OREANDA-NEWS. Edgewater Technology, Inc. (NASDAQ:EDGW), a leading consulting firm that helps business leaders drive transformational change through its unique selection of business and technology services and specialized product-based solutions, reported financial results for the quarter ended June 30, 2016.

Second Quarter 2016 Financial Results vs. Same Year-Ago Quarter

  • Total revenue was $34.0 million compared to $30.5 million;
  • Service revenue was $28.6 million compared to $24.6 million;
  • Gross profit was $12.8 million, or 37.7% of total revenue, compared to $10.4 million, or 34.1% of total revenue;
  • Gross profit margin related to service revenue was 39.5% compared to 34.1%; 
  • Utilization was 75.6% compared to 69.8%;
  • Net income was $1.3 million, or $0.09 per diluted share, compared to net income of $494,000, or $0.04 per diluted share;
  • Cash flow provided by operating activities was $5.2 million compared to $945,000; and
  • Adjusted EBITDA (a non-GAAP financial measure) was $3.4 million, or 10.1% of total revenue (see “Non-GAAP Financial Measures” below for further discussion of this non-GAAP term), compared to Adjusted EBITDA of $1.9 million, or 6.2% of total revenue.

First Half of 2016 Financial Results vs. Same Year-Ago Period

  • Total revenue was $65.9 million compared to $57.1 million;
  • Service revenue was $56.8 million compared to $47.3 million;
  • Gross profit was $23.6 million, or 35.7% of total revenue, compared to $18.1 million, or 31.6% of total revenue;
  • Gross profit margin related to service revenue was 37.4% compared to 32.3%; 
  • Utilization was 74.2% compared to 70.1%;
  • Net income was $550,000, or $0.04 per diluted share, compared to a net loss of $(446,000), or $(0.04) per diluted share;
  • Cash flow provided by operating activities was $78,000 compared to cash flow used in operating activities of $(2.5) million; and
  • Adjusted EBITDA was $4.8 million, or 7.3% of total revenue, compared to Adjusted EBITDA of $1.8 million, or 3.1% of total revenue.

Management Commentary

“We are pleased that our second quarter results reflect significant year?over?year improvement in all of our key metrics,” commented Shirley Singleton, Edgewater’s chairman, president and CEO. “Strong second quarter sales were additive to our backlog, especially in the cloud arena.

“We are optimistic that cloud?based services will create additional growth opportunities. The cloud opens up the middle market, an area that has always been an Edgewater core strength. Helping customers decide how, when and where the cloud should be adopted was an area of significant service revenue growth in our classic consulting offering during the second quarter of 2016.  In the Microsoft channel, our Dynamics CRM offering is also showing significant year-over-year revenue growth. Lastly, in the Oracle channel, we have successfully deployed several cloud-based EPM projects and we see a healthy pipeline of new cloud opportunities.

“As to third quarter guidance, we expect service revenue for the third quarter of 2016 to be in the range of $29 million to $30 million.”

 

About Edgewater
Edgewater (NASDAQ:EDGW) helps business leaders drive transformational change through its unique selection of business and technology services and specialized product-based solutions.

Classic consulting disciplines (such as business advisory, process improvement, organizational change management, M&A due diligence, and domain expertise) are blended with technical services (such as digital transformation, technical roadmaps, data and analytics services, custom development, and system integration) to help organizations get the most out of their existing IT assets while creating new digital business models.

Delivering both on premise and in the cloud, Edgewater partners with Oracle and Microsoft to offer Business Analytics, BI, ERP, and CRM solutions. Edgewater Ranzal, an Oracle Platinum Consulting Partner, provides Business Analytics solutions leveraging Oracle EPM, BI, and Big Data technologies. As an award-winning Microsoft partner, Edgewater Fullscope delivers Dynamics AX ERP, Business Intelligence, and CRM solutions, with a specialty in manufacturing.

 

EDGEWATER TECHNOLOGY, INC.
Condensed Consolidated Balance Sheets
(In Thousands)
(Unaudited)
         
    June 30,
2016		   December 31,
2015
 Assets            
Cash and cash equivalents   $ 10,737   $ 11,981
Accounts receivable, net     29,093     27,753
Prepaid expenses and other current assets     1,623     704
Total current assets     41,453     40,438
Property and equipment, net     755     824
Goodwill and intangible assets, net     40,167     41,900
Deferred tax assets, net     23,731     24,032
Other assets     238     230
Total Assets   $ 106,344   $ 107,424
             
Liabilities and Stockholders’ Equity            
Accounts payable   $ 831   $ 586
Accrued liabilities     14,642     15,486
Short-term portion of contingent earnout consideration     6,053     7,072
Deferred revenue     2,146     2,428
Total current liabilities     23,672     25,572
Long-term debt     5,000     5,000
Long-term portion of contingent earnout consideration     899     3,468
Total liabilities     29,571     34,040
Stockholders' Equity     76,773     73,384
Total Liabilities and Stockholders' Equity   $ 106,344   $ 107,424
             
