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Ciber Inc. (NYSE:CBR)

Q4 2013 Earnings Call

February 11, 2014 8:30 am ET

Executives

David Peterschmidt – Chief Executive Officer

Christian Mezger – Chief Financial Officer

Mike Lehman – Chief Financial Officer (interim)

Heather Pollard – Director of Finance.

Analysts

Brian Kintslinger – Sidoti & Co.

Vincent Colicchio – Noble Finance

Operator

Good day ladies and gentlemen and welcome to the Ciber Inc. Quarter Four 2013 Earnings conference call. My name is Leanne and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of the conference. If at any time during the call you do require assistance, please key star, zero and an operator will be happy to assist you. As a reminder, this call is being recorded for replay purposes.

And now I’d like to turn the call over to Ms. Heather Pollard, Director of Finance. Please go ahead.

Heather Pollard

Thank you, Leanne. Good morning everyone. My name is Heather Pollard, Director of Finance at Ciber. Welcome to Ciber’s fourth quarter and full-year 2013 earnings conference call. With me today are Dave Peterschmidt, our Chief Executive Officer, Christian Mezger, who today assumes the role of CFO, and Mike Lehman, who has been working with us as our interim CFO. Our agenda for today is as follows: Dave will begin with an overview of our results, the current environment, as well as a high level view of how we are driving our strategy. Christian will discuss our financial performance in greater detail, and then Mike will offer a perspective on our forward-looking plan. Finally, Dave, Mike and Christian will be available to take your questions and then Dave will wrap up with some closing comments.

Before turning the call over to Dave, I will remind you that some of our prepared comments and responses to your questions will constitute forward-looking statements. These forward-looking statements are subject to risks 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 in the Investor Relations section of our website, ciber.com. In addition, please note that we have added an Investor Fact Sheet with additional disclosures. This information can be found in the Investor Relations section of our website, ciber.com. Today’s discussion will be on a continuing operations basis. Please refer to our SEC filings on Form 10-Q and 8-K for a recap of historical comparisons.

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

David Peterschmidt

Heather, thank you, and good morning everyone. Thank you for joining us. 2013 marked a year of important progress at Ciber, and based on our fourth quarter results, we see early indications our initiatives are beginning to pay off. Christian will provide the details in his comments, but here are a few highlights.

In the quarter, gross margins improved sequentially. Operating margins improved sequentially, and quite frankly our balance sheet is in terrific shape. We believe this is evidence of a business that is gradually getting stronger on all financial measures. At the same time, we see a clear path to revenue growth and further margin improvement as we continue to execute our strategy and implement our restructuring plans to improve overall profitability.

Specifically, our renewed focus on operating discipline is improving utilization and bid management, and better integrating our global delivery resources. We are deliberately and thoughtfully investing in key growth opportunities aligned with our strategy to drive a mix shift in our revenue to higher growth, higher value services. At the same time, we have been addressing the challenges in the business which have somewhat offset the benefit of the good progress underway.

While there is still work to be done, I am encouraged by the evidence in the fourth quarter that our initiatives are having a positive impact on both revenue and cost, and we ended the year with good momentum. Fourth quarter revenues increased year-over-year and sequentially as we saw growth internationally and continued to make progress in our move to managed services and ISV practices. We also experienced some relief from the pressures in our ADM business.

Operating margins advanced to levels well above where we started the year as we begin to realize operating leverage from our restructuring activities. Our solid balance sheet continues to provide financial flexibility. We ended the year with zero debt, a milestone in our recent history, a strong cash position and positive operating cash flow, permitting us to invest prudently and build our platform for growth. I am optimistic about the trends I’m seeing in the business.

The foundation is in place that should allow us to more consistently and steadily stabilize revenue and deliver the margin expansion that our business is capable of driving. We maintain the view that the total company’s longer term operating margin can reach 8%. That objective has not changed. We expect to make visible progress in 2014 towards the longer term P&L objective.

