Computer Task Group Inc (CTG) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CTG Second Quarter 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.

Thank you. Good morning, everyone. This is James Boldt. I want to thank you for joining us this morning for our Second Quarter 2006 Earnings Conference Call. Joining me is our Interim CFO, Brendan Harrington. As to the format of the call this morning, I am going to begin with a review of our financial results and talk about the trends that we saw in the second quarter, as well as what we anticipate in the third quarter and the remainder of 2006. And then, we'll 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 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 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 second quarter of 2006, CTG's revenues were 85.8 million. Net income was $808,000. Cash earnings were $0.06 per share. And net income per diluted share was $0.05. Revenues increased 18% in the quarter, while net income increased by 30%. Under the accounting rules that went into effect on January 1, 2006, the second quarter's net income includes $144,000 after-tax, non-cash charge for equity compensation.

Revenues from IBM were 33.2 million in the second quarter of 2006, as compared to 26.9 million in the second quarter of 2005. Quarterly revenues from our European operations were 14.4 million in the second quarter, an increase of 22% from the 11.8 million recorded in last year's second quarter. There was virtually no impact from exchange rate changes in the quarter. Once again, our testing offering did very well in Europe in the second quarter.

On the balance sheet, our days sales outstanding decreased to 56 days from 81 days in the second quarter of 2005, largely as a result of our previously announced change to a cash discount option for a significant customer. Our cash used in operations during the quarter was approximately $200,000. We had $476,000 in capital expenditures and recorded depreciation expense of $638,000.

As previously announced on May 12, 2005, the Board of Directors authorized the repurchase of an additional 1 million shares of Company stock. During the 2006 second quarter, while adhering to the SEC-imposed volume limitation, we repurchased back 150,400 shares of CTG common stock. The changes we made in managing receivables in the first quarter of the year have enhanced our ability to repurchase shares. We expect to continue our repurchase program in the third quarter of 2006.

We're pleased with our second quarter performance as we attained an 18% increase in our revenues, and despite the new requirement to expense stock options, a 30% increase in profitability. As to our total employment, we added 100 employees to our headcount during the quarter bringing our total employment to 3,800 employees at quarter's end.

As to the individual business units, while our strategic staffing business had a good second quarter, as was disclosed in our earnings release, we were informed on Monday by a significant customer of a reduction in their need for approximately 350 CTG staff. The reduction is in our strategic staffing business and equates to $25 to $30 million of revenue on an annualized basis. This reduction is not a result of CTG's performance, but rather a change in our client's business needs. While it's unfortunate, the reality is that on the staffing side of the business, one of the reasons that our clients engage us is their ability to quickly increase and decrease staff.

As to our solutions business, while it's not back to what we would consider our normal market, we continue to see an increase in demand for some of the high growth solutions that we focused on. The areas of greatest demand continue to include testing, information security, in our life sciences, financial services, and general industry markets. In our healthcare vertical, demand is strong for clinical transformation projects, as well as transitional outsourcing from clients installing new software.

With respect to the National Healthcare System project in the UK, the project is progressing and we expect to begin to ramp--to ramp up staff on the project in the fourth quarter of the year.

Given the reduction in staffing, which will impact revenues in the last two months of the third quarter, we are forecasting revenues in the range of $81.5 to $83.5 million, an increase of 9 to 12% over the third quarter of 2005. Given the revenue forecast, we expect the cash earnings in the third quarter of 2006 to be in the range of $0.04 to $0.06 per share, and that GAAP earnings will be in the $0.03 to $0.05 per share range in the quarter. As to the full year, we believe that CTG's 2006 revenues will be in the range of $330 to $340 million - 12 to 15% above 2005 revenue.

