Computer Task Group Inc (CTG) 2003 Q2 法說會逐字稿

Good morning. My name is Chasity and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Computer Task Group second quarter 2003 earnings release conference call. All lines have been placed on mute to prevent any background noise. After these speakers' remarks, there will be a question and answer period.

If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now turn the conference over to Mr. Boldt, Chairman and CEO. Mr. Boldt you may begin your conference

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

Before we begin, I want to mention that the statements made in the course of this conference call that state the company's or management's intentions, hopes, believes, 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 second quarter of 2003 CTG's revenues were $64.1m, net income was $458,000 and net income per diluted share was 3 cents. As we mentioned in our news release, in the second quarter of 2003 we sold a building in Melbourne, Florida that resulted in a per diluted share loss of approximately 1 cent, that loss had not been anticipated when we provided guidance for the second quarter.

Revenues from IBM were $13.5m in the second quarter of 2003 versus $12.9m in the second quarter of 2002. Revenues from our European operations were $10m in the 2003 second quarter, compared to $9.2m in last year's second quarter. In general, revenues in the second quarter were up sequentially, but less than we expected. April and May's revenues were in line with our forecast. The short fall came in the month of June, when we had a number of delays at projects start dates. Most of those projects started up in the month of July, and the reasons given for the delays, by and large, centered around our customer's desire not to show those expenditures in the second quarter results. On the earnings side, particularly if you exclude the one time loss from the sale of the building, our EPS was at the higher end of our guidance for the quarter.

In the second quarter, we once again saw a strong demand from our strategic staffing business. This is the fourth quarter in a row that we've reported strong staffing demand. As we mentioned in our last call, we did add an additional 20% to the number of recruiters on our strategic staffing group in the second quarter. That group now has 50% more recruiters than it had at the end of last summer. Based upon the staffing demand that we have seen recently, we are glad that we added the additional recruiters.

As for our solutions business, we really saw no change in the number of new development and integration projects during the second quarter. When talking to CIOs, it appears that there is a good amount of pin-up demand, but it is clear that many development and integration projects continue to remain on hold, as clients contain their expenditures, given the current economic climate.

We closed one new AMO in our health care practice during the second quarter of the year and we continued to engage in outsourcing discussions with a number of customers. As to our healthcare group, business remains strong. We have been working on the integration testing that is associated with HIPAA version upgrades and believe we will continue to do so, through much of the rest of the year.

Demand is also picking up in the health care markets for computerized physician order entry or CPOE systems.

As to Europe, overall demand continues to be weak and we have reduced our bench substantially in 2002 and 2003. While our bench in Europe is still higher than we'd like, we're beginning to sell our way out of the remaining excess. While our European business is weak overall, some bright spots are starting to emerge particularly in Belgium where we're once again starting to grow the number of our billable staff. As to the third quarter of 2003, we're forecasting revenues in the range of $60m to $62m. The decline from the second quarter is a function of the normal seasonality in our business. There're 63 billing days in the third quarter of the year one less than in the second quarter. Each billing day equates to approximately $1m of revenue. In addition, our technical staff takes more vacation in the third quarter of the year than they take in the second quarter of the year.

The additional vacation generally reduces our revenues by approximately 3% or $2m. I suspect that we're impacted more by the vacation seasonality than our competitors because of our higher percentage of European business. As you know, European business virtually grinds to a stand still in the month of August of each year. Given the revenue forecast, we expect earnings to be in the break even to two-cent per share range in the third quarter of the year. But we're not prepared to give out a forecast for the fourth quarter of the year at this time. We will have 66 billing days in the fourth quarter of the year, three more than in the third quarter of the year and less vacation time, as a result we'd anticipate that when we do provide guidance for the fourth quarter, will be for higher revenues and profitability than we expect in the third quarter.

As to the future, we remain guardedly optimistic. Our strategic staffing business has been approving for the last year and given the demand that we're currently experiencing, we believe that trend will continue. We see positive trends in our health care, retail and life sciences verticals. We just announced the launch of our life science vertical last Friday. Based upon our experience and established client relationships in the industry, we see significant future opportunity there in automated manufacturing and regulatory compliance. Our European operations appeared to have bottomed out and we're now starting to see positive trends, again particularly in Belgium. I believe that like all IT services companies, our largest problem continues to be the lack of solution or project work.

At some point we expect that capital spending in the U.S and Europe will recover and that the solutions business will improve, when that will happen, however, is an unknown to all of us. In the meantime, we have been able to show a modest sequential increase in comparable revenues in each of the last few quarters and excluding the loss recorded in the first quarter of 2002, where there is required change in accounting principle, CTG has been profitable in each of the last eight quarters.

We believe that we're one of the few companies in our sector that's been able to achieve those results and that we'll be a survivor, with our lower cost structure and well positioned in selective verticals, when the IT services industry fully recovers.

