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CIBER, Inc. (NYSE:CBR)

Q2 2008 Earnings Call Transcript

July 24, 2008 11:00 am ET

Executives

Jennifer Matuschek – VP, IR

Mac Slingerlend – President and CEO

Peter Cheesbrough – EVP and CFO

Analysts

Anurag Rana – KeyBanc Capital Markets

George Price – Stifel Nicolaus

Ed Caso – Wachovia Securities

Tim Brown – Roth Capital Partners

Operator

Good morning, ladies and gentlemen. Welcome to the CIBER second quarter 2008 earnings call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions) Now, I would like to turn the conference over to Ms. Jennifer Matuschek, VP of Investors Relations. Please go ahead.

Jennifer Matuschek

Thank you, Nicole, and good morning, everyone. Thanks for joining CIBER's second quarter 2008 earnings call. With me today are Mac Slingerlend, our President and CEO; and Peter Cheesbrough, our CFO.

We distributed CIBER's second quarter 2008 earnings release before the market opened this morning and a copy is available on the company's Web site at CIBER.com. This morning we also published our financial scorecard on the Web site, which provides selected metric information as well as revenue and income for our operating segments for those of you that are interested.

During today's call the discussion may include certain non-GAAP financial measures in an effort to provide meaningful comparisons to investors. A reconciliation of non-GAAP measures to the related GAAP measures is provided in the Investor Relations section of our Web site.

Lastly, I would like to remind you that certain comments today may constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Please refer to the Safe Harbor language in today's press release and in CIBER's other public filings. Now Mac, please go ahead.

Mac Slingerlend

Thank you, Jennifer, and welcome to those all that have called in. Our second quarter 2008 was very good on several fronts, particularly, total revenue growth of 19% and the highest organic growth we've seen in years, even more importantly, the highest net income of any quarter since the Y2K days of 1999. Several of our operations improved margins.

And while we met the upper end of the operating contributions we guided to overall, our margins in total still did not yet improve to our level of expectations and we think better margins are still possible. There are of course details and explanations on the (inaudible) not as good, but, and I will get to those when I review our operating divisions. But, first, we're going to turn the call over to Peter Cheesbrough, our CFO, to review the metrics of the quarter. Peter?

Peter Cheesbrough

Thank you, Mac. Good morning, everyone. First, I would like to outline a few of the highlights for the quarter and the year-to-date. Strong organic growth in our European and U.S. commercial divisions resulted in overall company revenue exceeding our guidance.

Forward margin improvement at our largest division drove improvement in the operating earnings of the company. EPS of $0.15 was at the high end of the guidance range and for the six months revenues were $612 million or 16% increase over the same period last year. An EPS of $0.27, 17% increase. Strong cash flow from operations allowed us to reduce debt by $18 million since year-end.

Now, get into the details. Revenue for the second quarter was $317.6 million, up 19.1% quarter-over-quarter. Of this increase, 11.5% was organic, 5.4% was due to foreign exchange, and 2.3% acquisition. Organic revenue growth by division is as follows.

U.S. commercial was up 11.2%, Europe was an increase of 30.4%, state and local 4.3%, Federal had a slight retrenchment of 2.2% less than we have seen in the past, and CES was flat. For the six-month period, revenues grew by 16.4% with organic growth contributing 9%, foreign exchange 5.1% and acquisitions 2.3%.

Gross profit for the quarter was $87.1 million, an increase of $13.2 million or 17.9% versus last year's same quarter. Strong contributions from Europe and U.S. commercial drove this improvement. Gross profit margin in CES was $7.6 million, down from $9.8 million in last year's quarter. The largest component of this decline was attributable to lower gross profits and other revenues, specifically, IBM hardware sales.

Overall, gross profit margins for the quarter were 27.4%, slightly below last year's second quarter margin of 27.7%. For the six-month period, gross profit margin improved 10 basis points to 27.5%.

SG&A expense for the quarter of $68 million was 21.4% of revenue, an improved 30 basis points quarter-over-quarter. This reduction was largely attributable to the European division which has been consistent in holding the line on SG&A costs while continuing to grow the overall business.

Earnings before interest, taxes and amortization, EBITDA were $10.1 million, a $2.9 million or 18% increase over the prior year's quarter. As a percent of revenue, our EBITDA was 6% same as the second quarter last year, but sequentially, a 40 basis point improvement over the first quarter. This was driven by 290 basis point improvement in Europe's EBITDA at 8.6% and a 120 basis point improvement in U.S. commercial EBITDA to 9.1%.

