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Edgewater Technology, Inc. (NASDAQ:EDGW)

Q2 2008 Earnings Call

July 30, 2008 10:00 am ET

Executives

Timothy Oakes - Investor Relations

Shirley Singleton - President & CEO

Kevin Rhodes - Chief Financial Officer

David Clancey - Executive Vice President & Chief Strategy and Technology Officer

David Gallo - Chief Operating Officer

Analysts

Arnold Ursaner - CJS Securities

Unidentified Analyst

Macon Rudisil – Keane Capital Management

Operator

Welcome to the Edgewater Technology, Inc. second quarter 2008 financial results conference call. (Operator Instructions) I will now like to turn the conference over to Timothy Oakes of Investor Relations for introduction.

Timothy Oakes

Welcome to Edgewater Technology second quarter 2008 earnings call. I am here today with Shirley Singleton, Edgewater's President and CEO; David Clancey, Edgewater's Executive Vice President, Chief Strategy and Technology Officer; Kevin Rhodes, Edgewater's Chief Financial Officer and David Gallo, Edgewater's Chief Operating Officer.

Before we begin, I would like to remind everyone that today’s call could contain forward-looking statements under the Securities Act of 1933 as amended and the Securities Exchange Act of 1934 as amended. Investors are cautioned that such statements could involve risks and uncertainties that could cause actual results to differ from current expectations with respect to such statements. These types of statements and underlying factors related to these statements are listed and are reported and filed information with the Securities and Exchange Commission, as well as in the company’s press release that was distributed earlier this morning. The statements made during today’s call are made only as the date of today’s call and the company undertakes no obligation to update the forward-looking statements to reflect subsequent events and circumstances.

With that, I will now turn the call over to Shirley Singleton.

Shirley Singleton

Last earning's call, we talked about some things in softness in the classical text services area and that customers were still buying but in a more conservative bite. Exiting Q1, we felt that we had an opportunity to grow our CPM offering and that they were pockets of strength intact particularly in new areas such as Web Analytics, Internet Commerce 2O, collaboration portals and actually we are seeing some traction in SAP business planning and consolidations. Compared to Q2 of last year, Edgewater has achieved double digit service revenue growth.

We have seen some measured pullback in spending in our classic tech base as our customers are attempting to squeeze cost out by taking more internally. At the same time, we are seeing demand and this is really important in strategic initiatives like give the customer one, a relatively short ROI; two, they need insight and try to control into their financials; and three, traction into new markets. The demands for these new areas are shifting rapidly and we are endeavoring to repurpose our available staff to fulfill those needs to match that pipeline.

Just to give you a sense on what we have been up to, year-to-date, we have trained 41 people in a variety of data services classes, trained 24 staff members in Microsoft BI and share point services, upgraded and expanded 51 of our high pairing consultants capabilities, trained 13 people in emerging SAP technologies and diversified our project management capability by certifying nine Scrum masters

While our utilization has been somewhat lower, it has given us the opportunity to accelerate our retraining program. This process has increased our turnover a bit and some consultants may not embrace our new direction as well, we have been hiring some key talent to blend with the training programs that I just mentioned and into some extent, that actually is assault and post hit to our utilization because we are hiring ahead some key talent to position up us to deliver some of the jobs that are in the pipeline.

I thought it might be useful for everyone to recap our strategic plans so that everyone understands what we are doing here. Edgewater will continue to move into CPM related services and the tech offerings are really moving into application creation using technique such as Mashups, Ruby on Rails, Cloud Computing, social and collaborative sites and Wikis which are all a part of that bundled Web 2.0 technologies and to that end, we have executive step one of our plans namely retooling the consultant base. We are on step-two right now, re-tasking the sales force to drive hard on those new messages. We have been executing on a campaign rather to reintroduce the new Edgewater to past and existing customers who may not be aware of the changes in our service offerings that have occurred over the past two years and I will tell you we have had some success selling into new customers but also selling into existing customers that even in the midst of cutbacks in the legacy business with us, they are buying the new offerings.

We believe our plan is starting to work and we will ultimately increase our future utilization as we aggressively sell into the new areas. We did have a rather slow start in sales but sale showed significant improvement by quarter's end. Edgewater welcomed 16 new customers in the quarter which happens to be the exact same number as Q1, big difference though is that the sales volume was double of the new customers' Q2 from sequentially Q1. We will shift to Kevin and get into the numbers.

