Computer Task Group Inc (CTG) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Matthew, and I will be your conference facilitator. At this time, I would like to welcome everyone to Computer Task Group's first quarter 2003 earnings conference call. All lines have been placed on mute to prevent any background noise. After speakers' remarks, there will be a question and answer period. If would you like to ask a question, simply press "" then 1 on your telephone key keypad and If you would like to withdraw your question, press "" then the number 2.

Thank you. I would now like to turn the call over to Mr. James Boldt, Chairman and CEO. Mr. Boldt, you may begin your conference.

Good morning, everyone. This is James Boldt. I want to thank you for joining us this morning for our first quarter 2003 earnings conference call. Joining me is our CFO, Greg Dearlove.

Before we begin, I want to mention 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 forward-looking statements. It's 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 from those in the forward-looking statements is contained in our press releases and from time to time in the company's Securities and Exchange Commission filings.

That out of the way, I'd now like to discuss our quarterly results. For the first quarter of 2003, CTG's revenues were 63.9 million. Net income was 130,000, and net income per diluted share was one cent.

Revenues from IBM were13.6 million in the first quarter of 2003, versus13.8 million in the first quarter of 2002.

Revenues from our European operations were 9.7 million in the 2003 first quarter, compared to 9.2 million in last year's first quarter.

In general, the first quarter was a little bit better than we'd anticipated, and our results were toward the top end of our guidance.

In the first quarter, we once again saw improved demand from our existing staffing business. This is the fourth quarter in a row that we've reported sequential increases in our staffing demand.

In addition to our existing clients, our strategic staffing group which serves large staffing clients in the United States won two new Fortune 100 customers.

As a result of increased demand from both new and existing customers, our strategic staffing group once again had a 4% quarterly increase in billable head count in the first quarter of the year. That's in addition to the 4%increase in head count that they experienced in both the third and fourth quarters of last year. That means their head count has been growing at a compound annual growth rate of just under 17% for the last three quarters.

As we mentioned in our last call, we've increased the number of our strategic staffing recruiters to deal with the increase in demand. Today, we have over a third more recruiters in strategic staffing than we had last summer. Even with this increase, we don't have enough recruiters in our group to adequately respond to the demand that we are currently experiencing, as well as the increase in demand that's been indicated by our customers for the next couple of quarters. To meet the demand, we plan on increasing the number of our strategic staffing recruiters by 20% during the second quarter of this year

By the end of the second quarter, that will bring the number of recruiters in our strategic staffing group to more than 50% above the number we had last August.

As to our solutions business, we really saw no change in the number of new development and integration projects in the first quarter. It's clear that many development and integration projects continue to remain on hold as clients contain their expenditures given the current economic environment.

There was a noticeable change in AMO activity in the latter part of the first quarter, however. We mentioned on the call in February that customers were hesitant to sign new AMO contracts. While there was never a single uniform reason given as to why they wish to suspend their AMO plans, it always seemed to come back to the fact that they were concerned about the future. The economic outlook, their own company situation, or the effects of reductions that they'd made to their own internal staffs. In the end, they told us that they were either delaying or terminating the outsourcing projects under consideration.

The change that's occurred in the last couple of weeks is that some of those same customers have comeback to us and so that they're now more comfortable with this situation, and have asked to reengage the process where they left of.

This change in attitude leaves us optimistic as to AMO closings in the second quarter of 2003. (inaudible) of our Group, business remain strong. Most of the software vendors have now introduced their HIPAA ready software for transaction processing. We've been working on integration testing that's associated with version upgrades and believe we'll continue to do so for most of the rest of the year.

As to Europe, demand remains weak and reduced our (inaudible) substantially in 2002 and in the first quarter of 2003. While our bench in Europe is still higher than we'd like, we think we've reached the point that we should be able to sell our way out of any remaining excess.

As to the second quarter of 2003, we're forecasting revenues in the range of 65 to 67 million. There --there will be 64 billing days in the first quarter of 2003 and there will be 64 billing days in the second quarter of this year.

Because of the greater number of billing days and strong demand for strategic staffing and health care services, we expect the revenues will rise 2 to 5% sequentially in the second quarter.

