Ciber, Inc. (NYSE:CBR)
Q4 2015 Earnings Conference Call
February 18, 2016 08:30 AM ET
Scott Kozak - Director, Investor Relations
Michael Boustridge - President and Chief Executive Officer
Christian Mezger - Chief Financial Officer
Brian Kinstlinger - Maxim Group
Juan Bejarano - Noble Financial
Marco Rodriguez - Stonegate Capital Markets
Greetings and welcome to the Ciber, Inc. Fourth Quarter Full Year 2015 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Scott Kozak, Direct of Investor Relations. Thank you, Mr. Kozak. You may begin.
Thank you, operator. Good morning, everyone. My name is Scott Kozak, Director of Investor Relations at Ciber. Welcome to Ciber’s fourth quarter 2015 earnings conference call. With me today are Michael Boustridge, our President and Chief Executive Officer and Christian Mezger, our Chief Financial Officer.
Before turning the call over to Michael, 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 Report 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 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 and Form 10-Q and 8-K for a recap of historical comparisons.
With that, it is my pleasure to turn the call over to Ciber’s President and CEO, Michael Boustridge. Michael?
Thank you, Scott. Good morning, everyone and welcome to our call. I am delighted to begin this call by announcing our first successful win and subscription to Ciber Momentum, by alas versified industrial company. This is an exciting win with an existing strategic customer. And we look forward to making more Ciber Momentum win announcements in the quarters and years to come.
Turning to the broader business, 2015 was my leadership’s team first at Ciber. We started the year with a clear understanding that the company was not meeting investor expectations and was underperforming both our peers as well as our own potential.
As you might expect, many factors contributed to our previous results and we knew they wouldn’t be fixed overnight. We have taken aggressive measures, actions to make Ciber a stronger and more competitive company.
We refined our strategic direction and invested heavily in products, talent and processes. We have also excellent pool revenue, low margin operations and reinvigorated our most profitable offering.
All of this was designed to create a larger base of profitable offerings focused on the needs of our customers that we believe will generate increased top-line growth, margin and cash flow for our company and expected returns for our shareholders.
Specifically, early in 2015, as part of our restructuring, we redefined five pillars focused on premium, scalable and well defined products. As previously mentioned, these five pillars are ISV, Independent Software Vendors, Managed Services, Business Consulting, At Location Development and Management and Software as a Service.
We signed several significant contracts to solidify our reputation in key markets. Last quarter for example, we won our first Oracle cloud implementation with a new client Presbyterian Medical Services, to create an integrated system that reduces support costs by moving to the cloud. The Ciber Presbyterian team achieved a successful system go live for this project in just 15 weeks.
With this contract, we have now worked with all five major software vendors, Microsoft, Salesforce, Oracle, Infor and SAP on cloud implementation, we intent to execute additional projects in this area in 2016.
We launched Ciber Momentum, our first software as a service solution in North America during the third quarter of 2015 and Europe in the fourth quarter. We believe Ciber Momentum represents us a standard growth opportunity and we have made significant investments in this business.
We have both a specialized Salesforce and have developed second and third generation products to establish a competitive advantage in the fast growing market for legacy application modernization. The Ciber Momentum SaaS business is positioned to accelerate our revenue growth and expand margins and we expect it to be a significant driver in the years to come.
We [indiscernible] delivering on our transformation services model, Ciber transformation services leverages our stock expertise that are offering the directly addressed key pain points for IT department including risk of operational cost, limited scalability and technology workforces that do not match current project needs.
Ciber was founded as an IT staffing business more than 40 years ago, and it remains an area of expertise and competitive advantage for the company. We also developed a clear and unique strategic marketing proposition that links Ciber Momentum and Ciber Transformation services.
We would combine these offerings we would help our clients modernize both the applications and their workforce transforming their operating models to better serve as their own clients.
I am pleased to note that most, if not all of our recent self-discussions about Ciber Momentum included the labor transformation component. We transformed the leadership of our company by making significant management changes throughout our organization, which were medically approved our sales efforts and operations in Europe to focus on high-margin projects and accounts up to years of Ciber’s top performance.
While the sales and profit turnaround may likely take a little bit more time to be evident, we see a deepening pipeline of new business opportunity and we expect continued recovery in 2016.
We made necessary decisions to avoid or end projects that represent poor quality revenue and earnings. In several instances, we disengage from business once it became apparent that the project would not meet our strict guidelines. In other examples, we imposed that discipline at the renewal or response to new terms imposed by the customer.
In one extreme case in the U.K. we decided to bring a project to an early end during the second quarter of 2015 after the contract became unchangeable with indefinite cost exposure. While these actions cause a short-term help to financial results, we believe that positions Ciber to produce more profitable top-line gains in the long-run.
From an internal perspective, we are making important investments at the corporate level. Many of these including programs such as SAP Simple Finance and SAP success factors represent opportunities to more fully integrate and thus fully leverage capabilities and resources that came with Ciber’s many acquisitions.
And for making these, cloud deployed solutions represents a significant fit forward as we consolidate our financial reporting and enhance our HR analytics. When completed we will have 1 ERP and 1 HR management system. We also recently re-launched our corporate website ciber.com that reflects the new strategic direction of our company.