Kevin Rhodes

First I would like to comment on the review of our goodwill and intangible assets and then I will review the preliminary results for the second quarter. We are issuing preliminary results today as we are in the process of analyzing potential impairment of goodwill and intangible assets. The only open item impacting our financial results is the resolution of this impairment analysis. Although we completed similar review in December of 2007 without any impairment, the current review is being conducted in accordance with FAS 142 as a part of this process management's quantifying the value of our goodwill and intangible assets.

This type of review process is really not uncommon and is required by GAAP when a triggering event occurs. Currently, we are working through the analysis and we do not have an impairment estimate at this time. We will have an analysis complete within the next two weeks. Accordingly, we will file our final financial results with our form 10-Q on or before August 11, 2008. I would like to note that any impairment would be a non-cash charge and therefore would not impact our cash and marketable securities balances.

In light of this review process, I would like to emphasize that the following comments are related to our related to our preliminary results and that these results may change based on the outcome of that impairment review process. Our total revenue for the second quarter was $19.6 million which was a 6% increase over the year ago quarter. Our service revenue which excludes software reimbursable expenses was also up. Service revenue amount to $18.1 million, an 11% year-over-year increase over $16.4 million reported in the year ago quarter and it also represented a $173,000 increase for the first quarter service revenue.

Just a quick count in our revenue as it relates to software sales during the quarter, we closed a large CPM software deal during the second quarter of 2007 and that impacted our overall revenue by $1.5 million during that quarter and total software sales were $248,000 this quarter. I bring this up because software sales can vary substantially from quarter to quarter and in this case, it impacted our year-over-year total revenue comparison. Utilization was just below our traditional range that came in at 76.6% by contrast with very strong utilization in the second quarter of 2007 which was 82.8%. Last year's utilization was clearly on the high end and was above our normal range.

The comparative lower utilization impacted our gross profit as we achieved moderate growth in this metric on a year-over-year basis. We did see improvement over the first quarter however as our gross profit as the percentage of sales increased by 80 basis points. Our gross profit margin on service revenue amounted to 42.6% as compared to 45.7% in the year ago quarter. I would note that this quarter's gross profit margin was within our traditional range of 42% to 45% and we did experience an increase in this metric over the first quarter of a 120 basis points.

We did experience some nice growth in our average revenue for available consultant metric this quarter which amounted to $334,000 annualized compared to $302,000 in the year ago quarter, this is an 11% increase. The increase in our revenue for consultant metric is really due to the shift in service revenue mix as we continue to deliver high end consulting revenue services. SG&A amounted to $6.3 million in the second quarter as compared to $5.6 million in the year ago quarter. The growth in SG&A is primarily due to additional sales and operational personnel that were associated with the 2007 acquisitions.

In addition, we made some heavy investments and training during the quarter, as Shirley mentioned, to improve our skill sets in newer technologies. Additional investments in training have occurred throughout 2008. Depreciation and amortization expense was consistent with the prior quarter at $1 million. Our earnings were down on a year-over-year basis primarily due to the decrease in utilization that I just discussed. Our preliminary earnings excluding the impact of any impairment are up over the first quarter. Operating income amounted to $225,000 or $0.02 per diluted share compared to $1.046 million or $0.08 per diluted share in a year ago quarter.

In the first quarter, we reported operating income of $202,000 or $0.02 per diluted share. Looking at our non-GAAP measures, cash earnings amounted to $933,000 or $0.07 per diluted share and EBITDA amounted to $1.3 million or $0.10 per diluted share. EBITDA improved over the first quarter of 2008 by 10%. Touching on cash flow, Edgewater generated strong cash flow during the second quarter. We are happy to report that we had $3.6 million in cash flow from operating activities during the quarter. This compares to cash flow of $2.8 million during the year ago quarter.

Our balance sheet remains healthy despite the possibility of an impairment charge. Our working capital is $32 million with our cash marketable securities representing $22.8 million or a $1.70 per diluted share. We receivables balance with $16.8 million at the end of the second quarter and our DSO metric was in line with our expectation as 56 days during the current quarter. Our billable headcount was at 276 at the end of the quarter and our total employee headcount was 343 at the end of the quarter.