Our strategy hasn’t changed either. It is simple: one, to invest in and maintain our core ADM business; secondly, to expand our higher growth, higher value ISV practices; and third, to build on our momentum in the rapidly growing managed and cloud service markets.

Turning to our segments, in North America our strategic focus on ISVs and managed services, combined with restructuring initiatives, has driven operating margin improvement in the business. Revenue held flat sequentially in a quarter where we typically see sequential declines, and we continued to optimize our cost structure. We ended the year with operating margins at 8%, up 80 basis points from a year ago and over 100 basis points higher than in mid-2012, when we began restructuring.

Moreover, we are starting to see the tangible benefits of our strategy as the demand for managed services builds and we take advantage of the numerous opportunities to improve our overall business model. At the end of the fourth quarter, our ISV revenue in North America was approximately 35% of the total, and it grew by 7% sequentially, consistent with our expectations. The growth in our ISV practices is driving demand for managed services as well. Finally, we have room to grow and expand gross margins in our ISV and managed services offerings as we build scale and improve our processes. Our teams are squarely focused on this opportunity.

In the international segment, we are benefiting from solid trends in Germany, the U.K., and Norway, three of our largest markets. We posted steady progress in Norway and Germany and continued growth in the U.K., where strong demand for our managed services offering and cost initiatives are delivering improved gross margins. Our business in the Netherlands has stabilized sequentially and we remain diligent in our ongoing efforts to improve its contribution. We believe margin opportunities in our international markets will be driven by the benefits of the restructuring, subcontractor replacement, and our continued move to managed services.

I am also pleased with the momentum we are building in the markets. Clients clearly see Ciber as a leader in IT as we expand beyond ADM and build a strong presence and reputation with our ISV partners, and in the growing managed services and cloud segment. Our book-to-bill ratio continues to be over 1 and we generated bookings of about $20 million from new customers in the quarter. I’d like to share a few key deals with you.

Prentice, a German mail order company for office supplies selected Ciber to replace its legacy ERP system with an SAP solution for retailers as well as human capital management and customer relationship management applications. One of the largest non-profit, non-partisan associations in the United States selected Ciber to support and deliver their online web presence and implement best practices that can benefit association members. This is a continuation of and expansion to an existing relationship that includes distributed delivery from Ciber North America and Ciber India. Essent, the largest energy company in the Netherlands and a member of the RWE Group, one of Europe’s five largest gas and electric companies, extended its managed services contract for Ciber to oversee application infrastructure through 2015. And finally Tally Weijl, a leading international fashion label and retailer with more than 790 stores in 37 countries, chose Ciber managed services to oversee its SAP landscape and applications.

In summary, there is evidence that our initiatives are having visible impact on both revenues and cost. These initiatives provide validation of our strategy. We have built our 2014 plan based on this solid foundation and expect continued improvement in operating margins to our objective of 8% over time.

I am also very pleased to announce this morning that our own Christian Mezger will take over as CFO effective today. Watching Mike and Christian work side by side, it was clear that Christian was ready to assume the reins, and we’re pleased to hand them over to him with complete confidence in his ability to guide Ciber’s financial team and strategy. Most of you know Christian already and you can read more about his background in our news release from earlier today. Suffice it to say, Christian brings a strong global financial background both at Ciber and HP before that to this key role, and he has been instrumental in shaping our international finance strategy and guiding global initiatives.

Before I turn the call over to Christian, I’d like to personally thank Mike for overseeing our financial operations on an interim basis while we conducted a formal search for a permanent CFO. Not surprisingly, Mike jumped right in, bringing his more than 35 years of experience and perspective and knowledge of the sector to our organization. Thank you, Mike. Mike will be staying on with us as an advisor to me and Christian as Christian transitions into his CFO role.

With that, let me turn it over to our new CFO. Christian?

Christian Mezger

Thanks Dave and good morning everyone. As I look at our fourth quarter, there are a couple of items that strike me about the results that I think are worth highlighting until I get into the details of our quarter. Our financial strength and profitability have both improved. As Dave said in his remarks, our balance sheet strength is continuing to improve. Our restructuring initiatives are beginning to deliver the benefits we set out to achieve, and as a result our gross and operating margins improved sequentially.