Given the higher revenue forecast, we expect earnings to be in the 2 to 4% per share range in the second quarter for the year. As to the future, we continue to remain guardedly optimistic. When we talk to CIO's, they generally indicate they have a significant back log of projects. Surveys of CIO's in the United States would bear this condition out. When asked if they're reducing their backlogs, most CIO's respond that they have not been able to do so as they are working their existing IT resources to the maximum and have been limited on spending until their company's financial outlook improves.

We believe what's currently happening is that after limited IT spending for several years, mission-critical projects are appearing that have to be done. With current staffs already being used to the maximum, CIO's are naturally turning to staffing.

That's what we would have expected as we always believed we'd see the staffing part of the business return before we saw recovery in solutions. Given that staffing began to come back a year ago, we remain hopeful that solutions side of the business will begin to recover as well.

Even if it doesn't happen for some time, we still remain optimistic as to our future given the progressively increasing demand that we see for staffing.

Before I open the call to questions, I know you need some additional information to complete your models. The end of the first quarter, our day sales outstanding stood at 67 days.

Our depreciation for the first quarter was 942,000, and our capital expenditures were 624,000. Total employment was at the end of the first quarter 2800, approximately 85% of which were billable.

Now I'd like to open the call for questions if there are any.

Operator, would you please manage our question and answer period?

certainly. At this time, if you do have a question, please press "", then the number "1" on your telephone keypad. If your question has been asked and/or answered, press "2" to withdraw it. We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Ed Kaso.

Good morning, Jim. I had a question on the outsourcing of the AMO work. Can you describe a little bit about what type of projects you're seeing?

To be honest with you, they vary. That's a really good question, though. That I can think of, one or two are in the health care area, so it's AMO's for health care. One or two are transitional outsourcing, where the client may be moving over to an ARP-type package and we're taking on their legacy systems for a year or two years while they make the move over, and one or two were just, you know, traditional outsourcings where the customer wants to save 20% and get an increase in user satisfaction. So it's really all over the gamut.

There's no doubt, though, that in the last month, I would say, we've seen a lot more AMO activity than we did in the fourth quarter, and we never really could pin down why customers got all the way almost to the altar. We got selected, even, in some cases as being the vendor of choice, and then backed out. But it's clear to us that there's been a change in the customer's attitude, and they're coming back to the table.

Can you talk a little bit about the off-shore factor? Are the AMO's you're focused on not work in an off-shore model, or have you had to compete with them, and what level of success you've had?

We have occasionally competed with off shore. Some of the work that we're doing, I don't think would work very well off shore. You know, when you go off shore, you've got to leave a certain number of higher cost analysts on shore to do the specs for the off shore. So certainly some of the AMO's would be a little bit smaller, and, therefore, it just doesn't work well in that model.

But, on the transitional outsourcing, to run the risk of taking the implications off shore, a lot of customers just don't want to do that on a traditional outsourcing, they really prefer to have a lot of their existing staff maintain those.

And not all customers really, they are ready to go offshore or and I'm not sure that -- I know that currently the Indian companies and other areas of the world are touting the fact that they can do any IT work off shore, but I'm not so sure that the offshore mode always works the best in an AMO situation where often you need very quick response time to a particular user's need.

I had a question on IBM. The work you do for IBM, is it directly for IBM or is it as a sub to their IBM global services?

It's both. It always has been. We support IBM internally and we support global services and we also support their learning group, which is another group, so we're really into many different parts of IBM.

Thank you very much.

Ok. Thanks, Ed.

Your next question is from Michael Keller with McDonald Investments.

Hi, Jim. How you doing?

Good, Mike. How are you?

Pretty good. Couple of quick things. One, you know, the staffing head count for the second quarter, I guess now has grown faster than the sequential revenue changes, and I'm just wondering, to make sure I understand the offsets, that would make, you know, the overall head counts grow faster then the head count, obviously, the development integration side is drive off (inaudible) is there some effect of, you know, rate flip or utilization slip, or is it just fewer days maybe?

In this quarter, it's absolutely fewer days. We had 65 days in the fourth quarter, and we only have 62 billing days in the first quarter, and a billing day is worth about a million dollars. So we went up in revenues despite the fact we had three less days, so the biggest influence is clearly the number of days in the first quarter.

That's somewhat offsets itself from the second quarter, when we have 64 days, so we pick up two days compared to the third, we're still behind the billing days in the fourth quarter.