And with that, I will now pass it back to Shirley for final comments.

Shirley Singleton

At the beginning of the year at the CJS Conference in New York in January and through public filings of our presentations, we did predict a shift in legacy tech assignments to a heavier mix of CPM engagement. What we did not expect is how fast that was going to shift. It shifted faster than Dave and I even imagined. If you look at our top five customers and you will see this in our queue, you will start to see a shift. Synapse was our top customer for many years has moved down to the third slot and ITT Corporation and US Food has moved in to the top five.

In fact our total customer base is now more diversified than in the history of the company. If you dive down in yet another level and do a close examination of the year-to-date new customers, an interesting trend of margins in that we are starting to attract larger sized customers. I will give you a little sampling of new 2008 customers include UPEN, Manufacture's Life Insurance, MedStar Health, MetLife, Mattel, it seems like everyone was a M, [Mohawk Carpet], Chevron and American Power Conversion has all joined the ranks of Edgewater's customers this year and the new customers are primarily buying our CPM related services and the new tech service offerings that we have been discussing today.

The new tech offerings are gaining momentum but, and this is what I said in the press release this morning, but we need to acknowledge that the business environment is rapidly shifting and the rate of acceleration of this offerings may not be enough to overcome that cutback in legacy and more importantly that traditional seasonality that we usually see in Q3. For those reasons that we are guiding those revenues may be flat to down. We do feel that there is a buying opportunity in our stock and since we do not see a good deal of acquisition opportunities in the near term, many of these new technologies, there are not firms out there to buy and given the strategic direction we are taking the company, we feel this is a really good use of our cash to buy back stock.

And with that, I would like to take some questions.

Question-and-Answer Session

Operator

(Operator's instruction) Your first question comes from Arnold Ursaner - CJS Securities.

Arnold Ursaner - CJS Securities

My first question is going to the inner room triggering event; was there a specific customer that caused this?

Shirley Singleton

No.

Arnold Ursaner - CJS Securities

Specific transaction that caused it and is it in an internal or external review process?

Shirley Singleton

Internal review.

Arnold Ursaner - CJS Securities

Okay so the cost, you will not have external cost that would be no orderings in terms of SG&A.

Kevin Rhodes

No, we would not.

Arnold Ursaner - CJS Securities

Okay, you mentioned you are hiring several people in anticipation or ahead of pipeline growth. Can you expand on that comment please?

Shirley Singleton

Sure, I can. We are seeing an awful lot of data services work within the pipeline.

David Clancey

Yes, probably the best way to put this is what we are finding is the precursor of all the new technologies that we are working with on the Web 2.0 side as well as the pre as a post cursor to lot of it, BI, CPM work, data services so the to make BI and CPM more reliable, consistent and repeatable as well as to set yourself up for more content to go to the web, your data needs to be in order and we are seeing a very strong demand for that type of talent. So, we are in the process to doing as to really corralling up a fair amount of that senior talent to that particular lead-in because strategically, it fits right at the crux of where we are today. So, it is well worth our while to pick it up. It is very hard to find and when you can find it, you have to take advantage of it and we found the sea of that talent and a great opportunity and we jumped on it because we saw this is a really good use of cash.

Arnold Ursaner - CJS Securities

How should we think about the cost of implementing them?

Shirley Singleton

Let us see. There are six figure players, Dave Gallo and we think a half dozen.

David Gallo

That is correct and they are helping us and pursue this well as doing the proposal process and creating offerings and they are blending in with our attack on new business right now so we do not expect that we will be carrying all those for the rest of the year. We will be feathering them into new projects and integrating them with our current…

Arnold Ursaner - CJS Securities

I think they have gone up already, have not they?

David Gallo

That is correct, yes.

David Clancey

And they tend to bring some of the other talent that we have that were being trained with them as well as complete the training on the job of the people we have trained in these areas.

Arnold Ursaner - CJS Securities

More quick questions if I can, surely I know you gave a lot of details which I can hopefully get from Kevin offline about the number of people you have trained and in the various ways but can you quantify the cost or margin impact that training have in Q2 in your opinion?

Shirley Singleton

Yes, it is like a $130,000 minimum Q2.

Kevin Rhodes

Yes, that is the actual training cost itself on a year-over-year basis was an increase of $130,000.