You may also have noticed in our supplementary material that we added an investor fact sheet with additional disclosures. We will continue to reach out to the investment community to ensure that we provide the transparency and clarity that you need.

Ciber’s fourth quarter and full-year financial results reflected good progress in a number of areas in the business, a momentum we see opportunity to continue to leverage in 2014. In the fourth quarter, revenue of $222 million increased 1% year-over-year, flat in constant currency and up 3% from the third quarter or 2% in constant currency. Operating income or EBITDA grew to $6.1 million, excluding the remaining $2 million in restructuring charges taken in the quarter. Operating margins before restructuring were 2.8%, the highest level this year and solidly above year-ago margins of 2.2%.

Net income from continuing operations in the quarter grew to $3 million or $0.04 per share before restructuring charges, compared to $0.01 a year ago. Net cash at the end of the quarter was $44 million and we were in a net cash positive position for the fifth consecutive quarter. Operating cash flow from continuing operations totaled $30 million, consistent with normal seasonality and improved from third quarter cash flow of $13 million.

For the full year, revenue totaled $877 million, a 1% increase flat in constant currency. Operating income of $17.4 million before $16.9 million in restructuring charges represented an operating income margin of 2.0% before restructuring. Net income from continuing operations of $6.9 million before restructuring charges, or $0.09 per share compared to $0.04 a year ago, and operating cash flow from continuing operations reached $25 million.

Let me touch on restructuring. As we mentioned in last quarter’s call, we completed the charges associated with our 2012 restructuring, which totaled $11 million. In the fourth quarter, we booked $2 million in restructuring charges. We have essentially completed the approximately $13 million in charges related to our 2013 plan. We continue to expect run rate annual savings of approximately $12 million from the 2013 plan, most of which will be fully evident in the second half of this year.

Let me turn to the segment results now. In North America, we were able to hold revenues flat sequentially and maintain essentially flat operating margins. The rate of revenue decline in the ADM business has slowed in the fourth quarter and, as Dave mentioned earlier, was offset by growth in our ISVs. This being said, the ADM business will continue to be an important piece of our portfolio for the long term. We are investing in additional account managers to deepen our relationships and add more value for our clients. Gross margins came in at 26.5%, down from 27.6% in both the previous quarter and the year-ago quarter. The sequential reduction reflected normal seasonality and the year-over-year decline reflected pricing pressure in some of our ADM clients.

We captured the benefits of our cost discipline as SG&A decreased by nearly 6% sequentially. Year-over-year SG&A declined 12%, reflecting the benefits of restructuring contributing to a solid operating margin of 8% in the fourth quarter.

Let’s shift now to international. Revenues of $119 million were up 7% sequentially and increased 6% year-over-year, 4% and 3% increases respectively in constant currency. While sequential trends were helped in part by typical seasonality, results continued to be driven by the performance in our large markets, especially the U.K., Norway and Germany. Notably, these countries posted advances principally in managed services revenue as our strategic focus gained traction across Europe.

Gross margins expanded in the quarter to 25.4%, more than 100 basis point improvement from a year ago as we captured savings from our restructuring plans as well as reflecting the impact of normal seasonality when comparing sequentially.

Finally at the corporate level, we continue to improve our financial flexibility. We ended the quarter with zero debt, our lowest level since end of fiscal year 2000. Interest expense totaled $0.6 million in the quarter, reflecting lower average borrowings. Total interest expense was $2.5 million for the year, less than half of the year-ago levels as we reduced average borrowings by over $20 million in 2013. We expect interest expense to remain at this quarterly level for the next few quarters.

Income tax expense was $2.3 million in the quarter, bringing full-year income tax expense to $6.4 million compared to over $11 million in prior year. The year-over-year reduction in income tax expense reflects restructuring charges taken in 2013. We expect full-year taxes to be in the range of $10 million to $15 million in 2014. As it relates to stock compensation expense, we expect to remain close to the current quarterly level going forward.