The strength of EBITDA in these divisions overcame challenges encountered in the Federal and CES division, the EBITDA was down quarter-over-quarter. For the six months, EBITDA was $35.5 million, an 18% improvement over the same period last year, and EBITDA margin was 5.8%, or 10 basis point improvement over the prior year.

Operating income for the quarter was $17.4 million, an increase of $2.7 million or 18.2% over the prior year's quarter. The percentage of revenue, operating income was 5.5%, equal to that of Q2 '07 and a 40 basis point improvement sequentially. For the six months, operating income was $32.3 million, an 18% increase over the prior year and the operating margin at 5.3% was a 10 basis point improvement over last year.

Other expenses of $2.9 million for the quarter were $900,000 higher than the prior year's quarter. This was driven largely by higher interest expense, but was at the same level as the first quarter. Our income tax expense was 38.5% for the quarter. This is same as for the second quarter last year and despite there being no R&E credits this year, greater proportion of earnings generated in Europe in lower tax jurisdictions helped keep the rate steady.

Until Congress extends the R&E credit again, we like others are unable to take any benefit. Net income for the quarter was $8.9 million, a 14% increase over the $7.8 million in Q2 last year. The EPS is $0.15, represents a 15% increase over the $0.13 in the same quarter last year.

Net income for the six months was $16.1 million, an EPS of $0.27 representing a 17% increase over the $0.23 in the same period last year. Net cash flow provided from operating activities in the quarter was $16 million, and together, with the $25 million generated in the first quarter resulted in a combined $40.9 million for the six months as compared to the $4.4 million in the first six month last year.

Our CapEx for the six months was $8 million compared to $5.6 million last year. As a result, our free cash flow was $33 million compared to a negative $1 million last year.

Moving on to our balance sheet, here we made progress on a number of fronts. We repurchased $10 million of debentures in the quarter, which brings the total to $94 million or 54% of the issue, leaves $81 million of the debentures outstanding.

We reduced our total debt position from $210 million at the end of the 2007 to $193 million at the end of Q2, a reduction of $17.7 million. Total debt-to-capital improved to 29% from 31.6% at the end of the year, and that debt to EBITDA was 2.4 versus 2.8 at the end of 2007.

We repurchased an additional 300,000 shares of our common stock at an average price of $5.75. In addition, we managed to increase our cash position by $7 million to $38.7 million.

Accounts receivable, services DSOs was 66 days, an improvement of six days from the 72 days at 2007 year-end, an improvement of four days since the end of the first quarter. Overall, DSOs were 72 days versus 78 at the end of 2007.

We continued our discussions with the city of New Orleans and FEMA concerning the outstanding receivable balance, which at the end of the quarter stood at $10 million. We received $2.8 million from the city in the quarter related to current period billings, consistent with the city's commitment to paying on time for current work.

We continue to work with the city to seek reimbursement from FEMA for work done in earlier period, and hope to see some progress with this in the third and fourth quarters.

In conclusion, clearly, the European and U.S. commercial segments turned in outstanding performances with both revenue as well as margin growth. However, we have some work to do in the CES division.

Overall, we are pleased with these improvements as well as the strong cash flow generation. We now have only $81 million of convertible debentures outstanding, and expect these to be either put to us in December or we may purchase on before then if we see favorable prices.

For the balance of the year, we expect continuing to use cash generated from the business to fund working capital, capital expenditures, and to pay down our revolving credit facility.

That concludes my comments. Now back to you, Mac.

Mac Slingerlend

Peter, first, thanks very much. The two biggest things I'll give you is for the improvement in DSOs and cash flows, those are extraordinary numbers. I'm not going to walk through our five operating divisions, add a few comments on our expectations and open up the call for questions.

Starting with our U.S. commercial division, first and foremost, we earned our best revenue growth in this group since the late 90s. 11% quarter-over-quarter organic growth in these times in the U.S. was a very solid accomplishment. And since growth was a primary goal for this division in 2008, it's even more gratifying to see the progress. So to Tony Hadzi and Joe Mancuso, good job.

And while commercial's operating contributions improved year-over-year, in our 10% year to-date we are a little disappointed that that increase more sequentially. Couple of project completions and delays and an extra investment in one project for delivery purposes for one client led to the constrained growth of the sequential operating contribution improvement. Nonetheless, we overcame these smaller issues too, total improve materially year-over-year and to hold our own sequentially.