Shirley Singleton

In Q2, this as the numbers I quoted on Q1. Do you know at the top of your head when Q1…?

Kevin Rhodes

Yes and $50,000 in Q1 so a total about $180,000…

Shirley Singleton

$180,000 to $200,000.

Shirley Singleton

Incremental over last year, Arnie.

Arnold Ursaner - CJS Securities

Sure and then you talked about retooling and re-tasking the sales force and then in your prepared remarks, you indicated sale showed a significant improvement by quarters end and for guidance supplies, if trends were flat and service would imply a 15% rate of growth which is dramatic acceleration from what we have been seeing. So, two part question, can you kind of walk us through how you saw the improvement in June, what you are seeing so far in July on the assumption things will slow down quite a bit in August and are we in fact fair in looking at 15% of reacceleration of the growth that has been sort of an issue for the last several quarters?

Shirley Singleton

April and May were soft. We saw some movement in the pipeline but I would say that near the end of May, we saw acceleration because some of these messages started to take hold. We see in that pipeline a good deal of data services. We see in the pipeline a nice healthy growth in healthcare in particular and in insurance. Those two verticals seem to be the ones and people started to turn us on like end of the first week of June, Dave?

David Gallo

Yes, that is correct. I think the other thing Shirley that we should point out here is that the high number of sales in June, the good part about is that they were longer term and so they are giving us some run into the Q4 and Q1 of next year which is good but at the same time, the net effect on Q3, all those sales are not necessarily going to burn in Q3 so we got to continue to augment our revenue base in Q3 and in Q4 but the good news is the largest sized deals gave us a longer run in the business.

Shirley Singleton

For example, one of the sales list is a three year deal, that is low dollars monthly but it is a three-year, I will consider that and in no extreme, I will take that one and that is a new customer. In terms of July, I can say that everyday we are presenting and we are finalist if that helps. Now, we do not want to translate that and we are going to win everyone of those but I do know every single day this week we have been in front of CEOs or Board or senior players and we are presenting right now, as we speak the teams of, presenting an important new offering that we have that happens to be internet commerce and web analytics and we are going to find out whether we win that or not but we are in the finals and we keep getting up in front of the senior players and sooner or later, we will break our way. Does that help? Now, I am a little confused on the 15% acceleration so can you kind of play that back again and we will try to answer that.

Arnold Ursaner - CJS Securities

So, it is a factual thing. You basically are saying that revenues could be flat with Q2. That would imply $18 million of service revenue and look at your year ago period, you were 15, I have to reopen my model but 15.7…

Shirley Singleton

$15.6 million, also you are saying, yes that is true but not a sure statement, yes.

Arnold Ursaner - CJS Securities

So, I am saying if you end up being flat sequentially which is what you are hinting you would be flat to down but if you are flat, that would imply 15% year-over-year growth which is dramatically better than we have been seeing but it would imply that you actually are seeing the trends and continuing very nicely, if not accelerating in Q3.

Shirley Singleton

That is true. And I was throwing a cautious thing in there, Arnie because I worry about summer. You have known me for a long time and that is sort I worry about.

Arnold Ursaner - CJS Securities

And as I said that sequential normally you are down sequentially in Q3.

Shirley Singleton

Right.

Arnold Ursaner - CJS Securities

Yes, that is why I am trying to get a feel if you ended up flat sequentially you would have quite strong year over year growth, much stronger than we have seen for the last 3 or 4 quarters.

Shirley Singleton

Yes.

Operator

Your next question comes from Unidentified Analyst.

Unidentified Analyst

Shirley, I am assuming that you do not consider the level of sort of cash flow profitability that company is or cash flow margins that the company is producing right now. I am assuming that you consider those to be below where they ought to be and I think I hear you saying that for the most part you plan to increase those margins by increasing utilization through sales and revenue growth.

Shirley Singleton

Yes.

Unidentified Analyst

What would be the triggers for changing your view on that and what if any expense management oriented things can you do in this difficult environment to assure that the free cash machine that is Edgewater continues to operate in the free cash way that it has in the past?

Shirley Singleton

Well, triggers on changing my view would be if I did not see the continued traction and acceleration into the new messages and how I would probably attack that is reevaluate what am I training into and is it real and I could certainly pull back on the training. The last thing I want to do is trim staff but I have had one layoff in 15 years of managing the business and that was in 2002 in a very bad climate.

