Computer Task Group Inc (CTG) 2005 Q3 法說會逐字稿

Thank you for standing by. And welcome to the CTG Quarterly Earnings Conference Call.

[Operator Instructions].

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. James Boldt. Please go ahead.

Good morning everyone. This is Jim Boldt. I want to thank you for joining us this morning for our third-quarter 2005 conference call. Joining me is our interim CFO, Brendan Harrington (ph). As to the form of the call this morning, I'm going to begin with a review of our financial results, then talk about the trends that we saw in third quarter as well as what we anticipate in the fourth quarter of 2005, and open the call for questions.

Before I 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.

For the third quarter of 2005, CTG's revenues from continuing operations were 74.8 million. Net income was 640,000, and net income per diluted share was $0.04. Revenues increased 29% in the quarter. Net income was even with last year due to the favorable tax benefits recorded in the third quarter of 2004. Operating income as a percentage of revenue was 1.9% in the third quarter of 2005, versus 1.2% in the third quarter of last year.

As we expected, our operating income percentage has improved in each of the last three quarters. Our direct profit percentage was 22.6% in the third quarter of 2005, compared with 26.4% last year, although SG&A increased by 850,000 in the third quarter versus the same quarter of last year. SG&A as a percentage of revenue was 20.7% in the 2005 period, versus the 25.2% that the company recorded in the third quarter of last year.

The single-largest reason for the changes in the direct profit and SG&A's percentages was the shift in our sales mix to a higher concentration of staffing. Revenues from IBM were 27.8 million in the third quarter of 2005, as compared to 12.6 million in 2004.Quarterly revenues from our European operations were 11.4 million in the 2005 quarter, an increase of 4.9% from the 10.8 million recorded in last year's third quarter.

On the balance sheet, our days sales outstanding increased to 82 days from 72 days in the fourth quarter of 2004, but are down from our high of 88 days reported in first quarter of 2005. Our cash provided from operations was approximately 2.4 million in the quarter. In the quarter, we had 496,000 in capital expenditures and recorded depreciation expense of 648,000.

Total employment at the end of the third quarter was 3,500, of which approximately 87% were billable employees. As previously announced on May 12th 2005, the Board of Directors authorized the repurchase of an additional 1 million shares of the Company's stock during the quarter. While adhering to the SEC imposed volume limitations, we repurchased 97,700 shares of our stock. We expect to continue our repurchase program in the fourth quarter.

We're pleased with our third-quarter performance, as we achieved an almost 30% increase in our revenues when compared with the third quarter of 2004. With a few exceptions, which I'll review, the quarter came in pretty much as we expected that caused our revenues to be at the high end of our guidance and earnings per share to be at the midpoint. One favorable unexpected event that occurred during the quarter was the addition of 200 people to our headcount.

At the beginning of the quarter, we had expected to add 100 to our staff in the third quarter. This growth brings our year-to- date headcount increase to 1,000, 40% higher than a year ago. In term of our profitability, our operating income increased by over 100% when compared to the third quarter of 2004. All in all, we are pleased with our progress this quarter.

As to the individual business units, our strategic staffing business clearly had a good third quarter. But most of the transition costs associated with the significant new staffing business we had in the first quarter of the year have ended, we are still incurring expenses from retention bonuses. Without those retention bonuses, our operating income in the third quarter would have been 2.3% of revenue.

Overall, demand for staffing remained strong, and we see our strategic staffing group continuing to grow. As to our solutions business, while it's not back to what we would consider a normal market, we are definitely starting to see an increase in demand, particularly in some of the high-growth solutions that we've focused on.

In the healthcare area, for example, we're seeing greater demand for assistance with software implementations projects as well as transitional outsourcing from clients installing new software. We believe that part of the increase in our demand is a result of the Class (ph) Enterprises June 2005 Healthcare Study, that rated CTG Healthcare Solutions as number one in acute care clinical IT systems implementation. In response to the growing demand, we are increasing the number of US healthcare sales personnel in order to adequately respond to the increase in opportunities in the market.

Our testing offering has been very well received in our life sciences, financial services, and general industry markets. We believe that our testing offering will be a strong contributor to next year's growth. In anticipation of that, we're adding sales personnel and subject matter experts to support our testing as well as our information securities solutions sales efforts.

Our European revenues increased by 4.9% in the third quarter of 2005 versus the third quarter of last year. If there had been no changes in the exchange rates, the revenue increase would have been 5.3%. While our testing offering did very well in Europe in the third quarter, as previously mentioned, the delay in the National Healthcare System project in the UK limited Europe's revenue growth.

We believe that we are well positioned for further growth in Europe, when the NHS project resumes early. As to the fourth quarter of 2005, our forecast in revenue is in the range of 77 million to 79 million. As you know, we had 63 billable days in the third quarter and expect to have 63 billable days in the fourth quarter of 2005.

When compared to last year's fourth quarter, the fourth quarter of 2005 should have revenue growth in the range of 31 to 34%. Given our revenue forecast, we believe earnings will be in the $0.03 to $0.05 per share range in the fourth quarter of 2005. As to 2006, with an improving solutions market and the transition costs from our first quarter of 2005, expansion of our staffing business behind us, we look for further improvements in our results.

With that, 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.

[Operator Instructions].

And we do have a question from Rick D'Auteuil from Columbia Management. Please go ahead.

And I think that's Rick D'Auteuil

Hey, good morning, Rich.

Thanks, Jim. Good morning. Just a couple of things. One was I know you had to on the buyback you had to -- you were constrained by the rules out there. Was there a -- did you do a self-imposed blackout period? In other words, have you been in there in the month of October?

