Computer Task Group Inc (CTG) 2004 Q2 法說會逐字稿

(OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. Please stand by. I would now like to turn the conference over to our host, James Boldt, Chairman and CEO. Please go ahead.

Good morning, everyone. This is Jim Boldt. I want to thank you for joining us this morning for our second-quarter 2004 earnings conference call. Joining me is our CFO, Greg Dearlove. As to the format of the call this morning, Greg is going to begin with a review of our financial results; after his review, I will talk about the trends we saw in the second quarter as well as what we anticipate for the third quarter of 2004, then we'll open the call for questions. Greg, if you'd start us off, please.

Thank you, Jim, and good morning. 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 SEC filings.

For the second quarter of 2004, CTG's revenues from continuing operations were $59 million. Net income from continuing operations was $700,000. Net income per diluted share was 4 cents. Our second-quarter revenues from continuing operations were below our expectations, however, our net income from continuing operations and diluted earnings per share were at the midpoint of our guidance. The direct profit percentage was 26.8 percent in the second quarter, down about 7/10 of a percentage point from the second quarter of last year, and our operating profits declined from 2.9 percent last year to 1.4 percent in the second quarter this year.

Excluding the impact of our accounting change in 2002, this is the 12th consecutive quarter that the Company has reported profitability from continuing operations. SG&A decreased by over $297,000 in the second quarter versus the same quarter last year and approximated 25.5 percent of revenues versus 24.6 percent in last year's second quarter. Because of the impact of positive operating profitability in Europe, along with recently enacted tax law changes in Europe, we have adjusted our expected effective tax rate for the year to approximately 25 percent percentage points. Revenues from IBM were $13 million in the second quarter of 2004 as compared to $13.5 million in the second quarter of 2003. Quarterly revenues from our European operations were $10.3 million in 2004 as compared to $10 million in last year's second quarter.

On the balance sheet, our days sales outstanding and receivables decreased to 68 days from 71 days in the first quarter of 2004 but were 2 days higher than the second quarter of 2003. Total debt for the Company was $6.6 million at quarter-end, down from $9 million as of the end of the first quarter of 2004, and $7.6 million at the end of the second quarter of 2003.

Our cash flows reflect an increase in operating cash flows from the quarter, or during the quarter, of approximately $1.4 million. We made $478,000 in capital acquisitions and recorded depreciation expense of $678,000. Also total employment in the second quarter was at 2500, of which approximately 85 percent are billable employees. Jim, that concludes my summary of the Company's financial results for the second quarter of 2004.

Thanks, Greg. Obviously, we were disappointed with our revenues in the second quarter of the year. The largest single reason for the decline in sales in the second quarter versus the first quarter of 2004 was the 2 fewer billing days than we had during the second quarter when compared to the first quarter of the year. At the end of the first quarter, we forecasted new sales would more than offset the loss of the 2 billing days in the second quarter. Most of the shortfall in the quarter versus our original forecast came in the health-care and strategic staffing businesses. While our health-care group did start the implementation of two new engagements as expected, those projects ramped up much later in the quarter than we had forecast, causing a good portion of the shortfall. While demand in strategic staffing area increased during the quarter -- and I will talk a little bit more about that in a minute -- we experienced an isolated incident of a customer insisting in a reduction in their billing rates. As you know, particularly in the staffing portion of the business, if we incur a billing-rate adjustment, we are forced to make a comparable adjustment to wages. On the past few years, this has not impacted our turnover. Given opportunities for technical staff are increasing, we experienced a higher than normal turnover in technical staff in the second quarter due to the wage reductions. We believe that the increased turnover is subsiding and expect it will go back to a more normal turnover rate in the third quarter of the year.

Our staffing demand increased significantly during the quarter, given that hiring in aggregate increased in the U.S. in the second quarter of the year. This shouldn't come as a surprise. Based upon current demand, we need to add about one-third more to our recruiters and our strategic staffing group and expect to do so by the end of the third quarter of 2004. When this is accomplished, we will have doubled the number of recruiters in that group since we began to see an increase in staffing demand in the third quarter of 2002.

Our health-care group had another good quarter and now having securities these 2 large development and integration projects, we are convinced that we will have a double-digit increase in our health-care business in 2004. Our life sciences vertical continues to perform extremely well. Revenues from our financial services vertical declined in the quarter due to the multi-year projects that ended earlier this year. We are introducing new offerings into our financial services vertical, which should benefit the group as the year progresses.

As you know, we sold our Netherlands operating company earlier this year. Now that the Dutch operations have been eliminated, our European region is growing and profitable again. We see a lot of opportunity in the European market in the next 12 months.

As we mentioned on the last call, we did invest in several areas in the second quarter of the year. We ran classes in certain health-care software packages in the second quarter; that investment has paid off for us as we placed all of those billable staff on assignment at the beginning of the third quarter. We also invested in our information security practice in the second quarter. That investment also is paying off for us in the third quarter as we're seeing strong demand, particularly from our Sarbanes-Oxley offering.