David Clancey

We are always willing to do what is necessary but what we do not like to do is get in a situation where we are sort of trashing seed corn. It is kind of like if you have a good programmer, it is easier to train him in a new language than it is to take someone who knows the syntax and new language and train him to be a programmer so we expect a good uptake but if the macro economy goes down where we could be wrong for some reason, we can address the expense issue on the people side which is the largest component. As far as the facilities, technology, laptops, etc. any of the background expenses, Shirley has always had a very aggressive program of constant cost cutting, constantly looking at this particular numbers and constantly driving them down. Some times we feel like we are the Wal-Mart of laptops and IP telephone in facilities.

Shirley Singleton

Yes and I think we have had some added cost that we cannot control namely the cost of being public with new auditing controls coming in 404 and the tax legacy we have from Staffmark, the good news is there are so many wells that we got from the old parent but the bad news is we are caught in a cycle of reevaluating the tax assets, etc which put the burden on the company in terms of cost. So, that is a little bit harder to control.

Unidentified Analyst

Shirley, do you have in your mind what and can you share what you think is an appropriate level of cash flow margins for this business and when I am talking about that, I am talking about EBITDA even before stock comp. So, your true cash flow margin which I guess I have seen run as high as I think for all of last year, it was something like 12.6%. With last year in your mind, I mean is 12.6% or something like last year, is that a goal or is that something you can do better in a reasonable environment. How do you, what sort of cash flow margin would you try to manage the business to because I think your stock at this point, I think, is well it does not reflect how much cash flow you produce but I think as you go forward, it is both your downside protection and your upside you do produce a lot of cash so how do we frame how even in sort of all kinds of environment you still should be able to produce a decent amount of cash.

Shirley Singleton

Yes, I would say that internally, I tried to challenge everyone in the 15% to 18% category and that is where we really tried to target. We are running below that for utilization reasons and others but it certainly not 12. That is not my target.

Unidentified Analyst

Okay and so what do you think of I mean is getting the 15% to 18% all about revenues or can you talk about, I mean, is there a mix change as you move to more CPM business? Would you expect that your margins would improve on a mix basis because of that how do you walk people through how you get there but then also talk about the downside because I think that is what people are kind of focused on now. How do you manage the business to prevent that 12% from going to 10% or 8% or 0 or negative, I mean I cannot imagine it would ever be negative. I do not think you would let it do that but those are the kinds of things people think about when your stocks in the force.

Shirley Singleton

Okay.

David Clancey

If you think about it with this business, it is like real estate location, location, location. In this business, it is utilization, utilization, utilization. We have tuned everything up around it so that it is really the utilization number and the drive to get that particular number up. We have gone through a period of training and then somewhat a larger bench than normal. We have had some attrition out of it. So our goal is now to take advantage of that training and get all of those people up. So, the faster we can move the dial on utilization up into our normal ranges, the faster we can get to the cash numbers that we are looking for because we really view our cash numbers a way of measuring the business and we agree with you.

We see it as a cash machine and also it is why we are going to take another look at the stock buyback in the coming periods especially since we are not going to have the blackout range as we had in the past.

Shirley Singleton

And I think another thing to think about when you are evaluating the management team is Edgewater, the tech consulting portion grew really nicely from 2003 till about midyear last year at double digit growth and it has allowed us to throw off cash and position ourselves to actually get into the CPM business and buy that second leg of the stool, if you will, and move forward. It is time to retool Edgewater, Dave and I started coming, albeit we did not think it was going to be this fast. Someone thought we are almost live in front of all of you retooling Edgewater into the new pieces while the CPM business continues to grow and it is allowing us…

David Clancey

Right and that the Edgewater business allowed us to grow CPM, now, CPM is going to allow us to transform Edgewater to bring that utilization back up and move us away from competing on the commodity side so it is really like a slinky step over step over step and you just keep it moving and you want that transition to be as, shall we say, not as bumpy as it was this time but your really want to try and smooth it as much as possible and still be able to throw up cash and do that transition.