Europe once again posted superior results. Revenue was up sequentially 16%, and year-over-year 53%. And while aided by a weak US dollar, year-to-year organic growth was just over 30%. Operating contributions were even more impressive, more than doubling year-over-year.

And for those of you that remember the – what I will call 2005/2006 memories in Denmark, not our largest country, but still meaningful. Denmark has rebounded to 10% operating contributions in May and June, a credit to Lars and Peter Lloyd to Denmark's rebound. And to (inaudible), at all for all of your – our compliments on a very solid quarter.

Next largest is our public sector divisions, state, local and federal. For state and local, top line growth as mentioned was 4% year-over-year and 6% year-to-date and its operating contributions were stable year-over-year. Their pipeline remains very strong and we envision our results here will continue to be safe.

It is very nice to report that our Federal government division improves sequentially in the second quarter 2008, the first time in several quarters that this has happened. Revenue and operating contributions were up and we are narrowing the gap, catching up on 2007 numbers. Once again, there's a very robust maturing pipeline in this division.

That said, there are tons of variables, including an election year, in the Federal government group. We remain confident in our leadership decision 15 months ago to bring in Marcia Kim and the changes she has made in the business development personnel and private bidding proposal processes since that time, and we believe we are positioned to see more improvements over the next 12 to 24 months.

Lastly, is our U.S. ERP division, also known as CIBER Enterprise Solutions. Overall, this group did not perform in total as well in the second quarter. Our Oracle practice was fine, and while our IBM reselling activities showed some life, it remained tougher.

The domestic SAP practice was under pressure, partially from the successful completion of the $60 million Pennsylvania turnpike project and another smaller, but also successful project in the SAP space. But we are making progress and I think it's the kind of thing where speedier pipeline decisions can improve the results prospectively in the SAP house.

In the next 12 months, we have made meaningful changes to the SAP – sorry, in the last 12 months we have made meaningful changes to the SAP business development team and our focus on delivery. Its leaders are confident in a rebound from this quarter forward assuming of course positive pipeline conversions.

Overall, Europe remains very robust. Federal has rebounded and just may be climbing back. We have revenue growth in our commercial division that we have not seen since the late '90s. Gross profit margin has stayed little bit edged up, but still needs to go further and our U.S. ERP business while struggling a little in 2Q is positioned to improve sequentially.

Collectively, our outlook for the third quarter in 2008 remains intact for better and prospectively, we have issued expectations for the third quarter and updated increased earnings and guidance. I will say, I feel is as or more confident in the third quarter prospects at this point than in the last couple of years.

Our stable head counts, balanced business model both geographically and in the custom European environment, and in the public and private sectors, combined with the talent and dedication of our employees make us better positioned and lead to this confidence.

At this point, Nicole, we'd like to open up the call to see if you have any questions for us.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question comes from the line of Anurag Rana with KeyBanc. Please go ahead.

Anurag Rana – KeyBanc Capital Markets

Hi, good morning, everyone. Congratulations on a very good quarter.

Mac Slingerlend

Thank you, Anurag.

Anurag Rana – KeyBanc Capital Markets

Just wanted to get an idea about overall technology spending from your clients, folks you have talked to over the last several weeks or few months. What are they talking about regarding their budgets for next year or just general spending, the general spending environment?

Mac Slingerlend

It's probably a hackneyed comment, Anurag, to say it's kind of the same things we always talked about over calls or otherwise. But, we are not seeing cancellations. I can't really sit here and tell you we are seeing slowdowns. We are probably seeing – our growth is a little bit more spotty as opposed to 100% in 100 places. It's more growth in some areas or maybe even sectors. For example, the telecom sector is meaningful to us and our portion of the financial sector, because we are involved in the subprime activities that others were doing in the last year or two. So, still I would have to say we have stability. We've had a little bit of popping of the pipeline in the Oracle public sector space that has been a bottleneck for somewhere around two or three quarters now. Some things came out of the third quarter – sorry, some victories are coming out of the Oracle public sector late second quarter or early third quarter that we haven't seen for some time, and that's certainly a positive signal for us. Federally, we are holding our own and we’ve got several things submitted, just kind of hoping that they get broken out of the log jam before either the end of the fiscal year, change of staffing regardless of party, et cetera. And so, things generally are holding up or else we wouldn't have the organic growth that we're able to show you here. And our head counts are holding up. So head counts are up a hair, not dramatically, but they are up 1% or 2% from, say, March time frame. So head counts are holding up and organic growth is there, and it appears things are holding up for us.

Anurag Rana – KeyBanc Capital Markets

Great. And any update on plans to expand offshore?

