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Edgewater Technology, Inc. (EDGW)

Q1 2009 Earnings Call

May 6, 2009 10:00 am ET

Executives

Timothy Oakes – Investor Relations

Shirley Singleton – President & Chief Executive Officer

Kevin Rhodes – Chief Financial Officer

Analysts

Lee Jagoda – CJS Securities

Poole Bob – Bricoleur Capital Management LLC

Operator

Good morning, and welcome ladies and gentlemen to Edgewater Technology, Incorporated first quarter 2009 financial results conference call. (Operator Instructions) I will now turn the conference over to Mr. Timothy Oakes from Investor Relations for introductions.

Timothy Oakes

Thank you, (Heather). Good morning everyone. And welcome to Edgewater's first quarter 2009 earnings call. I'm here today with Shirley Singleton, Edgewater's Chairman, President and CEO; David Clancy, Edgewater's Executive Vice President and Chief Strategy and Technology Officer; Kevin Rhodes, Edgewater's Chief Financial Officer and David Gallo, Edgewater's Chief Operating Officer.

Before we begin, I would like to remind everyone that today's call may contain forward-looking statements as described under the Securities Acts. Investors are cautioned that such statements could involve risks and uncertainties that could cause actual results to differ from the current expectations with respect to such statements.

These types of statements and the underlying factors related to these statements are listed and are reported in filed information with the Securities and Exchange Commission as well as in the company's press release that was distributed earlier this morning. The statements made during today's call are made only as of the day of today's call and the company undertakes no obligation to update the forward-looking statements to reflect subsequent events or circumstances.

With that, I will now turn the call over to Shirley.

Shirley Singleton

Thanks, Tim. Good morning everybody and let’s talk about Q1. We generated a fair number of proposals during the first quarter and secured business from 13 new customers, while the number of proposals generated was a little bit lower than we normally experienced, what is changed is the number of wins versus the number of proposals pending. As we sit here today talking with you a larger number than normal proposals that remain open are waiting the clients decision reflecting what we think is an uncertainty in the current economic environment.

I will share with you some of the new wins that we did experience in Q1 and there are really solid name brand customers, PWC, LoJack, Hot Topic, ING Canada, Siemens Medical and the Home Shopping Network. While the number of new customers is slightly less, I will point out on a positive side that the average (Inaudible) deal size increased from the year ago period.

At the March earnings call, we did talk to you guys about two of our legacy accounts that ramped down and we estimated that approximately $9 million in new business would need to generated in 2009 to backfill the loss of revenue. The loss of those accounts in conjunction with the soft selling environment accounts for the year-over-year drop in revenue. This is also caused our top five customers to shift. Avon and Chevron are now in the top two spot. Also mentioned in the last earnings call, we stated that beginning of come back in Q1 is tough, as the EPM business tends to be soft in the first quarter. And selling and general no matter what service we have for sale at this point is tough in the current economic conditions.

We also mentioned in last call that we downsized our staff in response to the shifting conditions. We also discussed that we would continue to monitor our pipeline to our utilization and do what is necessary to navigate tough times. Subsequent to Q1, we have made another reduction in staff to continue our balancing of pipeline to utilization. These decisions are tough to make but necessary. These actions have allowed us to hold utilization steady at approximately 68% over the last two quarters.

Now let's have Kevin dive into the numbers.

Kevin Rhodes

Thank you, Shirley. Good morning everyone. First, I will provide some color on the revenue picture and provide some insight on the cost savings measures that we have recently implemented. And after that I will run through the financial results and key metrics and also cover the balance sheet. And then I will pass the call back to Shirley to discuss the outlook.

Total revenue for the quarter was $14.9 million, compared to $19.5 million in the year ago quarter. The $4.6 million reduction in revenue was primarily due to the pullback in legacy account spending that Shirley just mentioned. As you might recall, we discussed this issue in March and stated that we are expecting a revenue decline of around $9 million on a full year basis between 2008 and 2009. The actual decline accounted for about $2.5 million on a year-over-year basis.

In addition to that, we experienced a decline of approximately $1 million in revenue due to the natural completion of some large projects, while the projects were very successful. In general clients were taking some time before considering additional investments, especially in this difficult environment.

The selling environment continues to be challenging, while we are so generating leads, proposals and are securing new customers like the 13 that we secured during the first quarter, new projects starts to experience decision delays as many companies appeared to be, we call window shopping for firms in anticipation of the economy and its eventual turnaround. It’s a situation where customers agree that business process must change and must occur within their business, and that the visibility into their operations is a high priority, but capital freeze is in place, there is a limited ability to spend at this point.

