Peter Cheesbrough - Interim President & CEO, EVP & CFO
Terje Laugerud - EVP & CEO, CIBER International
Tony Hadzi - EVP & President, Custom Solutions Division
Jeff Martin - Roth Capital Partners
Reik Read - Baird
George Price - Stifel Nicolaus
Karl Keirstead - Kaufman Brothers
CIBER, Inc. (CBR) Q1 2010 Earnings Call May 5, 2010 11:00 AM ET
Ladies and gentlemen, thank you for standing by. Welcome to the CIBER first quarter 2010 earnings conference call on the 5th of May, 2010. (Operator Instructions).
I would now like to turn the conference over to Peter Cheesbrough. Please go ahead, sir.
Thank you, Holly , and thanks, everyone, for joining us today for CIBER’s first quarter 2010 earnings announcement. I’m Peter Cheesbrough, Interim President and CEO and permanent CFO. With me this morning are Terje Laugerud, CEO of our International division; and Tony Hadzi, President of our Custom Solution division in the United States.
We issued our first quarter news release earlier this morning and hope you had an opportunity to review it. We also filed our 10 Q and in fact, it’s being filed this instant for the first quarter this morning, which should be available on CIBER’s Investor Relations webpage, as well as on the SEC’s website. On today’s call, I will provide an overview of our first quarter results and then take you through the financial details.
I will then ask Terje and Tony to provide some insights on their respective divisions, what they are seeing in their markets and how we are positioning our business for the expected upturn and future growth. Following their presentations, I will provide our outlook for the second quarter and the full fiscal year. We will then ask the operator to open up the call to take your questions.
As a reminder, some of the matters we’ll discuss on today’s call are forward looking. You should keep in mind, these forward looking statements are subject to known and unknown 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, general economics conditions and those factors set out in today’s news release and discussed under the Risks Factors section in our annual report on Form 10 K and other SEC filings.
During the call, we will reference certain non GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of those measures to GAAP in our news release or on the Investor Relations section of our website at www.ciber.com. Also, CIBER assumes no obligation to update the information presented on this conference call.
And now I’d like to discuss some of the highlights for the quarter. The results for the quarter are in line with expectations, with revenues slightly above our guidance. Many of our customers are still focusing on initiatives that reduce costs and improve efficiency. However, we are seeing encouraging signs that many are starting to invest more.
We are focused on executing on our business model and improving our margins. We believe there are opportunities for improving efficiencies by increasing our collaboration across the company and leveraging and enhancing our global delivery capabilities. Which provide us increased flexibility and scope to deliver value to our customers. We believe that we are well positioned to benefit as customers begin to increase their spending on information technology.
One of our priorities over the past few years has been on reducing our debt. And during the first quarter, we are pleased to report that we have made further progress in that regard. In fact, over the past year, we have reduced our debt by 31%.
Now let me you walk through CIBER’s first quarter 2010 financial results. The revenue for the quarter was $262.7 million. Compared to the first quarter of 2009, revenue increased by $4 million or 2%. The key drivers of this were strong growth in our US ERP segment with 24% year over year growth, driven by solid performances in Oracle Commercial and Public sector, as well as in the SAP Commercial sector.
We also saw an increase in Hardware sales, as customer confidence began to return. And we saw many customers execute on previously postponed decisions. Our International division posted a 12% increase this quarter over the prior year’s quarter as result of growth in demand from our key markets in Central Europe.
In addition, our Federal division grew 4% as a result of the work we have begun on a contract that we won in the quarter. This gain was somewhat offset by a 12% reduction in our Custom Solutions division. However, I am pleased to report that after a few quarters of declines stemming from customers cutting back on IT spending, this division is now starting to see growth again. And on a sequential basis, revenue increased by 3% compared to the fourth quarter of 2009.
While organic revenues from our International division grew 3% on constant currency basis, overall organic revenue growth was a negative 1%, largely due to our Custom Solutions division.
Now let me review the sequential revenue change. For the quarter, revenue was $262.7 million, a 20 basis point increase sequentially in US dollars compared to the fourth quarter of 2009. This is reflective of the strength of the US dollar this quarter. On a constant currency basis, revenue grew 2%, with 4 out of our 5 base business segments growing.