Lastly, Ciber’s Board of Directors took several important steps to demonstrate their support of our company’s new strategic effort. The Board named one new independent director in 2014 and three additional independent directors in 2015, all of whom offer important skill-sets and expertise as the Board provide strategic directions and oversight.
The Board also amended several critical governance practices that increase our accountability and our transparency with shareholders. I want you to know that my team and I recognize that this is a list of accomplishments is only that, a catalog of [indiscernible] action that now require effective execution.
I am proud of our achievements in 2015 but they are not yet reflected in our financial results. I am as impatient as you are but Ciber is showing the successful growth, I am confident we can achieve. But it’s important to recognize that it takes time to reverse the prior multi-year period of chronic under-investment in our customers, our people, our technology and our operating model and capability.
In 2015, a large part of our challenge was the strength of the dollar against the euro and the British Pound. Currency reduced our reported revenues by $67 million. Regardless of the foreign exchange impact however, we must generate increased sales across all of our pillars including Ciber Momentum and Ciber transformation services.
We must also focus on controlling our GA overhead costs. We needed to keep these expenses largely static during our transformation but we’ll now turn our attention to significant overhead cost reduction opportunity.
In 2016, my focus will be to reduce cost and raise revenues to a more appropriate ratio. The investment community has provided Ciber with consistency back in recent periods that the pace of our transformation is difficult to judge because we haven’t been able to provide metrics to track our progress.
We indicated that we would provide key measurements as for the transformation was complete. And I am now able to offer four metrics. One; that we have discussed before and three others that we would use going forward to define and monitor our progress.
The first metric and the one I introduced last quarter is investment. We continue our accelerated pace on investment in the fourth quarter of 2015 adding $2 million to the $7 million spent over the prior 15 months to support product development, marketing expenditures, proof-of-concept and start-up costs associated with Ciber Momentum and Ciber Transformation services.
As one indicator of our plans for 2016, we expect to increase investment spending for Ciber Momentum from roughly $1.5 million in 2015 to $5 million in 2016.
The second metric involves sales. In order to give you a sense about progression, we would be providing you with a pipeline figure. In the fourth quarter, we increased our overall company pipeline of qualified opportunities by 7% compared to the third quarter. The third metric; moves below the top-line to GA expenses. Cost cutting efforts should allow us to achieve $5 million from our GA overhead expenses in 2016.
The fourth metric involves cash. We recognized that Ciber must increase its cash generation and continue reinvesting in our business. I expect Ciber to produce positive cash flow from operations in 2016.
Next, I would like to talk about our key product offerings beginning with Ciber Momentum. Our goal is to be among the market leaders in application modernization. With our proprietary approach, we believe we can deliver high quality coded scale using and a vast degree of automation with pass baton to completion.
Put simply, Ciber Momentum enables application transformation faster than it can be done through human labor or more primitive technology. This process can represent a meaningful cost saving to our customers.
Let me offer an example from this build in this case, relating to harvesting sourcing code. We recently demonstrated Ciber Momentum to a potential customer that had deployed two of their strongest IT engineers for a full month, during which time they identified approximately 1,000 business logic candidates by manually reading code. And this in 8 hours, Ciber Momentum identified 3,000 business logic candidates by automatically scanning the legacy code.
A significant portion of our investment in Ciber Momentum will include developing next generation product enhancements that will increase the level of automation. We believe this upgrades will position Momentum at the forefront of this critical marketplace. Our focus in 2016 is to automate the process of transforming business logic from the source to the target stage which has traditionally been the barrier to a tool-based in digital transformation.
Let me update you on the sales and marketing progress for Ciber Momentum. As I mentioned, we launched Ciber Momentum in North America in the third quarter of 2015 and we introduced the product in Europe in the fourth quarter.
We had seven proof-of-concepts underway at the end of third quarter and ended fiscal 2015 with more than a dozen. These potential clients are a mix of new accounts and cross-selling to existing clients. As I discussed last quarter, the most promising verticals of Ciber Momentum include financial services, a public sector, healthcare, retailers in complex manufacturing.
We believe Ciber Momentum has broad applicability across almost all industry, but these sectors had the most acute need for application modernization. Our experience continues to point to an average sales cycle of at least 12 months although both the time and investment to bring Ciber Momentum to contract have exceeded our initial expectation.
Every proof-of-concept costs, money but each is also an investment in what we consider a revenue growth engine and alluding experience. In today’s environment there is no such thing as an easy sell. However, the topic of legacy modernization has been around for 20 years, and Ciber Momentum is a compelling solution to a serious pain point. The need is increasingly important to C suite executive as the aggregate impact of legacy systems grows with the cloud acting as a clear catalytic event.
The sales process for Ciber Momentum is complex. However, we’re selling to complicated companies with complicated systems. I believe the first projects themselves, as we just announced will be impactful all via small relative to future deals as initial projects avoid mission critical systems.
Beyond the product development investments that I discussed a few minutes ago, we have also invested heavily in sales and marketing efforts. Our Ciber Momentum sales force combines dedicated new hires with existing sales staff and we have added significant engineering resources to support their efforts.
The fourth quarter was by far our most extensive investment quarter to date. We have added significant sales and support talent equally split between North America and Europe. We also continue to invest in external resources including research analyst, market intelligent and industry analyst to provide feedback on our product development and sales effort.
