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Edited Transcript of EDGW earnings conference call or presentation 2-Nov-17 2:00pm GMT

Q3 2017 Edgewater Technology Inc Earnings Call

WAKEFIELD Jun 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Edgewater Technology Inc earnings conference call or presentation Thursday, November 2, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey L. Rutherford

Edgewater Technology, Inc. - Former Chairman

* Paul McNeice

* Timothy R. Oakes

Edgewater Technology, Inc. - Former CFO, Treasurer & Corporate Secretary

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Conference Call Participants

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* Lee M. Jagoda

CJS Securities, Inc. - Senior MD & Analyst

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Presentation

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Operator [1]

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Good morning and welcome, ladies and gentlemen, to Edgewater Technology's Third Quarter 2017 Financial Results Conference Call. At this time, I would like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen-only mode. (Operator Instructions) I would now like to turn the conference over to Paul McNeice, Chief Accounting Officer. Sir, you may begin.

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Paul McNeice, [2]

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Thank you, Miranda. Good morning, everyone, and welcome to Edgewater Technology's Third Quarter 2017 Financial Results Call. I'm here today with Jeffrey Rutherford, Edgewater's Chairman, Interim President and Interim CEO; and Timothy Oakes, Edgewater's Chief Financial Officer. Before we begin, I would like to remind everyone that today's call may contain forward-looking statements as described under the Securities Act. Investors are cautioned that such statements could involve risk and uncertainties that could cause actual results to differ from current expectations with respect to such statements. These types of statements and the underlying factors related to these statements are listed and reported in filed information with 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 of date of today's call and the company undertakes no obligation to update the forward-looking statements to reflect subsequent events or circumstances.

With that, I'll now turn the call over to Jeff.

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Jeffrey L. Rutherford, Edgewater Technology, Inc. - Former Chairman [3]

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Thanks, Paul. One of the primary goals of these quarterly calls is to provide investors with the information they need to value the company and make informed investment decisions. It's obvious that the only effective means to understand, model and value Edgewater is to perform that analysis at the segment level. Therefore, I will again talk to the results and prospects of each segment. Let's start with the ERP segment. That's the business as they go to market as Edgewater Fullscope. For the quarter, revenue was $12.9 million increasing approximately 18% from the prior year third quarter, down seasonally from the second quarter revenue of $14.6 million. EBITDA increased to $1.8 million, up 105% from the prior year third quarter. EBITDA margin was 13.9%, up from the 8% in the prior year. This was accomplished while absorbing an increase of $600,000 in SG&A costs mainly attributable to investments in sales and marketing costs.

For the year, revenue was $38.9 million increasing approximately 11.7% from the prior year. EBITDA increased to $5.7 million, up 77.4% from the prior year with EBITDA margin of 14.7%, up from the 9.3% from the prior year. Again this was accomplished while absorbing an increase of $1.1 million in SG&A costs mainly attributable again to investments in sales and marketing efforts. During the quarter, we moved the Microsoft based consulting group from the Classic Consulting segment of Fullscope. For accounting purposes, the move was effective September 1st. Annualized expectations for this group are revenue of $2 million to $2.5 million with EBITDA margin greater than 25%. Our expectations for the ERP segment i.e. Fullscope continue to be annualized growth of approximately 10% and annual increases in EBITDA margin of 50 basis points.

Next I will address the EPM segment, the business unit goes to market as Edgewater Ranzal. For the quarter, revenue was $12.3 million decreasing approximately 24% from the prior year third quarter, relatively flat with the second quarter revenue of $12.7 million. EBITDA excluding severance cost was $1.5 million, down 50% from the prior year third quarter. EBITDA margin was 12.3%, down from the 18.7% in the prior year. Note that during the quarter this segment absorbed an increase of $600,000 in SG&A again mainly attributable to investments in sales and marketing. For the year, revenue was $39.3 million decreasing approximately 20% from the prior year. EBITDA excluding severance cost was $4.2 million, down 50% from the prior year. EBITDA margin was 10.7%, down from the 16.7% from the prior year.