So as a team, Edgewater is taking this opportunity to get (us) front of our potential customers and to explain our value proposition and we are actually making very good progress there. And we hope to be well positioned when the economy makes a recovery.

Looking at the concentration of our revenue, it’s pretty consistent on a year-over-year basis, despite the loss in revenue from the large customers that we talked about. The top 10 customers represented 38% of our revenue in 2009, while our top 10 customers represented 40% of our revenue in 2008. Our current service revenue mix was as follows. Enterprise Performance Management represents 62% of our quarterly service revenue; Technology Consulting represents 32% of our service revenue and management consulting is 6% of our service revenue.

Now let’s take a look at some of the cost saving measures that we put in place. I would like to foresee that we've taken a very careful review of our expense structure and have looked both brought in keep better organization. As an example, I would point out that our SG&A expense, as the decrease $1.5 million on a year-over-year basis. This reduction as a percentage of sales, as almost in locks that with our revenue decline on a year-over-year basis. We have reduced expenses related to travel, professional fees, training telecommunications and even some marketing programs, which traditionally required us to travel. And we’ve also reduced some bonus accruals across the board.

In terms of headcount reductions, which is the most meaningful savings we can get. On a year-over-year basis, our billable headcount is decreased on a net basis by 57. We also reduced 10 general administrative positions. This has generated meaningful savings for our company, I would like to highlight that subsequent to Q1 we made additional headcount reductions. The savings from all of the actions that we’ve made in 2009 will generate approximately $3.9 million annualized savings, and based on the timing of these actions approximately 1/5 of that amount or roughly $780,000 is expected to be realized in each of the third and fourth quarters.

Our billable headcount was 228 at the end of the first quarter and total headcount was 291. Based on the recent actions, our billable headcount is 205 and total headcount is 266 as of today. I would like to state emphatically that we value our employees very much. And so these are difficult decisions to make, but as a management team, we know that these decisions are the best for the long-term in the company, its shareholders and our employees. So by providing this detail, we hope that investors will takeaway that we have managed in tough times before and we will continue to be able to manage to these tough times as well.

Now I'll cover some of the operating metrics and results. Our gross profit margin on service revenue amounted to 33.4%, as compared to 40.7% in the year ago quarter. The decline in margin is due to lower revenue and utilization, experienced during the quarter. Utilization was below our traditional range and came in at 67.8%, which is comparable to the fourth quarter of 2008 at 68.3%.

In the year ago quarter, our utilization was 77.2%. We continue to work hard at balancing our utilization and billable resources with our sales pipeline opportunities. The issue is primarily how long it takes to close newer follow-on business, especially in this challenging economic environment.

SG&A amounted to $4.7 million in the first quarter, compared to $6.2 million in the year ago quarter. The reduction in SG&A was due to our broad looking expenses in our cost cutting initiatives, as I discussed a few moments ago.

Depreciation and amortization expense was down over the year ago quarter to $7,000 as compared to $1,045,000 and the reduction was primarily due to a lower amortization expense related to our intangible assets.

Our earnings were down on a year-over-year basis primarily due to the decrease in revenue and utilization I just discussed. Operating loss was $802,000 compared to operating income of $168,000 in the year ago quarter. Looking at our non-GAAP financials, adjusted EBITDA loss amounted to $94,000 or $0.01 per diluted share compared to adjusted EBITDA of $1.2 million or $0.09 per diluted share in the year ago quarter.

Stock-based compensation expense amounted to $345,000 in the first quarter of 2009, compared to $474,000 in the year ago quarter. Touching on cash flow, Edgewater generated an operating cash outflow during the first quarter as this customary in the first quarter due to the broad-based year end consultant bonus payouts that we make, as well as annual insurance renewals. The outflow was $2.4 million, compared to $3.7 million in the year ago quarter. We purchased 35,800 shares of our stock during the first quarter for $97,000. As of the end of the first quarter we hedge 4.2 million shares outstanding with $3.3 million remaining under our stock repurchase authorization.

Capital expenditures during the first quarter were negligible at $21,000. I would point out that our balance sheet remains very healthy, our working capital now at $29.4 million with our cash and marketable securities representing $22.1 million or a $0.81 per diluted share. Our receivables amounted to $11.9 million in the first quarter and our DSO metric improved by 10 days over the fourth quarter to 51 days.

Our receivables actually are quite healthy and are in better shape than they were in the year ago quarter.

With that, I will now pass the call back to Shirley for final comments.

Shirley Singleton

Thanks Kevin. Good job. We believe that the economic uncertainty is causing people to delay some new projects. And to be very clear, it’s not a question of need, but it’s rather a question of is now the right time given the economy. Sooner or later, IT systems are need to be tuned or maintained, new systems need to built in order to keep that market share or to gain market share.