The major items impacting this sequential revenue growth were $4 million or 14% growth in US ERP, resulting in improvements in the Retail, Apparel and Footwear verticals. 3% growth in our Custom Solutions group, largely driven by increased demand from our customers in the Healthcare segment. Slightly less than 1% growth in International division in constant currency terms but because of the stronger dollar in the first quarter, when translating those results to US dollars, the business experienced negative growth of 5%.
A reduction in revenue from IT Outsourcing of 10%, in large part because of the completion of several projects, including the implementation of a contract management solution for a customer. And also certain discovery projects that we anticipate will result in additional future revenue streams for CIBER once the customers have assessed how they wish to move forward.
Gross margins for the first quarter of 2010 were $65.5 million or 24.9% of revenue, compared to the 25.1% for the same period in 2009. Our US ERP division had significant margin improvement over the first quarter of last year, when its results were negatively affected by completing a low margin, fixed price contract. This was more than offset by margin decreases in our Federal and International divisions relating to costs incurred to create future value and opportunities in these divisions. Customer pricing pressure in 2009 also contributed to the gross margin decline.
SG&A costs for the quarter were $57.1 million, which represented 21.7% of revenue. This was a $700,000 increase over the first quarter of 2009, largely resulting from an increase of $600,000 in bad debt charges that we took this quarter. However, as a percent of revenue, SG&A expenses showed a small decrease of 10 basis points compared to last year’s first quarter.
Operating income for the quarter was $7.2 million, a $200,000 increase over the first quarter last year. And as a percent of revenue was 2.7%, the same as last year’s first quarter. Operating income at our International division declined by 30 basis points as compared to the first quarter of 2009. Largely as a result of the investment being made in a new business opportunity, which is expected to grow revenues in the future.
Custom Solutions operating income remained consistent with the first quarter of 2009 as a percent of revenue. SG&A costs were lowered to reflect the reductions in revenue and gross margin that occurred through 2009. US ERP increased margins significantly and improved operating income by $2.7 million or 700 basis points. This was gratifying after the challenging year that our SAP practice had in 2008 and in the first quarter of 2009.
Operating income in our Federal division declined by 250 basis points over the first quarter of 2009 as a result of investing in internal infrastructure and also more complex and larger proposals. We expect to benefit from these in future periods.
The IT Outsourcing divisions’ operating income also declined about 250 basis points compared to the first quarter of 2009. In part due to investing in global delivery capabilities, as well as incurring increase in bad debt expense.
Corporate expenses increased largely as a result of the increase in costs of resolving an old dispute, as well as higher costs within employee benefit programs.
Other expenses net were $1.9 million for the quarter compared to $300,000 in last year’s first quarter. This increase is largely due to a significantly smaller gain on foreign exchange transactions, and also higher interest spreads on our credit facility that was put in place in mid 2009.
Interest expense for the quarter also reflected a $400,000 write off of deferred costs on our credit facility from the agreement to reduce the size of out facility, as we have previously announced, in February.
The effective tax rate for the quarter was 38%, reflecting a delay by Congress in the expected extension of the Research and Experimentation credit. This compares to 36% in the first quarter a year ago, and 41% in the fourth quarter, when we incurred additional tax costs from repatriating $22 million from Europe for the purpose of paying down debt.
For the quarter, net income was $3.5 million or $0.05 per share on 69.6 million fully diluted shares outstanding. This compares to $4.3 million or $0.07 per share on 63.2 million shares in Q1 2009.
Moving on to cash flow, net cash provided by operating activities for the quarter was a negative $4.8 million. This was the result of changes in working capital item, which required about $60 million of cash. We pushed the organization fairly hard through 2009, including the fourth quarter, to squeeze cash out of working capital, and we did so quite successfully. However, it’s difficult to keep this up every quarter, and this quarter we gave a little back.
Last year’s first quarter also showed an increase in the cash required for working capital item of about $4 million. Our CapEx for the quarter was $3 million, essentially flat with the $3.2 million a year ago. As a result, our free cash flow calculated as net cash provided by operating activities, less CapEx, was a negative $7.8 million for the quarter compared to a positive $2.5 million in last year’s first quarter. The point being that the first quarter in each year is typically our weakest quarter for cash flow generation.