Mac Slingerlend

It's just one of those things like when something to say, we'll say it. I'm not trying to be too critical to you there, sir. But, we are continuing to work on things. We are very encouraged about some activity that we’ve got going on at the moment, but I don't think I have anything specific to report to you.

Anurag Rana – KeyBanc Capital Markets

And lastly, any free cash flow expectations for full year?

Peter Cheesbrough

Obviously, the free cash flow in the first six months was very strong, Anurag, and earlier in the year, we'd expected cash flow in the low 40s for the rest of the year – for the full year. I think we'll see some modest improvement for the rest of the year, but the third quarter probably won't be as good. I'm sure it won't be as good as we've seen so far and for the full year, we will probably see a little bit of improvement in the $45 million to $50 million range for the full year.

Anurag Rana – KeyBanc Capital Markets

Thank you so much.

Operator

Thank you. Our next question is from the line of George Price with Stifel Nicolaus. Please go ahead.

George Price – Stifel Nicolaus

Thanks very much. Congratulations on some good numbers.

Mac Slingerlend

Thanks, George.

George Price – Stifel Nicolaus

Wanted to dig into couple of the segments. First, can you talk a little bit more about what is going on in U.S. ERP? You mentioned PA turnpike ramping down and another smaller contract. But the commentary in the press release on some maybe some struggling projects and delayed start-ups. Can you give us more color around that? Maybe is any of that – where are you seeing that? Is any of that – would you say macro related?

Mac Slingerlend

Yes. George, thanks. I'm guilty of the guy putting the word struggling in there. I guess I would have to say something like it would be disingenuous not to say that everything is rosy, et cetera, however you split that out. With respect to the public sector, you heard me say a second ago that Oracle's public sector has had some – pipeline has had some leakage in the (inaudible) here in the last 30 or 60 days or so. The SAP public sector for us, anyway, hasn't been leaking out of the pipeline into (inaudible). They are still just more or less a hold up in some pipeline with public sector. I'm actually afoot with some plans in that area, but I do – I would be correct to say to you that we are still not necessarily busting the things out of the pipeline in the SAP public sector which when you close a major project and have a minor one at the same time, it's going to have a negative impact to your P&L unless you can replace it quickly. As for the struggle side, I'm going to say there was one change order we had hoped to get in June for a project that's being finished successfully, change order did not come in on time, I still think we're going to get a change order from this client for that work, but it wasn't there for June 30th. So, consequently, I couldn't, and put it in the P&L. And there's another project where we inherited, it does do a little bit of the carryover from the Metamor days where we inherited a project where I'm not really happy with the structure of the project and how proceeded on CIBER's watch, but we are fully engaged in coming up with a satisfactory solution for the project this quarter such that it won't be – they're going to end up with a good – I believe that we're going to end up with an agreement where they’re going to have a very successful go-live and we're going to bring it to conclusion probably early in '09. But it was not helpful to our second quarter results.

George Price – Stifel Nicolaus

So, kind of a mix around. I guess, would you – it sounds like you attribute more of the – the growth impact to the public sector side of the SAP business. Is that fair?

Mac Slingerlend

If we are just sticking to SAP, and we could bring up the IBM stuff in a second here because that's also impactful to the quarter and we need to highlight that.

George Price – Stifel Nicolaus

Yes.

Mac Slingerlend

I would say a third to a half of it dealt with public sector finishing up projects successfully. And the other half of it deals with just the pipe – we ramped up for a bench on some projects that we're going to start. They now got a Labor Day start instead of a July start or June start. We thought they were going to be there, but they're still going to start. Maybe a change or a two here. So, it's kind of 50/50. It's couple of things. But it isn't something that's like, wildly like out of control or going on prospectively. Back to IBM for a second. Last June, and I'm not sure if Peter commented on this. I apologize. But it was one of the better quarters in that IBM hardware reselling business. We have not made as much in the last year as we made in the second quarter last year in that business. And so when you go year-over-year, I'm going to say roughly say, it was down a good $1 million or down $0.01 second quarter this year versus second quarter last year. So, when you are comparing the results of that consolidated group year-over-year, a very good contribution to the fact that it didn't – that it did decrease was the fact that this IBM business is not a stellar now as it was a year ago at this time.

George Price – Stifel Nicolaus

Is there any structural change or change to the relationship with respect to the IBM business?

