Keane 2Q Revenue Is Up; Earnings Stabilize On Outsourcing Strength

Keane

"I wish I could tell you the environment for IT services is improving," CEO Brian Keane told analysts during an earnings conference call Tuesday morning. "But we continue to see tight budgets and prolonged sales cycles."

For the quarter ended June 30, Keane reported income, before charges, of $5.5 million, or 11 cents per share, on sales of $226 million. That compares with income, before charges, of $6.7 million, or 13 cents per share, on sales of $197 million for the same quarter last year.

The results are in line with Wall Street's expectations of 11 cents per share in income, according to 12 analysts tracked by First Call/Thompson Financial.

Revenue from Keane's flagship offering,application development outsourcing,was up 10 percent from last quarter, to $106 million, and accounted for about half of revenue for the quarter. And while revenue from work in the public sector and health-care sector was stable at 17 percent and 16 percent, respectively, revenue from consulting services was down sequentially, said Keane.

"[Consulting projects are being approved in smaller chunks and we continue to experience rate pressure," said Keane. "Big Five firms literally give away business to solidify customer accounts and keep their consultants off the bench."

In the coming quarters the company will ramp up its newest service offering,applications rationalization,developed to combat waning consulting revenue, Keane said.

The new offering is aimed at Global 2000 customers that have invested millions in hundreds of applications on various platforms. The new offering, said Keane, helps customers "identify and eliminate redundant functionality, noncore technologies, end-of-life applications and other low-value systems."

"Cleaning out this clutter within IT garages can reduce costs while increasing flexibility and scalability," Keane said. "Delivered jointly with Keane Consulting, it can generate significant pull-through revenue in the form of conversions, consolidations, renovations and application rewrites."

Much of the pull-through work lends itself to being performed in Keane's near-shore and offshore operations, Keane said.

Meanwhile, Keane also told investors the company performed a "major cleanup" of its sales pipeline, scrubbing out several large government deals not scheduled to close until 2003 or 2004, and others deemed not likely to materialize. The result is a sales pipeline at the end of the second quarter that is down to $2.6 billion, from $3.9 billion last quarter.

"We do not believe this represents any material change in opportunities," said Keane, "but rather a more realistic, better quality pipeline."

Utilization for the second quarter stood at 77 percent, up 1 percent from the previous quarter. Keane also closed the quarter with 6,800 billable consultants, down from about 7,300 last quarter. The reduction was due in part to staff reductions from recent acquisitions and voluntary attrition. The company now has a total workforce of about 8,000 employees.

Keane also said the company's acquisition of Metro is complete and the acquisition of SignalTree Solutions Holding is well under way. Keane signed a $62 million cash deal to acquire SignalTree in mid-February. Along with SignalTree, Keane acquired two software development facilities in India, now dubbed Keane India, and additional operations in the United States.

"We are now intensely focused on gaining longer-term revenue synergies by cross-selling the hundreds of new customers we obtained from Metro," said Keane.

The integration of SignalTree, he said, should be completed by the third quarter and Keane is already transferring work offshore for some existing clients.

John Leahy, Keane CFO, told investors that during the second quarter Keane invested $2.2 million to repurchase 175,000 shares of stock under an existing authorization to build value. More acquisitions are being eyed over the next few quarters.

"We remain committed to driving cash flow to provide Keane with the financial flexibility to make appropriate investments in M&A and stock repurchases to build per-share value," Leahy told investors.

Operating cash flow for the quarter was $16.2 million. Leahy said the company estimates third-quarter revenue in the range of $210 million to $220 million, or 8 to 10 cents per share.