Cash flow from continuing operations was $30 million in the quarter, benefiting from improved working capital. We expect cash flow to follow normal seasonal trends in the first quarter. DSOs of 59 days improved year-over-year and sequentially due to improved collections and seasonality, and was slightly better than our goal of 60 days.

Before we go to Q&A, let me hand it over to Mike for his perspective on the business today and the potential for improvement in the coming quarters. Mike?

Mike Lehman

Thank you Christian. I will now share some thoughts with you as to how we are thinking about 2014 and beyond. As Dave mentioned, I will stay with the company as an advisor to him and Christian and the overall executive team. My principal areas of focus will include ensuring that we are measuring and monitoring near-term progress towards our 2014 goals, as well as assisting with implementing strategies to ensure we achieve our longer term objectives.

Turning to 2014, we have our annual operating plan in place, have had a kickoff meeting with our top 75 or so worldwide leaders last month, and are well underway towards meeting our first quarter goals and objectives. I have observed a greater focus on the part of the broader leadership team as well as shared commitment to the steps necessary to achieve the plan.

The principal areas of emphasis for our operating plan include maintaining revenue stability, improving gross margins, and reducing overall SG&A as a percentage of revenues. We have detailed tactics in place for each of these higher level areas and have much improved line of sight into these on a week-to-week basis.

The solutions to the challenges in the international segment are a bit different from those in the North American segment. As an example, with regard to international gross margins, there are three principal areas of focus. Those include direct cost reduction, which practically means implementation of the previously announced restructuring; cost improvement, which largely consists of subcontractor conversion and utilization of global delivery resources; and change in the business mix over time, winning an increased proportion of managed services engagements. The cost reduction initiatives should impact reported gross margins within the next couple of quarters. The cost improvement work is more likely to improve gross margin in the medium term – say, three to six quarters, while the business mix shift is likely to take six to 10 quarters to be more fully achieved.

In North America, the principal areas for gross margin improvement include better use of our global delivery resources and longer term change in our business mix. We are actively managing the first item in the near term, including driving better processes for building such resources into bids. The second item includes both an increased level of managed services engagements – that is, a higher percentage over time – and getting a bit more scale in some of our key ISV practices. As mentioned in the prior quarter’s conference call, our project gross margins in the key ISV practices are well above the overall corporate rate, but we have had to build and maintain a bench of available consultants in order to compete for such work. As we gain more experience throughout 2014, we can more effectively lower this bench and increase utilization.

Finally on the SG&A front, we are focused on two areas. First, while we are making some modest investments in key sales areas, such as more client-facing people in our ADM practice and some in our key ISV practices, we are focused on improving yields as the sales teams ramp to full productivity during the year. In the G&A area, we are continuing our implementation of shared services in finance, legal, HR and IT. Such shared services will allow us to scale the organization with minimal incremental cost. By the end of 2014, we expect a modest reduction in overall SG&A, but expect to be set up to gain much improved operating leverage in the following year.

I have gone into this level of detail to give you a sense of two things: first, to illustrate that we have detailed plans in place for each of these key areas and will be measuring and monitoring progress weekly; and second, to illustrate that there will not necessarily be immediate or step function improvements in our performance. Certain of these take more time, but we expect visible progress this year.

In summary, in 2014 we expect to achieve significant improvement in year-over-year- operating leverage, much of which will be evident in the second half of the calendar year. In the near term, we expect to see improved revenue stability on a year-over-year basis in both segments. We have delivered one solid quarter – Q4 of 2013. While one quarter does not make a trend, it is encouraging.

With that, we would like to open it up for Q&A. Operator, please give the instructions.

Question and Answer Session

Operator

Thank you. [Operator instructions]

Your first question is from Brian Kintslinger from Sidoti & Company. Please go ahead.

Brian Kintslinger – Sidoti & Co.