The uniqueness of Ciber Momentum offering means our sales process must include teaching as well as selling. Given that industry and analysts and the media continue to spotlight a huge number of existing organizations that have legacy applications in daily-use that are in desperately need of modernization. More and more, every day forward-looking CEOs are asking the IT department to repurpose and re-imagine their application.
Now sales effort for Ciber Momentum has further been enhanced by two recent partnerships. In November 2015 we announced the go-to-market partnership with CA Technologies. This venture will combine CA Technologies with solutions for application development enlarging the Ciber Momentum’s ability to accelerate application modernization.
Ciber will also work with WhiteHat Security, an application security company to help enterprise customers modernize and secure their mission critical applications. This partnership will allow Ciber to deliver security throughout the entire software development cycle, getting rid of very first line of code.
Specifically, the objective here is to have Ciber Momentum transform legacy custom systems into modern architecture and WhiteHat applications security testing will scan code from day one of the project for daily remediation.
Moving to Ciber Transformation services, IT lines within many companies has become out of balance with outdated skill-sets too heavily associated with ageing applications and expensive coding processes.
Ciber Transformation services helps clients realign their work functions and cost structures. In addition, the link between application modernization and large scale labor reengineering is a very exciting opportunity for Ciber. And everywhere we sell Ciber Momentum, we talk about Ciber Transformation services.
When we combine Ciber Momentum and Ciber Transformation services, we can help clients both modernize their technologies and their workforces simultaneously.
Now I would like to move on to other new business successes. In North America, Ciber was recently hired by Like Rich [ph] Health, to conduct several assessments of their current info system and processes, total upgrade and consolidate and improve the company’s info [indiscernible] systems and transform their business processes as finance, supply chain and human resources.
We signed a large contract with a U.K. based Aerospace and Defense company to migrate the existing SAP system landscape into SAP HANA to provide end-to-end [ph] platform for processing high volumes of operational and transactional data in real time. This contract is the first of the U.K. SAP HANA deal to be signed.
Ciber began a project with a leading global financial institution to implement Microsoft dynamic CRM for a number of key corporate banking functions. We run this contract in competition against Tier 1 IT companies and have firmly established in Ciber’s Microsoft dynamic CRM conventions on an international level.
Lastly, but more importantly, for a second consecutive year, Ciber was named Infor last partner of the year in 2015.
As we look to 2016, the key investor question for Ciber is how would we grow revenues, reduce overhead and generate cash while still making the critical investments required to capitalize in the launch of Ciber Momentum and Ciber Transformation services.
The answer is simple, although the execution process is complex our people, our strategy and our products are now defined and aligned. Ciber must now execute to deliver positive outcomes for our clients and our shareholders. I look forward to sharing with you’re the progression and our 2016 results with you, which I believe will show you increased cash and margins stemming from our strong investments in product development, sales talent and internal processes.
With that, I will hand the call over to Christian.
Thank you, Michael and good morning everyone.
Before I get into the numbers, I will provide a few highlights for the most recent quarter. Let me start by discussing the revenue performance for the quarter. Currency was responsible for about half the revenue decline in the U.K. for another substantial portion. Ciber’s pipeline remains robust. In fact, we increased our overall company pipeline of qualified opportunities by 7% in the fourth quarter compared to the third quarter.
We continued to reduce SG&A cost year-over-year and sequentially, primarily due to tight expense control and actions related to our 2014 restructuring which is substantially completed. We also continued to invest in Ciber Momentum, Transformation services and Talent services.
As Michael mentioned, we invested $2 million during the most recent quarter, which represents nearly 100 basis points of operating margin. After generating $5 million of positive operating cash flow in the third quarter, we generated another $6 million of operating cash flow from continuing operations in the fourth quarter.
This figure would have been significantly higher in the fourth quarter of 2015 if not for the timing of one additional payroll period. In addition, we spent $4 million on restructuring during the quarter.
Turning to corporate results. Revenue in the fourth quarter of 2015 was $194 million, up 2% sequentially in constant currency and down 6% year-over-year. When measured in U.S. dollars, revenue was up 1% sequentially and down 11% year-over-year. You can see from these figures, a continued impact that a stronger dollar on our reported results.
Gross margin was 25.3% down 50 basis points compared to the prior year, primarily due to the ramp of transformation services. SG&A expense was $45.7 million in the quarter, down 7% year-over-year and down 7% sequentially.
SG&A declined due to restructuring activities completed in the last 12 months, which resulted in reduced headcount and facility spend in 2015.
Operating income from continuing operations totaled $3.4 million in the quarter, before amortization and restructuring charges, representing an operating income margin of 1.8%. This margin compares to 3.5% in the year ago quarter and 1.4% in the third quarter of 2015. I should mention there was significantly greater investment in 2015 versus 2014.
Net income from continuing operations in the fourth quarter before amortization and restructuring charges was $0.9 million or $0.01 per share compared to net income of $5.6 million or $0.07 per share in the year ago period.
Looking at our North American segment, revenue was $108 million in the fourth quarter, flat year-over-year and down 2% sequentially. Year-over-year revenue increases in our influent practices were offset by declines in talent services. However, our recent investment in talent services has started to pay off as revenue per day increased sequentially adjusted for seasonality.
Revenue for the most recent quarter also benefited from the ramp up of our Transformation services business.