For those who prefer to calculate cash flow more along the lines of EBITDA, please see the press release for some of these components. During the quarter, we also purchased 578,000 shares of CIBER for $2.1 million.
Now let’s turn to the balance sheet. We’ve been working hard over the last few years to reduce CIBER’s leverage, and we are able to further reduce our debt this quarter. At the end of the quarter total debt was $94.1 million, a decline of 31% from the end of the first quarter of 2009. Our total cash position at the end of the quarter was $51 million, a reduction of $16 million since year end.
DOSs for services were 63 days, a two day increase over year end, but a seven day improvement over a year ago. Total DSOs were 69 days, a one day increase over year end and a 7 day improvement over a year ago. At quarter end, our ratio of total debt to total capital was 16%. And net of cash, this ratio was just 9%.
Now, a couple of operational comments. Internationally, we’re starting to see customers investing more in upgrading their SAP systems, as well as rolling out new modules. Although it’s too early to see any particular trend, we are starting to see indications of increased investment by customers in their ERP systems. We are seeing increased interest from both Retail and Manufacturing sectors.
Custom Solutions. We’re seeing increased demand for our global delivery based solutions. And we are seeing more opportunities in Healthcare and related service areas, as well as in the Pharmaceutical and Retail verticals.
In the US ERP, our Oracle practice continues to see good opportunities in the public sector, including both state as well as local government. This is despite the current challenging economic environment for governmental entities.
Demand from Higher Education entities is slow at present. But there is a growing pipeline of projects that are expected to benefit the latter part of 2010 and into 2011. Our SAP practice is seeing good opportunities for SAP in both, Retail as well as Apparel and Footwear segment.
And in the Federal division, although the division has had a substantial number in value of proposals that have been submitted to the federal government, which are awaiting award decisions, we continue to see delays in those awards. However, the pipeline continues to grow with good opportunities and increase in both number and size of projects.
In the IT Outsourcing division, this division is continuing to expand its global delivery capabilities in India, and is currently assessing adding capabilities in Eastern Europe to assess the growing demand for outsourced services and customer interests and innovative solutions to optimize costs and create business value. There is broad demand for IT services in the general IT outsourcing and managed application services market.
And now I’m going to turn the call over to Terje and Tony, who will discuss current market conditions in our International and Custom Solutions divisions. First of all, Terje.
Okay. Good morning. I am Terje Laugerud, Executive Vice President and Chief Executive Officer of our International Division. I would like to start by briefly updating you on CIBER International’s activities and its positioning in its chosen markets. We currently operate from 28 offices in 14 countries throughout Europe and Asia Pacific, although our reach and services continue to expand. 70% of revenue comes from Package Solutions. And although we have a solid presence in the public sector, the Commercial market represents around 87% of the total business.
We support the full solution lifecycle to our customers, ranging from this final analysis through application development, systems implementation and integration, ongoing support, application management. And last but not the least, in our fully integrated corporation with CIBER’s Global ITO division. We provide hosting and IT operation services. The core of our International business is the consistency of services and solution offerings we provide across all of our geographies.
This is for us a strong competitive edge, enabling us to win rollout and systems integration projects. And finally, support our customers both locally; and importantly across different territories by the sharing of resources. SAP is the dominant platform under which we provide services, with Q1 2010 SAP based revenues representing 65% of our total sales, which is consistent with previous quarters over the last year.
Now that you are familiar with our business model, let me make some specific remarks regarding the performance of the International division in the first quarter of this year. We delivered 50 basis points, sequentially underlying organic top line growth, if I just put the impact of FX rates, over the Q4 last year. This compares very favorably against the same sequential period last year, which experienced a 10% reduction in revenues. Given that historically Q4 had been our strongest quarter, this is a good indication that business is picking up.
Furthermore, when compared to the first quarter of 2009, our organic growth in local currencies, FX adjusted at 3%, came from higher utilization and an increased head count, stemming from higher demand in multiple vertical markets.
