CIBER's CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: CIBER, Inc. (CBR)
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CIBER, Inc. (NYSE:CBR) Q2 2013 Earnings Call July 30, 2013 5:00 PM ET


Christian Mezger – SVP, Corporate Finance

Dave Peterschmidt – CEO

Claude Pumilia – CFO


Brian Kinstlinger – Sidoti & Company


Good day, ladies and gentlemen. And welcome to the Q2 2013 CIBER Earnings Conference Call. My name is Clinton, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

As a reminder, this call is being recorded for replay purposes. And now, I would now like hand the call over to Christian Mezger, Senior Vice President of Corporate Finance. Please proceed, sir.

Christian Mezger

Thank you, Clinton. Good afternoon, everyone. My name is Christian Mezger, Senior Vice President, Corporate Finance. Welcome to our second quarter and six months 2013 earnings conference call. With me today are Dave Peterschmidt, our Chief Executive Officer; and Claude Pumilia, our Chief Financial Officer.

Before turning the call over to Dave, 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 reports 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 web page Today’s discussion will be on a continue operations basis, with the result for our former Russia operations now being treated as discontinued operations. For your convenience and historic comparison, we’ve included annual and quarterly results for 2012 and 2013 on a continuing operations basis as well as six quarters of GAAP restated historical financial with our earnings release this afternoon and in the IR section of the website at

With that, it is my pleasure to turn the call over to Dave Peterschmidt. Dave?

Dave Peterschmidt

Thanks, Christian and good afternoon everyone. In the second quarter CIBER continued its disciplined approach to the business with ongoing progress on many fronts including encouraging signs of improvement in our international operations in a steady North American business. As we have said in the past, our objective is to balance capital allocation with asset utilization. And thus drive cash flow and shareholder value.

We continually evaluate our business to ensure that our focus is on markets and practices that offer the most profitable growth potential while we right size our operations in market where the opportunities for consistent growth is less robust. To that end in the quarter, CIBER took several deliberate steps to position the company for long-term sustainable growth.

Today, we’ve announced the plan to further streamline, right size and more appropriately provide resources for certain international operations where the economy has affected the IT services market generally and our business specifically. These efforts will result in a restructuring charge in the third quarter of 2013 with expected savings in 2014. The focus of our actions is both strategic in support of our growth strategy as well as tactical, removing cost from the business and results in a strong and rapid return on investment.

We believe these actions will enable us to improve profitability and allocate capital towards the best opportunities while building on our success especially in our top four markets, Germany, the UK, Norway and the Netherlands which together now represents almost 80% of our international revenue. We are encouraged that the UK, Germany and Norway are growing and contributing to solid revenues in margin. And we expect those positive trends to continue.

I will have more to say on the challenges in Netherlands and the proactive plans we are putting in place to align our performances there with what we are experiencing in the UK and Germany and Norway. Also, in the second quarter CIBER exited its business in Russia, which is now reported as a discontinued operations. In the quarter, the bulk of our Russian employees chose to leave CIBER for a new entity taking clients with them.

Given the impact of this change and the nature and magnitude of risk involved in continue to operate in Russia, the Board and management decided the best course is to minimize the impact and exit this market. Exiting Russia further lowers the risk profile of our business, and allows us to focus on our growth markets in Europe, while benefiting from the economies and operation in a much tighter geographic footprint.

Claude will extend on these developments in his remarks. Continued wins in the market place are cornerstone of our success. In the past quarter, we won a number of important deals. CIBER in the UK secured a multimillion dollar agreement with a leading European supplier of recycle packaging. And CIBER will deliver a complex program to consolidate and rationalize the group’s SAP systems. The agreement also includes five year manage services contract.

A Southern U.S. university system, with three institutions serving nearly 40,000 students, selected CIBER to manage an upgrade to Oracle’s latest Version 9.2 for human resources, payroll, and financial management. CIBER also will split the Human Capital Management and Campus Solutions database and implement CIBER’s new Admissions system, as well as Oracle’s Talent Acquisition Management, Candidate Gateway, ePerformance and eSettlements modules.