Hi, great. Good morning guys. The first question I had, you mentioned you’re on your way to hitting goals in the first quarter. Can you just share what those goals—I think you shared the timeline of others, of the changes you’re making. Where are those goals in the first quarter that you’re on track to meeting?

Mike Lehman

Brian, it’s Mike Lehman. At the highest level, I alluded to it. What we’re looking for in the near term is revenue stability, both on a—principally on a sequential basis and on a year-over-year basis, so we’re looking for—as Christian talked about, there’s a little bit less pressure in our ADM business. We’re looking at some stability across the key four markets and Europe, so we’re looking at revenue stability principally and the leading indicator of that is, as Dave mentioned, the positive book-to-bill that we had in Q4, and frankly we’re seeing very good linear bookings in the first quarter. So in terms of that, that helps us in the second quarter, but we’re off to a good linear start, and frankly better than expected in first quarter bookings.

So it’s those types of things that we’re seeing that give us a sense we’re off to a good start, but the near term measures are principally revenue stability.

Brian Kintslinger – Sidoti & Co.

Now, the fourth quarter operating margin was the highest, as was the European margin, since the first quarter of ’12. As you talked about, some of the restructuring that you’re doing isn’t going to be fully seen until the second half of the year, but I guess what I’m wondering is when we look from the fourth quarter, is that the new baseline that you should see stability there as well, if not modest improvements in the first half of the year, albeit small maybe given, for example, the subcontracting changes? Give us a sense if there’s a step back or not before we see that improvement.

Christian Mezger

This is Christian, Brian. I think as you look at fourth quarter, there is maybe two in fact: the very early stages impact of the restructuring – and I say early stages – and then secondly seasonality, right? And as you know our business well, I think it builds from here but, you know, I think you have a good starting point here. Initiatives like restructuring, the conversion of subcos will add to the margin profile over time.

Brian Kintslinger – Sidoti & Co.

Okay. And then can you tell us as a percentage of your European delivery what percentage was from subs, maybe how that compares to last year or the third quarter as well, and maybe where you want to get that to. You mentioned the second half of the year is probably when we’ll see that, but where is the target?

Mike Lehman

Yeah, so Brian, it’s Mike Lehman again. If you’ll notice, we did add some supplemental information—

Brian Kintslinger – Sidoti & Co.

Yeah, I didn’t see it. Sorry, I can’t find it.

Mike Lehman

Yeah, it’s giving you some information about the number of subcontractors in the company, the number of employees in the company, the number of billable people in the company, so what you’re seeing there is a trend that’s showing a decline in subcontractors over time. We expect that trend to continue, and we’ve talked about that for the last few months, but that’s a longer term process. We have to hire people, we have to convert some of those resources to ones from our global delivery center, so we expect a continued trend of reduction of that, and we’re going to consider whether or not we can break this down further by segment. But at this point, we’ve at least given you the highest level, here’s the number of subcontractors by quarter for the last X-quarters.

Brian Kintslinger – Sidoti & Co.

So what’s the target ratio? Sorry.

David Peterschmidt

Brian, this is Dave. Just for your benefit, we have a very discrete set of metrics to measure the subcontractor reduction and the replacement with our own people, and I will tell you that they are ahead of plan on the subcontractor reductions, so we’re progressing the way we want to.

Mike Lehman

And Brian, it’s Mike. The reason I can’t give you a number target is that, frankly, it varies by country and we’re reducing them more dramatically in the Netherlands and Germany than some other places. In fact, in some cases thought when we get a new engagement, we may in fact hire subcontractors because we see the length of that engagement to be relatively short. So there isn’t an overall number that we want to say, this is the number. It’s significantly down from the number that we have today and we’ll get there throughout the year, but subcontractors will always be a part of our mix. Again, I would just say look at the slope of the line, and we’re continuing to move down that line and we will continue that throughout this calendar year.

Brian Kintslinger – Sidoti & Co.