No, we haven't. Our attorneys have advised us that once we start to become aware of our quarter-end results that we can no longer buy stocks. So we -- the last purchase that we made was on September 30th. We have not repurchased any shares in the month of October.

Right. And then, I guess self-imposed -- is it a couple of days that before you can get back in?

Right. It's a day to three days before we can get back in.

Okay. I mean that's a little disappointing considering the volume has ticked up here recently and without you having the ability to do anything about it. The headcount in the quarter was 100 more than you expected. Can you speak about -- is that increasing your exposure to your largest customer? And then what was -- I guess, what was unexpected? Was there an opportunity that came up in the quarter? Is that -- I guess, first -- is it the largest customer or not the largest customer?

There definitely was a significant amount of those people who are working for IBM, but it really was across the board increase in demand for staffing the most of our clients. We just saw a lot more staffing demand than we were expecting, when we started the quarter. So it is really a combination. I think, I suspect the IBM revenues have been be about 37% of our total revenue in the last two quarters. It might tickup slightly in the fourth quarter, but I don't think it will be a huge increase in the IBM. But the staffing -- we can't explain why, because when you go to customers, they just tell you that there is a lot more in terms of projects what they have to get done. But we think the demand for staffing just continues to increase.

Okay. And to the extent that there is incremental IBM business there, is there also incremental incentives in place that hold back the margin?

We'd do that if the additional businesses in the area that we picked up the 700 people at the beginning of the year. There were additional retention bonuses that we would have given people as we took more of that transition work on during in the quarter. But it is nowhere as near the significance of the retention bonuses that we currently have. Most of the retention bonuses, almost all the retention expense really ends in the fourth quarter this year.

And by my calculation if that's about 90-basis-point negative impact, maybe, earnings without that today are up as much as $0.015 to $0.02, I guess, more than what you're reporting?

Yes. As I mentioned before, the operating margin would have gone up to --

...2.3.

2.3, which is probably a penny. Okay.

Okay. The UK healthcare project -- you talk about it restarting in 2006. Is there any more definitive timeframe on when that begins to kick in?

We are actually waiting from our customer. The issue in several other regions in the UK is really the software. A lot of the software being installed in the UK is American-based software IDEX, SONAR (ph) , et cetera. And that actually is good for us, because we have the expertise. There is not that expertise over in the UK. They haven't to any great extent used those packages. The modification of the packages in order to comply with the NHS requirements did not happen as quickly as they thought. That is really the reason for the delay.

So we are still waiting from our customer -- customers rather, the general contractors on this as to when they think they will have the software, and when it can actually begin the implementations and the hospital, which is our greatest area of expertise. But we expect right now -- I mean, every indication would be that it's going to happen sometime in the fourth quarter.

Now, is it January or March? You know, we're still not sure of that. They are behind from where they originally forecast. There were supposed to be a lot of hospitals actually installed no varying number, but it would not be unusual for a region. I think that they were going to do 50 hospitals maybe in 2005. In addition of it to during the hospitals that there were supposed to do in 2006, they have to somehow make up for those additional installations.

Do you think they will seek other partners or subcontractors or, will they look to you as one, anyway, to step up and provide more help in a more condensed time frame?

I think we will look to multiple partners. I don't think there is any company that can alone do this task. Most of the primes really are very large IT services companies themselves, but hey realize they do not have all the expertise needed. This is in total for all the regions, it is a $9 billion project. That is the largest healthcare project in the world. I think that they're going to come to us for the additional help, but I suspect it will also go to some our competition.

Yes. I guess I was more referring to, given the condensed timeframe, can you guys staff up in over fewer months, going forward? We just lost 12 months and the deadline did not change. So they have to, as you pointed out, have to make up the 50 hospitals that did not get done in 2005. Are you going to be able to step out and still address what he might have likely addressed over the 3-year period?

Yes. We believe that we can.

Okay.

We can staff up for that. And actually I want to use the example -- and not just an example of 50 hospitals, it's just one region or 5 regions.

Okay. And then going back to the DSOs, is that likely to be a more stable number from here because of the IBM mix or --?

It clearly, because of the IBM mix, is one of the largest factors that increased the DSO. We're looking at our options that we have. So I'm hopeful that we'll be able to bring the number down as early as the end of the year. But right now, it is not a function of the quality of the receivables; it's just the terms that we currently have on some of our larger deals that is causing that.

Okay. Do you -- are you content with where IBM is as a percent of revenues or, is it likely to continue to creep north? I think you said it might be up a little bit in Q4, but how are you going to manage that, going forward?

Well, it is always tough to turn down business. We actually have been at these levels before in the late '90s. We were in the high 30s as well, certainly below 40%. I'm content with it. Our focus, though, internally is to try and sell more solutions business next year. As you know, there is a better margin on those. It is not that we like the staffing business, we're glad that it came back first.

But in order to get the margins up, we are really putting the investment dollars that we have on the solutions side, because we think we've got some solutions that are going to start to perform next year or so. I guess if I had my brothers (ph), certainly, IBM would continue to grow, but the solutions side next year would grow faster than the staffing side of the business. And that just by math would cost IBM as a percentage of revenue to drop.

Okay. I'll let other asks. Thanks.

Okay. Thank you.

[Operator Instructions].

And I will turn the conference back to you, Mr. Boldt. Please continue.

Thank you. Without any more questions, I'd like to thank you for your continued support and for joining us this morning. Have a great day.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.