North America gross profit margin was 26.7% down 100 basis points compared to last year’s fourth quarter and down 50 basis points sequentially. Our year-over-year and sequential margins was impacted by lower margin revenues during the initial steps in the delivery of transformation services.
SG&A expense was $18.1 million, down 4% year-over-year and down 8% sequentially. Year-over-year declines were driven by tight cost control, partially offset by increased investment in our Ciber Momentum transformation services and talent services businesses.
Operating margin of 9.9% was down 30 basis points compared to the year ago period, but up 60 basis points sequentially. We believe this level is a solid sustainable profit margin for North America operations.
I will now discuss the international segment. Fourth quarter revenues were $87 million down 11% in constant currency compared to the year ago quarter, mainly due to declines in the U.K. In U.S. dollars, the year-over-year decline was 22%. Revenues in the international segment were up 8% sequentially on a constant currency basis driven by seasonality. These gains were supported by growth in the Netherlands, Germany and Norway.
For the U.K. the rate of year-over-year revenue decline has slowed and profitability is improving. We expect this trend of recovery to continue in the U.K. in 2016. Gross profit margin of 23.1% in the fourth quarter, was down 60 basis points year-over-year.
SG&A was $16.6 million during the fourth quarter, down 13% year-over-year primarily due to restructuring. Sequentially, SG&A was down only 2% due to the increased investment in our sales force during the fourth quarter.
Operating margins of 4.1% was down 260 basis points compared to the year ago period and down 140 basis points from the third quarter of 2015.
Turning to the full year, Ciber’s total revenues were $787 million down 1% year-over-year on a constant currency basis. The revenue decline was driven by international results particularly in the U.K. Excluding the U.K. corporate revenues increased 1% on a constant currency basis. Revenues were down 9% compared to the prior year in U.S. dollars.
Gross profit margin for 2015 was 25.9% compared to 25.8% in 2014. A slight improvement was driven by higher international gross profits for the year. SG&A for 2015 was $188 million, down 9% year-over-year. On a constant currency basis, SG&A was down 2% compared to 2014. Lower cost in international and North America was partially offset by increases in corporate expenses, which included investments in our global operating models.
Operating profit before amortization, restructuring charges and management concession cost was $15.7 million in 2015, representing an operating margin of 2%.
In 2014, net operating profit of $21.6 million, were a margin of 2.5% on the same basis. On a constant currency basis operating margin improved 20 basis points compared to 2014. Our operating margin was significantly impacted by increased investments in our growth initiatives. In fact, the investment reduced operating margins by approximately 90 basis points.
Net income from continuing operations for 2015 before amortization, restructuring charges and management transition costs totaled $7.9 million or $0.10 per share compared to a net income of $9.1 million or $0.12 per share in 2014. Management transition cost applied only to our 2014 financial results.
Let me give you a brief summary of our segment results for the full year. In North America, revenue was $432 million for 2015, up 2% compared to 2014. Revenue increases in our Oracle and Infor practices, more than offset for client and talent services.
North America’s gross profit margin for 2015 of 27.1% was slightly down compared to the 2014. SG&A expenses for 2015 were $75.6 million down 3% year-over-year. Operating margin of 9.6% improved 40 basis points from 2014. As I said earlier, we believe this is a sustainable, strong level of profits for this business.
I will now briefly discuss the international segment. 2015 revenues were $356 million down 4% compared to 2014 on a constant currency basis. On a U.S. dollar basis, 2015 revenues were down 19% compared to 2014 driven by declines in the U.K. and the Netherland, partially offset by increases in Germany. We continue to see success in Ciber Managed services across the region, as the revenues increased year-over-year well above market rate with particular strength in Germany.
Excluding the impact of the U.K. decline in currency, international revenues would have been flat compared to 2014. We see 2016 as a year of recovery in our international segment.
Gross profit margin was 24.3% in 2015, up 50 basis points versus 2014. SG&A was $66.8 million during 2015 down 22% compared to 2014. On a constant currency basis, SG&A went down 7%. Operating margin of 5.6% was up 120 basis points compared to 2014. We believe there is still room to increase the margin from these levels.
Let me touch on a few items beyond North America and International. Our quarterly corporate expenses were $11 million in Q4 2015, flat with 2014. For the full year, corporate expenses were $46 million compared to $42 million in 2014 reflecting investment in the global operating model, portfolio realignment and increased legal expenses associated with litigation initiative several years ago.
Our tax expense for the full year was $6.6 million. Our cash taxes for the same period were $2.1 million. Stock compensation expense for 2015 was $8 million compared to $11 million in 2014.
I will now discuss cash and our balance sheet. We ended the year with a cash balance of $20 million compared to $46 million at year-end 2014 and $18 million at the end of the third quarter. Cash used in operating activities from continuing operations was $25.9 million in 2015 compared with cash provided by operating activities from continuing operations of $2 million in 2014.
Changes in working capital primarily contributed to the overall decrease in cash from operations during 2015 as compared to 2014. Normalizing for restructuring expenditures and an extra domestic cycle, we would have moved for a positive cash flow from operations in 2015 comparable to last year’s levels.
Capital expenditures were $6 million in the quarter and $13 million for the full year. On a quarterly run rate for core capital expenditures, its $2 million to $3 million per quarter. The increments of CapEx in the fourth quarter is related to the implementation of the new ERP and HR Am systems that Michael described earlier as well as spending for Ciber Momentum. The outstanding balance on a credit facility was $33 million at the end of 2015.
