Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
EDGW > SEC Filings for EDGW > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for EDGEWATER TECHNOLOGY INC/DE/

Form 10-Q for EDGEWATER TECHNOLOGY INC/DE/


2-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the information contained in the Unaudited Condensed Consolidated Financial Statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. See "Risk Factors" and "Special Note Regarding Forward-Looking Statements" included elsewhere herein. We use the terms "we," "our," "us," "Edgewater" and "the Company" in this report to refer to Edgewater Technology, Inc. and its wholly-owned subsidiaries.

Business Overview

Edgewater is a strategic consulting firm that brings a synergistic blend of specialty services to drive transformational change that (1) improves process,
(2) reduces costs and (3) increases revenue. Our solutions are tailored to the C-level executives in the upper mid-market and Global 2000.

We deliver our services across a broad range of industries. We work onsite with our clients, providing a full spectrum of services in the following areas:
classic consulting and product-based consulting, primarily in enterprise performance management ("EPM") and enterprise resource planning ("ERP").

Our Services

Edgewater offers a full spectrum of services and expertise to ensure the success of our engagement. Our consulting services are consolidated into two major synergistic offerings: (1) Classic Consulting and (2) Product-Based Consulting.

The following diagram illustrates these offerings:

[[Image Removed: LOGO]]

Edgewater has the proven expertise to plan, deliver and manage integration services that improve performance and maximize business results. We focus on deploying new systems and unlocking the value of the existing corporate assets. This proven expertise enables us to bring complex technologies and systems together while minimizing risk, leveraging our clients' technology investments and delivering tailored solutions.


Table of Contents

The following are Edgewater's service categories with sample services:

Classic consulting services

CFO advisory services

Business improvement roadmaps

Organizational change management

Program/project management

Business process rejuvenation and integrated social media best practices

Specialized operational, due diligence and technology management expertise to mergers and acquisitions, private equity and venture capital

Strategic advice, costing, estimates to complete, failing or failed programs or project initiatives

Independent package selection and Request for Information or Proposal process design and implementation

Technical architecture and roadmaps

CIO advisory services

Strategic technology selections

Technical evaluation and design

Custom component design and implementation

Customer intelligence solutions using web/mobile analytics combined with social intelligence

Cloud architecture, integration and phasing solutions

On-going support services

Infrastructure optimization and redesign, disaster recovery and business continuity specialized design and assistance

Product-based consulting services

Business transformation through the use of packaged software solutions

Enterprise performance management with Oracle budgeting, planning, consolidation and strategic finance

Enterprise resource planning with Microsoft Dynamics AX targeted in process and discrete manufacturing verticals such as CPG, IEM, Chemical, Pharmaceuticals and Food and Beverage

Customer relationship management with Microsoft Dynamics CRM

Industry specific platform and best practice solutions

Blended solutions; Microsoft CRM/XRM and specialized custom solutions

Business intelligence analytics

Design, development and introduction of IP that helps "verticalize" channel product stacks

Support and training services

In addition to the above services, the Company also provides synergistic services in the area of data management and analytics. Examples of such services include the following:

Enterprise information management services

Provide for data related matters: master data management, data governance, logical and physical data base design, data warehouse strategies and design

Provide practical data architectures and roadmaps to support transactional systems and enterprise performance management through advanced analytics

Provide forms of data manipulation, transformation and quality services

Analytics services

Advise on lead derivation of key financial and operational performance indicators and correlate their measurement, visualization and action for a given organization

Advise on opportunities for the use of predictive techniques, external data and benchmarks to improve business performance measurement and forecasting

Advise on the creation and adoption of analytics architectures, roadmaps and supporting organizations

Advise, design and roadmap analytics-based near real-time to real-time alerting strategies and implementations


Table of Contents

Our consultants are expected to travel and to be onsite with the customer to provide the highest level of service and support in all of these endeavors. We provide varying degrees of customer project assistance and will incorporate customer resources for technology transfer or cost optimization purposes. Independent teams and proper project process and delineation provide conflict-free transition points among all key service offerings as well as independent entry points. Leads for all offerings are internally driven with assistance from the respective vendors for software product solutions.

