that you see.

So I would say financial services, telecommunications and financial services are the primary three growth areas for us.

Vincent Colicchio - Noble Financial

Okay. Thanks Dave.

Dave Peterschmidt

Thanks Vince.

Operator

Your next question is from the line of Jeff Martin with Roth Capital Partners. Please go ahead.

Jeff Martin - Roth Capital Partners

Thanks. Good morning. Appreciate you taking my questions.

Dave Peterschmidt

Good morning Jeff.

Jeff Martin - Roth Capital Partners

Wanted to ask Claude what the adjusted EBITDA number is for 2012 and for Q4. I’m coming up with about $32 million in 2012 and about $7.2 million in Q4. Just wanted to see if I’m on track there?

Claude Pumilia

Yeah. You’re on track, Jeff. Those are good numbers to use.

Jeff Martin - Roth Capital Partners

Okay. So if we wanted to use that $32 million or so for this year and add roughly $7 million for restructuring. That would be kind of a base adjusted EBITDA to be thinking of. And then whatever growth and flow through to the EBITDA line, that’s probably what we are looking like for next year?

Claude Pumilia

Yeah. I think that’s fair math.

Jeff Martin - Roth Capital Partners

Okay. Great. And then given Europe had seasonally strong Q4. Should we expect a seasonal step down in Q1. And can you help characterize what the seasonal pattern looks like on a quarterly basis in a given year?

Claude Pumilia

For Europe or for the whole business.

Jeff Martin - Roth Capital Partners

For Europe specifically, or International specifically.

Claude Pumilia

Yeah. For International, if you look at International, Jeff, Q1 versus Q4 can have a slight seasonal step down that can occur. I think the big seasonal factors, always keep in mind for Europe, obviously is Q3 where we have just the entire continent basically goes on vacation.

In fact, in our business, when you think about our consultants been on-site, we have circumstances even where clients they looking for shutting our facilities down for the next two or three weeks. And your consultants need to go home too. So that’s just a natural kind of constant in our business. So that’s the one that I would be most cognizant of.

Jeff Martin - Roth Capital Partners

Right. Okay. And then in terms of the client transition, you mentioned that the drag is behind you. Are you referring to full-year 2013 only or is that on a quarterly basis as well, the drag is behind you?

Claude Pumilia

Jeff, I would say that it’s both. The drag is behind us in both instances.

Dave Peterschmidt

Yeah, Jeff. This is Dave. The way I look at that scenario is that one is completely behind us now.

Jeff Martin - Roth Capital Partners

Great. That’s good news.

Dave Peterschmidt

Yeah. It is.

Jeff Martin - Roth Capital Partners

So with you transitioning to the next phase now, I think that’s something for people to get excited about. Wondering if you are going to get into the enhanced communications of providing bookings, backlog, bill rates, utilization that sort of thing. And ultimately, do you see yourself giving guidance anytime this year?

Dave Peterschmidt

So Jeff, I doubt it. I mean, until I see our International business with the same predictability and sustainable performance that I see in North America, I don’t think it’s appropriate for us to do that. So that’s, kind of, where we are. I would not anticipate in 2013. I was changing our policy on guidance.

If you and -- let me, kind of, help put a bigger picture over the top of this. We did a lot of heavy lifting in 2012. The management team did. If you can think about this, I mean we divested ourselves at two operating divisions, streamlined our operations, we renegotiated all of our credit facilities, we’ve lowered our SG&A cost. And quite frankly, I would tell you that 80% of management’s time was focused on internal problems and issues and only 20% on the external marketplace.

As we go into 2013, it’s actually reverse now. I can tell you that from my desk and most of the other executives, we’re 80% now in the marketplace, in the business development side of things and only 20%, if you will, on our internal issues. So as I look at 2013, I expect us to grow but I recognize that we’ve still got some operational stuff with our International team.

And as I said they are moving forward on that at a pretty good pace. So that’s the way I would -- if you will characterize the difference between 2012 and 2013.

Jeff Martin - Roth Capital Partners

Great. Appreciate your time.

Dave Peterschmidt

Thanks Jeff.

Operator

Your next question is a follow-up from the line of George Price with BB&T.

George Price - BB&T

Thanks guys for taking some follow-ups. Just to follow on to a question that was asked before about the International revenue. So a little bit of a seasonal stepdown in first quarter, I guess, better second, a little stepdown third, better fourth. It seems like the profile. What about North America, I guess, how do you see things entering 2013 for the first quarter? And then should we largely expect kind of a sequential progression through the third quarter and then the typical seasonality in the fourth quarter. Is that how to think about it?

Claude Pumilia

Yeah. Seasonality in North America, George, you’ve got it right. The dip in North America, that North America faces is a natural kind of component of the business is the Q4 and the holiday season. How it impacts the revenue numbers and flows down through the P&L. But I think you’ve got an appropriate view of the seasonal impacts in North America.

Dave Peterschmidt

Yeah. And George, let me tell you that North America, if you think about it and you look at those numbers, Q3 and Q4, it’s pretty stable. It didn’t have much of an uptick in Q4 with some of that seasonality. But my expectations around North America is it continues to grow now and show sequential growth. And so that’s the way I’m looking at it, as we move into 2013.

George Price - BB&T

Okay.

Dave Peterschmidt

So think if North America as -- it’s going to be a pretty stable operation. And it’s going to demonstrate growth that is equal to or greater than what the industry sector growth is going to be.

George Price - BB&T

Okay. Okay. And understand that on a cash flow basis, you don’t want to get too pinned down. But I guess maybe stepping back, kind of, higher level, maybe number one, when can you and would you consider some type of cash or capital deployment, even in the context of debt markets that are still pretty loose these days, be that capital deployment acquisitions, your share repurchases? I mean, when do you think you’d start to feel comfortable. Even thinking about something like that, how would you prioritize that at this point?

Claude Pumilia

George, let me, say, first off, the fact that we don’t have guidance obviously frames this entire discussion. And when you start talking about cash flow, there is timing and seasonality elements that differ from the net income affect back to Brian’s question that caused some of these discrepancies and you all as analyst know that well.

I think what -- when we get to the capital allocation question, we’d leave you with is the notion that we feel more confident about our cash generation capabilities. And we continue as we said in the past to be very conscious about shareholder value and only making capital allocation decisions that are beneficial to our shareholders and that will be the guiding principal going forward.

So I’d like to live it at that for now. And with that, we appreciate all the questions and I want to turn it back over to Dave to summarize the call.

Dave Peterschmidt

Yeah. Thanks, Claude and thanks everybody. Look, in closing, this was an important year for us. And it was a year that had a tremendous amount of change in it. And first I want to thank all of our colleagues here and acknowledge management team for their diligence in the planning and implementation of their strategy that I think has put CIBER on a clear growth path now.

In 2012 and especially in the first quarter -- fourth quarter, we saw tangible evidence that the plans we put in place are in fact helping us transform CIBER into a company that can deliver a balance between targeted topline growth and margin expansion. Our vision remains unchanged and our strategy is sound.

We’re delivering in North America and our International operations are obviously gaining traction. We have a strong team in place and our strategic partnerships are solid and they are yielding positive results. We achieved our goals of operational excellence in ‘12. And we are positioned in 2013 to leverage our business for both topline growth and margin expansion.

Thank you. And I appreciate your interest in CIBER. We look forward to talking to you after the next quarter. Thanks everybody.

Operator

Ladies and gentlemen that will conclude today’s conference. Thank you very much for joining us. You may now disconnect. Have a great day.

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