Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Edgewater Technology, Inc. (NASDAQ:EDGW)

Q4 2013 Earnings Conference Call

February 26, 2014 10:00 am ET

Executives

Paul McNeice - VP, Finance

Shirley Singleton - Chairman, President & CEO

David Clancey - EVP & Chief Strategy and Technology Officer

Timothy Oakes - CFO

Analysts

Lee Jagoda – CJS Securities

John Vandermosten - Singular Research

Alexander Renker – Sidoti & Co

Operator

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Edgewater Technology Incorporated's Fourth Quarter 2013 Financial Results Conference Call. At this time, I'd like to inform everyone that this conference is being recording for re-broadcast and then all participants are in listen-only mode.

At the request of the company, we will open the conference up for questions and answers following the presentation.

I will now turn the conference over to Paul McNeice, Vice President of Finance for introductions. Sir, the floor is yours.

Paul McNeice

Thank you, [Healy]. Good morning everyone and welcome to Edgewater Technology's fourth quarter and full year 2013 financial results call. I'm here today with Shirley Singleton, Edgewater's Chairman, President and CEO; David Clancey, Edgewater's EVP and Chief Strategy and Technology Officer; and Timothy Oakes, Edgewater's Chief Financial Officer.

Before we begin, I would like to remind everyone that today's call may contain forward-looking statements as described under the Securities Act. Investors are cautioned that such statements could involve risks and uncertainties that could cause actual results to differ from current expectations with respect to such statements. These statements and the underlying factors related to these statements are listed and reported in filed information with the Securities and Exchange Commission, as well as the company's press release that was distributed earlier this morning. The statements made during today's call are made only as of the date 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

Thank you, Paul. Good morning everybody. We're really pleased to see Edgewater finished the year strong. During Q4, we posted double digit year-over-year total revenue as well as service revenue growth. We had improvements in gross margin. We improved net income and we improved adjusted EBITDA. For the full year, the company reached an all time historic high in both total revenues and total service revenues. We are also pleased to see that the leverage we are getting from the monetization of our intellectual property. But with that, let's get into the details. Tim?

Timothy Oakes

Thank you, Shirley. Good morning everyone, and thank you for joining us for our fourth quarter and full year earnings call. We follow the same usual process this morning by going through our prepared comments in the financial results for the fourth quarter. After this will follow some additional comments and closing remarks before opening up the call for questions.

Short story is that we had a strong close to the fourth quarter. We managed to successfully navigate potential utilization volatility associated with the timing of the holiday season and also observed robust sale activity across each of our service offerings highlighted by the closing of two significant software transactions in our Dynamics AX ERP service offering.

Total revenue for the fourth quarter of 2013 increased 10% to $26.8 million compared to $24.2 million in the fourth quarter of 2012. Service revenue for the fourth quarter of 2013 increased 12% to $21.9 million compared to $19.5 million in the same year ago quarter. We benefitted from improved sales pipeline activity as we advance through fiscal 2013. This positive momentum provided us with a healthy base of signed engagements entering the fourth quarter. During the quarter, we were able to close business and successfully leverage our delivery backlog lifting billable consultant utilization to 73.7% as compared to 67.7% during the fourth quarter of 2012.

This provided us with the foundations not only generate year-over-year service revenue growth, but also sequential service revenue growth of 2.5% compared to the third quarter of 2013. Software revenue during the fourth quarter of 2013 was $3 million compared to $3.2 million during the fourth quarter of 2012. Included in software during the fourth quarter of 2013 was approximately $453,000 of PI2 related revenue, as compared with $434,000 in PI2 related software revenue during the fourth quarter of 2012.

During fiscal 2013, we recognize a total of $2.5 million in PI2 related software revenue which contributed approximately $2.2 million in gross margin. As of December 31, 2013, we have fully completed all of our PI2 (inaudible) and no future PI2 related service revenue or software revenue will be recognized by the company after December 31, 2013.