We expect cash earnings per share to be $0.20 to $0.24 - 43 to 71% higher than 2005, and that GAAP earnings per share will be $0.17 to $0.21 - 21 to 50% better than our 2005 performance. Because the pending headcount reduction is in our lower margin staffing business, the impact on our updated 2006 EPS guidance is a $0.02 per share reduction from the range of our previous guidance. While disappointed with this reduction in our staffing business, we believe that our guidance continues to put us in the upper quartile in terms of performance in the IP services industry.

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?

Go to questions at this time? (Operator Instructions.) And we'll go to the line of Rick D'Auteuil with Columbia Management. Please go ahead.

I think that's Rick D'Auteuil, Operator. Go ahead, Rick.

Hi, Jim.

Hi.

A couple of things. What was the average price of the buyback in the quarter?

It was--I think it was $4.75. Yes, $4.75.

Okay. And the impact--the cash impact from the large customer reduction. I assume some receivables--I know--is there still a lag on the deal--the arrangement you made on the receivables there? Can we expect net cash to come out to be positive as a result of that reduction?

Yes. Definitely. The--I know it's about $25 to $30 million is probably at least a month's worth of receivables at any point in time. So it will probably reduce either our debt or increase our cash by $2 million or maybe $2.2 million.

And again, there's--just to remind us. On the buyback, is there any kind of restriction on that from your financing sources, or you're good to go on the--I think you have about 600,000 still open, right?

We clearly on the 600,000 that we still have open can repurchase all of those without talking to our banks. To go above that there is a restriction. We'd have to go back to the banks. But if you--the data at the end of the quarter was about 1 million--or $3 million, rather. And that was on one of our bi-weekly payrolls. The third quarter will be between our bi-weekly payroll, so there won't be any meaningful debt at all. I don't think there'll be any resistance at all from our banks to increase the authorization.

I'll pass it on right now and maybe come back.

Okay. Thank you.

Thanks.

Thank you. We'll go to the line of [Christopher Mintz] with Boenning and Scattergood. Please go ahead.

Good morning.

Good morning, Chris.

I was wondering if you could give me some color on the current pricing picture as it perhaps compares to maybe last year's spreads.

In terms of the ability to increase prices or--?

--In terms of was there any increase in price that you're receiving from your clients, and if you were able to pass those spreads off to--those increases off to your staffing?

Okay. I'm going to have to give this to you on the staffing side of the business separate from the solutions side because they're acting very differently right now.

Okay.

The staffing side of the business there's no price increases. Wages and prices have remained flat really over the last year. In some very select areas within staffing - and this is a very small percentage - we are starting to see a slight increase in pricing. It would be things like [indiscernible] with--[that means] web sphere or dot.net programming. They're starting to develop a scarcity of those type resources and clients are having to pay more because it costs more to get those.

On the solutions side of the business, particularly for some of the higher value-added, we're passing along what I would consider to be normal wage increases and price increases, which are probably 3%. It's not broad-based over all of the solutions, but many of the solutions businesses have been able to raise prices.

Great. Thank you. And also, regarding the solutions staffing mix, after both the reduction of CTG staff needed by your significant customer and also the inclusion of your new business wins, could you approximate on where the solutions staffing mix will be in the future after these events transpire?

That's an excellent question. Actually, we--as we only learned about this on Monday, we haven't totally run--rerun projections. However, in the first six months of the year, about 73% of our total business was in staffing. And I would expect that when we get to a full quarter that that number will probably drop to maybe 70--67% or so, 67 to 68%.

Great. Thank you. That is all for me.

Okay. Thank you.

Thank you. We'll go to the line of [Bill O'Laughlin] with Brook Street Securities. Please go ahead.

Jim, continued great work on the revenue growth and the income increase. You're doing a great job in turning CTG around.

Thank you, Bill.

The question I have, Jim, is the NASDAQ listing, which as you know, on occasion the spreads are pretty wide. On occasion, the price volatility--for example, in the last week from top to bottom the stock declined 25% from 4.90'ish down to 3.60 or 3.70 yesterday. Are you satisfied with the way the stock now trades? And if not, have you talked to NASDAQ? And if so, what have they said to you, if anything, that you could share? I'd appreciate that.