Total DSO was 64 days at the end of the year down from the 67 days at September 30, and up from 57 days at the end of 2014. The Q4 2015 results reflect an anticipated temporary increase associated with a large project is in track for expected completion.
I think it will be also helpful to provide you with a review of the restructuring announced in 2014. The savings we achieved in 2015 and the investments we made in new growth initiatives mainly Ciber Momentum, transformation services and talent services. The purpose of the restructuring was to reduce our cost and increase efficiency. We have completed almost all of the actions from the 2014 restructuring which involve a workforce reduction of about 290 people and $20 million in severance payments plus another $7 million in office closures and other expenses.
The restructuring has enhanced our global delivery model with improved utilization of our workforce and increased off-shoring. We’ve also streamlined our portfolio. We achieved about $3.6 million of savings in the fourth quarter of 2015.
A significant portion of the restructuring savings did not reach the bottom-line, as they were offset by investment spending. We spent about $7 million of investment mainly in Ciber Momentum, transformation services and talent services during 2015. Investments in POC in large upfront sales and start-up cost for Ciber Momentum are running higher than we originally expected. And these costs are reflecting in our operating profit margin.
Revenue for Ciber Momentum is not expected to be realized until the latter half of 2016 at the earliest, and it will be modest to begin with. Normal term of course, we believe in the potential for strong revenue growth with higher margins from Ciber Momentum.
Transformation services, is generating modest revenue with our initial client but with lower margins than our corporate average as the business ramps up. We anticipate improved margin trend as we take on additional business. We’re confident in the potential for this business, particularly when it is linked with Ciber Momentum, as the combination allows Ciber to transform our clients’ application environment and labor model.
We anticipate approximately $4 million to $5 million of incremental investment during 2016 versus 2015 for Ciber Momentum, Ciber Transformation services and Talent services. If we see a strong pick-up in new business for Momentum, we may prudently increase the investment level proportionally. This spending will impact our profitability until this initiative and contract signing and revenue and profit generation, sufficient to offset the investment.
In summary, with Europe changes Ciber and we made course corrections to realign and improve our portfolio and complete a major restructuring. We made significant investments to position Ciber Momentum, transformation services and talent services for success.
We also invested in the company’s internal processes and systems, many of which had suffered under-funding for a number of years. Now, the key is operational discipline and execution to realize Ciber’s full potential.
With that, I would like to open it up for Q&A. Operator, please give the instructions.
[Operator Instructions]. Our first question comes from the line of Brian Kinstlinger with Maxim Group. Please proceed with your question.
Hi, good morning guys.
Good morning, Brian.
Based on the more than dozen proof-of-concepts Momentum, can you share maybe a target for an average deal size or bookings for 2016? I guess, when I look at the first yield, it sounded like it was pretty small, is that indicative of what you expect to see on initial deals this year?
The first deal, first of all, we’re delighted to have our first deal done. We thought this out back, it would be about 12 months from launch, we were looking somewhere around third quarter for that to happen. It is an existing client, and it’s an interesting - it’s Microsoft to Microsoft uses the full capability of Momentum.
And it has the potential to be substantive and it’s not - I don’t want to comment whether it’s small or not small now, because I don’t want to talk about the size of the deal. But the deal is very strategic and it is clearly good deal. And the proof point that Momentum is at the right place at the right time. So that just describes the deal.
What I said in the script Brian, and I think this is what we put up was, and maybe this is the nuance that we thought the deal was small, was when I said, I believe that being dealing in the pipeline that we have some of the largest what we’ve talked about largest scope sizes, address mission critical occasions.
And what was down in the last six months of lessons learnt on Momentum is there are two parts that Momentum goes down, one; when a customer has legacy mission critical of applications they want to modernize and they go down and use their path and it is a larger size than customers that want to do the other path, which is I want to go from an old Microsoft to a new Microsoft or from an old Java to a new Java, still modernizing it and still using the application source code.
But there are two distinct paths that Momentum is addressing. And then the third one of course is what we’re doing with CA and WhiteHat. And that WhiteHat announcement was really around addressing security, given that Ciber security is the number one issued at most companies based today.
And with the sales cycle, the 12 that you’re talking to, where are you in that sales cycle in that 9 to 12 months, are you towards the end of it do you think? Are you some of at the beginning?
Yes, good question. We launched in the third quarter in the U.S. and we launched in the fourth quarter in Europe. And I think when we look at the pipeline, you can see the relatively maturity, the U.S. is ahead of Europe in the pipeline.
But the level of size between new client and existing client is around 50-50 which it itself is an important thing to think about because we would never have gotten some of these new logos without Momentum, these companies would never have come to Ciber if we had not had the Momentum discussion over Ciber Transformation services discussion.
And then, secondly, I think as we look at how things will pan out I think the more complex out definitely the 12-month cycle. And the other one that is at the other path will be a lot quicker. And I think we’re confident now that, and the other thing Brian I think is, we’ve taken on what we think we can deliver at the time being because the last thing we want to do is sign up a lot and be not be able to ramp up the delivery component on the back-end.
So, we would be very cautious to better deliver what we sign. We’re also very adamant, we’ve reached a lot in the last six months and I’m more convincing than ever that we got the right product at the right time. But this is a complex.