Additionally, as we discussed in previous calls the reported amount of fourth quarter 2013 software revenue was also impacted by a change in how we report certain sales of Dynamic AX software. Prior to the second quarter of 2013, we essentially reported software resale revenue on a gross basis, reflecting all revenue and cost of revenue on our periodic statement of operations.

As a result of changes in the nature of certain software resale transactions, we have began to record certain software resale revenue on a net basis, reflecting only the amount due to Edgewater's revenue not reflecting any gross amount of software revenue or software costs in our statement of operations.

We want to de-emphasize that amount of software revenue reported going forward along with the associated margin and the timing of margin we've recognized on software resales may vary significantly from quarter-to-quarter, depending on specific reporting treatment for each individual transaction.

With respect to other standard quarterly revenue metrics we note that our annualized service revenue per billable consultant was $359,000 in the fourth quarter of 2013, compared to $344,000 in the fourth quarter of 2012. We entered into fist time engagements with 18 new customers during the fourth quarter of 2013 compared to 16 new customer engagements in the fourth quarter of 2012. For the full year, we entered into 92 new customer engagements during 2013 compared to 103 customer engagements during 2012.

Service revenue generated during the fourth quarter 2013 by our top 10 customers represented 29% of total service revenue compared to 26.4% in the fourth quarter of 2012. No individual customer represented more than 5% of our total service revenue during the fourth quarter of 2012. Similarly, no customer represented more than 5% of total service revenue during the year 2013 or 2012 full year periods.

As of December 31, 2013, we maintained 332 total billable consultants, which includes 19 contractors compared to billable headcount of 333 including 23 contractors on December 31, 2012.

Moving on to gross margin, total gross margin in the fourth quarter of 2013, increased 530 basis points to 40.1% compared to 34.8% in the same year-ago quarter. While gross margin related to service revenue increased by 520 basis points to 41.2% in the fourth quarter of 2013, compared to 36% during the fourth quarter of 2012. The improvement in total gross margin during the fourth quarter of 2013 was attributable to the combined effects of the year-over-year increase in fourth quarter service revenue and software gross margin contribution reflective of a higher concentration that software deals recognized on a net basis is supposed to a gross basis.

The significant improvement in reported gross margin related to service revenue during the fourth quarter of 2013 is the result of the double digit increase in service revenue and the associated improvement in fourth quarter 2013 billable consultant utilization, which again increased from 73.7% compared to 67.7% in the fourth quarter of 2012.

Quickly touching upon SG&A, SG&A expenses, excluding embezzlement related expenses, increased to $8.4 million in the fourth quarter of 2013, compared to $7.5 million in the same year ago quarter. The primary drivers for the year-over-year increase in SG&A expenses are associated with our performance based on commission plans reflective of a year-over-year improvement in fourth quarter 2013 operating performance compared to the softness and drop off in operating performance we experienced in the latter half of 2012. As well as increases in travel and a occupancy related expenses.

While our strong fourth quarter performance provide us with a basis for favorable year-over-year operating metrics our comparing 2013 fourth quarter and full year financial results include a $30.4 million non-cash income tax benefit associated with a reduction in the previously established valuation allowance against for carrying value of our deferred tax assets. We have deferred tax assets that have arisen as a result of timing differences primarily generated in connection with historical goodwill and intangible asset impairment charges.

Net operating loss carryforwards and tax credits. Since 2010 we have provided a full valuation allowance against our deferred tax assets producing the carrying value of these assets on our balance sheet to zero. We are required to continually evaluate the need for a valuation allowance and determined it is more likely than not that in the future, we would generate sufficient free tax income to utilize substantially all of our deferred tax assets.

An important factor on our assessment is the fact during 2013, we moved into a three year cumulative pretax profit position. Therefore, as required by the applicable accounting rules we have reduced a previously established valuation allowance which has resulted in the non-cash income tax benefit in the fourth quarter of the $30.4 million.