And maybe talk about—I don’t have that metric sheet. I’ll look at it, I guess, so I don’t ask exact numbers, but if we think about utilization over the course of time, what is your target? I mean, I take a look at some of the companies that have mid-80%, some of the (indiscernible) have 90% given you don’t grow a ton in the U.S. Where do you think that can settle, and what’s the benefit just from that alone to your operating margin?

Christian Mezger

Brian, this is Christian. I think utilization in the mid-80s is a good number to start with. I think this is probably where our business model should be.

Brian Kintslinger – Sidoti & Co.

Okay, I have a few more, but I’m going to ask one last question and then get back in the queue. You’ve got an improved balance sheet with no debt now. You’re generating cash. I think in the past you’ve talked about buying back stock, potentially thinking about it in the summer, maybe even a little later. But with all the confidence you seem to have about the business improving, it seems the stock might go up as well by that time if you’re showing more and more evidence. Are you thinking about accelerating that plan in terms of time?

Mike Lehman

It’s Mike Lehman, and I guess I would look at it a little bit differently. Now that we’re seeing stability in our operations and we’re going to not let up on that, we’re beginning to look at other opportunities for utilization of the cash and some of those external opportunities might increase our growth and profitability. We’re not ready to go make any decisions. What we also need to do, though, is take a look at our debt capacity and our covenants and our current arrangements and potentially expand those, so we’re looking really, I’d say, at a different process of capital allocation. Stock buyback is not on top of that list right now. Right now, we’ve got to take a few months and make sure we’re comfortable with that. As you know, we do have some seasonality in our cash flows. We typically are paying annual bonuses in Q1 so we would draw down on the debt a little bit in Q1, so we’re not ready to go out and do a stock buyback or anything like that. We’re going to be evaluating our opportunities, including external growth opportunities and making sure that we’ve got the right debt structure in place as we go forward. So nothing near term; just stay tuned throughout this year.

Brian Kintslinger – Sidoti & Co.

Thanks. I’ll get back in the queue.

Operator

Thank you, and just a reminder for everybody on the phone, if you do wish to ask a question, it is star then one. Your next question comes from Vincent Colicchio from Noble Finance. Please go ahead.

Vincent Colicchio – Noble Finance

Good morning. Nice quarter, guys. I guess it’s Dave or Christian on this one. ISV was very strong in the quarter – I guess you said 7% sequential growth. Could you give us more detail on what partnerships or areas were the strongest drivers?

David Peterschmidt

Yeah, Vince. The three principal ISVs for us are Oracle, SAP and Infor. Oracle, we’re seeing significant impact and uptake in that Oracle business, and we’re pretty verticalized in Oracle. That’s primarily in higher education and also in healthcare. Infor, we’re also seeing strong demand for our offerings, and again that’s been a very strong ISV relationship – in fact, I think Infor would tell you we’re probably their largest system integrator in the United States, so we’re seeing good things there.

SAP to me is the opportunity for us. We’ve still got some work to do to get our SAP business really going, but we’re working pretty close with SAP now to understand how to rev that practice up. But Oracle and Infor are clearly very strong players for us.

Vincent Colicchio – Noble Finance

Thanks for that color. In the quarter, were there any particularly large deals that benefited you versus the prior quarter, or was it fairly broad-based demand that helped you deliver the results?

Christian Mezger

Yeah Vince, this is Christian. I think it’s a broad base of successes across the portfolio. As you see in the highlights that we pointed out, there’s a couple of nice wins in the managed service space, obviously something that follows right in our strategic intent.

Vincent Colicchio – Noble Finance

In Europe, how are you feeling about consolidation? Is that something we should still keep on our radar as an area of concern?

David Peterschmidt

Explain to me, just a second Vince, what you mean by consolidation.

Vincent Colicchio – Noble Finance

Consolidation – client consolidation.

David Peterschmidt

Oh, oh – okay. No, I don’t see a lot of that happening right now, to be honest with you. We’re seeing all of the segments in Europe, the major markets for us – the U.K., Germany, Norway and even the Netherlands – we’re seeing pretty good pickup in demand across a broad spectrum, so I don’t see that as a factor for us.