A large, Japan-based retail chain with more than 3,000 stores in 24 countries chose CIBER to support its expansion into the Australian market. CIBER will be implementing SAP Retail for merchandising, financials, and logistics and reporting to facilitate the client’s goal of building a larger store network across Australia over the next three years.

And finally a large developer our eCommerce and direct response business for sports organizations selected CIBER to provide significant enhancements to the IBM power server environment that supports its supply chain and fulfillment operations. These wins are the demonstration of the value we bring to the clients in the market and are key to driving higher value for CIBER and shareholders.

Claude will walk you through the details of our second quarter results; however, I want to provide a high level review. Second quarter consolidated revenue operating income and EPS increased from year ago levels demonstrating our steady progress especially on the bottom line.

Our North American operations was able to hold revenue and expand operating margins in the quarter despite the impact of economic headwinds particularly in our ADM business as we continue to implement our strategy to grow our ISV practices and our managed services practice. While these headwinds are likely to continue in the near term, we expect performance to stabilize in the second half of 2013 as the team continues to execute our strategy to migrate into higher growth higher margins services and managed cost.

As I mentioned earlier, the economy in Europe has played a role in the need for further rightsizing in a few of our international operations. A soft economy primarily in the Netherlands adversely affecting the IT services market, and some of the sectors in which CIBER operates.

I want to address overall growth in gross margins for a moment. Over the past two years consistent implementation of our strategy has deliberately emphasized revenue and margins whether it be the reparation of the troubled accounts or elimination of low growth businesses, we resolve those challenges while de-risking the portfolio and increasing our focus on growth in areas of opportunity.

Concurrently, we have improved process and significantly reduced cost especially in our North American business. Through our prior restructuring results and expected savings that benefit gross margins and more obviously SG&A. And while we’ve made significant progress, I’m still not satisfied with where we are today. The team here at CIBER takes great pride in doing what we say we are going to do. Current results indicate we still have work to do including the restructuring we announced today.

The substantial improvements in our operating leverage have shaped CIBER in a company that can grow profitably. As we continue to execute our strategy to drive revenue and margin improvement especially gross margins. We are pleased to take advantage of that leverage to drive long-term and sustainable shareholder value.

As a reminder, our strategy hasn’t changed through the years. It centers on three areas of opportunity first, to continue to successfully execute our important core ADM business. Second, to accelerate migration into higher growth, higher value services intelligently partnering with ISVs to complement CIBER, and third to expand position to manage services and Cloud as a leader in high growth, high margin full life cycle support to our clients, and we do that for their environment through our managed services offering at CIBER.

In summary, as I look at CIBER today I see a company with a more stable platform yielding more consistent and predictable performance than three years ago when we started our transformation. We are addressing the risks and challenges in the business in a timely fashion while also focusing on the ISV practices in CIBER managed service business that are key to our growth strategy. Moreover, our significantly improved balance sheet is delivering solid below the line improvements driving higher profitability and cash flow. And finally I firmly believe the ability to grow the business now more than ever is in our control.

Now I’ll turn the call over to Claude.

Claude Pumilia

Thank you, Dave and good afternoon everyone. Starting with the first six months of 2013 our financial results reflect progress in a number of areas of the business and some challenges that we still need to work through over the remainder of the year. As a reminder all numbers reflect restatement of historical results for discontinued operations. Here are the highlights: revenue of $440 million increased 1% year over year up 1% in constant currency. Adjusting for restructuring charges operating income totaled $10.8 million versus $11.7 million a year ago. Operating margins of 2.4% were 30 basis points below the year ago period.

Net income from continuing operations of $5.2 million before restructuring charge of $1 million was up significantly compared to net income of $1.7 million a year ago. And EPS from continuing operations before restructuring charges totaled $0.07 per share versus $0.02 a year ago. Second quarter highlights include consolidated revenue of $220 million, up 2% year-over- year or 1% in constant currency and sequentially flat or up 1% in constant currency. Gross margins of 25.4% were below year ago levels, but up 30 basis points sequentially.