And then for the year, the segment absorbed $1.1 million of incremental sales and marketing cost. The Ranzal strategy has been complicated by the well-documented changes in the Oracle ecosystem, mainly Oracle shift from on-premise to cloud software offerings. Due to this change at Oracle, the Ranzal model continues to be affected by the shift from on-premise to cloud software offerings and the roll-out of the EPM portion of Oracle's new cloud stack, which was done in stages and trailed the ERP roll-out. We believe that the Oracle ecosystem is stabilized and will grow as the adoption curve of Oracle's cloud solutions accelerates. We believe Ranzal is well positioned to continue to serve its on-premise client base while also capturing its market share of cloud-based implementations.

Our long-term expectations for this segment are annualized growth in the mid to high single-digit range and annual increases in EBITDA margin of 50 basis points to 100 basis points. The Classic Consulting segment has seen considerable change since the last time we reported. We sub segmented consulting into its actual operating groups and found that the infrastructure and Microsoft businesses were by far the most reliable and profitable groups. As previously mentioned, we moved the Microsoft group to Fullscope. Additionally, certain of the healthcare related full-time equivalents were moved to Ranzal to bolster its already solid healthcare practice. We have carved out the infrastructure sub-group separately under the leadership of Marc Damboorajian and moved certain other logical business and people from other groups to infrastructure.

Annualized expectations for this group are revenue of $4 million to $4.5 million with EBITDA margin of approximately 20%. We will continue to address the other service offerings and make appropriate decisions to preserve shareholder value. From a corporate perspective and for corporate modeling purposes, we believe that use of recurring G&A of $2 million to $2.3 million is reasonable. The board management are making the right choices to preserve, create and realize value. We have strong management at each segment and we are committed to the value creating decisions we are making -- who are committed to the value creating decisions we are making.

With that, I'll turn the call over to Tim.

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Timothy R. Oakes, Edgewater Technology, Inc. - Former CFO, Treasurer & Corporate Secretary [4]

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Thanks, Jeff. Good morning, everyone. As Jeff touched upon in his opening remarks, our consolidated operating results for the third quarter of 2017 continue to reflect the strategic steps being taken by board and management of the company targeted at maximizing shareholder value. While these steps tend to create near-term disruption in our operating performance, the end game is to better position the company to drive improved future operating performance. Now, a few comments regarding our consolidated operating performance for the recently completed quarter. Total revenue for the third quarter of 2017 was $27.4 million compared to $30.8 million in the third quarter of 2016 while service revenue during the third quarter of 2017 totaled $23.6 million compared to $27 million in the year-ago quarter.

As we have described in our previous earnings call, the year-over-year decline in third quarter 2017 service revenue is in large part attributable to a decline in our Oracle based service offerings as well as our Classic Consulting offerings. The decline in our Oracle service offerings continues to reflect the disruption created by Oracle's internal decision to combine ERP and EPM into a consolidated business offering as well as slow customer adoption of Oracle's cloud-based applications. Our Microsoft Dynamics service offerings, inclusive of both ERP and CRM, continued their strong operating performance generating third quarter 2017 service revenue growth of 19% as compared to the third quarter of 2016. Software revenue was $2.4 million during the third quarter of 2017, up from $2.1 million during the year-ago quarter. The year-over-year increase in software revenue is attributable to the comparative increases in both Dynamics AX software and maintenance sales and CRM license revenue.

Historically, the majority of our software revenue has been associated with the resale of Microsoft Dynamics AX software and CRM related licenses. Additionally, we would like to remind investors of the volatile nature of our software revenue, the timing of which in the associated accounting recognition methodology applied is subject to the purchasing habits of our customers. With respect to our standard quarterly revenue metrics, we note that our annual service -- annualized service revenue per billable consultant was $367,000 in the third quarter of 2017 compared to $360,000 in the third quarter of 2016. Changes in this reporting metric are for the most part driven by fluctuations in our total service revenue mix as well as the consistency of our standard billing rates during each of the comparable quarterly periods. We entered into first-time engagements with 23 new customers during the third quarter of 2017 compared to 31 new customer engagements in the third quarter of 2016.