Shirley Singleton

And then Dave and I have also been thinking about what would the third leg of this tool be so we are challenging ourselves to think about turning it on its head again in saying is there is something that new that we would like to start as yet another engine underneath Edgewater in the process of looking at those types of ideas as well. In regards to the second part of your question on how do you manage the downside, the ultimate weapon in the kit is downsizing the staff but that is…

David Clancey

That is a nuclear option.

Shirley Singleton

That is a retreat option and I do not, we are moving forward.

Unidentified Analyst

Right and do you guys have a process? I mean nobody hires perfectly. There is always in every company, there are always people who are not strong performers, do you have a regular process of weeding those people out or do you do it sort of periodically?

Shirley Singleton

No, we have like many companies in the first 90 days are critical and if someone is not making it, we endeavor to do some kind of action within the first 90 days and particularly in tough times, you should have more discipline in good times but in particularly tough times, I challenge Dave Gallo to go and do a re-look at all of our staff, what are their contributions, what are their skill sets and are they ready for the next generation of Edgewater. So, there is a constant process that goes on and we have a weekly process where we are looking at the bench and we have actually improved that process where I need to understand who is coming potentially down on the bench, who is coming off the bench and then more importantly what are people doing while they are on the bench. They should not be just sitting there idly. So, to that end we have actually taken some of these new technologies that we are talking to customers about and use our self as a guinea pig. We put up some collaboration portals where people on the bench are getting assignments from the executive staff in terms of learning new technology, getting ready to work on a bid, working with some marketing initiatives, etc so that they are constantly busy and engaged and that is new in our management process.

Unidentified Analyst

Okay and just quick follow up on the question of as you change the mix to more CPM, what is taking somebody out at the technical services and placing them in a CPM project, do they become more profitable as a result of doing that?

Shirley Singleton

Yes. The answer is yes and in particular, part of my comments and I know Arnie is going to call us later about the details of the training but we have actually taken some Edgewater project managers and train them in Hyperion product set, not from a detailed technical point of view but from a project management appreciation of what you need to do to put in a Hyperion project. The reason why we are doing that is because the deal sizes are increasing on the Hyperion services side which imply larger project teams, which imply that you need to have strong project management fundamentals. So, we are actually migrating those techniques from the original Edgewater, if you will, over into the Hyperion world thus they will get higher margin as being a CPM over there.

Unidentified Analyst

And then just finally, your CPM business, roughly speaking would be what? About $30 million kind of run rate business now?

Kevin Rhodes

It is about 50% of our revenue at this point.

Unidentified Analyst

Okay so maybe a little more than $30 million run rate.

Kevin Rhodes

Yes.

Unidentified Analyst

If you were out in the market looking to buy a $30 million CPM business, what do you think you will have to pay for it?

Shirley Singleton

Well it is 5 to 7 times EBITDA was the numbers we were looking at, I would say in mid last year.

Unidentified Analyst

Yes, it might even be a higher multiple…

David Clancey

Right and our investment banker and our advisers are saying that it was starting to blow out of our range to some of them going north as 7 times EBITDA.

Shirley Singleton

Yes, it is more like drifting 9 I think.

David Clancey

Yes. I think we are hitting more 9ish and they were getting closer to 1.7 to 2 times revenue which in our model is too pricey. We would never buy that which is another reason why we are kind not out in the market.

Unidentified Analyst

Are any deals getting done at those prices?

Shirley Singleton

I know that an offshore front just bought with the Whittman-Hart yesterday. I do not know the terms of the deal. Whittman-Hart was positioning themselves as BI, CPM but I am not detailed enough to tell you if that is true statement or what is it that they had for BI, CPM.

David Clancey

That would be a good question to our advisers to the next meeting.

Unidentified Analyst

Yes I mean because it maybe that your CPM business is worth more than all companies getting valued right now.

David Clancey

Actually, it could be. We do not know.

Operator

You have a follow-up question from Arnie Ursaner - CJS Securities.

Arnold Ursaner - CJS Securities

Your billable headcount, if my math is right, you are 285 at the end of March so you have a 4% decline in this quarter?

David Clancey

A 285 down to 276.

Arnold Ursaner - CJS Securities

So, can you give us a sense of, are you trying to build that back up? I know you mentioned you had some turnover but what should we look for at the end of Q3 for headcount versus the 276, higher or lower?