Mac Slingerlend

First answer is, no. The second one is always. I would probably tell you that they do change the programs from time to time and where they give incentives and what incentives they give. And that's just part of the battle being an operator, and that's fine, that's okay. The thing I liked about the second quarter this year was that when it got down to the last week in June, there was actually noise going on. If I took the third quarter of last year or fourth quarter last year, first quarter of this year, when you get down to the last week of a quarter which is always vital in a business like this, there wasn't enough to get you excited. This year there was. This year there was activity that was, is it going to close, or is it not going to close. So there was more vitality in that space this quarter. I'm not going to tell that you it gave us a robust result, at least it got our pulse going for the first time in a year. And that I'm hoping we'll carry over as the second half of the year comes along.

George Price – Stifel Nicolaus

On the U.S. commercial business, just very surprising growth. Can you give a little bit more insight as to what drove that growth? I mean, as you noted, we haven't seen that kind of growth in years and that.

Mac Slingerlend

Yes.

George Price – Stifel Nicolaus

…I guess a specific question, are there any like award fees or one-time payments or just give us a sense of what drove that growth?

Mac Slingerlend

No, there was a one-time religious event. Easter fell in March. I guess that's not one-time, but happens from time to time. When Easter falls in March, you absorb some costs in the first quarter that you don't have in the second quarter, that gives you a little bit of a leg up. In '07 Easter was in April and in '08 it was in March. The real key, and we didn't – we talked a little bit, could we talk more specifically about the change. Very good productivity, bill rates and stable head count led to the results. It was affected also by wins in the first quarter carried over to business volume in the second quarter. So the wins we previously announced were not so much second quarter wins, but first quarter wins, but it shows up in the P&L a quarter later. That's the way it should be. And you combine it with stable head count and a very good productivity and slight increases in bill rates which we have been experiencing all throughout these periods. It gives you the opportunity to have a very good year-over-year result.

George Price – Stifel Nicolaus

And then can we – can we expect above average growth to continue into 3Q specifically for commercial?

Mac Slingerlend

I hear you. I don't know if it's going to be 11. I was pretty impressed by 11 myself, but I'm just going to give you a swag that's between 5% and 10%. I think it's going to be a positive number, I don't think it's going to be a low positive number. But to sit here and tell you 11 would be a little ahead of my expectations at this point.

George Price – Stifel Nicolaus

Let me just ask you one or two more and then I will turn it over. With respect to the – I guess the broader P&L, how much – do you have a sense of how much acquired growth you expect in third quarter? And then for third quarter and second half, should we expect to see what looking back seems to be a typical seasonal margin downtrend in the second half?

Mac Slingerlend

You are tough, George. When it comes to acquired growth, there isn't anything that's thrown into our guidance that deals with anything that's – other than what's already on the table, of course. And sequentially, I don't think there's any change from the second quarter to the third quarter or if it is $1 million. I mean, it's not enough to – it's a rounding error, if you will. So, I'm really not looking for any change in the acquired growth component of – acquired percent of growth in the third quarter compared to the second. With respect to margins, that's an interesting one for me. And I'm just going to tell you that the effort and the (inaudible) is great. Commercial is doing better than a year ago. They are heading into the second half in a better place than they headed into the second half a year ago. They absorbed some things in the second quarter that they don't have in the third quarter. So, I have confidence that we're going to be a little bit stronger in the second half of '08 than I feel like we were in the second half of '07. It's an overall comment. I just feel like we're going to be a little stronger in the second half of this year than a year ago.

George Price – Stifel Nicolaus

It just – just to kind of be clear though, I mean the second half of last year wasn't exactly out of the park, I mean, you saw some pretty noticeable sequential margin degradation in the third and fourth quarter. I don't think the guidance implies quite that much. I'm just trying to–

Mac Slingerlend

I'll join you there. It's hard to – I accept the fact that I was not as pleased last year in the second half as I wish I was either. And it's not that we – I think we met the expectations we put out, but it doesn't mean I was blown away by how we did. I'm feeling a little bit better about this second half than the last year's second half.

George Price – Stifel Nicolaus

Thanks very much for taking the time.

Mac Slingerlend

Thank you, George.

Operator Our next question is come from the line of Ed Caso with Wachovia. Please go ahead.

Ed Caso – Wachovia Securities

Hi, Ed Caso, thanks. Mac, you have I think $38 million on the balance sheet, it's been nine months since you acquired something. I was wondering sort of what your use of cash was for. Are you going to stick with the converts and the share repurchase, or could there be some acquisitions in the future and if so, in what general areas?