Operating income before $600,000 in restructuring charges totaled $5.6 million, an increase of 21% year-over-year and 10% sequentially. Operating margins of 2.6% before restructuring 40 basis points from 2.2% in the year ago quarter and 20 basis points for the first quarter. Net income from continuing operations of $2.9 million or $0.04 per share was up from $400,000 a breakeven on a per share basis a year ago, and up from EPS of $0.02 in the first quarter.

Net cash at quarter end was $5 million and our overall cash balance was $34 million. And operating cash flow from continuing operations totaled $10 million. Before discussing the quarter, I would like to provide a bit more detail about development Dave touched on in his opening remarks.

As Dave referenced, this quarter we announced plans to further streamline our international operations as our initial restructuring revealed additional areas of opportunity. We’re implementing this targeted reductions aimed at improving margins. Areas of focus include rightsizing our bench to improve utilization; centralizing management of administrative functions in key markets to leverage shared services; and better matching labor cost and resources with revenue opportunities.

Following an estimated restructuring charge of $13 million in the third quarter of this year, we expect to see the net benefit in annual net savings of approximately $12million beginning in 2014. This is in addition to the benefit we are expecting from a restructuring announced in the third quarter of 2012, which is on plan and delivering expected savings of $7 million in 2013 and $11million annually thereafter. As a reminder, of our total $13 million of charges associated with the last year’s restructuring we took $8 million in the fourth quarter of 2012, $1 million in the first half of 2013, and expect to take the remaining $4 million in the third and fourth quarters of 2013.

We will continue to provide updates on our progress. As to the decision on Russia, we have identified and reserved the cost associated with our exit. These are reflected in our $4.6 million charge from discontinued operations in the quarter including primarily wind down cost and un-recovered receivables. Our swift decision to leave Russia helps to minimize cost to CIBER and its shareholders. We are pressing forward on all fronts to further reduce these costs.

Current and historical financial statements include the restatement of results to reflect our Russia business of discontinued operations. We are providing supplementary historical restated financials by quarter of 2012 and 2013 year-to- date. Now a look at our segment performance in the quarter. In our North America segment, traction in our ISV and managed service businesses was more than offset by the impact of vendor consolidation programs, terminating contracts and cautious client spending to lay in timeline for us to refill the backlog in our ADM business.

We believe this is at least in part attributable to current macro and IT market trends causing clients the whole spending in the current environment. North America revenues declined from year-over-year levels and helped sequentially in the quarter. We ended the quarter with $106.8 million in revenues down 3% year over year, and essentially unchanged sequentially. Gross margin declined to 27.3% in the quarter, the impact of pricing more than offset the benefit of improved utilization and better project oversight.

On the plus side, we ended the second quarter with very solid operating margins of 8% compared to 6.9% a year ago, marking four quarters of margins above the 7% mark. Margins benefited from solid efforts to contain SG&A which came at 19.4% of revenue in the quarter, down 80 basis points sequentially and 180 basis points from a year ago.

Finally, we made solid progress and our strategy to grow higher values services with positive results in both our managed services offerings and our ISV practices. Our international operations is showing encouraging signs of growth in both top line and margins particularly in our larger markets, and we expect this progress to continue, given the demand in some of these core markets as well as the benefits we expect to accrue from additional restructuring efforts now underway.

International revenue grew a healthy 8% year-over-year and 1% sequentially. In the UK, Norway and Germany, we added several new clients in our higher margin services offerings, and saw good traction in our SAP business as well as growth in these markets. In the Netherlands, a worsening economy, and especially as it affects the IT sector has placed increased pressure on clients to streamline their costs. While this trend continues to affect our business, we are cautiously optimistic given signs of stability in the second quarter.