Shirley Singleton

We cannot get prediction on headcount, Arnie. I think it is going to depend on how fast those higher heads get sucked up off the bench.

Arnold Ursaner - CJS Securities

Where I was going with that is if your revenue per consultant grew almost 11% to 12% this quarter…

Shirley Singleton

11%, yes.

Arnold Ursaner - CJS Securities

And it is sort of very high level and you were to add or build back, what I am trying to get to is a couple of questions. Is the revenue per billable consultant sustainable and if your utilization is going to be driven just primarily because you have lowered the billable headcount, that would lead to growth if you were expanding your billable back to where you were and could get the higher revenue per consultant. That would be a dramatic increase likely in terms of revenue opportunity.

Shirley Singleton

So, that was a big sonnet. So, you are saying I think even if your headcount dropped a bit but you up the utilization, you still would show significant growth.

Arnold Ursaner - CJS Securities

Well, your utilization just a billable headcount drop alone would lead to 4 percentage point or saw improvement in utilization would lead to a sizable growth. I have to back in to the math but it would lead to a sizable improvement in utilization and hopefully margin improvement but then on top of that, again what I am trying to get a feel for…, is the revenue per consultant growing because you flunk your headcount so much…?

Shirley Singleton

I see now. No.

David Clancey

Shifting business.

Shirley Singleton

Shifting business. Okay, now I got you, I am sorry.

Arnold Ursaner - CJS Securities

Again I am trying to hopefully give you a soft ball down the middle to explain your future revenue growth if you can expand back your billable headcount and get higher revenue per consultant, that should lead to very favorable outcome. It is the only reason we are seeing higher revenue per consultant is you drop your billable, that is a different way to get…

Shirley Singleton

Yes. It is a former rather than the latter. That is true. It is because of the mix change, the higher bill rates in the new offerings as well as the CPM business expanding, etc. It is not because of a drop in headcount.

Arnold Ursaner - CJS Securities

And I want to go to just a couple of factual items on your share repurchase; you have a $0.5 million share authorization?

Kevin Rhodes

You mean the $5 million share authorization.

David Clancey

$5 million authorization and we have reviewed it every Board meeting.

Arnold Ursaner - CJS Securities

Okay and that is not a [10B5] that is one where you choose to be opportunistic when you believe your stock is effective.

Shirley Singleton

Yes.

Arnold Ursaner - CJS Securities

Okay, the acquisition pipeline, what you are saying things quite inconsistent with almost every other public companies we deal with, where they are saying that the target because of private equity markets are so slow, they are seeing fewer people interested in bidding and much more realism on behalf of sellers. More opportunities, more reasonable pricing from sellers that is quite inconsistent with what I think you just said you are seeing in the market. Can you expand on that?

Shirley Singleton

Yes, absolutely. In fact there were some companies that we looked at that I had my eye on from a distance. We have gone through several meetings. They asked for a certain valuation and we felt that it was a little bit too pricey for us and they said “Well we got offers from everybody else but we would rather be with you” and I said well, “You need to go take those offers because we are not going to pay that” and I have gotten callbacks from some of the same players saying “Are you still interested in us.” So, I am not sure that we are matching their price.

David Clancey

Well, some of the others maybe looking at is they are looking at what I would call a lot of the more classic services. They are looking at WebSphere. They are looking at TIBCO. They are looking at a lot of the stuff that a lot of the offshore guys are just starting to move into. They are really looking into where we were so what we are running into is a lot of the really tough CPM stuff is incredibly pricey for a pure play because we would not want to take a lot of baggage on it and there is not a lot out there in terms of the new Web 2.0 stuff. That is a type of thing where you are almost entrepreneurial moving into that space and both of those places are where we want to be because the margins are good. There is no offshore competition to speak off and I do not really know where they are consolidating and where they are finding value but we just do not find value on that particular space.

Operator

Your next question comes from Macon Rudisil from Keane Capital Management.

Macon Rudisil – Keane Capital Management

I was just curious if,you Dave, pre-cash flow or pre-cash flow per share guidance for the remainder of this year and as far out as you gave those estimates. I was just trying to get the actual numbers.

Kevin Rhodes

We did not give any guidance out per se in terms of free cash flow. This particular quarter, we had cash flow from operations of $3.6 million and had a nice uptake in our cash balance up to $22.8 million but we did not really give guidance for the full year.