Mac Slingerlend

The cash position is a little illusionary. It isn't that it isn't there, because, yes, it is there and it's fine and it's solid. It's in good banks. It's not a problem. But there's also some of it what I might generally call landlocked in different European countries. There's more cash in Europe than there is in the U.S. And sometimes you are profitable in places where if you tried to extract the cash, there's a penalty for removing from countries and you are better off to spend it in the countries where the cash exists. So it isn't so much that there is a robust cash position and of course, we got a bank credit facility to replace the debentures and banks tend to have more covenants than debentures tend to have. So, we're going to watch those at the same time. We do have some flexibility. I think I've always said if there is a smallish federal niche player, that it has some vehicles, it would help us win business and ramp up federal faster. I'd take a look at that, but generally needed to be smallish. We continue to talk in terms of offshore opportunity. There's – we've turned down several things. I wouldn't say we turned down too many, but we certainly turned down several. There's a conversation that's alive. I can't tell you it's going to lead to somewhere, but, we are feeling good about an opportunity and if there's anything to say about it along the way, we'll talk about it. And other than that I would probably tell you that we continue to do little niche acquisitions in Europe, as we did early in the second quarter, something called InSync in Norway, I shouldn't call it something. It's good folks in the Norway area in SAP. Not very large, but continues to build up our SAP strength in the Nordic area, and anticipate that our guys in Europe – mainly growing organically but from some time to time may stumble on to something I think it's attractive to add into their local models. That's probably where the M&A dollars should be looked at.

Ed Caso – Wachovia Securities

Great. That's all I have. Thanks.

Mac Slingerlend

Mr. Caso, thank you sir.

Operator

Thank you. Our next question is from the line of Tim Brown with Roth Capital Partners. Please go ahead.

Tim Brown – Roth Capital Partners

Hi, good morning. Just a couple of questions. Just first on the SG&A. I know Peter touched on this earlier, but can you kind of give us a breakdown of why SG&A was up about $3.5 million over Q1? Obviously, some of it's going to be a foreign currency, but I'm curious what else there is there?

Peter Cheesbrough

It's a variety of reasons. And obviously, Europe has been growing strongly as a business, and as they expand geographically and within the individual countries starting, they have increased sales people and location. In the U.S., federally – federal has been continuing to invest in the SG&A area to make sure it's getting full compliance with federal across the county standards so it can bid more extensively as a prime contractor. And obviously the organic growth takes fueling. Additional – we put people in the field, they have been traveling much more, they have been working much harder, and all those things feel the increase in SG&A costs. I'm sure there is any – Mac and I looked at this the other day, I'm not sure there's any one particular item that is driving this, it's across the board.

Mac Slingerlend

And I'm not sure – Tim, I forgot what number you used a second ago as far as what the dollars were, but if revenue is up $17 million, and you put 20% on it, it's $3.5 million. In general, I think you have to take a look at the percent, the bigger we get and I think from the percent standpoint it was in line. It's the fact that we are a bigger company and consequently, we got more expenses going on.

Tim Brown – Roth Capital Partners

Right. Just a one thing that I noticed on the operating income breakdown was in the corporate expense line.

Mac Slingerlend

Yes.

Tim Brown – Roth Capital Partners

Did really been about pretty flat for the last five or six quarters and jumped to $1.3 million. I was wondering if that's a one-time event or not.

Mac Slingerlend

I will tell you that in part because when you have high productivity as we had in the quarter, you add to things like your vacation reserves, I think that climbs something like $600,000 in the quarter, but that doesn't mean that it was either the wrong amount or not sequential or not year-over-year. Just the fact that I know that we had some good increases in a couple line items that dealt with reserves for future periods, but you shouldn't look at it as though we went out and bought some (inaudible) item that's going to be continuing quarterly cost to us going forward.

Tim Brown – Roth Capital Partners

And then just on the gross margin, and just kind of looking at the entire company, we saw utilization was up fairly substantially, bill rates were up fairly substantially. I'm curious if there is anything else, why gross margins would go down. I think you mentioned that you obviously came to the conclusion of a couple contrasts in ERP. Is there anything else there–?

Mac Slingerlend

Remember the IBM reselling discussion, because if their revenues have done a lot, that's roughly kind of a 50% gross margin business. The way we book it, we don't book the whole price of the computer that we sell or the server or the blade server or whatever. We just book the commission. And so, consequently the gross margin on that business is great a year ago and just not as material this year. That's a very big item. FAS 123(NYSE:R), multi element accounting has a little bit of impact. I'm not going to tell you it's more than 10 or 20 basis points, but it's always something. And there's a little bit of – in Europe, even we had some hardware revenue dealing with their IT outsourcing business in the month of June, and the margin on that business isn't as great as typical services business, and that impacts Europe's margins, which obviously feed into our margins, but still good business, there's a great client relationship, we are glad to do it. But it doesn't necessarily mean that it drives gross.