Combined with right sizing our bench, we anticipate modest margin improvement in the back half of the year. International segment operating margins totaled 5.3% in the quarter, up nearly 100 basis points from the previous quarter, and consistent with margins in the strong year ago quarter. Gross margins of 23.4% declined 140 basis points from year ago levels, an increased 100 basis points sequentially as we benefited from our strategy to grow higher value in CIBER managed services and ISV services in some of our larger markets, while addressing utilization challenges in the Netherlands.

At the same time, SG&A as a percent of revenue benefited from efforts underway to reduce our cost as we implement the restructuring initiatives announced last year. We expect margins to improve overtime from continued SG&A reduction as well as our initiatives to address direct cost by more effectively matching our utilization and cost of labor to (inaudible)

As a reminder, the third quarter is typically seasonally soft quarter in Europe affecting a sequential comparison. Looking at below the line items, we continue to improve our financial flexibility and have made significant progress. We’ve reduced net interest expense by $1.8 million from a year ago and $600,000 sequentially to $500,000, due to lower interest rate on our credit facility as well as significant reduction in our average borrowings. The average cost of debt outstanding at 3.3% is down significantly from over 5% a year ago.

We expect interest expense for the remainder of 2013 to remain at less than $1 million per quarter. Second quarter income tax expense was $1.9 million ,compared with $2.7 million in the first quarter, the year-over-year reduction in income tax expense and estimated tax rate was related to the execution of our global tax strategy.

We now expect our 2013 tax expense to be approximately $10 million versus $11 million in 2012. Operating cash flow from continued operations was $10 million for the quarter, benefiting from higher net income and improved working capital. Given our moderate CapEx requirements, the free cash flow of $9 million was consistent with operating cash flow in the quarter.

DSO of 64 days was relatively unchanged year-over-year and sequentially and we continue to move towards our goal 60. As a reminder, we historically have experienced seasonality in cash flows, they are typically negative in the early part of the year, improving as the year progresses, and we expect the same trend in 2013.

In summary, our second quarter results were evidence of our continued progress. We are focused on driving revenue and gross margin improvement in North America and have intensified our efforts on the key area of improvement in our international segment. Because of the efficiencies, we are realizing from our restricting, an improvement we continue to make in delivery capability, we are positioned for further margin improvement in 2013 and beyond.

We’ve enhanced our financial flexibility, reducing our long-term debt in corresponding interest expense, which is benefited our cash flow. We have significantly improved our conversion of operating income to earnings. And finally, we remain committed to allocating capital to lend for optimizing shareholder value.

With that, I would like to open the floor to your questions.

Question-and-Answer Session


(Operator Instructions) The first question comes from the line of Brian Kinstlinger of Sidoti & Company. Please go ahead

Brian Kinstlinger – Sidoti & Company

Great, thanks, good afternoon. Hi, how are you? The first question the planned headcount reduction internationally, I think that’s nice to hear from investor but I am wondering if you could break that down- how much of that is been Netherlands as you talked about improving utilization there and how much is another country

Dave Peterschmidt

Brian, this is Dave. We are yet to make all the announcements to our employees, so I would like to refrain from breaking out the exact numbers by country. But suffice it to say that a large portion of that headcount reduction is in fact in the Netherlands. And it has to do with right sizing our bench there given the utilization rates to help improve on utilization.

Brian Kinstlinger – Sidoti & Company

And so may as opposed to saying being specific on country, what is international utilization and what it will look like after the restructuring?

Dave Peterschmidt

Well, really haven’t – we haven’t reported on utilization rates per se, but it will have impact where today our utilization rate is in the low 80s in international. And it should help improve it significantly from there.

Brian Kinstlinger – Sidoti & Company

Right and then on the Accenture’s conference call they talked about weakness in ERP in Europe, you may be could touch on the demand trends overall and touch on those two particular pieces if you could.

Dave Peterschmidt

Yeah, for us ERP in fact if we look at the three primary countries of UK, Norway and Germany, we are not seeing that impact on our business there that is as we see our ISV business as you know that’s our focus. We are not experiencing downward pressure in that market at all. We have obviously in the Netherlands – we basically may be in the mid-market ERP a little bit on that, but managed services is where we are putting a lot of energy and we are winning new contracts. So, we are not quite experiencing what they are. If anything our pressure is a little bit the same of what we saw in North America which is in the ADM side of our business.

