Computer Task Group Inc (CTG) 2002 Q4 法說會逐字稿

Good morning, I will be your conference facilitator today. At this is time, I would like to welcome everyone to the CTG 2002 fourth quarter and year end results conference call. All lines have been placed on mute. There will be a question and answer period. If you would like to ask a question during this time, please press star and the number 1 on your telephone key pad. If you would like to withdraw your question, please press star and then the number two. I would at this time like to turn the call over to Mr. James Boldt, Chairman and CEO.

Good morning. Thank you for joining us this morning for our fourth quarter 2002 earnings conference call. Joining us this morning is our CFO, Greg Dearlove. Before I begin, I want to tell you that statements made in the course of this conference call that state the company’s or management’s intentions, hopes, beliefs, expectations, and predictions in the future are force. It is important to note that the company’s actual results could differ materially from those projected. Additional information concerning factors that could cause actual results to differ to those from the forward-looking statements contained in our press releases and from time to time in the company’s Securities and Exchange Commission filing.

With that out of the way, I would now like to discuss our quarterly results. For the fourth quarter of 2002, CTG's revenues were 63.6m, net income was 101,000, and net income per diluted share was 1 cent. Revenues from IBM were 13m in the fourth quarter of 2002 versus 14.6m in the fourth quarter of 2001. Revenues from our European operations were 9.1m in the 2002 fourth quarter compared to 10.1m in last year’s fourth quarter. In general the fourth quarter was pretty much what we anticipated and our results were within our guidance. In the fourth quarter, we once again saw improving demand from our staffing business. That’s the third quarter in a row that we have reported sequential increases in our staffing demand.

We continue to see that improved demand in the first quarter of 2003. In total, our billable headcount increased by a little over 1% in the fourth quarter and represents the second quarter in a row that we've seen our overall billable headcount rise. It is clear that development and integration projects continue to remain on hold as clients contain their expenditures in the current economic situation. While it has been reported that capital expenditures did increase very marginally in the U.S. in the fourth quarter, we saw virtually no impact of that in additional spending in the IT services market.

In analyzing the fourth quarter of 2002, one Wall Street analyst declared a dearth of AMO contract signings. Well, this was the first quarter we did not find at least 1 new AMO contract, we believe that the hiatus is temporary. We’re actively talking to customers about AMO engagements and while we see some hesitance on their part to reduce their internal staffs further. The economics of outsourcing are compelling. While we do not have anything immanent, we already have had indications from customers that would point towards activity in the first half of 2003.

Our perception of staffing market continues to differ from what we've heard of others in our sector. Comparing demand from both customers we’ve had for both the full third and fourth quarters, we would say we saw a quarter to quarter increase in demand in the U.S.

As you may recall, we also indicated an increase in staffing demand in our third quarter versus the second quarter of the year. Why the difference in views of companies in out sector? We believe it's because we all have a significant difference in the mix of our customers, and therefore may experience different demand trends from time to time. A significant part of our strategy for our staffing business is to sell new preferred vendor contracts. We were successful in signing several new accounts in the last 6 months. As a result, our strategic staffing group, which has the responsibility for most of our large U.S. staffing customers had a 4% increase in billable headcount during the fourth quarter of this year. That’s the in addition to the 4% increase in headcount they experienced in the third quarter of the year. Demand will remain strong in January and we continue to add to our recruiting staff in order to meet that demand. As we mentioned in our press release, our healthcare business remains strong with almost a 20% increase in revenues in 2002.

Most of our health care business is with providers that general rely on packaged software solutions. While our HIPPA assessment and security businesses have exceeded our expectations, we have not done any significant work on remediation, because none of the major suppliers of health care packages for hospital have released their HIPPA compliant software. As a result we anticipate that remediation will commence later in 2003. As to Europe, demand remains weak. And while we have reduced our bench substantially in 2002 it remained higher than we would like. We therefore elected in January of 2003 to further adjust the bench to a more normal level. While the severance will hurt our first quarter numbers it should bring an end to the ongoing [inaudible] will allow our European management team to devote their full energies to drive revenues.

As to the first quarter of 2003, we’re forecasting revenues in the range of 62m to 64m, expect earnings to approximately breakeven. And with 65 billing days in the fourth quarter of 2002, and there will only 62 in the first quarter office in year, the least of any quarter. If we calculate the average billing per days, they were 978,000 in the fourth quarter of last first quarter versus a forecasted 1m to [inaudible] in the first quarter of 2003. That's a 2.2% to 5.5% increase in daily revenue, the result of additional billable staff and utilization. Unless something dramatically changes in the demand that we are currently seeing for staff, we believe that we saw the turning point in our revenues in the third quarter of our last year and anticipate daily revenues to increase going forward. This will be much more noticeable in the second quarter of 2003, when we have 64 billing days. By the way, if you're curious as to what happens to the extra couple of billing days that we’re short in the first quarter of the year, [they don't go away].