Well, great, congratulations on signing that deal. That certainly is a groundbreaking one for you. The next question I had is, U.S. revenue declined sequentially. I would have expected a ramp at HP might have offset the seasonal weakness that you have of your billable days or vacation. So can you highlight the trends at [indiscernible] and then maybe exclude HP and the North American business and what the trends are there?
Yes, so, Brian this is Christian, good morning. First of all, we started to ramp this transformation services business. It is pretty small in the quarter. So, if you think of total company basis, its low single-digit, very low single-digits x percentage of revenue. So, as you see, historically we would have shown a slight decline in revenues at least analysis wise, now it’s flat. So that is what is happening in North America.
If you step back right from a total company basis, the revenue profile really shows the $25 million decline, where more than half of that is related to currency and the remainder is linked to our U.K. business.
Have we did HP, are we just in the very early stages or can you maybe highlight that?
So, I think, what I want to - because I don’t want to really pull out one single concept. What I will say is transitions occurred, I will say that the start-up account activity as you know, the expense always comes at the front, because it’s got the start-up and all the associated costs with that. So we’re burning through that.
The customer is happy, which is important. And at the moment we’re delivering against our committed ramp-up and our committed contract. So, all-in-all I’m incredibly pleased given that this is a new area, Ciber Transformation services. And like Ciber Momentum we’re being very cautiously what we have done and we are at the moment right on where we should be. These costs, as you know on a three to five year contract, typically bidding up in the first 12 to 18 months.
And is that why I see the cost of services increasing sequentially faster than revenue because you’re hiring people ahead of deploying them for this large deal?
Yes, so the margin decline you can associate to a large portion, to the ramp-up of Transformation services.
Okay. And there were lot of comments, so, I didn’t catch them all. But, can you talk about the lower international operating profit in 4Q versus 3Q sequentially? I mean, you had more revenues, but it looks like you got lower operating actual profit dollars, so maybe go through that please.
Sure. So, on the international side, obviously the biggest factor on the top-line and also impacting bottom-line is currency. The U.K. operation and the year-over-year decline in terms of revenue is another big contribution. And so, overall, revenue for Europe we’ve seen sequentially seasonality up-ticks in some of the big countries like Germany and Netherlands and Norway as earlier mentioned in the script. So, it is a mixed bag, it’s not a one-sided story. It is many factors coming together here.
But is it not a natural hedge with currency, with revenue and expenses where the margin stays the same even on the fluctuations of currency?
Yes, there is a net fill patch that is to, let’s say on an absolute dollar basis, right, you’re going to see a decline.
And in the U.K. remember, Brian, it’s attributable to that one contract that I terminated because the situation was untamable for Ciber. And, so, therefore there was incredibly large second half decline in the revenue associated with the termination of that contract.
Okay, a few more. First of all you mentioned it is going to take some time to see the evidence of the progress in the income statement, that’s what you were alluding to. So, maybe can you talk about when you expect to see those margins begin to recover and maybe when investors should target or start to see a recovery in revenue as well?
Yes, so, overall, as we said in order to see improved margin, we need revenue growth, and Michael was really focusing around that in his part of the remarks. Obviously, the ramp up of talent transformation, will another portion to see revenue grow as well as late in the second half, Momentum. So those are the elements that relate to revenue.
Within Momentum revenue stream, you’re going to see improved margin profile for the corporation, given the margin profile of Momentum. And the last element is G&A reductions as Michael outlined, we target $5 million reduction of G&A. It also comes over the year will kick-in and improve margins. So, if you add this all together, the margin profile improvement in the second half are to be the factors.
Okay. So then, in the first half of the year, given the increased investments, you sort of hover around breakeven like you did in the December quarter excluding restructuring?
Well, in future quarters as we’ll almost complete from a restructuring perspective, we don’t expect large additional cost in the first half. So, I compare this to the roughly 2% or 1.8%, so operating margin adjusted for this.
Okay. And then, you mentioned just now as well as in the prepared remarks, the $5 million of lower G&A. I’m curious, is this savings or will this be reinvested, I guess, the revenue declining, should we see absolute SG&A dollars continue to go down?
Yes, so, this is a good question. So, G&A reductions, we target that in order to free-up room for investments. We outlined as well that we expect in those initiatives because some of them ramp through 2015, increase the level of investment. And so therefore, you’re going to see that the bottom-line impact is depending on the level of investment which we’ve outlined.
So, just to be clear so I understand you’re saying that, some of that, a good portion of that $5 million will be reinvested in the business? Is that right?
Okay. And then I guess, you seem to be quite confident given the momentum pick-up and I think that a lot is going on in a year that you don’t think is normal flex in the income statement yet. Stock is down a wide margin coupled with the broader market. Has the company, like I’ve asked every quarter thought about using their cash or cash flow generation to buy back stock? Maybe an update on that would be great.
Yes, I think, Brian, what I’ll say is, we announced a program Christian will talk about what we’ve purchased to date. We’ve not withdrawn that program so that program is still very active. And we continue to get very consistent feedback from both new vision and owner side that stop buyback at this time and given the relativity of the market is a good use of that cash. The cost of acquisition and the numerous amounts of activity and acquisition at the moment, we don’t comment on acquisitions but I believe that cash today and where our stock prices that having to program out there an announcement is a good thing.
Okay, thank you.