Service revenue generated by our Top 10 customers during the third quarter of 2017 represented [24.7%] of total service revenue compared to 27% in the third quarter of 2016. No individual customer represented more than 5% of our total service revenue during the third quarter of either 2017 or 2016. Breaking down quarterly service revenue by individual offerings. During the third quarter of 2017; our Oracle based offerings represented 49% of total service revenue, our Microsoft Dynamics offerings represented 42% and technology consulting offerings represented 9%. Comparatively, in the year-ago quarter; Oracle based offerings represented 56% of total service revenue, Microsoft based offerings represented 31% and technology consulting offerings represented 13%. At the end of the third quarter of 2017, we maintained 362 total billable resources, which included 26 contractors. This compares to billable headcount of 401 including 33 contractors at the end of the third quarter of 2016.

As we have described in prior quarters, the comparative reduction in billable consultant headcount including our usage of contractors is attributable to our proactive management of our billable resources in accordance with our forward-looking service revenue expectations. The billable resource management has come in the form of selective staff trimming and normal attrition. Moving on to gross margin. Total gross margin in the third quarter of 2017 was 38% as compared to total gross margin of 35% in the third quarter of 2016. Gross margin related to service revenue was 40% in the third quarter of 2017 compared to 37% in the third quarter of 2016. The comparative improvements in both total gross margin and service revenue gross margin during the third quarter of 2017 is primarily attributable to the comparative quarterly decrease in billable consultant headcount including contractors, which decreased by a total of 39 resources.

Further, total gross margin to a lesser extent was favorably impacted by the incremental margin contribution from the increase in software revenue in the third quarter of 2017. Our billable consultant utilization rate for the third quarter of 2017 was 71% compared to 73% in the third quarter of 2016. Moving on to SG&A expense. SG&A expense in the third quarter of 2017, excluding $816,000 in executive officer severance and an $856,000 reduction in operating expense associated with the reversal of an accrual for contingent consideration associated with our Branchbird acquisition, totaled $10.3 million as compared to SG&A expense of $8.9 million in the year-ago quarter. SG&A expense in the third quarter of 2017 in large part reflects comparative increases in expense associated with the current quarter bonus accruals and the quarterly impact of our 2017 strategic investments in sales and marketing related expenses including salaries and wages and commissions.

As mentioned, non-recurring operating expenses recorded by the company during the third quarter 2017 included $816,000 in executive officer severance in connection with the August 2017 termination of the President of the Oracle Business Unit and an $856,000 reduction in operating expense in connection with the reversal of an accrual related to potential additional contingent earn-out consideration that could have been earned by the former stockholders of Branchbird. During the third quarter 2017 the former stockholders of Branchbird, which was acquired by the company in August 2015, completed their second and final earn-out period during which the financial performance measures necessary to achieve additional contingent consideration were not achieved. As of September 30, 2017, there are no active earn-out arrangements. We are reporting $782,000 in depreciation and amortization during the third quarter of 2017 compared to $1.0 million in the year-ago quarter.

The decrease in the comparative quarterly periods is primarily attributable to a reduction in the amortization expense recorded against the identified intangible assets associated with the 2015 acquisitions of Zero2Ten, Branchbird and M2 Dynamics. Moving on to income taxes. The company is reporting an income tax benefit of $528,000 during the third quarter of 2017, which reflects income tax benefit and expense derived from the current period federal state and foreign income tax provisions, provision to return adjustments on filed U.S. based federal and state income tax returns and from tax benefits associated with the company's current year adoption of ASU 2016-09 related to the tax accounting treatment of stock-based compensation. Comparatively, the company's recorded income tax expense is $73,000 in the third quarter of 2016.