Highlighting the Retail sector for a second, we have kicked off significant projects this quarter. And we see a general revival of business in this vertical across all our territories.
In Manufacturing, which is our biggest vertical, the last quarter has provided major wins and extension on contracts in such sub sectors as Chemical and Pharmaceutical, Sophisticated Engineering and Consumer Electronics. Where we are providing a service offering to one client across the continent.
In addition, this quarter we have signed major contracts within the Utility and Healthcare verticals. As a consequence, we exited the first quarter this year with an improved backlog and pipeline, which I believe will help us to see continued top line growth and improved margins.
As I mentioned earlier, generally Q4 in any year has provided our strongest performance, and Q1 has historically been our weakest. And this not only impacts revenue, but also gross margins and business until usage and income.
Q1 2010 provides no exception with gross margin, and income sequentially reduced by 110 and 180 basis points respectively. However, most importantly in both cases, this margin dilution was almost entirely caused by the planned investment we have made in our new SAP managed service offering based in Germany. And the recruitment of some 75 additional consultants, and set up our new office of CIBER, also in Germany, all of which took place in Q1.
Furthermore, when comparing Q1 2010 with Q1 in 2009, this investment is responsible for the 30 basis point reduction in the International business unit income versus Q1 2009. In fact, without this managed service investment, International net income would have been actually increased by 120 basis points over the same quarter of last year, which again highlights the pickup in underlying business.
Looking forward, while the managed service investment is expected to impact margins for the next few quarters, we are all excited about the potential opportunity for growth in revenues and margins through the longer term customer engagement this business offers. I believe that applies to – across all our business in Mainland Europe.
Okay, Peter. Back to you.
Thanks, Terje. I appreciate that. Tony, over to you.
Good morning. I am Tony Hadzi, Executive Vice President and President of the Custom Solutions Division. After a challenging 2009, I am pleased to report that CIBER’s Custom Solution Division, which specializes in application development, integration and management on an outsource or consultative basis, as well as IT consulting services, has stabilized and posted positive sequential growth of 3% in this quarter as compared to the fourth quarter of 2009.
In response to the economic downturn in 2009, we continued to focus and invest in the improvement of our global delivery verification outsourcing, education developments and systems integration. Our India operations have now grown to almost 800 with additional capacity around 1,200. At the same time, in an effort to capitalize on the recent trend in the United States for onshore outsourcing and delivery, we have enhanced our domestic delivery centers based in Tampa, Detroit and Pittsburgh to approximately 400. And with additional capacity to around 800 for business that is currently in our pipeline.
From a US Solutions delivering perspective, 20% of our total head count is now sourced from India, which relative to our size and our focus on the mid market segment, is getting closer to the right ratios of onshore to offshore sourcing. But by expanding these outsourcing competencies, we have improved our positioning and increased our ability to scale and thus, meet the needs of our clients.
Our results this quarter have reinforced the improvements in our global delivery model. We have also made changes in our Sales and Delivery organizations to better leverage our ITO division, which makes up for 19% of our opportunity pipeline. Our well established local sales team now seamless access to all of CIBER’s practice and vertical capabilities. This provides our clients with the flexibility to access any and all of our strategic capabilities and assets.
The improvements to our operating model has started to show good results and have improved our competitive edge and overall value proposition to our existing and future clients. Other improvements that we have made in the last 9 months were additions to our vertical expertise in Healthcare, Energy, Retail and supply chains. We have added deeper expertise in business intelligence and relationship management to our technological practice capabilities.
By optimizing and promoting a collaborative approach amongst ourselves and delivery teams, we have both improved our self performance and at the same time reduced SG&A, which has helped fund some of these initiatives.
Going forward, we believe that we are well positioned to win and continue to deliver an improving value proposition to our clients, particularly for the mid market segment where value, flexibility and approach and speed to market are critical. Finally, the Custom Solutions pipeline is approximately 3 times our current revenue run rate. And in addition to this, more than 80% of the opportunities are in our strategic service lines of Application Outsourcing, Application Development and Maintenance, Systems Integration and ITO. Peter?