Net income for the fourth quarter of 2013, which was aided by the $30.4 million non-cash tax benefit was $32.4 million or $2.55 per diluted share compared to net income of $345,000 or $0.03 per diluted share in the fourth quarter of 2012. Excluding the $30.4 million non-cash income tax benefit, the comparative improvement in fourth quarter net income was due to service revenue growth and increased software revenue related margin contribution.

With respect to our non-GAAP measures, adjusted EBITDA increased 97% in the fourth quarter of 2013 to $2.7 million or $0.21 per diluted share and 10.1% of total revenue, compared to $1.4 million or $0.12 per diluted share and 5.7% of total revenue in the fourth quarter of 2012. The comparative improvement in our adjusted EBITDA is similarly attributable to the fourth quarter 2013 service revenue growth and the incremental margin contribution generated from Dynamics AX software revenue.

Additional information regarding our use of non-GAAP measures including a reconciliation to the most comparable GAAP measures can be found on our press release that was issued earlier this morning.

As of December 31, 2013, we continue to maintain a strong balance sheet and carry no debt. Additionally, we have an available $10 million credit facility with no balances drawn against it as of December 31, 2013. On December 31, 2013, cash and cash equivalents totaled $20.3 million compared to $16.7 million on December 31, 2012.

Our overall cash position was enhanced during the year in connection with the generation of $4.7 million in cash flow from operations and $1.3 million from employee stock plans and option exercises, which are partially offset by $1.2 million in payments associated with the settlement of pre-acquisition of Fullscope sales and new tax liabilities, which we believe are fully recoverable from an existing acquisition related escrow account, $1.5 million of repurchases of company's common stock and, to a lesser extent, purchases of property and equipment and intellectual property.

As of December 31, 2013, our cash and cash equivalents represent approximately $1.69 per diluted share. Cash flow provided by operations in the fourth quarter was $2.4 million compared to cash flow from operations of $2.9 million in the fourth quarter of 2012. Accounts receivable balances including unbilled AR totaled $19.8 million at the end of the fourth quarter of 2013, compared to $18.3 million as of December 31, 2012.

Our DSO metric related to billed AR was approximately 65 day as compared to 73 days at the end of the fourth quarter of 2012.

Finally, as of December 31, 2013, we had $10 million remaining under our stock repurchase authorization and we did not repurchased any shares during the fourth quarter of 2013. During fiscal 2013, we repurchased a total of 365,000 shares at an aggregate repurchase price of $1.5 million or an average of $4.14 per share.

Now I’d like to turn the call back over to Shirley for further comment on the quarter.

Shirley Singleton

Thank you. As Tim mentioned, we engaged in 18 new projects with customers such as Pan-American Life Insurance, Oshkosh Corporation, Care New England, a large supplier of tea and coffee, and a manufacturer of premium chemicals and lubricants. As mentioned in our last earnings call, I think it makes sense for us to review our four point go forward strategy. One is we are going to continue to build critical mass in our channel base consultant offerings and that's primarily the Oracle EPM channel and the Microsoft channel.

Two, we are going to continue to execute on the development and monetization of our own IP in those channels that I mentioned. Thirdly, we are going to continue to build out a key vertical expertise in our class to consulting offering and by that I mean, primarily insurance health care, hospitality which seem to be gaining traction in those areas in the classic piece.

And then lastly, we are going to pursue optimistic acquisitions that add either critical mass to our specialty areas or add a new complementary revenue stream or streams. As it relates to go forward guidance, we are very pleased to see the sales activities that's happening and it's really exciting to see it happens across all the offerings. Given this, we feel that we are going to experience double digit year-over-year organic growth for the first quarter of 2014. We are going to amend our press release. In my management commentary section of the press release, we said high single digit and that is an error. So we are going to file something later this afternoon that will change my wording to double digit organic growth. We apologize for that.

With that, Healy, we would like to take some questions.

Question-and-Answer Session

Operator

Sure thing, ma'am. (Operator Instructions). And it looks like our first question will come from Lee at CJS. Please go ahead. Your line is open.

