Edgewater Technology's CEO Discusses Q2 2011 Results - Earnings Call Transcript

Edgewater Technology Inc. ( EDGW)

Q2 2011 Earnings Call

August 3, 2011 10:00 AM ET

Executives

Paul McNiece – Director, Finance

Shirley Singleton – President and CEO

Timothy Oaks – CFO

Analysts

Lee Jagoda – CJS Securities

Presentation

Operator

Good ladies and gentlemen and welcome to the Q2 2011 Edgewater Technology Financial Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Mr. Paul McNiece, you may begin.

Paul McNiece

Thank you, Namie. Good morning everyone and welcome to Edgewater Technology’s second quarter 2011 financial results call. I’m here today with Shirley Singleton, EdgeWater’s Chairman, President and CEO. David Clancey, Edgewater’s EVP and Chief Strategy and Technology Officer and Timothy Oaks, 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 risks and uncertainties that could cause actual results to differ from current expectations with respect to such statements. These types of statements and the underlying facts related to these statements are listed and are reported in 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 calls are made only as of the today’s date and the company undertakes no obligation to update the forward-looking statements to reflect subsequent events or circumstances. With that I will now turn the call over to Shirley.

Shirley Singleton

Thanks Paul, hello everyone. We mentioned in the last earnings call that we thought we would see a little bit of volatility, and I would characterize the quarter as a noisy quarter. There were some unusual activities. So let’s get right into Tim – and Tim’s remarks to get at the numbers.

Timothy Oaks

Thank you, Shirley. To echo Shirley’s initial comments on the quarter, the second quarter of 2011 has been very noisy and does have quite a few moving parts. We are reporting an all-time high in total revenue. Second quarter total revenue was the result of the anticipated lift in software revenue and an non-anticipated lift from royalty revenue associated with Fullscope’s business process contracts which are the basis of the Fullscope earnout.

Total revenue for the second quarter was $27.4 million compared to $23.4 million in the second quarter of 2010. Service revenue was $18.6 million during the second quarter compared to service revenue of $17.4 million in the second quarter 2010. On a year-over-year basis, we are for the second quarter in a row, reporting growth in both total revenue and service revenue. Year-over-year growth in total revenue and service revenue was 17.3% and 7.1% respectively. Excluding incremental revenue generated by our Meridian acquisition, which was completed in May of 2010, organic service revenue increased by 5.7% on a year-over-year basis.

Year-over-year service revenue growth in the second quarter is in large part being driven by the carryover effects of the strong first quarter in our EPM based service offerings. On a sequential basis, total revenue increased by $3.8 million or 16.1% compared to the first quarter of 2011. There were some significant changes in our sequential revenue mix during the second quarter. Service revenue decreased by $1.1 million while software revenue and royalty revenue increased by $3.2 million and $1.7 million respectively. The sequential decrease in second quarter service revenue is attributable to a sequential decrease in our billable consultant utilization rate to 72%. And that’s compared to 79% in the first quarter of 2011. And the previously described and anticipated pullback in process related service revenue of approximately of $350,000 in connection with the winding down of the process related contracts.

The decrease in our utilization rate was due to the scale back in process service revenue combined with a noted delay in both project decision cycles and or project start dates within the quarter. Our pipeline remains active as evidenced by our entering into first time engagements with 31 new customers during the second quarter and continues to build. When customers make project decisions, we are experiencing a closure rate in the 80% range. However we are observing a delay in this process which is causing greater than expected downtime for our billable consultants increasing our bench and accordingly placing a drag on our billable consultant utilization rate.

Software revenue which includes related maintenance revenue was $4.7 million during the second quarter, and represented 17.3% of our total quarterly revenue. This compared to $3.8 million or 16.1% of total revenue during the second quarter of 2010. The second quarter software revenue is primarily related to re-sales of Microsoft Dynamics AX software and maintenance. The second quarter is typically our strongest software revenue quarter, as the second quarter alliances with Microsoft’s year-end.

Of note, in the second quarter of 2011, reported software revenue has a greater mix of product revenue as opposed to lower margin maintenance revenue. During the second quarter, we received an unexpected lift in royalty revenue associated with Fullscope business process contracts. As we’ve described on previous earnings calls and in our periodic SEC filings, this is the last quarter in which the company would generate royalty revenue under the business process contracts. We attribute the spike in second quarter royalty revenue to increase product and maintenance sales driven by Microsoft’s year-end.

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