We are starting to hear prospects; talk about is should I repair versus replace. So you are starting hear rumblings of that. Some of the newer customers that we just brought on board in Q1 are sighting they are doubling down and reinventing themselves now, while things are slow. You can see that in the commitment to larger first time projects about with the number of proposals outstanding, it’s not clear to us that most customers are willing to take the plunge just you had.

For those reasons, we are anticipating lower revenue for Q2, as compared to the first quarter. The customers that are buying now seem to be very happy with our services; we just went live with a really big enterprise data warehouse yesterday for a large healthcare chain in their astatic. And we also went live with Avon with the huge financial implementation overseas. So, customers are really happy and you can see that in the improved DSO metric, as they are willing to pay their bills.

Keep in mind that we have a strong balance sheet, and an incredible iron will this team has to do what's necessary to endure the tough times. With that (Heather), we'd like to take some questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Lee Jagoda. Please state your affiliation followed by your question.

Lee Jagoda – CJS Securities

Hi. This is Lee Jagoda from CJS securities. Good morning.

Shirley Singleton

Hi Lee. How are you doing?

Lee Jagoda – CJS Securities

Pretty good. So, we are all well aware, Shirley that this is a pretty challenging environment. Can you talk a little bit about what you're seeing on the sales side? What's working for you, and what's not?

Shirley Singleton

Okay. I think what's not working is any kind of approach to custom development as in terms of vis-à-vis a large project. What seems to be working is coming in with fresh ideas on how they might be able to cut costs, or increase revenues. So anything where you can manipulate IT to go towards those two goals. What we’ve done differently and it really was a project we started a year ago, but I would say is come to fruition at this point is revamp the way that we market the company. The first point that I would have you look at is edgewater.com it's a brand new website that went up about two weeks ago, and its got elements of web 2.0 technology, its got social networking, we’re branching into Facebook, Twitter, MySpace et cetera, as one cohesive hole face to the outside world if you will.

And the crux of the marketing is, we have some fresh ideas, we have some thoughts. So really trying to point out that we have management consulting experience. We have thought leadership, we have a vertical expertise, and these are some of the fundamental elements of driving our sales messages to much tighter and more niche point of view. Also what’s helping as, because we are bringing in some projects that took quite a while to build and they're going in successfully. Customers are happy, we're talking to customers about perhaps going on a webinar with us, and talking about their experiences, on the Ranzal side, webinars are off the hook in terms of attendance, there is a gentleman we have in the Ranzal Organization that's doing a brilliant job. And comments we're getting as it doesn't feel like a sales pitch, it feels like you guys really know what you're doing, come on in and let’s talk. Does that answer your question Lee?

Lee Jagoda – CJS Securities

Yeah. That was perfect. My next question sort of shifts for the cost side. Can you give us the breakdown of the $3.9 million in cost savings into components?

Kevin Rhodes

Sure. I mean the majority of it was in the cost of sales side is really what it comes down to, I say approximately 90% cost of sales, 10% SG&A.

Lee Jagoda – CJS Securities

Great. And then looking in the Q2, do you think utilization could be maintained at or near to 68% level. And do you think the costs are sufficiently adjusted that we could see some margin improvement in Q2 even on lower revenues.

Shirley Singleton

Well. We don’t give go forward guidance on utilization and our target of 78% to 82% as a whole that we want to get back to. So everything that we are doing Lee is attempting to get back to that spot since we did an action just last week in terms of headcount reduction, as Kevin mentioned earlier not going to see the effect of those savings in Q2. Therefore, your utilization wouldn’t have a big impact if you will. Q3 typically is a stronger quarter for Ranzal. They tend to have very strong summers and since they are more or like 61% did you say, Kevin, of our business at this point you can have more of an influence, what has been a slow summer for the Edgewater side, when we were larger. So that’s a long one to answer, I am not going to give a utilization go-forward, but we certainly are trying to get to our old metrics.

Lee Jagoda – CJS Securities

Got it. And then one last question, do you have the growth rate sequentially in year-over-year for both EPM and (Inaudible)?

Kevin Rhodes

Revenue mix is if you will between the two, but we really don’t look at it from a sequential growth, enterprise performance management was 62% this quarter, year ago it was 46% of our revenue. And then if you look at technology consulting that was 32% of revenue this quarter, it was 45% in the year ago quarter, and then management consulting was 6% versus 9%.

Lee Jagoda – CJS Securities

Got it. Thanks very much.

Shirley Singleton

You’re welcome.

Operator

(Operator Instructions) And your next question comes from the line of Bob Poole. Please state your affiliation followed by your question.