Lee Jagoda – CJS Securities

Hi, good morning.

Shirley Singleton

Hi, Lee.

Lee Jagoda – CJS Securities

So Tim, just doing some basic math to get to an adjusted EPS calculation if I exclude $30.4 million tax item I end up with about $2 million of net income and $0.16 of adjusted EPS. Does that sound as outright?

Timothy Oakes

Yes Lee, that's about right.

Lee Jagoda – CJS Securities

And then on a go forward basis, now this evaluation allowance behind you how should we think about a book tax rate going on the assumption that cash taxes will essentially remain de minimis for the reasonable future.

Timothy Oakes

Right. And that's a fair point. Cash taxes will remain limited, right. We won't have the full exposure from a cash outlet basis related to the federal (inaudible), but what you will see is you will start to see that effective rate come up more in a normalized range, be it between, don't hold me to the number as an absolute, but a 38% to 40% effective tax rate go forward as it relates to federal and state, and that is primarily reflective of the absent to the valuation allowance which has effectively shielded the federal tax rate from our historical tax provisions over the past few quarters on since 2010.

Lee Jagoda – CJS Securities

Got you. And one more and I will hop back in the queue. Just with regard to the leverage, a look on a year-over-year basis, utilization increased about 90 basis point but service gross margin actually decreased slightly. So I guess the question what factors impacted the negative leverage and how should we think about incremental leverage on improved utilization going forward?

Timothy Oakes

Yes, I think that's actually a good question, Lee. If you look at it, I mean once you look at the similarity of the utilization on consistent billable headcount where we go from I think its plus or minus one billable headcount year over year. It's basically just a function of you get that small blip in the increasing salaries and wages. It's just a normal appreciation of wages as you move through time. As we go forward and continue to drive that utilization of where to drive that utilization up, you will get better leverage on your billable consultant that would offset that anomalous blip this year.

Lee Jagoda – CJS Securities

Are you able to capture any of the increase you see on the salaries and wages in general pricing of your product service?

Shirley Singleton

When we sell our services, we don't have rate tables where we say this is the price, its market driven. So obviously, we tried to have that in the back of our mind as we price future deals because people are getting rises every year for really good work.

Lee Jagoda – CJS Securities

Thanks.

Shirley Singleton

Thank you, Lee.

Operator

Thank you sir. Our next question will come from John Vandermosten of Singular Research. Please go ahead, sir, your line is open.

John Vandermosten - Singular Research

Thank you and good morning everybody.

Timothy Oakes

Hi, John.

John Vandermosten - Singular Research

How are you doing? I was going o ask about the PI2 that contract has come to an end, and so revenues associated whether it has, and I'm going to go through anything with a pipe line to replace that since that has been such a strong driver of the last year for performance.

Shirley Singleton

We are very pleased with what's been happening with our own development of IP and we have actually put together a two year plan go forward future IP development, we are doing some development as we speak. It doesn't speak if someone going to come in and buy it again although it has happened three times now, but certainly it's a channel blocker, it's a differentiator for us and we get also our free to license our own IP if in that way monetizing as well.

Timothy Oakes

I would basically say we are in the investment phase of building that IP and we have got probably a little bit of time before we are able to bring any additional earnings or something like data on stream, but again you never know.

John Vandermosten - Singular Research

Okay. Thank you. And then a second question on utilization. Is that number adjusted for holidays in the fourth quarter, because I know that generally the fourth quarter is a little bit lower or just fewer billable days because of holidays and what not, and I was wondering if that number is adjusted for the holidays?

Timothy Oakes

Is the name utilization number adjusted for the holidays? It's reflective of the bill days for the account, yes, I say there is some consideration of planning for the holidays in there.

John Vandermosten - Singular Research

Okay. Thank you. Great quarter.

Shirley Singleton

Thank you.