Shares Outstanding     12,275     11,862
EDGEWATER TECHNOLOGY, INC.
Condensed Consolidated Statement of Operations
(In thousands, except per share amounts)
(Unaudited)
           
    Three Months Ended   Six Months Ended  
    June 30,   June 30,  
    2016   2015   2016   2015  
Revenue:                      
Service revenue   $ 28,564   $ 24,622   $ 56,779   $ 47,299  
Software     3,636     4,116     5,665     6,283  
Reimbursable expenses     1,824     1,789     3,478     3,523  
Total revenue     34,024     30,527     65,922     57,105  
                           
Cost of revenue:                          
Project and personnel costs     17,288     16,220     35,528     32,014  
Software costs     2,098     2,105     3,352     3,510  
Reimbursable expenses     1,824     1,789     3,478     3,523  
Total cost of revenue     21,210     20,114     42,358     39,047  
Gross profit     12,814     10,413     23,564     18,058  
                           
Selling, general and administrative     9,733     8,963     19,619     17,229  
Direct acquisition costs     -     -     430     611  
Change in contingent consideration     (928 )   -     (928 )   -  
Consent solicitation expenses     50     -     108     -  
Embezzlement loss recovery     -     ( 250 )   -     ( 250 )
Depreciation and amortization     1,004     323     2,008     546  
Operating expenses     9,859     9,036     21,237     18,136  
Operating income (loss)     2,955     1,377     2,327     ( 78 )
                           
Other expense, net     568     504     1,193     624  
Income (loss) before income taxes     2,387     873     1,134     ( 702 )
Tax provision (benefit)     1,074     379     584     ( 256 )
Net income (loss)   $ 1,313   $ 494   $ 550   $ ( 446 )
                           
BASIC EARNINGS (LOSS) PER SHARE:                          
Basic earnings (loss) per share   $ 0.11   $ 0.04   $ 0.05   $ ( 0.04 )
Weighted average shares outstanding – Basic     12,126     11,473     11,959     11,410  
                           
DILUTED EARNINGS (LOSS) PER SHARE:                          
Diluted earnings (loss) per share   $ 0.09   $ 0.04   $ 0.04   $ ( 0.04 )
Weighted average shares outstanding – Diluted     14,032     13,230     13,876     11,410  
                           
EDGEWATER TECHNOLOGY, INC.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
      Three Months Ended        Six Months Ended
  
      June 30,        June 30,
  
      2016       2015       2016       2015  
Cash flow provided by (used in):                                
Operating activities   $ 5,231     $ 945     $ 78     $ (2,474 )
Investing activities     (180 )     (233 )     (316 )     (4,885 )
Financing activities     (2,262 )      577       (1,046 )      833  
Effect of exchange rates on cash     (19 )     10       40       (22 )
Net increase (decrease) in cash and cash equivalents   $ 2,770     $ 1,299     $ ( 1,244 )   $ ( 6,548 )
                                 

Non-GAAP Financial Measures

Edgewater reports its financial results in accordance with generally accepted accounting principles (“GAAP”). Management believes, however, that certain non-GAAP financial measures used in managing the Company’s business may provide users of this financial information with additional meaningful comparisons between current results and prior reported results. Certain of the information set forth herein and certain of the information presented by the Company from time to time may constitute non-GAAP financial measures within the meaning of Regulation G adopted by the Securities and Exchange Commission. We have presented herein a reconciliation of these measures to the most directly comparable GAAP financial measure. The non-GAAP measures presented herein may not be comparable to similarly titled measures presented by other companies. As noted below, the foregoing measures have limitations and do not serve as a substitute and should not be construed as a substitute for GAAP performance, but provide supplemental information concerning our performance that our investors and we find useful.

Edgewater views Adjusted EBITDA and Adjusted EBITDA as a Percentage of Total Revenue as important indicators of performance, consistent with the manner in which management measures and forecasts the Company’s performance. We believe Adjusted EBITDA measures are important performance metrics because they facilitate the analysis of our results, exclusive of certain non-cash items, including items which do not directly correlate to our business operations. 

The non-GAAP adjustments, and the basis for excluding them, are outlined below:

Income tax provision. The exit of our former significant unrelated operations in 2000 and 2001 created significant net operating loss carry-forwards and deferred tax assets, and the tax provisions that we take under GAAP, for which there is no corresponding federal tax payment obligation for us, and the adjustments that we make to our deferred tax asset, based on the prospects and anticipated future profitability of our ongoing operations, can be significant and can obscure, either significantly, or in part, period-to-period changes in our core operating results.