Factors Influencing Our Results of Operations

Revenue. The Company derives its service revenue from time and materials-based contracts, fixed-price contracts and retainer-based arrangements. Time and materials-based contracts represented 93.6% and 91.8% of service revenue for the three-month periods ended March 31, 2014 and 2013, respectively. Revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates. Fixed-price contracts represented 2.6% and 4.9% of service revenue for the three-month periods ended March 31, 2014 and 2013, respectively. Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting.
Retainer-based contracts represented 3.8% and 3.3% of service revenue during the three-month periods ended March 31, 2014 and 2013, respectively. Revenue under retainer-based contracts is recognized ratably over the contract period, as outlined within the respective contract.

Estimates of total project costs are continuously monitored during the term of an engagement. There are situations where the number of hours to complete projects may exceed (or be less than) our original estimate, as a result of an increase (or decrease) in project scope, unforeseen events that arise, or the inability of the client or the delivery team to fulfill their responsibilities. Accordingly, recorded revenues and costs are subject to revision throughout the life of a project based on current information and historical trends. Such revisions may result in increases or decreases to revenue and income and are reflected in the consolidated financial statements in the periods in which they are first identified.

We anticipate that software revenue will continue to be a significant portion of our revenues. Our reported software revenue represents the resale of certain third-party off-the-shelf software and related maintenance (primarily relates to the resale of Microsoft Dynamics AX product) and has historically been recorded on a gross basis provided we act as principal in the transaction, whereby we have credit risk and we set the price to the end user. In the event we do not meet the requirements to be considered a principal in the software sale transaction and act as an agent, software revenue is recorded on a net basis.

Software revenue is recognized upon delivery, except in the infrequent situation where the Company provides maintenance services, in which case the related maintenance is recognized ratably over the maintenance period (while the software revenue is recognized upon delivery). Software revenue is expected to fluctuate between quarters, dependent on our customers' demand for such third-party off-the-shelf software. Fluctuations in software revenue may have an impact upon our periodic operating performance, including gross margin.

Prior to the second quarter of 2013, we recorded substantially all of our software resale revenue on a gross basis (reporting the revenue and cost from the transaction in our consolidated statement of comprehensive income (loss)). However, beginning in the second quarter of 2013, due to changes in the nature of the terms of certain of our Microsoft Dynamics AX software resale arrangements (primarily the risk of credit loss and ability to establish pricing), we began to recognize a portion of our software resale revenue on a net basis (reporting only the net profit from the transaction as revenue in our consolidated statement of comprehensive income (loss)). We expect this trend to continue and also anticipate that the number of new software resale arrangements subject to these terms may increase in future periods. Additionally, the changes in the terms of the resale arrangements may, in certain situations, extend the timing of the recognition period (from full, immediate recognition of the gross margin on the transaction to recognition of the gross margin on the transaction over a three-year period) due to payment terms being spread over a multiple year period. This would reduce the amount of the software revenue and associated gross margin to be recognized by the Company in the initial period of the sale.

Operating Expenses. The largest portion of our operating expenses consists of cash and non-cash compensation and benefits associated with our project consulting personnel and related expenses. Non-cash compensation includes share-based compensation expense arising from restricted stock and option grants to employees. Project personnel expenses also consist of payroll costs and related benefits associated with our professional staff. Other related expenses include travel, subcontracting costs, third-party vendor payments and non-billable expenses associated with the delivery of services to our customers. We consider the relationship between project personnel expenses and service revenue to be an important measure of our operating performance. The relationship between project personnel expenses and service revenue is driven largely by the chargeability of our consultant base, the prices we charge our customers and the non-billable costs associated with securing new customer engagements and developing new service offerings. The remainder of our recurring operating expense is composed of expenses associated with the development of our business and the support of our customer-serving


Table of Contents

professionals, such as professional development and recruiting, marketing and sales, and management and administrative support. Professional development and recruiting expenses consist primarily of recruiting and training content development and delivery costs. Marketing and sales expenses consist primarily of the costs associated with the development and maintenance of our marketing materials and programs. Management and administrative support expenses consist primarily of the costs associated with operations, including finance, information systems, human resources, facilities (including the rent of office space) and other administrative support for project personnel.

We regularly review our fees for services, professional compensation and overhead costs to ensure that our services and compensation are competitive within the industry and that our overhead costs are balanced with our revenue levels. In addition, we monitor the progress of customer projects with customer senior management. We manage the activities of our professionals by closely monitoring engagement schedules and staffing requirements. However, a rapid decline in the demand for the professional services that we provide could result in lower utilization of our professionals than we planned. In addition, because most of our customer engagements are terminable by our customers without penalty, an unanticipated termination of a customer project could require us to maintain underutilized employees. While professional staff levels must be adjusted to reflect active engagements, we must also maintain a sufficient number of consulting professionals to oversee existing customer engagements and to participate in sales activities to secure new customer assignments.

Fullscope Embezzlement Expenses. Since fiscal 2010, we have incurred certain non-routine professional service-related expenses associated with our identification of embezzlement activities at Fullscope, one of our wholly-owned subsidiaries (the "Fullscope Embezzlement Issue"). We incurred a majority of our embezzlement-related expenses during fiscal 2010 in connection with our identification and investigation of the embezzlement activity.

During the fourth quarter of 2012, the Company began to file tax returns and pay sales and use tax liabilities related to the Fullscope Embezzlement (which were created by the methods employed by a former employee of Fullscope to conceal the discovered fraudulent activity). The Company has made payments totaling $1.4 million associated with the sales and use tax liabilities. As of March 31, 2014, we had completed the process of making initial payments to settle the identified pre-acquisition sales and use tax exposure. The remaining accrual for pre-acquisition sales and use tax exposure as of March 31, 2014 was $149 thousand, which will be utilized to cover any further potential sales and use tax exposure arising from the initial filing and payment process. The Company does not anticipate that it will make any future payments associated with these liabilities.

The Company has incurred significant expenses related to the investigation and related to the filing of sales and use tax returns. The Company anticipates that it may continue to incur additional expenses associated with the Fullscope Embezzlement Issue. We intend to aggressively pursue recovery of these expenses through a claim against existing escrow accounts established in connection with the acquisition of Fullscope, Inc. ("Fullscope Acquisition") which totals approximately $4.6 million as of March 31, 2014, which is sufficient to cover our claims. We believe that we may be able to recover some, if not all, of the expenses we incur in addressing this situation. However, reimbursement from escrow is not expected until resolution is reached on all outstanding embezzlement-related sales and use tax amounts. Amounts recovered, if any, will be recorded during the period in which settlement is determined to be probable of recovery from escrow.

Company Performance Measurement Systems and Metrics. The Company's management monitors and assesses its operating performance by evaluating key metrics and indicators on an ongoing basis. For example, we regularly review performance information related to annualized revenue per billable consultant, periodic consultant utilization rates, gross profit margins, average bill rates and billable employee headcount. Edgewater has also developed internal Enterprise Performance Management systems which aid us in measuring our operating performance and consultant utilization rates. The matching of sales opportunities to available skill sets in our consultant base is one of our greatest challenges and therefore, we monitor consultant utilization closely. These metrics, along with other operating and financial performance metrics, are used in evaluating management's overall performance. These metrics and indicators are discussed in more detail under "Results for the Three Months Ended March 31, 2014, Compared to Results for the Three Months Ended March 31, 2013," included elsewhere in this Quarterly Report on Form 10-Q.


Table of Contents

Results for the Three Months Ended March 31, 2014, Compared to Results for the Three Months Ended March 31, 2013

The financial information that follows has been rounded in order to simplify its presentation. The amounts and percentages below have been calculated using the detailed financial information contained in the unaudited condensed consolidated financial statements, the notes thereto, and the other financial data included in this Quarterly Report on Form 10-Q.

The following table sets forth the percentage of total revenue of items included in our unaudited condensed consolidated statements ofoperations:

                                                   Three Months Ended
                                                        March 31,
                                                   2014           2013
           Revenue:
           Service revenue                            85.1 %        83.9 %
           Software revenue                            7.4 %         8.4 %
           Reimbursable expenses                       7.5 %         7.7 %

           Total revenue                             100.0 %       100.0 %
           Cost of revenue:
           Project and personnel costs                52.0 %        56.7 %
           Software costs                              3.9 %         5.2 %
           Reimbursable expenses                       7.5 %         7.7 %

           Total cost of revenue                      63.4 %        69.6 %

           Gross profit                               36.6 %        30.4 %
           Operating expenses:
           Selling, general and administrative        31.1 %        32.1 %
           Depreciation and amortization               0.9 %         1.3 %

           Total operating expenses                   32.0 %        33.4 %

           Operating income (loss)                     4.6 %        (3.0 )%
           Other expense, net                          0.1 %         0.4 %

           Income (loss) before income taxes           4.5 %        (3.4 )%
           Income tax provision                        1.9 %         0.4 %

           Net income (loss)                           2.6 %        (3.8 )%

Revenue. Total revenue increased by $4.1 million, or 17.6%, to $27.6 million during the three-month period ended March 31, 2014, compared to total revenue of $23.5 million in the three-month period ended March 31, 2013. With respect to the comparative changes in year-over-year total revenue, service revenue increased by $3.8 million, or 19.2%, to $23.5 million for the three-month period ended March 31, 2014, compared to $19.7 million during the comparative 2013 quarterly period. Software revenue represented $2.1 million, or 7.4% of total revenue, during the three-month period ended March 31, 2014, compared to $2.0 million, or 8.4% of total revenue, during the first quarter of 2013.

On a year-over-year basis, the increase in quarterly service revenue is reflective of the increase in billable consultant utilization, which improved to 78.0% in the first quarter of 2014, compared to 69.0% in the first quarter of 2013. The rise in utilization was driven by the improved pipeline activity and project signings in the fourth quarter of 2013, which positioned the Company for a strong start to 2014. Conversely, the first quarter of 2013 was impacted by customer project start delays (a trend that had carried over from the second half of 2012). On a sequential quarterly basis, service revenue in the first quarter of 2014 increased by $1.6 million, or 7.1%, compared to the fourth quarter of 2013. The sequential quarterly increase in service revenue is similarly the result of an increase in billable consultant utilization (driven by the improved pipeline activity and project signings during the fourth quarter of 2013 and the absence of the seasonal influence of the holidays in the fourth quarter of 2013). The Company continues to develop strong pipeline activity across each of its service offerings.


Table of Contents

The existence of intellectual property (IP) design and build capabilities in our strategic offerings mix has had a positive impact on our lead generation and overall sales activity. We plan to continue to build out intellectual property in the healthcare, insurance and manufacturing verticals, as well as in our EPM service offering, in future periods.

As described above, utilization, which is the rate at which we are able to generate revenue from our consultants, increased to 78.0% during the first quarter of 2014, compared to 69.0% during the first quarter of 2013. Billable headcount, including contractors, increased by 14 during the first quarter of 2014, compared to the first quarter of 2013. The Company proactively manages its reliance on external resources, while maintaining appropriate levels of staff to service existing customer demand and effectively respond to proposal activity. First quarter 2014 utilization, on a sequential quarterly basis, increased to 78.0% from 73.7% during the fourth quarter of 2013 essentially as a result of the strong pipeline activity and the absence of the seasonal holiday influence, as referenced above.

Annualized service revenue per billable consultant, as adjusted for utilization, was $361 thousand and $346 thousand during the three-month periods ended March 31, 2014 and 2013, respectively. The periodic fluctuations in our annualized service revenue per billable consultant metric continue to reflect the changes in the mix of our service offering revenue generated by our current engagements.