Net loss during the third quarter of 2017 was $172,000 or $0.01 per diluted share compared to net income of $43,000 or $0.00 per diluted share during the third quarter of 2016. The change in periodic net income is attributable to the decline in comparative quarterly service revenue and the associated decline in gross profit margin contribution and that comparative increase in SG&A expense resulting from the quarterly increase in sales and marketing expenses and the increase in bonus expense. With respect to our non-GAAP financial measures, adjusted EBITDA totaled $199,000 and was roughly 1% of total revenue in the third quarter of 2017 compared to adjusted EBITDA of $2 million and 6.5% of total revenue in the year-ago quarter. Additional information regarding our use of non-GAAP measures, including a reconciliation to the most comparable GAAP measures, can be found in the press release we issued earlier this morning, which is also available on the Investor Relations section of our website.

As of September 30, 2017, cash and cash equivalents totaled $12.8 million as compared to $19.7 million on December 31, 2016. Cash flow used in operations during the third quarter of 2017 was $602,000 compared to cash flow provided by operations of $88,000 during the third quarter of 2016. The year-over-year change in operating cash flows reflects current quarter payments of approximately $900,000 in connection with executive officers severance payments. Accounts receivable balances including unbilled AR totaled $25.6 million at the end of the third quarter of 2017 compared to $25.7 million as of December 30, 2016. Our DSO metric related to build AR was approximately 76 days as compared to 79 days at the end of the third quarter of 2016.

Finally, as closing comment, regarding our stock repurchase program. During the third quarter of 2017, we extended our stock repurchase program for an additional year. We did not make any other changes to the stock repurchase program. The program is now scheduled to expire in September 2018. We did not make any purchases under the repurchase program during the third quarter of 2017 and as of September 30, 2017 there remains approximately $8.7 million of purchase authorization under the program.

With that, I'll now turn the call back over to Jeff.

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Jeffrey L. Rutherford, Edgewater Technology, Inc. - Former Chairman [5]

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Thanks, Tim. In closing, all I want to say is I'd like to thank all the Edgewater employees for their continued focus on serving their clients. And I would like to assure investors and to remind them that we have 3 value creating business units, various size and various growth; but through the restructuring we're doing, we're going to get to a point where we're going to maximize the intrinsic value of those 3 business units. And to let investors know that board and management are committed to realizing the intrinsic value of those assets for shareholders.

And with that, we'll take whatever questions you have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Lee Jagoda. Please state your affiliation followed by your question.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [2]

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Lee Jagoda from CJS. So Jeff, can you -- you mentioned that corporate expense is going to be running about $2 million or $2.3 million a quarter going forward. Can you bridge the gap between that and the roughly $15 million of annual corporate expense you have on a trailing basis?

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Jeffrey L. Rutherford, Edgewater Technology, Inc. - Former Chairman [3]

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Yes. I mean what -- the $2 million to $2.3 million is without any one-time charges so there's no severance in that. We've also put in place for key operating employees some incremental compensation relative to retention, that's in there so I would pull that out from an ongoing basis. And any other one-time charge or contract settlement and all the adjustments that come in and out from earn-outs are in there. So, the $2 million to $2.3 million is the base cause for the shared services that are at corporate and then public company fees, board fees, anything else that's not strategic to the operating groups. So, that's the basis. Now when you look at that and you look at the segmentation and that's effectively a segment, what you get is what I described on -- in my thesis. You have again 3 strategic operating segments that are creating value and you can do your own methodology for evaluation for intrinsic value and get to a value for each. And then within our model and in every model that's a public company, you're going to have compliance costs and you're going to have shared service costs. Some entities have it in their operating group, we happen to have it in the corporate group, which I prefer and then there you're going to have some level depending on the cost of value disruption. So what you have are 3 positive intrinsic value, a negative intrinsic value and you get to a net value. The challenge for us obviously and as what I described earlier is how do you release that value.