Vincent Colicchio – Noble Finance

And as far as your strong balance sheet, you haven’t talked a lot about it but are you—would you do more acquisition in the near future? What are your thoughts on that, and what would you be targeting, if so?

Mike Lehman

Vince, it’s Mike Lehman. That’s a little bit what I was alluding to when I said we’re certainly going to look at external opportunities that might allow us to jumpstart and amplify some of our practice areas. As an example – and again, this is not a prediction – if we saw a small successful practice that would amplify our SAP opportunity, we might look at that; but again, we’re not ready. So we will look externally. We’ll look at some of those things. Again, because we now have a little bit more flexibility, we’ve had our heads down working on operations, we’re going to continue to do that, but now we’re at the point where we can begin to look up and look around, and that’s what we’ll be evaluating over the next six months.

David Peterschmidt

And Vince, let me elaborate on that behind Mike for a second. There has been some concern on the part of our investors that said, you know, you’re doing the restructuring, we can see how you’ll get the margin expansion. Obviously that is starting. We’re seeing improved cash flow, improved balance sheet, and so the concern has been if you start, quote, doing a lot of investing, does that mean you’re not going to let the margin expansion occur? And the answer to that is, no. We’re going to let the margin expansion occur, but if we’re in a position to do an acquisition that would allow us to have instant margins against the ISV practices without us having to do what Mike alluded to, which is build bench in front of revenue, which obviously puts pressure on margins, we’ll entertain looking at some of that.

We think there are some areas that are down the middle of our strategic roadmap that may be of interest, but we’ll do that in a very cautious fashion. And I think we still have a good three to six months before we would start executing on any plan like that.

Vincent Colicchio – Noble Finance

Okay, thanks for the color, guys.

Operator

Thank you. Your next question is from Brian Kintslinger with Sidoti & Company. Please go ahead.

Brian Kintslinger – Sidoti & Co.

Great, thanks again. Dave, maybe you can talk about the leadership changes you’ve made in Europe, and do you think you’ve got the right team in place or are more changes on the horizon? Maybe some of the background of new guys you’ve added to lead those countries.

David Peterschmidt

Well I think that, Brian, we’ll continue to build senior level management throughout Europe. I mean, we’ve got a great new CFO that’s come in to run all of Europe from a financial perspective. He’s a very experienced enterprise guy that had actually worked for Mike at Sun. The first of March, we’ve got a new country manager joining us in the Netherlands. He has deep experience from both Atos and from Hewlett Packard, so the areas where we need to build, we’re building.

But I think what’s important is that we’re expanding senior leadership to give us more breadth for the growth that we anticipate coming down the road for us, so it’s not that we’re doing any retrenching, it’s really that we’re hiring and blending the mix of capabilities to support our growth.

Brian Kintslinger – Sidoti & Co.

Okay. And in North America, the revenue trends, with the relief of the ADM you talked about, I guess I’m curious what’s holding back growth in that business. IT budgets are starting to inch up for the first time in several years, and in fact are forecasted by many to be up in 2014. So can you share your goals for that business in ’14 in terms of revenue trends?

David Peterschmidt

Yeah, I’d like to be—I’ll be more specific with that, Brian, as we get down the road more in 2014. One of the things that we’ve done is that we have realigned the go-to-market sales resources that we’ve had. We felt that we didn’t have enough dedicated sales resource, both in acquiring new business as well as account management. We’ve corrected that now, and those resources are on board, but it’s going to take a little bit of time. But we believe we can turn that business back into a growth business.

Brian Kintslinger – Sidoti & Co.

Can you explain what you mean by that? Are you talking about having what some people call hunters and farmers, and some people are hunting for new customers and then there are others now that are going to be focused on expanding those customers? Is that what you’re talking about?