Claude Pumilia

Brian, this is Claude, I was just going to add to Dave’s point about the mid-market, with our mid-market focus is I think it is little different than Accenture. And we’ve got a pretty robust maintenance services offering particularly in the SAP space in Europe, that has gained traction has been well received I would say in the mid-market in the country where we are marketing.

Brian Kinstlinger – Sidoti & Company

Okay, and if I look at Russia, and you’ve you restated and accepted and seen that your international business is now more profitable if you restated. So I guess when you stepped back, a, I am wondering how many countries you are in other than the three or four major international countries that you talk about that are being growing and or the Netherlands and would you – is the board and management seeking alternative for those other countries and you can become more profitable without them.

Dave Peterschmidt

No, well I think look we’ve said that our 80% of our businesses historically been in those four countries but we are also positioned in Sweden, Denmark and Spain as well as our position in Australia. Sweden and Denmark are obviously smaller than the primary four countries, but we do not see those as a drag in profitability overall, we think the opportunity in the restructuring is focusing also lot at the Netherlands market place with some adjustments in the smaller countries. But not an intension to exit those countries.

Brian Kinstlinger – Sidoti & Company

Got it, one more and I will go back in a queue. And I read the press release I am not sure you commented – you mentioned in the restructuring fees more focused on near shore an offshore, and I think it predates you guys to the management team that discuss its eye burn, can’t remember when you gave your initial strategy outlook talking about offshore, and I haven’t seen kick off and I guess I am wondering if anything going on differently other than may be who is running the show and that would make you think that that would better today than may be it has done in the past.

Dave Peterschmidt

Yeah, your observations are correct Brian. But what we are seeing now, what’s going to allow us to really make that shift effectively is a focused on managed services and that really is going to help a lot, part of the offshore phenomenon for us at least in Western Europe has been more different language supports and things of that nature. Manage services doesn’t require the language skill sets because we can shift that to offshore, it’s not interfacing necessarily directly with the client in the same manner that an ERP is implementation is.

Brian Kinstlinger – Sidoti & Company

Okay, thank you.

Dave Peterschmidt

Thanks, Brian


(Operator Instructions). We have another question from Brian Kinstlinger of Sidoti & Company. Please go ahead

Brian Kinstlinger – Sidoti & Company

Forgive me I guess other two or three guys aren’t here I’m sorry. So I wanted to touch little bit on the cut, since you are people related so is that going to mainly impacting gross margin as with the 2014

Dave Peterschmidt

Brian, the mix is focused primarily on gross profit, it is mix between direct cost and SG&A but it’s probably 80% focused on direct cost.

Brian Kinstlinger – Sidoti & Company

If I look at the North American business, revenue decline I think marginally by the $1 million have recorded since second quarter, and I am wondering, a, what do you think is driving that – in the meantime as well what’s driving the much better profitability while revenues coming down, is it utilization, it is pricing, have you put cost, there are two obviously opposite dynamics

Dave Peterschmidt

Hey, Brian, this is Dave. First off as you know we went through pretty major reorganization of our North American operations, and this was a lot of the work that Rich Genovese did when he joined the company. What we got now setup in North America on the margin front is clearly the businesses set up and I would express which is the way Rich expresses is it we now know when we sent somebody out on a job that we would make money, and we made money consistently, and that was not the case prior to the work that Rich did in North America. And the result of that is Rich is leading the charge on the restructuring in Europe, and that’s why we really optimistic about the work there is going to result in the same type of phenomenon that we see in North America.

Now the pressure on the top line of North America is quite frankly what we talked about some of the headwinds in the ADM business, we are moving quickly to replace if you will that revenue against our ISV practice and our managed services. But I suspect that we are going to see another couple of quarter here in North America where we’ve got a headwind in that business, and we are moving as quickly as possible to transfer that type of revenues stream into the ISV business. It’s just – if you will the sale cycle is a little bit longer.