Thanks, Tony and thanks, Terje. I’ll now turn our discussion to our outlook for the balance of 2010. This quarter we have reassessed our guidance for the year. We are operating in what appears to be the early cycle of the global economic recovery. And we are starting to see encouraging signs of increased customer spending on IT projects in particular sectors. However, customers are continuing to invest with caution. Pre recession levels of IT spending have yet to return, and the environment remains competitive.
In light of these various factors, we felt confident in the revenue guidance for the full year that we have previously provided. And we are reaffirming our guidance for 2010 at a 1.25 billion to 1.45 billion for the year.
However, we are lowering GAAP EPS guidance to $0.22 to $0.26 per share for the full year 2010, partly as a result of higher anticipated costs relating to our recently announced management changes, including costs pertaining to the search process, the cost of a temporary Senior VP, Finance and other advisors.
We’ve also reassessed our cost structures and cost assumptions for the year. In terms of the second quarter 2010, we believe revenue will be $258 million to $265 million, and GAAP EPS will be $0.04 to $0.06 per share. However, I want to be clear that Q2 and the 2010 year guidance does not include the impact of any severance packages for our recently retired President and CEO or Chairman. As these one time costs are still being negotiated by the special committee of the board, and we’ll disclose these packages as soon as they are finalized.
For the full 2010 year, we also anticipate capital expenditures of about $12 million to $14 million, depreciation of $12 million, amortization of around $4 million, non cash, stock based compensation of approximately $4 million and a tax rate of about 34% to 35%. And that’s assuming that the R&E credit gets approved. However, without the extension of the R&E credit, this could be 3 to 4 points higher. We plan to use any excess cash flows to fund capital expenditures to make modest repurchases of CIBER stock to offset purchases for our employee stock plan and dilution from options, as well some potential tuck in acquisitions.
The balance will be used to continue paying down our revolving credit facility. We recognize that one of our key priorities has to be on optimizing our margins to increase profitability, and that is what we are all focused on.
Now let me turn to the search for our new CEO. In conjunction with the requirement of our long time CEO, Mac Slingerlend on April the 12th, the board established a search committee and retained the internationally recognized executive search firm, Heidrick & Struggles, to identify a permanent successor. The search process is progressing diligently. However, we are only a few weeks into the process, and it’s too early to say how long it will take to find the right leader.
That concludes my initial comments. Operator Holly, we are now ready to take questions from participants.
Question and Answer Session
(Operator Instructions). The first question comes from Jeff Martin.
Jeff Martin - Roth Capital Partners
Could you give us a sense of what your assumption is for the OpEx component relating to the management change?
I don’t know that I’d want to break out in terms of the guidance that we’ve included.
Jeff Martin - Roth Capital Partners
There’s a number of expenses that we have taken into account including, obviously, the cost of search itself; the additional communication advisors. I’ve actually brought in a – someone I’ve worked with for many years to help me on the financial front while I try and wear more than one hat. And so there’s some expenses and costs relating to that. And we have just reassessed, I guess, and re looked at our cost structure in the operations as well as in the SG&A area for the rest of the year. So that’s really a – sort of an overview of what I’m saying in terms of why we’ve brought the guidance down a little bit.
Jeff Martin - Roth Capital Partners
Okay. So it is safe to say your revision to EPS for the full year in terms of guidance is only reflecting that and not other components? And phrase it another way, have you changed any of your assumptions on gross margins given the current state of the business?
No. I think we are actually quite enthusiastic about what the outlook of the company is. I think we’re just trying to be maybe a little prudent in terms of how we’re approaching guidance. And the other thing is that although we’re pleased and gratified I guess with the growth, the little bit of growth we’ve seen and the customer enthusiasm in the first quarter, actually late in the fourth quarter and into the first quarter. But until we see a little bit more demonstration of that in terms of revenues coming through, it’s a little too premature to predict out for the balance of the year.
Jeff Martin - Roth Capital Partners
Okay. And then that kind of leads into my last question here. On revenue guidance, it seems like you’re more optimistic now than you were a quarter ago, and you had some modest upside, mostly driven by currency but modest upside Q1 revenue. I’m just curious if you thought about raising revenue guidance for the full year or if you’re just kind of waiting to see another quarter or so before you do that, or if I’m just off the mark on that?