As to the third quarter of 2004, we're forecasting revenues in the range of 56 to 58 million. As you know, we had 64 billion billing days in the second quarter of the year end we will have 63 billing days in the third quarter of the year. In addition, the billable staff takes off more vacation in the third quarter than in the second. We generally lose about 3 percent of revenue quarter to quarter given the additional vacation. This year, we also had the impact of the termination of a multi-year AMO by a customer who's in liquidation, and is bringing the work back in-house as they shut down their operations. We anticipate that the new health-care and staffing business will offset the loss of the AMO. Given the revenue forecast, we believe earnings will be in the 1 to 3 cent per share range in the third quarter of the year.

In general, as we said in the news release, we continue to be optimistic about the market conditions in our business. Staffing demand increased by more than 1/3 in the second quarter when compared to the first quarter of the year. We believe that staffing demand is back to a more normal level. We are adding recruiters and while it may take a month or 2 to get them acclimated to our company and their new clients, we expect to see very favorable results in our staffing business as the year progresses. Over the last 3 years, we have repositioned the Company to faster growing verticals such as healthcare and offerings with higher demand such as information security. We're seeing the benefit from the repositioning in the new health-care projects that are starting and with our particularly well-received Sarbanes-Oxley offering, we remain comfortable that our business has turned the corner and that we will continue on the road to recovery. With that, I would like to open the call for questions if there are any. Linda, would you please manage our question-and-answer period?

(OPERATOR INSTRUCTIONS). Bill Sutherland, Benning & Scattergood.

That was pretty close, actually. Did you guys give IBM?

Yes, I think Greg gave it out but he can repeat it again. In the quarter, IBM was just under $13 million, which is about 22 percent of our total revenues.

Okay. The strategic staffing piece of business -- I am going to assume it's probably not your largest client. But can you just go through the math a little bit with me like the dimension of the bill rate in decrease and what you pass through, and what kind of turnover that triggered?

Actually, I can't obviously talk about who the customer was.

Right. (multiple speakers).

The bill rate decline was 5 percent, which we believe and we have told our customer that in this current market is totally unwarranted. And we reduce the technical staff's wages by 5 percent if their bill rate decreased by 5 percent, which is pretty typical these days.

And then because of the turnover, you are talking about more than just the cost of friction. You mean that fewer -- the inability to staff as many slots as many days actually impacted revenue as well?

Yes, we literally had people quit. I mean they just walked out rather than take the bill rate reduction. Over the last -- well particularly starting in May, the demand for staffing has just increased dramatically. It was so high of an increase that at first we thought it was just an aberration. And the billable staff now have other alternatives, so rather than take a rate reduction and look for another job, they just said no thanks.

This is so cockeyed, I'm having trouble processing it. I don't see the strength in strategic staffing in your numbers, of course. I mean --

We would have expected -- our strategic staffing business has gone up for the last 4 quarters in a row through the first quarter of this year, in terms of the number of billable staff, etc. And in the second quarter, it didn't go up. I think the billable staff actually declined because the turnover went up so dramatically.

This was a pretty big client?

Yes, it was.

Okay. The health-care business, the 2 big deals you've gotten, Jim, are to do what kind of work?

It's package and implementation.

Is that typical of what you're getting or is it all over the place?

We do a lot of package implementation and integration. These are 2 huge projects; 1 is here in the United States and 1 is in England.

And those will probably run most of the year?

Oh, yes. Actually the one in England, I think the entire project runs 5 years or so.

Geez! How about what's new with AMO?

Well, we are certainly seeing a lot of interest in AMO. I think every CEO in the country has picked up the Wall Street Journal and read something about outsourcing a portion of the business. We did sign one new AMO up in second quarter of the year, and we probably in almost every one of the AMO's, I guess, we are pursuing currently a portion of at least goes offshore. But most of the work is still done here in the United States.

So I guess to really kind of see year-over-year -- well aside from seasonalities, when you fully embed this strategic staffing setback, you start to see sequential growth as soon as Q4 in your mind? Or too early to tell? I mean it seems like with all the strategic staffing momentum, you should.

I am not sure about versus the previous year's quarter, but certainly, we would expect that revenues would go up in the fourth quarter versus the third quarter of the year.

On a same-day basis?

Same-day basis, yes.

(OPERATOR INSTRUCTIONS). One moment, please. Dan Boyer (ph), Benning & Scattergood.

You got it right. A question pertaining to that contract where you had to -- where you asked for the give-back. I am relatively unfamiliar with this industry. I work with Bill and think his research is excellent. But do you see this as a beginning of a trend in the industry where someone can use their weight to reconfigure a contract? Or is this -- would you characterize this as an isolated incident?

I absolutely believe it's an isolated incident. But it's actually the reverse, it's the reverse of a trend that had been occurring. After 2000, as there were more technical workers unemployed, wages came down and bill rates tended to come down. And pretty much about a year ago, we thought that we'd absolutely seen the end of that, that there were some customers who asked for lower bill rates because wages in total had dropped. In the last year, we really have not seen much of that other than this one isolated incident. Linda?

One moment, please. There are no further questions at this time, sir. Please continue.

Well, I'd like to thank you for your continued support and for joining us today. Have a great day.

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