Well, we obviously aren't satisfied with the spreads. They're much larger than we would like them to be. And the volatility has been much more than we would have expected. What NASDAQ told us from the beginning is that a specialist on the New York Stock Exchange - their particular company - had probably traded our stock for 20 years. So they were very familiar with the way that it traded. We currently have nine market makers, which is more than they would have expected for a new listing on NASDAQ, that over a period of time as those individuals from those companies become more familiar with the way our stock trades, that the spreads will actually reduce.

The other thing that we're doing is we're starting to get out more and talk to institutional investors. I think some of the reason that the--for the volatility has been most of the time when you see the volatility it's clearly retail trades--100 shares, for instance, somebody buying at the bid 100 shares and the bid being very low when the market opens. So we're starting to schedule conferences, et cetera, to see if we can't attract more of the institutional investors. And as you know, they tend to trade in a more stable fashion.

Keep up the great work. Thank you.

Thank you.

We will go back to a follow-up with Rick D'Auteuil at Columbia Management. Please go ahead.

One of my questions related to the NASDAQ experience so far. We, as shareholders, don't like to see that kind of volatility. And I think there--particularly around the open, there's been some really abusive stuff I think as it relates to the market makers taking advantage of probably orders that don't have limits on them. But I guess, hopefully, over time that volatility declines some.

My follow-up question relates to the UK healthcare business that you're a subcontractor on. Can you give us a sense of how you--the size of that opportunity and how you expect it to ramp? I guess you've said that Q4 begins to ramp it. Is--how significant is that opportunity?

I think that over time the opportunity is very significant. We currently are running at a run rate of about $6 million a year. That's an annualized basis. By the end of the year, it will probably--if we hit our projections, we'll probably double that number. So we'll be at about $10 million. But the--what's happened, and it's happened in almost every region. It's not the prime contractor who is having the problem. It's that the software isn't ready. That's what keeps pushing it out. And that's why it's gotten delayed. So even at the end of this year, I don't think that they'll be doing a significant amount of installs in hospitals. They'll still be just starting up. So we would expect the business to go up even more next year.

Now we have some visibility because we talked to our customer as to where they think they'll be at the end of this year. We really haven't sat down with them and plotted out next year yet. But I would hope that it will be more than the $10 million run rate that we should be at by the end of this year.

Nobody is doing installs now because the software continues not to be ready.

They--I think they've done some betas or are trying to install. They--as you know, in at least one of the districts--one of the regions - the [spy] region - they went for about a year and a half and finally discontinued with the original software and they selected another software vendor. And that, of course, pushed the project off. That's where we have most of our business. We've heard rumblings that another one of the regions is thinking about doing the same thing.

We also--our understanding is that the NHS has not given any relief to the primes on when they had to be done. I believe that they had to have them all installed five years from when the project started, which was probably two years ago. And while we've not seen the contracts, obviously, with the National Healthcare System, my guess would be there's probably some pretty significant penalties if they don't hit the dates. There usually are.

So what's going to happen is that if there is no relief on the dates, they are going to have to ramp up more teams to do the installs in that short a period of time. By now, they should've been well on their way. The original plan was that they would be doing a significant amount of installs at this point in time and it just hasn't happened.

What's the latest feedback on the status of the software?

One of the vendors I know has something that I believe the NHS has signed off on to install. It does not meet all of the NHS requirements. So what's going to happen is they'll do the initial installs, which is what--as I said, they're working on some now to see how well that works. And then, they'll have to come back and do a fairly substantial version upgrade before the end of the five years.

Another one of the vendors I know is just way behind. I don't think that they have anything even to put into a hospital as a beta.

Once--the primes that you were working with, are they further along or not?

One of them I think is further along than some of the other regions because they switched, actually, software vendors and--the one that was further along.

Thank you.

Thank you. We have no further questions.

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

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