Operator

Thank you, sir. (Operator Instructions). And it looks like our next line of question will come from Alexander Renker of Sidoti & Company. Please go ahead, your line is open.

Alexander Renker – Sidoti & Co

Hi everyone. Good morning.

Timothy Oakes

Hey, Alex.

Shirley Singleton

Hi.

Alexander Renker – Sidoti & Co

Hey and so looking at new customer engagements for the full year, I see 92 in 2013 versus 103 in 2012. So down a little bit. Utilization was up despite that. So I'm wondering what business look like with legacy customers for the full year and during the quarter?

Shirley Singleton

Our year-over-year, when you compare those two number 2013 and 2012, if you recall the tail end of 2012 with capital in terms of closing business which left us on a weaker position in Q1. So I would characterize 2013 as sort of slow start heralding that closing issues we had with the pipeline was still but no one was signing if you remember the comments that we had. So I look at '13 as more of I won't call it a hockey stick and more of a rising tide in terms of closing.

We are seeing some nice follow on to existing customers that we've had as well as what's interesting is the bonus starting to ring from customers from five years ago. In other words, we are seeing some traction; I don't want to declare victory here. But we're seeing some people really start talking about I'm ready to invest now. I'm ready to change my infrastructure I have been close enough, long enough and we are getting call backs from prior customers. Doe that help you, Alex?

Alexander Renker – Sidoti & Co

Yes, I think so. Sort of the motivation for my question was thinking that if your customers were on boarded in 2013 while there is an increase in the utilization you must be doing more business with existing customers. Is that a correct intuition?

Shirley Singleton

Yes, that's a correct intuition.

Timothy Oakes

That's one factor. Another factor is also how they increasing project size would do that as well.

Alexander Renker – Sidoti & Co

Okay.

Timothy Oakes

Those are the factors that ones you have to bring in.

Alexander Renker – Sidoti & Co

As for as dollar amount or amount of time that a project is taking?

Shirley Singleton

Could be both.

Timothy Oakes

Could be both.

Alexander Renker – Sidoti & Co

Okay. I imagine they are correlated.

Shirley Singleton

Yes.

Alexander Renker – Sidoti & Co

Okay. All right. Excellent, thank you.

Shirley Singleton

You are welcome, but you do bring up a good point that we are managing closely to the hiring. So the headcount year-over-year was relatively similar but you can see the effect of what happens when you are controlling the hiring and the utilization is drifting upward.

Alexander Renker – Sidoti & Co

Great. Thank you.

Shirley Singleton

Thank you.

Operator

Thank you, sir. Our next question will come from the line of Lee Jagoda with CJS. Please go ahead, your line is open.

Lee Jagoda – CJS Securities

Just one more quick follow up from me. Tim, do you have the billing days by quarter for 2014?

Timothy Oakes

Lee, not right in front of me, for the most part they are going to be fairly similar to what 2013 was, but I can certainly follow up with you offline on that.

Lee Jagoda – CJS Securities

It will be great. Thanks.

Operator

Thank you, sir. And presenters, I'm showing no additional questions in the queue at this time. I like to turn the program back over to Ms. Shirley for any additional comments.

Shirley Singleton

Thank you very much. Just a remainder, we are going to reissue that press release when we get off the call and we will be adjusting my management commentary saying double digit year-over-year revenue growth for Q1 is our prediction. We also want to mention that we are going to be at the ROTH Conference March 12 in California and our next earnings call is April 30. Thank you, Healy..

Operator

My pleasure, ma'am. Ladies and gentlemen, this conference will be available for replay after 01:00 pm Eastern Standard Time today to March 12, 2014, 11:59 pm Eastern Standard Time. You may access to remote replay system at any time by dialing 855-859-2056 and entering the access code 35316343. International participants may dial 404-537-3406. Those numbers again are 855-859-2056 and 404-537-3406 access code 35316343. This concludes today's conference. Thank you for your participation and have a wonderful day. Attendees, you may now all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Edgewater Technology's CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts