​Edgewater Reports Second Quarter 2012 Financial Results

16% Organic Growth in Service Revenues; Microsoft Acquires Fullscope Process Industries 2 Solution for $3.25 Million​

Wakefield, MA – August 1, 2012 – Edgewater Technology, Inc. (NASDAQ: EDGW), a leading consulting firm that brings a blend of business advisory and product-based consulting services to its clients, reported financial results for the second quarter ended June 30, 2012.

Second Quarter 2012 Highlights

  • Organic service revenue grew 16% versus Q2 2011.

  • Service revenue gross margin improved from 36.3% to 39.5% versus Q2 2011.

  • Microsoft acquired Fullscope Process Industries 2 Solution (“PI2 Solution”) for $3.25 million.

  • Edgewater Fullscope named Microsoft Manufacturing Partner of the Year.

Second Quarter 2012 Financial Results

Total revenue in the second quarter of 2012 was $27.2 million, compared to $27.4 million in the year-ago quarter. Excluding $2.2 million of process royalties in the second quarter of 2011 that did not recur, total revenues increased 8% in the second quarter of 2012. The second quarter of 2012 included 16% organic growth in service revenue to $21.6 million compared to the year-ago quarter.

Total gross margin in the second quarter of 2012 decreased to 34.8% from 39.5% in the year-ago quarter, primarily due to the absence of process royalties and lower software revenue and related gross margins. Service revenue gross margin increased to 39.5% from 36.3% in the year-ago quarter primarily due to service revenue growth and a modest improvement in utilization. Utilization in the second quarter of 2012 increased to 73.2% from 72.2% in the year-ago quarter.

Net income in the second quarter of 2012 was $134,000 or $0.01 per diluted share, compared to net income of $395,000 or $0.03 per diluted share in the year-ago quarter. The decrease in net income was due to the absence of process royalties and lower software revenue and related gross margins, as well as a $550,000 charge, recorded as a period expense, for additional potential sales and use tax obligations resulting from the Fullscope embezzlement issue. The Fullscope escrow accounts established for the transaction are expected to fully cover and thereby offset this expense.

Adjusted EBITDA (a non-GAAP measure) in the second quarter of 2012 was 6.9% of total revenue, equaling $1.9 million or $0.16 per diluted share (see “Non-GAAP Financial Measures” below for further discussion of this non-GAAP term). This compares to 11.9% of total revenue that equaled $3.3 million, or $0.26 per diluted share, in the second quarter of 2011. The decrease in adjusted EBITDA was primarily due to the absence of process royalties and lower software revenue and related gross margins.

At June 30, 2012, cash and cash equivalents totaled $8.9 million versus $10.3 million at December 31, 2011. During the second quarter, Edgewater repurchased 118,000 shares of its common stock at an aggregate purchase price of $468,000, leaving $3.9 million remaining on its $13.5 million share repurchase program expiring in September 2012. The company continues to carry no debt.

First Half 2012 Financial Results

Total revenue in the first half of 2012 increased 3% to $52.5 million, compared to $51.0 million in the first half of 2011. The increase in total revenue was primarily due to a 13% increase in service revenue to $43.4 million. Excluding the process royalties earned in 2011, total revenues increased 9% in the first half of 2012.

Total gross margin in the first half of 2012 decreased to 34.4% from 38.1% in the first half of 2011, primarily due to the absence of process royalties and lower software revenue and related gross margins. Service revenue gross margin increased to 38.4% versus 37.4% in the first half of 2011, primarily due to the significant service revenue growth. Utilization in the first half of 2012 was 74.3% compared to 76.2% in the first half of 2011.

Net income in the first half of 2012 was $309,000 or $0.03 per diluted share, compared to net income of $705,000 or $0.06 per diluted share in the first half of 2011. The decrease in net income was primarily attributed to the absence of process royalties, lower software revenue and related gross margins and the $550,000 charge associated with the Fullscope embezzlement issue.

Adjusted EBITDA was 5.4% of total revenue, equaling $2.9 million or $0.24 per diluted share, compared to 9.1% of total revenue that equaled $4.7 million or $0.38 per diluted share in the first half of 2011. The decrease in adjusted EBITDA was primarily due to the factors described above.

Management Commentary

“We demonstrated solid momentum in service revenue with another quarter of double-digit organic growth,” said Shirley Singleton, Edgewater’s chairman, president and CEO. “Our Oracle-based EPM business is the primary driver of growth as customers move to buy enterprise EPM services, in effect doubling the average deal size of a year ago. Our EPM offering now represents about 55% of our overall service revenue and our Business Advisory and Support Services offerings are also trending up. The sale cycles in our ERP, CRM and technical consulting areas are lengthening, evidenced by many new proposals waiting for customer signatures in conjunction with requests to shift start dates into the near future. We do note that all offerings have very healthy pipelines.

“Utilization was trending up during the first two months of the quarter but June showed softness in signings across all offerings. The June softness in contract signings in conjunction with late quarter product sales left no opportunity to launch new services by quarter’s end, contributing to the slight sequential decline in utilization.

