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Edgewater Technology Inc. Reports Operating Results (10-Q)

August 05, 2011 | About:
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10qk

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Edgewater Technology Inc. (EDGW) filed Quarterly Report for the period ended 2011-06-30.

Edgewater Technology Inc. has a market cap of $35.4 million; its shares were traded at around $2.84 with a P/E ratio of 35.5 and P/S ratio of 0.4.

Highlight of Business Operations:

Revenue. The Company derives its service revenue from time and materials-based contracts, fixed-price contracts and fixed-fee arrangements. Time and materials-based contracts represented 95.6% and 94.6% of service revenue for the three- and six-month periods ended June 30, 2011, respectively. Time and materials-based contracts represented 93.7% and 93.0% of service revenue for the three- and six-month periods ended June 30, 2010, respectively. Revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates. Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. Fixed-price contracts represented 2.1% and 3.1% of service revenue for the three- and six-month periods ended June 30, 2011, respectively. Fixed-price contracts represented 4.2% and 4.9% of service revenue for the three- and six-month periods ended June 30, 2010, respectively. Revenue under fixed-fee contracts is recognized ratably over the contract period, as outlined within the respective contract. Fixed-fee contracts, which are specific to monthly hosting and support services, represented 2.3% and 2.3% of service revenue during the three- and six-month periods ended June 30, 2011, respectively. Fixed-fee contracts represented 2.1% and 2.1% of service revenue for the three- and six-month periods ended June 30, 2010.

Utilization, which is the rate at which we are able to generate revenue from our consultants, decreased to 72.2% during the second quarter of 2011 compared to 75.7% during the second quarter of 2010. On a year-to-date basis, utilization for the first six months of 2011 increased to 76.2% compared to utilization of 75.5% during the first six months of 2010. We typically target utilization in a range from 78%-82%. Utilization is influenced by a variety of factors, including customer demand for IT spending and general economic circumstances. The decline in our current quarter utilization rate is the result of the anticipated wind down of the process related service contracts and a hesitation by customers to approve and initiate new and/or extend existing projects. While we continue to see consistent pipeline activity, decision cycle times appear to be lengthening.

During the three- and six- month periods ended June 30, 2011, software revenue totaled $4.7 million and $6.3 million, or 17.3% and 12.4% of total revenue, respectively, compared to software revenue of $3.8 million and $6.7 million, or 16.1% and 15.3% of total revenue, respectively, in the three- and six- month periods ended June 30, 2010. Our software revenue is primarily related to our resale of Microsoft Dynamics AX ERP software. The year-over-year increase in software revenue during the three-month period ended June 30, 2011 is primarily attributable to the closing of several new product sales during the quarter.

Gross margin, as a percentage of total revenue, improved to 39.5% in the second quarter of 2011 compared to 36.8% in the comparative 2010 quarterly period. Similarly, gross margin improved to 38.0% in the six-month period ended June 30, 2011 compared to 35.1% in the comparative 2010 year-to-date period. The periodic year-over-year improvement in gross margin is directly related to the increase in process-related royalties earned under Fullscope process business contracts and gross margin contributions related to the mix of software revenue during the second quarter of 2011. Software revenue during the quarter contained a larger amount of product revenue than maintenance revenue. Product revenue generates a higher gross margin than maintenance revenue. These increases offset gross margin decreases resulting from the decrease in billable consultant utilization.

Service gross margin decreased to 36.3% in the second quarter of 2011 compared to 39.2% in the comparative 2010 quarterly period. Service gross margin increased to 37.4% in the six-month period ended June 30, 2011 compared to 36.8% in the comparative 2010 year-to-date period. The decrease in service gross margin for three-month period ended June 30, 2011 is primarily the result of the decrease in our billable consultant utilization. The increase in service gross margin for the six-month period ended June 30, 2011 is the result of strong performance within our EPM service offerings during the first quarter of 2011, which is historically a softer quarter for EPM services.

Selling, General and Administrative Expenses (SG&A). As a percentage of revenue, SG&A expenses were 34.5% and 33.3% during the three- and six-month periods ended June 30, 2011, respectively, compared to 33.0% and 33.1% in the comparative 2010 quarterly and year-to-date periods, respectively. On an absolute dollar-basis, SG&A expenses increased by $1.7 million, or 22.7%, to $9.4 million in the three-month period ended June 30, 2011 compared to SG&A expenses of $7.7 million in the three-month period ended June 30, 2010. Similarly, on a year-to-date basis, SG&A expenses increased by $2.5 million, or 17.6%, to $17.0 million in the six-month period ended June 30, 2011 compared to SG&A expenses of $14.4 million in the six-month period ended June 30, 2010.

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