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Timothy R. Oakes, Edgewater Technology, Inc. - Former CFO, Treasurer & Corporate Secretary [4]

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Lee, if I could just clarify one comment that Jeff had made regarding the bridge from the $50 million run rate to the $8 million, $9 million run rate that you were talking about. He did mention that that would include the elimination of the contingent consideration adjustments and whatnot. That does not. Those are booked at the business unit level so those numbers would not be part of the bridge. But if you look at the non-GAAP numbers in our press release, you see $5 million to $6 million of the one-time charges that Jeff relates to; executive severance, the termination of the Signal Hill agreement, et cetera. Those all come out plus you eliminate the management salaries associated with the severance that will be absent on the go forward and that's what gives you the bridge of getting to that $2 million to $2.3 million quarterly run rate.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [5]

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And then Jeff, in a scenario where the businesses get broken up and realize -- and values realized as sort of a sum of the parts. How much of that $2 million to $2.3 million quarterly run rate would need to be allocated towards the various business units and how much simply just goes away in your estimation?

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Jeffrey L. Rutherford, Edgewater Technology, Inc. - Former Chairman [6]

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Well, let's just -- let's just talk about it in this manner. I've been at companies, most of the companies or all of the companies I've been to have been portfolio companies to some extent, and you got through and you do your valuations from a strategic perspective and then you have compliance costs. Now the difference in companies that have shared services first as a holding company structure generally is the issue. We're a shared services company so all of the compliance end is at corporate. So what you're really asking is in a holding company structure, how much cost would go to the operating company and it varies by operating company. But generally, it's going to be accounting and it's going to be some level of systems and human resources. So, it really matters that the environment that any of the operating companies would be in relative to how much that cost would be. Beyond that is cost of public company, right, of being -- having a pubic board and all the costs associated with being registered.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [7]

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Got it. And just shifting gears a little, just looking at the Classic Consulting business, you threw out that $4 million to $4.5 million annual run rate of revenue. Just want to make sure I'm not double counting. That's after the Microsoft business gets transferred to Fullscope and after the healthcare piece goes to Ranzal?

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Jeffrey L. Rutherford, Edgewater Technology, Inc. - Former Chairman [8]

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That's correct.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [9]

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Okay. And then looking at last quarter, I guess you terminated the banking consulting arrangement with Signal Hill.

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Jeffrey L. Rutherford, Edgewater Technology, Inc. - Former Chairman [10]

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We're not going to mention -- we're going to talk about any past agreement so we're not going to mention even who that is, right.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [11]

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But I guess the only question is have you hired anyone to replace them?

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Jeffrey L. Rutherford, Edgewater Technology, Inc. - Former Chairman [12]

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Look, we have a new board. For the most part, majority of the board is new and what I can assure investors is that we have very good service providers and advisors, both legal and strategic.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [13]

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Okay. One more and I'll get out of the way. Just in terms of any -- is there any -- are you willing to talk to any timeline or any other detail around when we might get some resolution?

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Jeffrey L. Rutherford, Edgewater Technology, Inc. - Former Chairman [14]

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Yes, I'm not going to talk about it. It's not to our benefit to talk in that manner, right. Look, we are a public company committed to value realization. We've got -- again we've got three valuable assets here of various size, various values. The puzzle is how to do that to maximize value for shareholders and that's what we're working on. It wouldn't be to our benefit to talk any further detail or talk to any timeline. In fact it could be detrimental to so we won't do that.

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Operator [15]

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Thank you. If there's no further questions, I'd like to turn the conference back over to Mr. Jeff Rutherford for closing remarks.

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Jeffrey L. Rutherford, Edgewater Technology, Inc. - Former Chairman [16]

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Okay. Well, I want to thank everyone for participating in the call. We're always here to answer any questions that anyone has and we look forward to keeping everyone informed of what we're doing relative to our goals. Everybody, have a great day and thank you.

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Operator [17]

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Thank you. Ladies and gentlemen, if you wish to access the replay for today's call, you may do so by dialing 1-800-585-8367. This concludes our conference for today. Thank you all for participating and have a great day. All parties may now disconnect.