​​Edgewater Reports Third Quarter 2012 Financial Results

Wakefield, MA – October 31, 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 third quarter ended September 30, 2012.

Third Quarter 2012 Highlights

  • Generated $5.4 million in cash flow from operations, compared to $4.2 million in Q3 2011.

  • Secured first time engagements with 33 new customers.

  • Initiated integration work under the Microsoft IP sale-related development contracts.

  • Approved a $2.6 million increase and extension of the stock repurchase program to $16.1 million.

Third Quarter 2012 Financial Results

Total revenue in the third quarter of 2012 was $24.2 million, compared to $25.0 million in the year-ago quarter. The third quarter of 2012 included slight organic growth in service revenue to $20.2 million compared to the year-ago quarter.

Total gross margin in the third quarter of 2012 decreased to 36.5% from 37.4% in the year-ago quarter, primarily due to lower software revenue and a decline in the billable consultant utilization rate. Service revenue gross margin decreased to 38.7% from 40.6% in the year-ago quarter primarily due to the decline in utilization. Software revenue gross margin increased to 48.3% compared to 41.1% in the third quarter of 2011. The increase in software revenue gross margin was primarily due to the initial recognition of revenue related to the sale of Edgewater Fullscope’s Process Industries 2 (PI2) solution to Microsoft in the second quarter of 2012. Utilization in the third quarter of 2012 decreased to 69.5% from 75.4% in the year-ago quarter. During the quarter, Edgewater secured first time engagements with 33 new customers, compared to 38 new customers in the year-ago quarter.

Net income in the third quarter of 2012 was $793,000, or $0.07 per diluted share, compared to net income of $1.5 million, or $0.13 per diluted share, in the year-ago quarter. Net income in the third quarter of 2012 included a $246,000 reduction in operating expenses in connection with an adjustment to the estimated fair value of potential contingent consideration to be earned by the former stockholders of Meridian Consulting International, LLC, compared to a $1.4 million reduction in the same quarter last year.

Adjusted EBITDA (a non-GAAP measure) in the third quarter of 2012 was 5.8% of total revenue, equaling $1.4 million or $0.12 per diluted share (see “Non-GAAP Financial Measures” below for further discussion of this non-GAAP term). This compares to 6.5% of total revenue, equaling $1.6 million or $0.14 per diluted share in the third quarter of 2011. The decrease in adjusted EBITDA was primarily due to lower software revenue and the comparative reduction in billable consultant utilization.

During the third quarter of 2012, Edgewater generated $5.4 million in cash flow from operations, compared to $4.2 million in the year-ago quarter.  At September 30, 2012, cash and cash equivalents totaled $13.0 million compared to $10.3 million at December 31, 2011.

During the third quarter, Edgewater repurchased 383,000 shares of its common stock at an aggregate purchase price of $1.5 million. On September 26, 2012, the company’s board of directors approved an extension of the common stock repurchase program through September 20, 2013, and also increased the current repurchase authorization by an additional $2.6 million, leaving approximately $5.0 million remaining on its $16.1 million stock repurchase program. The company continues to carry no debt.

First Nine Months of 2012 Financial Results

Total revenue during the first nine months of 2012 increased to $76.6 million, compared to $76.0 million during the first nine months of 2011. The increase in total revenue was primarily due to a 9% increase in service revenue to $63.6 million, partially offset by process royalties in the same year-ago period which did not recur. Excluding process royalties earned in 2011, total revenues increased 5% in the first nine months of 2012.

Total gross margin in the first nine months of 2012 decreased to 35.0% from 37.9% in the first nine months of 2011, primarily due to the absence of process royalties, lower software revenue and related gross margins and the reduction in the billable consultant utilization rate. Service revenue gross margin in the first nine months of 2012 remained consistent at 38.5% compared to the same period in 2011 primarily due to significant service revenue growth, offset by a decline in utilization. Utilization in the first nine months of 2012 was 72.7% compared to 75.8% in the first nine months of 2011.

Net income in the first nine months of 2012 was $1.1 million, or $0.10 per diluted share, compared to net income of $2.3 million, or $0.18 per diluted share, in the first nine months of 2011. The decrease in net income was primarily attributed to the absence of process royalties, 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 was 5.6% of total revenue, equaling $4.3 million or $0.36 per diluted share, compared to 8.3% of total revenue, equaling $6.3 million or $0.51 per diluted share in the first nine months of 2011. The decrease in adjusted EBITDA was primarily due to the lower software revenue and the reduction in billable consultant utilization.

Management Commentary

“During our second quarter earnings call, we discussed our client pipeline that supported our organic growth expectations, but were concerned about customers delaying both contract signings and project launches,” said Shirley Singleton, Edgewater’s chairman, president and CEO. “During the third quarter, our year-over-year organic revenue growth was held to 1% as customers did in fact continue to pause for much of the quarter, making utilization choppy and resource planning very difficult to manage.

“Billable consultant utilization is one of the key operating metrics of our company.  The current instability in our utilization rate is attributable to an unusual pattern of project starts and stops across each of our offerings.   We are not experiencing a termination of current projects or an outright cancellation of pending projects.  Customers have chosen to pause between project phases.  We are actively managing our billable headcount in conjunction with our best estimate as to when we expect this cycle to end.

“At the end of the third quarter and into the first month of the fourth quarter, we experienced an increase in deal closures that have resulted in a noticeable increase in our utilization. We were able to launch these new engagements as smaller starter phases, which have the potential for progressively larger follow-on phases. Not only are we seeing our pipeline expand, but we are seeing the size of potential deals grow as well.”

Ms. Singleton concluded: “Despite these positive signs, we still see pockets of customer hesitation. This hesitation, combined with fewer billings days in the fourth quarter due to the holiday season, leads us to believe that our fourth quarter service revenue will be in-line with the third quarter of 2012. Consequently, we anticipate our full year 2012 service revenue will reflect organic growth in the mid-single digits.”

Selected Financial Data

Conference Call and Webcast Information

Edgewater has scheduled a conference call on Wednesday, October 31, 2012 at 10:00 a.m. Eastern time to discuss its third 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 #: 37239890. The replay will be available starting at 1:00 p.m. Eastern time through November 14, 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 fourth quarter 2012 and full year service revenue, the growth in our pipeline, expansion in deal sizes, 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.