Ok. The rate environment then, would you characterize as pretty much flat, at least?

In the second quarter of last year, the rate environment definitely was weak. We were getting requests from many companies for lower rates. We have had some of that this year, but it hasn't been anywhere as close to where it was in the first six months of 2002.

Ok. Just one more thing on the AMO bookings front. I know last time on the call you said January and February were just a ghost town. March sounds like it might have picked up a little bit. What about April as far as tracking? The activity you're talking about that seems to be resurfacing, is that very recent?

James Boldt I would say that it picked up probably sometime in the middle part of March, and it's definitely continuing in April.

Ok, and as far as these re-opened negotiations, scope and pricing generally the same as where you left them in

Yes. It's exactly the same. We're just picking up almost as if it was the next day.

Ok. Just looking at the -- some of the numbers, well, first of all, turnover, headcount turnover is pretty much in line with history or any change there?

No, there's no change. I mean, we're back to our relatively normal market.

Ok, and I noticed the debt -- long-term debt balance is up sequentially. What's the entry there that popped that?

Well, you'll see it go up and down. At the end of the year is always our low point, and our year-end is between our bi-weekly payroll, and that can run us 5 or $6 million. At the end of March, we were -- it was -- the quarter ended on the same day as our bi-weekly payroll, so it went up. Also at the end of the year, we often are able to get our DSO down. The DSO at the end of the year was 65 days. The DSO at the end of the first quarter was 67 days, so the DSO came up a couple days.

You should see the debt drop again at the end of the second quarter because, again, we'll be between our bi-weekly payrolls.

Ok. And finally, just obviously you've seen the stuff going on with Horizons and Aquant (ph), you know, evaluation of about .5 times, you know, as far as (inaudible) the takeout in your sector, I don't know, not the type of thing you would be looking for if that situation were to arise, but just to refresh my memory, is there a rights plan or any other takeover protection that you have in place?

We have a rights plan similar to a lot of other companies where if a person buys more than 20% of our stock, then there are additional rights given to the other shareholders that allow them to buy more. But like most of the rights plans, it's really designed to stop a two-tier takeover where somebody buys 51% of the stock with a large premium and then doesn't pay very much for the other 49%.

Right. Ok. Terrific. Thanks, Jim.

Thanks, Mike.

Your next question is from Rick Gotile (ph) with Columbia Management.

Yes, good morning.

Good morning, Rick. How are you ?

Good. Just a couple of follow-ups to things that you brought up. On the AMO business that you're seeing, is there reason to believe that because some of these are likely to be continuations of past discussions, that perhaps they work their way through the pipeline faster?

Yes. Absolutely, because we've gone part way with these customers. It's not going to take the, you know, six to a year cycle that they normally do. I'm hopeful that you'll see us close some of them in the second quarter.

Ok. And then related to the downsizing in Europe, you suggested that you think you're at a level now with personnel there that perhaps you can grow your way out of it from here and you don't need to do further downsizing? Did I hear that right?

Yeah, you did. We have been trying most quarters to lay off the maximum allowed under the local laws. We did more and we're in multiple countries obviously, so there are different rules in each one of them, but we did a little bit more in the first quarter than we've been doing in any other quarter for quite some time, they're trying to get the bench down to a more reasonable level.

The bench is still at a historically high level. People are sitting on the bench in Europe longer between assignments than is normal, but we're back, we think, to a position where we can sell the people that are on the bench. It may take us longer and they may sit on the bench longer than normal, but we think we can sell our way out of it. And like the United States, eventually the IT market should start to come back over in Europe, and a lot of these people are good people, we want them in the long term.

Can you quantify what the layoffs cost you in this quarter?

It was between 1-- it was probably 1 cent or a little bit more.

Ok. So, you know, on a comparable basis to the 2 to 4-cent guidance, we're kind of at 2 cents without layoffs in the second quarter?

That's correct.

At flat revenues?

Yes.

Ok. Thank you.

Ok. Thanks.

Once again, I would like to give everyone an additional minute to press "" then the number "1" on your telephone keypad. We'll pause for just a moment to continue to compile the Q and A roster.

Ok, there are no questions at this time.

I'd like to thank you for your continued support and for joining us this morning. Have a great day. Bye.

Thank you for participating in today's Computer Task Group's first quarter 2003 earnings conference call. You may now disconnect.