“We improved service revenue gross margin from 36.3% to 39.5% when compared to second quarter 2011. We attribute this improvement in margin to a modest improvement in utilization, while increasing billable headcount, and achieving better leverage on the growth in our service revenue while maintaining our average daily bill rates.

“At the end of the second quarter of 2012, Microsoft acquired our PI2 Solution and will incorporate it into their core Dynamics AX product. Our $8.9 million cash balance at the end of the second quarter of 2012 does not reflect the $3.25 million in cash we anticipate receiving from the transaction. Microsoft’s desire to include our PI2 Solution in their core Dynamics AX product showcases our expertise and proficiency in identifying and executing solutions for the channel, and is a testament to our relationship with Microsoft. As part of our growth strategy, we intend to continue identifying and building our own specialized industry-specific private label intellectual property which we believe is a key competitive differentiator in the Microsoft Dynamics channel.”

Ms. Singleton concluded: “We are diligently monitoring the signings softness and shifting start dates for any potential effect in the third quarter. However, when customers do launch, we are maintaining a very high success rate of closing new deals. For the third quarter, we remain cautiously optimistic that our current pipeline supports service revenue growth on both a sequential and year-over-year basis, and we reiterate our expectation of double-digit service revenue growth for the full year 2012.”

Selected Financial Data

Conference Call and Webcast Information

Edgewater has scheduled a conference call on Wednesday, August 1, 2012 at 10:00 a.m. Eastern time to discuss its second quarter financial results. You can participate by listening to the webcast available via Edgewater’s investor relations website at http://ir.edgewater.com or by dialing 1+ 877-713-9347.

Please dial in at least five to ten minutes prior to the call to register. If you have any difficulty connecting with the conference call, please contact Liolios Group at 1+ 949-574-3860.

A replay of the call will be available via Edgewater’s investor relations website at http://ir.edgewater.com or by dialing 1+ 855-859-2056 and entering conference ID #: 99371586. The replay will be available starting at 1:00 p.m. Eastern time through August 15, 2012.

About Edgewater

Edgewater Technology, Inc. (NASDAQ: EDGW) is a strategic consulting firm delivering a blend of advisory and product-based services. Edgewater addresses the market both vertically by industry and horizontally by product and technology specialty, providing its client base with a wide range of business and technology solutions. As one of the largest IT consulting firms based in New England, the company works with clients to reduce costs, improve processes and increase revenue through the judicious use of technology. Edgewater’s brand names include Edgewater Technology, Edgewater Ranzal and Edgewater Fullscope. To learn more, please visit edgewater.com.

Forward-Looking Statements

This Press Release contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements concerning our expected third quarter 2012 service revenue on both a sequential and year-over-year basis, the growth in breadth and depth of our pipeline, expansion in deal sizes in our key product-based service offerings, pipeline momentum, our targeted full year service revenue growth and the expected coverage under the Fullscope escrow accounts. These forward-looking statements inherently involve certain risks and uncertainties, although they are based on our current plans or assessments which are believed to be reasonable as of the date of this Press Release.  Factors that may cause actual results, goals, targets or objectives to differ materially from those contemplated, projected, forecasted, estimated, anticipated, planned or budgeted in such forward-looking statements include, among others, the following possibilities: (1) failure to obtain new customers or retain significant existing customers; (2) the loss of one or more key executives and/or employees; (3) changes in industry trends, such as a decline in the demand for Business Intelligence (“BI”), Enterprise Performance Management (“EPM”) and Enterprise Resource Planning (“ERP”) solutions, custom development and system integration services and/or declines in industry-wide information technology (“IT”) spending, whether on a temporary or permanent basis and/or delays by customers in initiating new projects or existing project milestones; (4) inability to execute upon growth objectives, including new services and growth in entities acquired by our Company; (5) adverse developments and volatility involving economic, geopolitical or technology market conditions; (6) unanticipated events or the occurrence of fluctuations or variability in critical accounting policies and estimates; (7) delays in, or the failure of, our sales pipeline being converted to billable work and recorded as revenue; (8) termination by clients of their contracts with us or inability or unwillingness of clients to pay for our services, which may impact our accounting assumptions; (9) inability to recruit and retain professionals with the high level of information technology skills and experience needed to provide our services; (10) any changes in ownership of the Company or otherwise that would result in a limitation of the net operating loss carry forward under applicable tax laws; (11) the failure of the marketplace to embrace advisory and product-based consulting services; (12) changes in the market for leased office space and/or (13) failure to make a successful claim against the Fullscope escrow accounts.  In evaluating these statements, you should specifically consider various factors described above as well as the risks outlined under “Part I - Item IA Risk Factors” in our 2011 Annual Report on Form 10-K filed with the SEC on March 12, 2012.  These factors may cause our actual results to differ materially from those contemplated, projected, anticipated, planned or budgeted in any such forward-looking statements.

Although we believe that the expectations in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, growth, earnings per share or achievements.  However, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements.  Except as required by law, we undertake no obligation to update any of the forward-looking statements after the date of this Press Release to conform such statements to actual results.