Yeah. We’ve certainly kicked that around. But I think I’d just reiterate what I said, and that is that we are enthusiastic about what’s happening. But until we see a little bit more track record of demonstrating that coming through the revenue line, I think we’re little reluctant to revisit the issue.
The next question comes from Reik Read.
Reik Read - Baird
I think all of the speakers have kind of suggested that you’ve got an improving backlog of business, and generally IT environment looks better. If I look at what you reported the midpoint of your guidance and what you’ve reported for the year end, you actually would see a decline in the second half versus the first half. And I’m just wondering, what is that gives you pause? Are there currency concerns? Are there pricing concerns? Are there just volume concerns? Can you kind of go through specifically what gives you the pause and how much conservatism you’re throwing in there?
Yeah. I’m not sure this is the right sequence to address this. But in terms of currency, obviously, the dollar/euro is something you’ve got to be concerned about. We have assumed for the balance of the year continued exchange rates, let me just look it up; got it here somewhere. Yeah. We assume the March average rates to be a problem for the rest of the year. So we assume the US/euro of 1.357 and the U.S/GD pound of 1.507. And obviously, there’s other currencies involved, but they’re the predominant ones that are important.
We’ve certainly seen encouraging signs in terms of pipelines, and so there’s lots of opportunities seem to be getting out there. Not in every sector, but for the most part across most of the divisions I think. I think we have actually got to translate that into increased wins and start implementing that before we’d be prepared to revisit this issue. I think the economy generally, what we are seeing is customers are certainly talking about a lot of more project.
But until we see a more consistent trend in terms of what’s happening out there, I think it’s a little risky to predict that’s going to happen continuously and customers are going to continuously buy more services. I mean it’s rather like predicting what you think is going to happen to the economy generally for the rest of this year. And I think we’re all hopeful that it’s going to continue improving, and steadily. But we’ll all disagree about what the pace of that recovery is in and how consistent it is and whether there’ll be any bumps along the way.
Reik Read - Baird
Do you see any changes in the seasonality pattern, or should this year be fairly normal?
That’s a good question. Usually, the first quarter is a tougher quarter for the International operation. They did well this quarter. So third quarter is a little slower because of holidays and things like that. We think it’s going to be consistent with prior years, although with the economy starting to recover; if it starts picking up pace, it could change that dynamic. But I think in terms of our expectations at this point in time, I would say the seasonality will continue as normal.
Reik Read - Baird
Okay. And then just going back to the question on the incremental expenses. If I just look at the difference in your EPS guidance, it’s roughly $3 million. Is that all due to the search and other related costs, or is there something else in there that – is there a component of that that’s other?
No. I think there’s another section in there, I guess, just taking a slightly more prudent approach, in my view, anyway, in terms of looking at costs throughout the organization in terms of what might happen. I’m just cognizant of our track record. And I just want to try and see if we can get a little more consistency going forward.
The next question comes from George Price.
George Price - Stifel Nicolaus
I guess one question was, I think, just focused on in terms of the cost side beyond just the search. So it does sound like, just to make sure we’re all hearing this clearly, that there was some incremental business related review of the cost side. And that’s partially bringing down the EPS guidance. But you’re not quantifying that right now. Am I hearing that right, Peter?
I think that’s a fair summation, George. Yes.
George Price - Stifel Nicolaus
The second thing is just, I wanted to kind of try to dig in a little bit more on some of the comments on offshore, which was positive to hear about because I think that’s an area where it’s increasingly a capability that sort of table stakes in the commercial market. And one where I think there’s still a lot of room for you guys to build up the capability.
I guess I was wondering if you could maybe go into a little bit more detail, you talked about you’re up to 800 capacity in India for 1,200. Do you have any ideas of the target mix; how much more you want to get to in your ultimate end state, at least as the business stands now? And to add to that, maybe, can you talk a little bit about metrics, incentives of getting there because you’ve had more of a dispersed model, branch offices; that sort of thing? Going offshore might present some issues with getting the incentives to push more work offshore, and how do you handle that?