During the three-month periods ended March 31, 2104 and 2013, software revenue totaled $2.1 million and $2.0 million, or 7.4% and 8.4% of total revenue, respectively. Our software revenue is primarily related to our resale of Microsoft Dynamics AX ERP software and maintenance. Software revenue is expected to fluctuate on a period-to-period basis dependent upon our customers' demand for such third-party off-the-shelf software. We anticipate that software revenue will continue to be a significant component of revenues in future years. Because of this, we believe that periodic fluctuations in the amount of software revenue recognized by the Company may have a material impact upon our total revenue and gross margins.

Prior to the second quarter of 2013, we recorded substantially all of our software resale revenue on a gross basis (reporting the revenue and cost from the transaction in our consolidated statement of comprehensive income (loss)). However, beginning in the second quarter of 2013, due to changes in the nature of the terms of certain of our Microsoft Dynamics AX software resale arrangements (primarily the risk of credit loss and ability to establish pricing), we began to recognize a portion of our software resale revenue on a net basis (reporting only the net profit from the transaction as revenue in our consolidated statement of comprehensive income (loss)). We expect this trend to continue and also anticipate that the number of new software resale arrangements subject to these terms may increase in future periods. Additionally, the changes in the terms of the resale arrangements may, in certain situations, extend the timing of the recognition period (from full, immediate recognition of the gross margin on the transaction to recognition of the gross margin on the transaction over a three-year period) due to payment terms being spread over a multiple year period. This would reduce the amount of the software revenue and associated gross margin to be recognized by the Company in the initial period of the sale.

A significant amount of our 2013 three-month software revenue is associated with the recognition of PI2 license revenue. In June 2012, Microsoft purchased the Company's internally developed PI2 software and intellectual property (the "PI2 Solution") for an aggregate purchase price of $3.25 million. The sale of the PI2 Solution was a significant multiple element contract. This contract included $3.25 million of license consideration and subsequent development and training services. At the time of the sale, we determined that the license did not have stand-alone value without the services, and accordingly we accounted for the license and related services as one unit. The PI2 Solution arrangement was completed during the fourth quarter of 2013 and therefore no future revenue will be generated from the PI2 Solution. The loss of this high margin contribution revenue stream was offset in the first quarter of 2014 by the recognition of several new software arrangements on a net basis methodology. The first quarter of 2014 included $678 thousand of software revenue reported on a net basis. The Company did not report any software revenue on a net basis in the first quarter of 2013.

Generally, we are reimbursed for our out-of-pocket expenses incurred in connection with our customers' consulting projects. Reimbursed expense revenue increased to $2.1 million for the three-month period ended March 31, 2014 compared to $1.8 million for the three-month period ended March 31, 2013. The aggregate amount of reimbursed expenses will fluctuate from period-to-period depending on the number of billable consultants as well the location of our customers, the general fluctuation of travel costs, such as airfare, and the number of our projects that require travel.

The number of customers the Company served during the three-month period ended March 31, 2014 totaled 270, as compared to 253 customers during the three-month period ended March 31, 2013. During the first three months of 2014, we secured first-time engagements with a total of 24 new customers, compared to 21 new customer engagements during the first three months of 2013.


Table of Contents

Cost of Revenue. Cost of revenue primarily consists of project personnel costs principally related to salaries, payroll taxes, employee benefits, software costs and travel expenses for personnel dedicated to customer projects. These costs represent the most significant expense we incur in providing our services. In total, cost of revenue increased by $1.2 million, or 7.2%, to $17.5 million for the three-month period ended March 31, 2014, compared to $16.3 million in the comparative 2013 quarterly period.

The primary drivers of the 2014 year-over-year quarterly increase in total cost of revenue, on an absolute dollar basis, were related to an increase in salary and wage-related expenses (including fringe-related expenses) in connection with the year-over-year growth in billable consultant headcount, and an increase billable consultant revenue share program costs, which were a result of both the growth in service revenue and the improvement in billable consultant utilization during the first quarter of 2014. The Company maintained 317 billable consultants (excluding contractors) as of the quarter ended March 31, 2014, compared to 299 billable consultants (excluding contractors) at the end of the first quarter of 2013.

Project and personnel costs represented 52.0% of total revenue during the three-month period ended March 31, 2014 as compared to 56.7% of total revenue . . .

  Add EDGW to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for EDGW - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.