Tim Brown – Roth Capital Partners

I guess just when you look at the second half, you think you are going to be putting that similar type margins or there's room for improvement?

Mac Slingerlend

I'm going to – Peter may have a comment here in a second, and it goes back to one of George's questions. I'm not going to say the second half of last year was stellar for me in the form of gross margins, so, I think there's a good opportunity for us to either be as good as or better given the improvements we made in the commercial margins, given the fact that Federal's gross margins have moved up year-over-year, the state and local appears to be in a position to continue to improve gross, and the CES is certainly in a position to improve gross from the second quarter. So, you put all those things together, you got to think – when there's only five items and you talk about four or five of them being in a good position, I think the second half should be okay.

Tim Brown – Roth Capital Partners

And then, Mac, just on the state and local, from your perspective, we hear a lot about the shortfall from – in budget constraints. Are you seeing business or particular pipeline start to decline?

Mac Slingerlend

We are not at all seeing pipeline these times. We are seeing decisions get delayed. I mentioned to you some Oracle stuff has popped through the ERP side of the house out of the public sector, and the state and local is still probably a little bit more held up at this point. The pipeline here is something like 5 to 6 times of run rate of revenue of that business unit. And it's very material. We feel pretty good about our ability to certainly not go backwards and make some improvement sequentially. I think they are going to be holding their own. I think I used the word stable when I made my written comments. So I think we're going to be – my forecast as I estimate the second half of the year is to include stability coming out of state and local. And I think that's probably torn between the fact that I think we are pretty good, we are going to win some things in the face of budget and tax receipt constraints on the other side. But, they are bidding some things. I'm feeling good about where they've got their business unit.

Tim Brown – Roth Capital Partners

And just the last question on Federal. I know that you have already – you have already bid on the prime contracts. When do you – have you heard from that upon any of them and when would you expect to hear from them?

Mac Slingerlend

No, but if you hear, would you let me know? We've mainly – this was a real quickly for a second here. If you generally get five year contracts and everything, lot of large numbers taken to place, you win 20 – you rebid 20% of those every year and every five years you can bid 100% of them. We had 60% rebid in our kind of business this year. And we've won either all or all but all. But some of those, even when you win them all, we've had to share some with smaller business is because when we had them, they were small business, but now they are part of CIBER. We're no longer small business, so we have to share some of those contract wins. They have spent a lot of time this year rebidding the base of business in our federal group and doing a very nice effective job of it. They got some prime things that I probably would – I mean, I can say this to you, but I can't say it to you with a commitment other than the fact that the Federal government's fiscal year is October 1st. There's this election thing coming up. I think we are hoping to see some things happen in that pipeline by the end of the fiscal year and I think we all have some concern. I'm not stand talking CIBER, I'm probably talking federal contractors that things you don't get by the 1st of October may not happen until the first part of '09 as does as staffs move in and staffs move out and things along this line. So, I don't say that as a pessimistic statement, I just say that realistically we are hopeful in this quarter some things could move out and move forward for us. And I think they are doing the right things. And I just encourage them to do what they have been doing.

Tim Brown – Roth Capital Partners

Thanks for taking my question.

Mac Slingerlend

You bet, sir.

Operator

Thank you. (Operator instructions) Our next question is from the line of George Price with Stifel Nicolaus. Please go ahead.

George Price – Stifel Nicolaus

Hi, thanks, got a good follow-ups. Just since we are on the topic of federal, could you comment on what drove the modest quarter-over-quarter improvement in federal? And whether you think that, that quarter-over-quarter improvement is going to continue in the third quarter because you could have a modest year-over-year drop even still showing some improvement?

Mac Slingerlend

I'm going to go back to the word productivity. Head counts were actually not quite as stable in federal as they were for the overall model, but they've been stable for the last 60 days. We're early in the quarter, there was a little bit of droppage in head count, but it's been stable for the last couple of months. My understanding is a combination of meeting milestones on projects and the productivity rates that we experienced in the quarter were what drove a lot of that sequential improvement. And best I can tell you is that with respect to our guidance and expectations for the third quarter, we're expecting a pretty stable sequential quarterly environment in our federal business unit.