David Peterschmidt

Yeah, exactly. So there will be account managers that are resident in the large accounts and will stay there full-time, and their job will be to expand our footprint in those accounts; and then there will be other salespeople who their job is to get new design wins for us. When we get more time and when we come out on the road, we can explain that in more detail. We’ve got a very well thought out strategy for the offerings in our ADM business, as well as our go-to-market strategy, and that’s why we believe we can turn that into a growth business again.

Brian Kintslinger – Sidoti & Co.

And then maybe just touch on how they’re incentivized. Is it gross margin percentage? Is it gross margin dollars? Just give us a little bit of a sense. I know there were some changes a few years back, but give us a sense of where we are today.

David Peterschmidt

I don’t want to go into too much detail, but suffice it to say they are motivated for revenue growth as well as profitability, so the way our compensation programs are set up, they have our salespeople focused on both of those line items.

Brian Kintslinger – Sidoti & Co.

Okay. Last question in terms of cash flow, do you expect that you’ll again generate similar cash flow or better, given it sounds like you’ll be more profitable this year? Is that a reasonable assumption, or will you have to give some of that working capital back throughout the year, do you think?

Christian Mezger

Brian, I think on an annual basis you’re at the right house number. I think the only thing I would warn you with Q1 is, as Mike pointed out, we have bonus payments coming up on an annual bonus plan, so Q1 you will see normal seasonality.

Brian Kintslinger – Sidoti & Co.

Great. And last question – as you become more profitable, how can we picture taxes coming down to a more normalized level? Is it you have to become more profitable in Europe to bring them down? Do you have to become more profitable in both? I mean, when we will get to that normalized, high 30’s, maybe 40% kind of sustainable basis?

Christian Mezger

Brian, I like those questions because I think there are certainly—we all can look at this in a normalized fashion. The fact of the matter is that in North America, we have that amortization of the deferred tax asset, right, that will stay around for a couple more years. Once you exclude that from that calculation, you actually should see normalized tax in international in 2014.

Brian Kintslinger – Sidoti & Co.

But sorry – the taxes we see on in the income statement, that’s not all cash taxes? Is that right, because the U.S. taxes, are you saying is non-cash taxes?

Christian Mezger

That’s correct.

Brian Kintslinger – Sidoti & Co.

And you expect to be a taxpayer in the U.S. maybe in two or three years? Is that what you’re trying to communicate?

Christian Mezger

So that’s too early to call. I think from a deferred tax asset that will roll off over—you know, I think it’s 2017 or so. Don’t nail me exact on the year. I think then you have NOLs and the other piece is that in order to reverse that deferred tax asset, you would need to be about two to three years profitable.

Brian Kintslinger – Sidoti & Co.

Great. Congratulations, Christian. Thanks guys.

Christian Mezger

Thanks Brian. All right, Operator, are there any more questions?

Operator

There are no more questions at this time, but again ladies and gentlemen, if you wish to ask a question, please key star, one.

David Peterschmidt

Operator, we’ll go ahead and close the call.

Operator

Okay. I’d like to turn the call over to Dave Peterschmidt for closing remarks.

David Peterschmidt

In closing, obviously we are encouraged by the evidence that our initiatives are having an impact on revenue and costs, providing the opportunity to drive sustainable and profitable growth here at Ciber. We’re mindful of investing to offer clients capabilities and services that will help them get the most out of their technology investment, and our efforts are obviously paying off as clients are increasingly partnering with Ciber and a significant portion of our revenue is now coming from these high growth, high value practices. At the same time, we remain focused on solidifying operating disciplines and streamlining our costs, and as a result we are demonstrating improvement in our profitability, our balance sheet and our cash flow.

We feel comfortable with our path to the longer term 8% operating margin goal, driven by performance improvement in our operating segments, specifically through implementation of our strategy to shift the mix of our business to higher growth practices, which includes margin expansion. In short, our goal is to deliver very tangible business value with a very personal experience to our clients and to drive sustainable and profitable growth and value for the shareholders.

Thank you for your interest in Ciber, and we look forward to talking to you on the next earnings call.

Operator

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and have a great day.

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