Before I open the call to the questions I know you need some additional information to complete your models. The end of the second quarter our day's sales outstanding stood at 67 days. Our depreciation for the second quarter was $848,000 and our capital expenditures were $494,000. Total employment was, at the end of the second quarter, 2,700. Approximately 85% of whom 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.

Thank you at this time I would like to remind everyone, if you would like to ask a question please press star then the number one on your telephone key pad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Michael Keller of McDonald Investment.

Hi Jim.

Hi Mike how are you?

Pretty good. Just to start off, recently -- I guess it was about a week ago there had been some indications from one of the third party chairman consulting firms on IT outsourcing.

They talked about some pipeline shrinkage for the back half of the year and I wonder if that's had any implication as far as, well two things really in your world, one on the AMO side I think this is PPI that put out that information. I think they were talking more on the IT outsourcing, you know, the infrastructure outsourcing side. But I just wonder if you'd seen any similar effect, any pipelines, anything fall out of the pipeline in the AMO side? And I also wonder on the staffing side, if, you know, potentially if there's some reduction in the pipelines for infrastructure outsourcing work, does that have any implications, do you think, on the staffing side for you? You know for staffing engagements that could be dubbed out as part of those infrastructure assignments.

I guess I'm going to answer no to both questions. The AMO pipeline is probably better now than it was at the first part of the year. Now we generally - - we do, do infrastructure but our sweet spot is really applications, so we'll do the infrastructure if it's part of an applications outsourcing.

So we haven't really seen reduction in the pipeline for AMOs during the first part of the year and the latest part of last year, customers that really - - conservative, they push the decisions out, actually into the second and third quarters of this year. So we did see some push back then, but since about March, really the AMO activity in terms of the pipeline has improved. Things always fall out of the pipeline, the most common for us is that the customer ultimately decides that they're not going to do it. Usually it's a cultural decision because they are just not ready to do it, but I would say our AMO pipeline is better.

Most of our staffing is not on the infrastructure side though, we do, do some infrastructure work, particularly for the large service providers, like IBM. But our - - there's no doubt that our staffing demand has improved in each of the last four quarters and even going into the first two weeks, at least in July, its also improving. So we're definitely seeing the business get better, it's not a, you know, someone turning on the faucet and it being back to the way that it used to be, but clearly there's an improvement every quarter and --

Right. While earlier in the year you said, I think the AMO pipeline, you know a lot of people got cold feet all of a sudden, and it sounds like it's improved fairly steadily since then and you can -- it sounds like the life of the pipeline is stronger now at the beginning of the year, say assume that its slightly level or going in the right direction.

That's right. And where we did close one in the second quarter, and actually we did not close one in the first quarter.

Okay. Secondly, was there a quantifiable EPS hit for layoffs related expenses this, according to the last quarter you had about a 1 cent hit to EPS?

Yeah, 'course there is always some charge for laying people off in every quarter, but the first quarter we hit about 1 cent or about 300,000 pre-tax, of what we call unusual layoffs in Europe where the people had been on the bench for quite a period of time. And because of regulatory concerns we hadn't been able to sever them.

The second quarter was pretty normal though. We didn't really have any additional significant layoffs in the second quarter. We are still struggling, quite frankly, with a higher bench in Europe. It's improving but it’s still out there and its still holding our DP down a little bit.

Actually if our European operations, when they do come back to, let’s say our average DP, our total DP will go up by about a percent. So we'd still expect to see improvements as the European bench kind of drops.

Okay, so that you didn't have layoff related expenses in Europe in the second quarter?

Not unusual ones no, just the normal ones.

Okay, noticing you paid down the long term debt by about $8m, 2 of that is probably sales of Florida location. Does the rest of that - you know where does the other 6 - where did you pay down the other 6 – where did you pay down the other 6 from, was it just cash flow or was it --?

Actually, it has to do with our pay roll. At the end of the quarter we either on a pay date which means we have to borrow money to make the pay roll or we're between our bi-weekly payroll. And the difference is about $5m.

Okay.

At the end of the first quarter, yeah, we're on a pay date and at the end of the second quarter we were between.

Okay and finally just -- you know what ever comment you could offer on the rate environments for the various sectors of your model, you know on the outsourcing side and then on the staffing side and even on the -- development and integration side. Just general commentary you could offer on where rates have been if you've seen you know some price slide up to this point in the year?

We've seen - it's very different as you mentioned on each of the various areas. We've seen some price reduction in the staffing side of the business. In total it would be less than 1% though. So relatively modest certainly not what it was a year ago. The AMO business has been pretty steady, those margins were under some pressure last year and probably the rates did come down a little bit. But they are pretty consistent now with where they were last year. On development and integration, it's certainly a competitive market but particularly in the verticals where the pay back to the customer is very good, those margins held up.

Okay.

Okay thanks Mike.

Once again I would like to remind everyone in order to ask a question please press star then the number 1 on your telephone key pad. There are no further questions at this time.

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