Poole Bob – Bricoleur Capital Management LLC

Hi. Yeah, Bob Poole from Bricoleur. How are you guys doing?

Shirley Singleton

Hi, Bob.

Poole Bob – Bricoleur Capital Management LLC

A couple of sort of philosophical questions about how you sort of manage the business through a business cycle and I understand from knowing guys over a number of years as people how difficult it is for you to, let people go, I know what how much you think of your people and how hard that is for you. But having said that, it seems like sort of philosophically you are now in a place where your objective here in this downturn and albeit, this is a relatively severe downturn. But the objective seems to be sort of cash flow or EBITDA sort of break-even during this (Inaudible). And I just I wanted to sort of hear your views on why, talking all of your stakeholders into consideration. Why that’s the sort of appropriate level to manage to in a downturn. When it seems like you could potentially, actually it’s very much in your control to run the business to produce cash flow even during a downturn. And it’s arguable that in a downturn, it’s okay to turn some people over, because in the upturn then you can bring in people with new, it’s a way to keep you so fresh on the technology side by having some turnover. So could you just talk philosophically about that a little bit?

Shirley Singleton

Sure. I think this is the first quarter, where operationally we've lost money far, I don’t know how long. So I want to start with that. The second point is, I don’t really philosophically look at it like how many hedge do I cut in order to make break-even that’s really not process that I'm using. Bob what I'm looking at is I need to have enough seed corn for when the economy comes back. So I'm looking at it in terms of multi-faceted skill sets. If someone as one skill set wonder, those folks are a little bit more difficult in a downturn to place in economy where you need to be multi-faceted, multi talented. So, the headcount reductions we’ve done are people that are more niche-oriented versus broad-based enable to do multitude of role.

So for example, a project manager for example could also do a business analysis role, and we have done swapping back and forth. We are starting to swap project managers on to the Ranzal accounts, (her) accounts are starting to get bigger and require project management. So we are seeing a lot of bleeding going back and forth, which is nice to see after all the integration work that we’ve attempted to do. So I wouldn’t say philosophically are managing to try to break-even and managing and what makes sense to have on board on the go forward.

The second point I want to make is, and you’ve been in on all the earnings calls, I’ve done quite an investment in training in 2008. And I have just trained these people. So it’s not a question of let them all go, and then we will hire others with the fresher skill set, others don’t have that skill set, I just did all that investment in the folks that I have. And then lastly what isn't in our comment is that we are looking at furlough programs where our people go out and with no pay will carry their benefits, but I am looking at ramping that up significantly, which is something that we just started to look at or actually institute in last 30 days.

Poole Bob – Bricoleur Capital Management LLC

I appreciate all the elements of that answer, Shirley. I guess all I would say in partial response is that you do seem to ramp up these actions when you do get down close to break-even. And so it seems like it appears to be outside world that does have some impact as a line in the sand for you?

Shirley Singleton

Well. My line in the sand quite frankly is I don’t want to lose any money. That we did in Q1, so appearance is a sight that’s really how I feel.

Poole Bob – Bricoleur Capital Management LLC

Yeah. Okay, great. And then what would you say today, I mean if 78% to 82% utilization is your sort of normal economy goal. And we've seen it go even higher in a great economy, but if that’s your normal economy goal. What kind of margin do you think goes with the 78% to 82% utilization range?

Shirley Singleton

Well, we have been looking at 42% to 44% and my saying is that right, Kevin.

[Multiple Speakers]

Kevin Rhodes

Yeah, that’s been historically what the range has been when we’ve achieved that level of utilization, right?

Shirley Singleton

Yeah.

Poole Bob – Bricoleur Capital Management LLC

And you would hope that would translate into an EBITDA margin what in the 12-ish range or, so is that right?

Kevin Rhodes

10 to 12%. Yeah.

Poole Bob – Bricoleur Capital Management LLC

Yeah. Okay. And then, yeah, okay that covers me thank you.

Shirley Singleton

You’re welcome.

Operator

(Operator Instructions). If there are no further questions I will now turn the conference call back Ms. Shirley Singleton for some closing comments.

Shirley Singleton

Thank you (Heather). I encourage everyone listening to check our edgewater.com and look at the blog, especially David Clancey’s blog (they’re) pretty funny. And our Annual Meeting will be held June 10, here at our headquarters in Wakefield, Mass. And our Q2 earnings call will be on August 5th, this summer. Thank you very much, (Heather). We are all set.

Operator

Ladies and gentlemen if you wish to access the replay for this call, you may do so by dialing 888-286-8010, access code 31191528. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may disconnect.

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Source: Edgewater Technology, Inc. Q1 2009 Earnings Call Transcript
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