Our next question comes from the line of Juan Bejarano with Noble Financial. Please proceed with your question.
Hi, good morning and thank you for taking my questions. First, congrats on the Ciber Momentum win. Just want to understand your revenue growth for Ciber Momentum in the past, you talked about the potential for that business to become a $200 million plus business over three years. Can you discuss in more detail how you plan to reach this goal, it seems to be a good number but will you need to add partners, maybe license, resolution anything around that?
Yes, I mean, when we first announced Ciber Momentum, I think we said we believe that this has the potential of $200 million plus business in three years. And then I think last quarter I was very clear by saying, even if this was $100 million, it is incredibly accretive and important to Ciber. So, and I do think the three window to get to a substantial revenue is about right. And certainly the way that we’ve seen how we would address and how we would ramp up larger deals, leads back to that conclusion.
I think the way that we’ve articulated strategy around Ciber Momentum is sort of a couple of pillars. First of all, it’s the attachment of partners, so you would have seen the CA announcement and this quarter we announced WhiteHat. Now you see the press release go out next week on WhiteHat. And those two companies are incredibly important because the CA is all around the sales purchase and using CA technologies. WhiteHat is all around making sure that application code that’s generated is run through a security scan to ensure that vulnerabilities and the code that’s generated don’t exist.
So, it’s very two important partnerships and I think you’ll see that we’ll continue down that path. The other important thing about WhiteHat is that’s a SaaS to a SaaS model. So, as we, Momentum is a SaaS model, WhiteHat is a SaaS, so we’re combining two SaaS business models to create value for the client.
The second route is what we call partnership route. So, who would we license Momentum to that would use Momentum in an operating space. So another company, with companies that would operate in the same space that would look at Momentum and sort of whether you call it wide labeling or using the technology to enable their reductions into their profile, into their customers. And we’re looking at that as a work stream.
And then certainly the adjusted growth we have with pipeline and new and existing clients is the third good streams. Those three good streams are very active.
So, you are talking to a few people as far as wide labeling?
I think we’re talking to a lot of people and a lot of people are actually talking to us. So, it’s not - I mean, I think we’re talking more calls than we’re placing calls.
Okay, thank you, that’s helpful. And now, that you have this new client, do you feel to convert new clients or do you maybe need a few more wins to kind of start seeing the conversion kind of speed up a little bit?
So, I think it’s a great question. Here is what I don’t want I may have not said it correctly before. I want to make sure that when I saw Momentum, I know how to deliver it, and I know how it’s done with the margin profile that we expect. So the releases that we have done, Momentum, make the product more stable and more enhanced at every delivery cycle.
The most important thing we’ve got at the moment is the ability to convert these environments to the new environment and it seemed to be working incredibly well. And that’s why I gave you the two examples in the script, one about how quickly we can go and find candidates and codes, complete the menu, which company did today. But more importantly how quickly then Momentum can help turn that into an output product.
So, yes, so I will probably deliberately go slow in terms of the way that we take on these customers until I know that we have the model right and that we have the matching profile right and that we have the true steps with everything falling into the right buckets of the SaaS model correctly. But I don’t believe that we’ll be - it would take us too long. And I do believe that careful selling of this and making sure that we do the right thing always is more important than announcing ten sales at the moment, and not being able to deliver them.
Okay, thank you. And just on Ciber Transformation services, I think last quarter you discussion a proposal to a global consumer large sale manufacturer from overseas. Any update on that front?
I think we have, yes the update is they are still looking. This is a very - as Momentum is, when we talk about people and we’re talking about the transformation of people. It takes, most companies take very, very careful approach. There is, lots of legalities that you have to look into. But everything that we’ve talked about is still active.
Okay, thank you. That’s it from me.
Our next question comes from the line of Marco Rodriguez with Stonegate Capital Markets. Please proceed with your question.
Good morning guys, thank you for taking my questions. I apologize I lost my phone connection, so if you repeat this, I could follow-up with you later here. But did you provide any sort of information in terms of the operating margin for fiscal ‘16 second half, I know that prior to this call you had a goal of 6% to 8%. Is there an update on that?
There was no update to that. So, let me step back first and discussion also that 2015 results on a full-year basis. If you go and you look at the financial statement you see 2% of operating margin. If you adjust that for both currency and the investment we put in place for future, you get to more 3% to 3.5% operating margin for the year. We highlighted the investment level at $7 million.
What we said in the forward-looking model is that we need elements of growth and that is growth in our core business, transformation services and Momentum. The later will lead to margin expansion given the profile of the margin profile of Ciber Momentum. And if you couple that with G&A reductions throughout the year, you will get to the improved margin profile from current level in the second half.
Okay, that’s helpful. And in terms of the G&A reductions and the investments, I just want to make sure I’m, fully understanding things here as far as where we go in terms of the bucket. You had mentioned that you were going to do about $5 million in reductions in SG&A. I’m assuming that’s an annual number. But obviously you’re investing as well to support momentum and transformation services to grow top-line.
Those investments, are we going to see that all SG&A or is it going to be a combination of SG&A and cost of sales, can you kind of probably think through that?
Yes, so, from an investment, that’s a good question. From an investment perspective, think about when we go and deliver and POC that would involve delivery resources so that is a direct cost for us, right so it’s above the crust margin. If we go in and invest into sales people and business architects that would be in the SG&A bucket. If you then look at how to ramp-up prior to large Momentum deals, that will be all in direct cost.