The rest of the year we are guardedly optimistic. That optimism comes not so much from anticipating there will be an improvement in capital spending later in the year but from looking at the significant increase that we are now seeing in th demand for staffing. Before I open the call to questions, I know you need some additional information to complete your models. At the end of the fourth quarter, our day sales outstanding stood at 65 days. That’s the lowest DSO that we’ve had in a long time, I might add. But appreciation for the fourth quarter was 1,134,000 and our capital expenditures were 225,000. [Total employment] at the end of the fourth quarter was 2,800, approximately 85% of which were billable.

I would like to open the calls for questions, if there are any. Operator, if you would, please manage our question and answer period.

Certainly. And I would like to remind everyone in order to ask a question to press star and the number 1 on the we'll pause for just a moment to the Q&A roster. Your first question will come from Michael Keller with McDonald Investments.

Hi, Jim.

Hi, Mike how are you.

Looking back about a quarter, we talked a little bit about how IBM business was seasonal [third] quarter, I’m wondering if the pickups for into the fourth quarter would you say that's normal seasonality, or just the result of increased staffing.

Well, even if you add just for the seasonality, our business with IBM was really up, the number of people we have. I think IBM is picking up some market share. That hasn't affected us yet, but as you know they won the JP Morgan outsourcing so that will probably affect us later part of the first or in the second quarter when they actually take that over, but anytime that they pick up market share it is good for our business.

Okay. The gross margin ticks down a little bit quarter to quart are -- I'm sorry, sequentially, would you attribute that more to up line effect, or the fact that you've been adding staff, you know, direct costs?

Well, the direct margin I thought was about the same in the fourth quarter as it was in the third quarter. It does tend to tick down a little bit in the fourth quarter because of the holidays, but we would expect for it in the first quarter for it to decline a little bit more, given the severance that we’re incurring over in Europe, overall after we get the beyond t he first quarter I expect that to start going up again.

Has that view changed much since last call?

No, it hasn't, our utilization in the United States is back what it should be. Our utilization in Europe, certainly in the fourth quarter, in the first quarter is going to be less than what we expect. With this last serverance of European billable staff -- by the way, -- we should start to get back into a normal rage of utilization in Europe.

Okay, you talk a little bit about AMO, new business activity sounds a little bit slow, certainly wasn't there in the fourth quarter, but, you know, just a lot of other things I've been hearing, was January just another -- whatever you want to call it -- wasteland for AMO signings? I mean, is it still slow to date in, February here?

In terms of actually signing contracts, yes, definitely it is. In terms of customers talking to us about outsourcing, that has picked up a little bit, and we have comments from one customer that they plan to too outsource with us in the second quarter, but contract signings have been slow. There's a lot of speculation, and when I talk to customers, a lot of times it has because they have shifted so much of their business offshore, for instance, and they cut their own IT staffs but their just concerned about [inaudible] but they don't deny that the [inaudible] money that would be saved by having us outsource some of their applications.

So the first quarter could be another [inaudible] for AMO signings.

That's possible, yes.

And last time, you gave me a little bit of update on financial services verticals as far as what the staffing trends looked like on that side.

We see good things in financial services, in addition to staffing, we also see opportunities for application management outsourcing. A lot of the big financial institutions are looking to take some of their processing out of the New York, New Jersey area and to other places, partially driven by the risks associated with 9-11. We have what we think is a compelling offering, which is to move some of it to Buffalo, and some of it to southern Canada, and we cap be very cost effective doing that, we can meet the regulations by keeping some of it in Buffalo, and I think in long term, there's a good opportunity for to us do a lot of work in the financial services market.

But the development integration type work is obviously still –

I think that’s still pretty flat.

Okay. Thank, Jim.

Thanks Mike.

Our next question comes from Rick [Gotile] with Columbia Management Group.

: You may have covered this, I joined a couple of minutes late. But on the debt side, I see was what the long term debt is, is there any current debt imbedded the current liabilities in the presented balance sheet.

No, the 8.5m of long term debt is all the debt the company has.

Is there anything related to workers comp that would effectively be used against a line of credit?

No.

Okay. That’s all I have right now.

Once again, if you would like to ask a question, please press star and the Number 1 on your key pad. Your next question comes from John [Dyser] with Bartlett Capital.

Nice quarter in a pretty tough environment. I came on the call a little built late. Did you disclose, Jim, what the severence is going to be for the reduction of the European bench.

No, I didn't, but it's going to be a cent.

I'm sorry.

1 to 2 cents per share.

At this time, sir, there are no further questions.

I got off easy this morning, I would like to thank you for your continued support and for joining us this morning. Have a great day.

Ladies and gentlemen, thank you for your participation. This concludes this conference call.