Depreciation and amortization. We incur expense associated with the amortization of intangible assets that is primarily related to the various acquisitions we have completed. We believe that eliminating this expense from our non-GAAP financial measures is useful to investors because the amortization of intangible assets can be inconsistent in amount and frequency, and is significantly impacted by the timing and magnitude of the individual acquisition transactions, which also vary substantially in frequency from period-to-period.

Stock-based compensation expense. We incur stock-based compensation expense under Financial Accounting Standards Board Accounting Standards Codification Topic 718, “Compensation – Stock Compensation.” We exclude this non-cash expense as we do not believe it is reflective of business performance. The nature of stock-based compensation expense also makes it very difficult to estimate prospectively, since the expense will vary with changes in the stock price and market conditions at the time of new grants, varying valuation methodologies, subjective assumptions and different award types, making the comparison of current results with forward-looking guidance potentially difficult for investors to interpret. Edgewater believes that non-GAAP financial measures of profitability, which exclude stock-based compensation, are widely used by analysts and investors.

Adjustments to contingent consideration earned, at fair value. We are required to remeasure the fair value of our contingent consideration liability related to acquisitions each reporting period until the contingency is settled. Any changes in fair value are recognized as a current period operating expense. The Company believes that excluding these adjustments from its non-GAAP financial measures is useful to investors because they are related to acquisition events and make it difficult to evaluate core operating results.

Direct acquisition costs. We incur direct transaction costs related to acquisitions which are expensed in our GAAP financial statements. Our non-GAAP financial measures exclude the effects of direct acquisition-related costs as we believe these transaction-specific expenses are inconsistent in amount and frequency and make it difficult to make period-to-period comparisons of our core operating results.

Consent solicitation expenses.  Consent solicitation expenses are expenses incurred to respond to activities and inquiries of Lone Star Value Management, including its consent solicitation and subsequent settlement agreement. The Company has not incurred significant expenses in connection with such matters in historical periods, and these costs are not considered core operating activities. Management believes that it is appropriate to exclude these costs in order to provide investors with the ability to compare our period-over-period operating results from continuing operations.

Other expense, net. We record periodic interest and other (income) and expense amounts in connection with our cash and cash equivalents, capital lease obligations, (gains) and losses on foreign currency transactions and the recognition of the recorded discount on accrued contingent earnout consideration. Our non-GAAP financial measures exclude (income) expense associated with these items as we believe such (income) expense is inconsistent in amount and frequency and makes it difficult to make period-to-period comparisons of our core operating results.

We believe that Adjusted EBITDA metrics provide qualitative insight into our current performance; we use these measures to evaluate our results, the performance of our management team and our management’s entitlement to incentive compensation; and we believe that making this information available to investors enables them to view our performance the way that we view our performance and thereby gain a meaningful understanding of our core operating results, in general, and from period to period.

EDGEWATER TECHNOLOGY, INC.
Reconciliation of GAAP Net Income (Loss) to Non-GAAP Adjusted EBITDA
(In Thousands)
(Unaudited)
 
  For The Three Months Ended
June 30,		   For The Six Months Ended
June 30,		  
  2016   2015   2016   2015  
   
Reported GAAP net income (loss) $  1,313   $  494   $ 550   $ (446 )
Add: Income tax provision (benefit)   1,074     379     584     (256 )
Add: Depreciation and amortization   1,053     371     2,102     648  
Add: Stock-based compensation expense   301     387     778     850  
Add: Direct acquisition costs     -       -       430       611  
Add: Consent solicitation expense     50       -       108       -  
Add: Other expense, net     568       504     1,193     624  
Less: Fullscope embezzlement loss recovery   -     (250 )   -     (250 )
Less: Adjustments to contingent consideration earned, at fair value   (928 )   -     (928 )   -  
Adjusted EBITDA1 $   3,431   $   1,885   $   4,817   $   1,781  
                         
Adjusted EBITDA as a % of total revenue1   10.1 %   6.2 %   7.3 %   3.1 %
Total revenue $ 34,024   $ 30,527   $  65,922   $  57,105  
                         
1- Adjusted EBITDA and Adjusted EBITDA as a Percentage of Total Revenue are Non-GAAP performance measures and are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, GAAP Net Income. Adjusted EBITDA measures presented may not be comparable to similarly titled measures presented by other companies. Adjusted EBITDA is defined as net income less other expense, net, plus taxes, depreciation and amortization, stock-based compensation expense, adjustments to contingent consideration earned, goodwill and intangible asset impairment charges, direct acquisition costs and consent solicitation expenses. Adjusted EBITDA as a % of Total Revenue is defined as Adjusted EBITDA divided by Total Revenue.