Brian Kinstlinger – Sidoti & Company

And just the function of

The economy in the US that is driving the ADM business to slowly go lower or is it a matter of specific customer you have customer concentration. Why do you think that’s been the case?

Dave Peterschmidt

Yeah I think there are two things that we see there one is we are seeing some slowing of customers making decisions. So the sale cycle in some of the ADM areas taken a little bit longer than normal for replacing businesses that’s falling off which is always been the case in that market. But I think the other thing is quite frankly there is vendor consolidation going on, and when that applies in some cases we’re not getting the renewal we want in the ADM side. So I think those are the two areas impacting us.

And again remember that our strategy is moving more and more to manage services in the ISV business, and we just got to continue to make that transition because we are making significant progress in the ISV business. We’re seeing good pipelines and good deal flow there.

Claude Pumilia

Hey Brian this is Claude one thing I want to add because you asked about the profit component in North America I think it’s important to highlight the team has done an outstanding job of managing cost quarter after quarter and I think it’s a testament to what we’ve been talking about in terms of the discipline, and process that we’ve instilled in the organization and the organization manages that P&L based on the outlook and adjust appropriately. As you all know I mean follow the company, the operating profit levels in North America are at the highest levels we have seen in quite a while, and we expect to see that to continue.

Brian Kinstlinger – Sidoti & Company

I got one last question. Since September your operating margin has improved every quarter and you are taking steps – you’ve already taken steps to cut down some cost, I don’t think you get the 100% benefit yet and then you are proactively taking them into the third quarter too. So if I take look at the operating margin is 2.6% in the June quarter, is there a reason to expect that would be flat or go down from this point or should we continue to see improvements there in each quarter, and then will there be a step function in the March quarter when the second set of cuts coming may be for modeling purposes take us through the timeline of may be how we’ll be seeing the income statement?

Claude Pumilia

Sure Brian. First off, I’d say as you know we don’t have guidance out so that does restrict on how we’re going to answer that question, but first I would expect for your modeling purposes to model in what you think is typical CIBER seasonality. That will certainly affect kind of the quarterly outlook. In addition to that, I do want to be clear right we’re expecting to see progress from all the actions we’ve talked about and we fully expect to realize the savings we’ve articulated in the call here.

Brian Kinstlinger – Sidoti & Company

You got potentially mean that you could see margins pull back even certain seasonality and how are they periods especially internationally even despite these cuts?

Claude Pumilia

No I would say that it’s a question just going back and looking back at seasonally how the quarters play out at CIBER. I think you will see kind of the cycle we’re talking about there. But since we don’t have guidance out we don’t want to get more specific than that.

Brian Kinstlinger – Sidoti & Company

Right, I’m sorry I’m clear about that I know you’ve got seasonality, I don’t know which is stronger seasonality or the cost cut in driving you know offsetting it

Dave Peterschmidt

Yeah, I just so think Brian we can go any further I just don’t want to violate the principal right now of us not giving guidance on quarter-by -quarter performance.


Thank you. There are no further questions in the queue. I would now like to hand the call back over to Dave Peterschmidt for closing remarks.

Dave Peterschmidt

Thank you and I want to thank all of you. In closing, when I look at CIBER over the last few years, today it’s a different company based on a much more stable platform with more rigorous process and structure but more importantly greater consistency and predictability. We do have some challenges namely that macro trends affecting our ADM business, and our business in the Netherlands and a couple small related companies, but we know how to fix them and we will. We’ve tried to move rapidly when we see problems and I think the performance you’ve seen reflects this. The good news is that I’m not able to spend much more of my time with our clients, and potential clients and employees and quite frankly in my most recent visit our employees are very motivated and enthusiastic about the opportunities for CIBER in the market. I thank you for joining us more importantly, we thank you for your continued interest in CIBER, and we’ll talk to you again after our third quarter closes.


Thank you. Ladies and gentlemen that concludes your conference call for today. You may now disconnect. Thanks for joining us. Have a very good day.

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