George Price – Stifel Nicolaus

That's helpful. And in terms of the – you mentioned the rebids that you have to give away, some of which were small business deals, that contracts which you have to give away, some of that revenue to a small business prime, any – can you give us a sense, I guess, of where within the year – like, how that's kind of progressing through the year? So, were a lot of those rebids in the first half and so you are going to start to kind of feel that move through the second half or is it – do we still have a lot of that in front of us and should that be something that we think about maybe as we go into in the first half of '09?

Mac Slingerlend

No, I think your question is a good one, George, but it's – I think we are well on the down slope here. I think we were facing headwinds early in the year, somewhere in the area of three quarters of those are in the background at this point. So, are there a few remaining? Sure, but the material items that we needed to deal with we have been – we dealt with and been successful with. So – and I'm not really quoting Marcia per se, but I would say that she felt a significant part of her work in '08 was maintaining the base, making sure that she kept what she had coming into '08 intact so that she could lever off that to grow in '09, '10 or '11. And I think she feels we have succeeded as best we can in that regard. And I guess specifically to your point, all these something like three quarters, but we are on the down side of being successful in this – at this point. So, it's not that – less than half are an issue in the second half of the year.

George Price – Stifel Nicolaus

Just jumping back to U.S. ERP real quick. Given what you saw in the quarter and what the view is can you talk a little bit about what you expect in terms of your third quarter guidance and second half of the year? How much more does this unit have to kind of work through?

Mac Slingerlend

This comes out of category, George, if I give you 1,000 answers, you will ask 1,001 questions, so I don't know that – I don't think in the last 58 quarterly calls that I have been on, I don't recall giving as much segment expectation breakdown as I'm feeling like I'm getting asked here today. I think the only thing I can say to that comment is with respect to my expectations for third and fourth quarter in this group, I'm looking for a pickup in performance in the overall, generally driven by stability, better – little bit better stability in gross profit crossing – the pipeline in Oracle is already busting a little bit out which is good. That gives us some – probably revenue growth. I have to take a look at sequentially that stuff from last year, et cetera. But, I think the Oracle side looks really solid for us and if we pass a couple things on the SAP side and if we go back to the IBM hardware business which had a poor second half last year. The guys that run it are (inaudible) are good people. They had a poor financial result. It doesn't make them bad people. But we don't have second half of the year comparisons in technology solutions like we had first half of the year comparisons. So, that's a little bit of wind in our back as we head to the second half of the year.

George Price – Stifel Nicolaus

Fair enough. Last one and this is a broad high level one, so I'm done with the segment specific ones. Just pricing, you mentioned I think in the release higher bill rates in the U.S. commercial business. I guess was that – was that mixed or rate card? And just, more broadly, what are you seeing on the pricing front? Are you seeing relative stability in the pricing or are you seeing pricing pressure in any particular areas, if you could give a little color on that? Thank you.

Mac Slingerlend

I'm going to say that you get back to my comment on equilibrium. Right now, I think that the demand is equal to the supply, that the requests for work from our clients is equal to the supply of consultants that are out there, i.e., they don't have me at a disadvantage and I don't have them at a disadvantage. In general, if you want our best folks, you're going to have to pay for them, or else somebody else is going to pay for them. So I think we're in a very stable rate environment, in virtually all the sectors that we're operating in. Demand is to my back in SAP. There's greater, if you will, demand generally than supply for experience in the SAP space. So that gives us reasons and opportunities to raise rates, if you will. As the Oracle stuff pops out of the pipeline, those build rates will bias up for us as an overall company. Europe's rates have been very stable and I think they would also say – nobody has given away the business there. So if that business continues to grow, it's not growing at smaller build rates. I just think we have a very stable overall industry equilibrium client demand at the moment and nobody is sitting with leverage over us with respect to what bill rates we're getting.

George Price – Stifel Nicolaus

Great. Thanks very much for taking some follow-ups.

Mac Slingerlend

Thanks, George.

Operator

Thank you. And at this time, we have no further questions. Please continue with any closing remarks.

Mac Slingerlend

Nicole, thanks for your help today. Thanks for calling in. I've got a plane to catch before too long today, so I will be here a little bit. Peter and Jennifer will be here all day to my knowledge, and can help you with more questions if you may have them. And we look forward to speaking with you when September's results are in. Thanks for your support and your continued interest in CIBER.

Operator

Thank you, ladies and gentlemen, this concludes the CIBER second quarter 2008 earnings call. We thank you for your participation. And you may now disconnect.

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Source: CIBER, Inc. Q2 2008 Earnings Call Transcript
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