Macon Rudisil – Keane Capital Management

So the free cash flow generation off of that $3.6 million number from operating line, what was the actual pre-cash number? What did you spend below that?

Kevin Rhodes

In terms of CapEx, we have spent very little in CapEx during the quarter, about $60,000.

Macon Rudisil – Keane Capital Management

So, give or take that is sort of the number then, right?

Kevin Rhodes

Yes. In our business, that is the case. We do not a lot of capital expenditures so kind of if you look at EBITDA and maybe even add that stock base compensation which is a non cash charge, if you take that is pretty much a good proxy for cash flow.

Macon Rudisil – Keane Capital Management

Okay and year-over-year revenues grew I do not have the release in front of me but this quarter this year versus quarter last year.

Kevin Rhodes

Yes, service revenue grew by 11% year over year.

Operator

Your last question is a follow-up from Unidentified Analyst.

Unidentified Analyst

Your operating cash flow was $3.6 million, your actual increasing cash from quarter to quarter was $4.8 million, the additional $1.2 million, the previous question was asked about subtractions from the operating cash flow but you actually had an addition, is that all related to reduction in receivables?

Kevin Rhodes

Yes, it is pretty much reduction in receivables. I mean you have the various changes in operating accounts, payables and that sort of thing but it is definitely a reduction in receivables.

Unidentified Analyst

Okay and normally you see people try to slow down payments during times like this but what have you done on the collection? How do you explain your collection success in the quarter?

Kevin Rhodes

I would say yes, the collection success is probably will just the continued concerted effort to try and collect those receivables as soon and as quick as we can, nothing what I would call abnormal in terms of our process of looking at collections.

Shirley Singleton

Well I think maybe one of the changes in the last year has been the dedicated collection site.

Kevin Rhodes

Right but I mean as second quarter, this quarter in particular…

David Clancey

For standard blocking and tackling.

Kevin Rhodes

To blocking and a word from our COO service helps.

Unidentified Analyst

And you are not really seeing sort of a tendency of customers to sort of slow down payments to conserve their own cash obviously.

Shirley Singleton

It is always the customer that tries to do that.

Kevin Rhodes

Yes but I would not say it is broad trend across the entire customer base at all.

Unidentified Analyst

Okay and then following on Arnie's question about the cost of acquisition candidates, I mean is not that really a, it is really kind of a relative gain, isn’t it? I mean yes maybe acquisition candidate prices and sellers have become more realistic. However, when you are looking at your own stock trading if you guys could do and you seem to believe you can do 15% at a minimum cash flow margins, you are trading at something like I do not know, a 25% to 30% cash yield or three to four times your free cash flow, net of your cash, it is hard for your to find anything certainly I would think that can compete with buying your own company.

Shirley Singleton

That is true and then also what you have to do and one of the questions we ask our selves is it cheap for the buyer or is it cheap for the building? And that is something we challenge our customers too as well and I can tell you in the case to SAP where we are seeing some resurgence there since their purchase of Outlook Soft and Business Objects. I will remind all our listeners here that we purchased an Outlook Soft shop in Los Angeles that actually is doing really nicely and we have been reintroduced in the SAP and trying to work that relationship. One of the first things that I did when Dave Gallo told me that SAP is doing well, I tried to go out there and look for acquisitions for little shops and the deal here is this is just one example, Bob.

SAP is changing their code base in the fall. So they are doing a complete flip and so when you look at that and you say- “Are there any little SAP shops that I could pick up to further the momentum?” they are going to have to go through the training. So, why do not I just take some of the deployment in the excess capacity I have, flew them into training for SAP and we will come in with that code flip base of SAP rather than to go buy something that just to flip it.

David Clancey

Right, especially given your point on using the stock would be insane given the valuation right now so it just knocks the cost out. So, what happen is in that calculation, that Shirley alludes to, it really focuses on the bill side which is why you see us training and hiring versus going out in the acquisition trail.

Operator

At this time we do not have any further questions.

Shirley Singleton

I want to thank everyone for being on the call and I would like to remind everyone that our next earnings call is Wednesday, October 29 and we are here all day if they would like to call in and chat with us. Thank you.

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Source: Edgewater Technology, Inc. Q2 2008 Earnings Call Transcript
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