So, if you now timeline that, SG&A would come way ahead of the sale because we need to invest into the sales people and business architect. Once you get to the stage of the POC, you see an increase of direct cost. And ultimately as you get close to delivering like you have the direct cost sitting there.
Okay. And then, just kind of based on the commentary you guys had and perhaps I’m just interpreting things all incorrect what’s here, but just looking for some guidance. So, if you have that $5 million drop, either about $188 million in SG&A for fiscal ‘15 but you’re going to be investing pretty heavily in ‘16, it sounds like so kind of almost sounds like if reductions on the cost side will be nominal. Is that the correct way to interpret your guys’ statements?
Yes, it’s a timing thing. I point you to one of my remarks, right. As we grow Momentum and we see if Momentum takes off, we will very prudently invest proportionally. So, to say, there is an absolute number against the $188 million, it’s very hard because it really relates to the growth of Momentum.
Got you. And Michael, last quick question here. In your prepared remarks I think you were talking about Momentum and you made some comments that, the sales cycle and just the overall process I guess, it has kind of exceeded your expectations that you guys had initially set. I was wondering if you could maybe spend a little more time add little more color, I understand that the sales cycle is rather complex. But information or feedback that you’re getting from the sales cycle or the pipeline would be helpful?
Sure, a couple of things. First of all, let’s get back at the end of actually nearly at the end of fourth quarter. And we brought in an independent party to review when we were on Ciber Momentum, just to see that we weren’t eating our endowment. That party had full and unfretted access and gave a very independent report to myself and the board that talked about Ciber Momentum.
That report validated everything that we had thought about Ciber Momentum and pointed out a couple of things that we hadn’t and I’ll walk you through those in a minute.
The second thing was the amount of PRCs that we’ve done has taught us a couple of things. First of all, what we think our candidates for Momentum, logical candidates for Momentum, weren’t actually produce sometimes the best results. And choosing the applications that we’re going to run through the proof-of-concept is really important.
So, when we describe to a client now what the application could run through the PRC is, we’ve got much more prescriptive and we’re getting much, we’re getting really good results. Every single PRC we’ve done has proven out in the fact that we do get the automation right that we talk about, we do get the ability to identify business logic candidates and we do get the ability to show a customer that what they’ve thought was in the application versus what we found on the application are divergent, I mean, they’re like left and right they are poles apart.
And yet simply because some of the ages of the applications and some of the, the amount of people that have come in and out, you just don’t follow. We definitely found as I described before that there are two distinct paths for Momentum. Loads that may not want to enter into a full modernization but yet want to take an old environment like an old Microsoft pre-release environment and go to the latest Microsoft.net.
While that is transformation, it’s sort of a different than application Momentum, because you’re going language upright, staying still language from language, and Microsoft to Microsoft, but absolutely getting that application in a new domain environment.
The second of course as I said, tool application modernization. What we’ve done with some of the competitive environment is with our Indian colleagues, like everyone with revenue slowdown, they understand when a Momentum tool is very disruptive and in a couple of cases where we have looked at our proxy model versus what a competition would do. The due response was discounted labor, dramatic discounted labor, which helped with keeping their bench full. And it proves the point that Momentum has a significant advantage over the cabin based model.
And responding to that, now how we watch that and how we communicate that and how we get our ROI done, we’ve thought a lot more clear on and we have a way big enhancement we had probably six months ago.
From a mixed point of view that I’ve mentioned before, we have about 50% new logos. Those new logos incredibly large companies. And what we found is why we think the value proposition is so ensure to the obviously. When you’re dealing with a large company that has applications that sit between three or four departments, finding the earlier in the business application, finding with the budget for the business application is in, get it everyone on board, it’s taking a little longer.
No one disagrees that has to happen. No one disagrees that there is money there. But the buying and the amount of people you need to sign up is a little bit longer and a little bit harder than what we anticipated. And so therefore, that has allowed us to go back and rewrite all our scripts. We think about the way that we sell this and reposition this in the market. And that’s all good, I mean, that’s what you learn when you launch a product, so that’s all good feedback.
Going back to what the external analyst came and when they looked at Ciber Momentum, one of the areas that they said was in desperate need. And one of the feedbacks we had from the earlier Ciber releases; was business logic is very difficult. And we had business logic in a Momentum roadmap and in fact we’re delivering an update to business logic now.
Most tool base can handle as one plus one equals two then repeat. But when you have very complex business logic, which allow the application say, no tool today can handle complex business logic. We found now that the modifications that we make with Momentum will now handle complex business logic. And half of us, the way that we go think about taking an application to having an application that has incredibly complex business logic is actually a great candidate now for Ciber Momentum.
So, we’re actually broadening the scope and we’re looking at every single competitor. I think we have been compared to every two out there. And to date we’ve not lost to a tool. So, I think that’s an important point. And I’ll stop there, because I’ve gone into a lot of detail for you. But I hope that gives you some clarity.
That’s very helpful. Thank you. Thanks for your time guys.
Ladies and gentlemen, those are all the questions we have time for today. I would like to turn the floor back over to Christian Mezger for closing comments.
So, thank you for your participation on today’s call. And thank you for your continued interest in Ciber. Have a great day. Thank you.
This concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.
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