Okay. Yeah. That’s a very good question, George. We’re certainly enthusiastic about what’s been going on in that area. And I’m going to turn this question over to Tony Hadzi. As you probably are aware, Tony is not only responsible for the Custom Solutions Division or he’s also responsible for our activities in India. So he’s more than well equipped to respond to that comment. So, Tony?
Yes. Thanks, Peter. As far as the 800 is concerned, it’s not capacity, people on the ground that are working on projects right now. So you can see we’ve had tremendous growth. And it really stems from a couple of things. We have changed the sales model here in the Unites States to embrace more of a global delivery. And I’m glad to say that, that innovation or that reengineering has provided the results. In other words, we’re getting a lot more going offshore. And global delivery is now an integral part of everything we do in every division.
Every division, even outside of Custom Solutions, has a representation in India, including the vertical practices; including the technology practices. So it became – we’ve made it part of the fabric now. So that’s really the approach we’ve taken, and it’s been very successful.
And you’ve got to keep in mind that we did start late. We finished the acquisition beginning of last year, 2009. So the guys really worked hard to make it a cohesive entity. The 1,200 capacity that we have that I’ll mention. So we’re at 800 now, and we have capacity to 1,200. The way we’re investing in that is we’re right, following the pipeline. So we’re trying to take a very pragmatic approach on how to scale it up right behind the pipeline. So we look at our opportunities; we look what’s coming down. And of course as you know, the industry, the demand is for a value solution, for a mix of resources.
And the other thing that we’ve also done is the rural facilities that we have in Tampa, in Pittsburgh and in Detroit, we have a second tier of cost. Those now all integrate back into Bangalore.
So the whole model for CIBER is integrated. I will also say that Europe is involved in the model, so we’re getting the growth from both sides of the ocean. And we’re very excited. I think we’ve put some good numbers down that are very achievable. But again, we follow the pipeline, and we’re very pragmatic in the way we build it out.
George Price - Stifel Nicolaus
How much are you moving existing work that you’re doing and pushing that offshore versus new incremental work? And I guess where I’m going with this is I’m also wondering, Peter, about from a margin perspective to the extent that you’re shifting existing work and you’re going from a higher rate per unit to a lower rate per unit. Still probably better on a margin basis, but fewer dollars. Do you have any negative overhead leverage that you have to worry about? Is that any of what’s going on with that operational element of the EPS guidance?
Let me take a first shot at that, and then I’ll get Tony to make any comment. I think that you’re absolutely right. Obviously, as we migrate revenues from, or the delivery of solutions from the US to offshore implementations such as India, the revenue dollars that we receive will go down because the billing rates are obviously much lower. But the margins are a little bit higher.
Obviously, until we get a little bit more scale in India, there is perhaps not the margin we would ideally like in the long term. I don’t see that there’s enough significance there at this point in time that it’s having any impact in our outlook. We didn’t build any negativity, if you will in, with respect to the extra costs for India because it’s not material at this point. We’re seeing good growth there, and things are coming along nicely.
I agree. The growth model; the prices are set on what our customers are asking of us. And the beauty of it is that we have existing customers that have really asked us to go down to help them improve their spend. It’s been more a collaborative approach with our customers rather than aggressively saying, this is the way we’re going to go.
And the other thing is competitive. We have to be competitive. And if you don’t have the capability, which everybody’s been commenting on over the past years, you’re not going to get the deal; as simple as that. So following the customer direction, one of the other things about the customer direction, and again building for, our customers are asking from us in those mid market segments. And I’ve got to be specific about that because we play differently in the market segments.
We’ve seen a trend, also from our competitors, in building onshore lower cost models in the United States. By the way, that is a very positive trend for the US economy as well, employing jobs in areas like Detroit where the economy has really hurt them the most. So we’re reaping those benefits from being good community leaders in that area as well in taking advantage of the United States’ skills that we have with an integration back into Bangalore. So it’s not a radical model; it’s more a business value based model that we’re approaching. And by having both the onshore low cost and the offshore, we really put CIBER in a very unique position to do something very different going into the future.
And if you look at the numbers, the way they’re coming up and the demand coming from the customer and the pipelines both behind it, it’s amazing. That’s what really is making us so excited about what we have landed on here.
George Price - Stifel Nicolaus
I’d love to hear your perspectives on what’s going on in Europe or particularly around the sovereign debt issues; Greece and Portugal and Spain, et cetera. I know this is a relatively recent development. But I guess are you picking up any impact from a broader demand perspective on clients in Europe, different places in Europe? Are they any more skittish as a result of this? Is it having an impact yet? Thank you.
No. First of all I would say that the kind of careful uptick we have seen in the business over the last two quarters is coming across most of our territories. Fortunately, CIBER doesn’t have an operation in Greece. And I haven’t seen any impact on that whatsoever into our business so far. And I don’t really expect to see anything, either.
But certainly, we have a good operation in Spain. Again, most of our clients in Spain are coming from the public sector, and we have very, very strong healthcare vertical, which is more or less funded by public money. And there we have seen a pretty stable performance. So, so far, the adverse economy in Spain has not impacted our business in this quarter. I see going to market, like the Germany, Netherlands and the UK, those 3 major markets is picking up growth.
(Operator Instructions). The next question comes from Karl Keirstead.
Karl Keirstead - Kaufman Brothers
Peter, it seems like the top line performance is actually, in my view anyway, tracking relatively well. It feels to me like the real catalyst for the stock would be if you can lay out a path to take the operating margins out of this 2% to 3% territory where they’ve been stuck for the last year or so. So could you take a moment in lay out how you plan to take the operating margins up to the mid single digit, and then the high single digit trajectory? Thanks.
Well that’s a big question, obviously, Karl. I’ve been in this role for less than 3 weeks at this point. But there’s no doubt across the management team, we agree wholeheartedly with the sentiment that we clearly need to move our margins in that direction. I think initially in the interim period, until we have a permanent CEO in place, our focus is going to be more on optimizing our activities and our go to market strategies, et cetera as opposed to reassessing any larger strategies.
We’re definitely going to focus, and we’ve already been focusing quite a lot on more collaboration across within each of the groups and also across and between the different groups and amongst the different geographic segment. And I think there’s a fair amount of enthusiasm in the organization that more efficiencies are there to be had, although it’s way too early to even start thinking about quantifying anything like that.
I think once we’ve got a permanent CEO on board, obviously they’ll have their own views in terms of assessing some of the things we’re doing, and we’ll take it from there. But we’re very cognizant of the issue that our margins are below where they should be. And we’re very focused on doing what we can to start moving in the right direction. But as you’re well aware, that’s not going to happen overnight.
Karl Keirstead - Kaufman Brothers
Okay. And then if I might ask a follow up. On the cash flow guidance, I know sometimes you don’t offer sort of full year cash guide. But just because Q1 came in negative and a little bit light, could you put a stake in the ground and offer a operating or a free cash flow guidance for the full year?
I don’t know about a stake in the ground, but I’ll certainly be able to give you a little color on that, maybe. I think if you take our guidance and adjust for some of the non cash items, our net cash provided from operating activities should still be in the mid to high 40 million range.
And then we’ve got CapEx, we’re saying of around 12 million. So 35ish million in terms of free cash flow. I mean that’s a little specific and, obviously, that’s more of a range than it is a specific number. But I think that’s not far off what we were talking about in the February call where the similar questions were asked. So I think that’s where we’ll end up.
(Operator Instructions). There appears to be no further questions. Please continue with any other points you wish to raise.
Holly, thanks very much. Appreciate your help this morning. Just a few concluding comments before we sign off. I want to say that our internal team is excited about the prospective market opportunity, and the opportunity for all of us to work collaboratively together to execute more efficiently and to bring our customers greater value with solutions to larger and more complex problems.
We are committed to demonstrating to our shareholders that we are moving in the right direction to improve our performance, which over time should be reflected in shareholder value as well. I’d like to thank all of you for your participation and your questions this morning, and look forward to speaking you again after we have announced the results for our second quarter. Thank you and good day.
Thank you, sir. Ladies and gentlemen, this concludes the CIBER first quarter 2010 earnings presentation. Thank you for participating. You may now disconnect.
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