Computer Task Group Inc (CTG) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CTG quarterly earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session; instructions will be given at that time. (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 2006 earnings conference call. Joining me is our CFO, Brendan Harrington. As the foreman of the call this morning, I'm going to begin with a review of our financial results, then talk about the trends we saw in the third quarter as well as what we anticipate for the fourth quarter of the year then we will open up the call for questions.

Before I began I want to mention that statements made in the course of this conference call that state the Company's or managements 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 cost 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 filing.

For the third quarter of 2006, CTG's revenues were $79.8 million. Net income was $832,000; net income per diluted share was $0.05 and net income per diluted share excluding equity compensation was $0.06. Revenues increased 7% in the quarter while net income increased by 30%. Under the accounting rules that went into effect on January 1, 2006 the third-quarter net income includes $167,000 after-tax non-cash charge for equity compensation.

Revenues from IBM were at $26.9 million in the third quarter of 2006 as compared to $27.8 million in the third quarter of 2005. Revenues from our European operation were $14.3 million in the 2006 third quarter compared to $11.4 million recorded in last year's third quarter. Foreign exchange fluctuations accounted for approximately 5% of our 26% increase in European revenues in the quarter. Once again, our testing offering did very well in Europe in the third quarter.

On the balance sheet our days sales outstanding decreased to 61 days from 82 days in the third quarter of 2005 largely as a result of a previously announced change to a cash discount option for a significant customer. Our cash provided by operations was approximately $3.3 million in the quarter. We had $385,000 in capital expenditures and recorded depreciation expense of $642,000 in the third quarter.

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 third quarter. While adhering to the SEC imposed volume limitations, we repurchased 108,000 shares of CTG common stock. We expect to continue our repurchase program in the fourth quarter of 2006.

As to our total employment, we were informed just before our second-quarter earnings release in the last week of July by a significant customer of an immediate reduction in their need for approximately 350 CTG billable staff. At the time we believed there was the extent of the reduction; later the customer -- when a customer finalized its reorganization in September there was an additional reduction of another 100 billable staff. On the staff inside of our business the reality is that customers often choose us for our ability to quickly increase or decrease technical staff. The recent change in this customer's requirements still leaves us with a significant net gain of 750 technical staff since we began bringing on the expanded new staffing business at the start of 2005.

While the reduction equates to approximately $35 million of revenues on an annualized basis, we expect to mitigate much of the impact on earnings through the increased level of higher margin solutions business that began in the third quarter of 2006.

Overall we continue to be optimistic about growth prospects for our Strategic Staffing business. As was mentioned in our earnings release we were among a small group of firms selected as a preferred staffing supplier as another large technology service provider significantly reduced the number of its vendors. While it will take some time we expect this opportunity should help us continue to build on our staffing business.

On the solution side of our business, we continue to see an increase in demand in some of the high-growth solutions we have focused on. The areas of greatest demand continue to include testing and information security in our life sciences, financial services and general industry markets and our healthcare vertical demand continues to be strong for clinical transformation projects as well as transitional outsourcing. As noted in our earnings release, we sold our largest ever healthcare transitional engagement outsourcing engagement in the third quarter.

With respect to the national healthcare system project in the UK, the project is progressing albeit somewhat slower than expected. We have, however, been placing additional staff on the project and expect to do so for the remainder of 2006 and throughout 2007. As a result of our U.S. and UK healthcare practices, we're beginning to be approached by companies in Europe for assistance with development and implementations of hospital-related software packages.

In the fourth quarter of 2006, we will lose all of the revenues generated by the 450 billable staff severed during the third quarter. We anticipate that the new business that we are winning, combined with better utilization in the fourth quarter will offset the third-quarter staffing reductions. Therefore, we're forecasting revenues in the range of the 79 to $81 million in the fourth quarter of 2006, an increase of 1 to 4% over the fourth quarter of 2005 and near the level of our third-quarter revenues.

Given the revenue forecast, we expect that fourth-quarter GAAP net income will be in the range of $0.04 to $0.06 per diluted share and that net income excluding equity compensation will be in the range of $0.05 to $0.07 per share. As to the full year, we believe that CTG's revenues will be in the range of 328 to $330 million, 11% and 12% above 2005 revenues.

We expect net income excluding equity compensation, to be $0.22 to $0.24 per diluted share, 57% to 71% higher than 2005 and the GAAP net income will be $0.18 to $0.20 per diluted share, 29% to 43% better than our 2005 performance.

Despite the reduction in staffing needs for a major customer, we see a lot opportunities going forward to grow our Strategic Staffing business with other clients. Our decision to focus only on a few high growth industry verticals is paying off for us in this market. While the broad base solutions business has not yet recovered, our niche marketing on select in-demand solutions is yielding favorable results particularly in our healthcare vertical. You can see the positive impact of the increased concentration of higher margin solutions business and our ability to maintain our profitability at the level of the second-quarter despite the sequential quarter-to-quarter revenue reduction.

We look forward to a similar trend to continue in the fourth quarter which affirms our ability to affectively adapt to changes in the market and customer needs.

With that I look to open the call for questions if there are any. Operator, would you please manage our question-and-answer period?

(OPERATOR INSTRUCTIONS) Rick D'Auteuil, Columbia Management.

Just a couple of questions. Do you have an average price on the shares bought in over the quarter?

Sure. It was $4.23.

Okay. Second question is you referenced in your press release the mix of business coming back a little with the large customer reduction in the quarter to a 70/30 mix staffing/solutions. If you were to guess on what it would look like for the fourth quarter, what do you think that would look like?

Well, the 450 people that we severed in the third quarter because they worked for part of the quarter, most of them were terminated in August, late July, August or a few in early September, the revenue associated with them was about $3.4 million. So if you forward to the fourth quarter I guess that our staffing would probably be about 68% of the total business and solutions would probably be around 32%. Obviously the staffing business is going to drop in the third quarter -- I'm sorry the fourth quarter because of the revenue that we had from those 450 people.

And solutions would be the makeup of -- it will grow by the 3 or 4 million, right?

That is correct.

Okay. What are you doing with recruiter hiring? And then if you can talk specifically to both staffing and solutions, are we now at a stable kind of recruiter base?

Well, actually with the cutback in the third quarter we did reduce a few recruiters in the quarter. We redeployed a lot of them to other accounts. So pretty much we are stable in terms of headcount of recruiters in the fourth quarter.

Is that true of the solution side of the business too or (multiple speakers) redeployed them, how did they get redeployed?

Some of them got redeployed to the solution side of the business.

Okay. So we can to the extent that there is a learning curve, we are now at a stable level and we should be getting leverage off the folks that are already in place, right?

That is right.

Okay. When you say the delays in the UK project -- what is your newest update on timing for meaningful revenues there?

I'm almost afraid to give out a projection. As you probably know, Excentra pulled out of two of the Northern regions or five regions in total. And CSC now has those three regions. iSoft is the software that they are putting in. Our understanding is that the software isn't ready. So the projects are not moving ahead very quickly.

In the London region, BT, the old British Telecom is the prime. They were up until a couple months ago trying to install IDX. They switched to Cerner and we think that it will probably take them about nine months to do the replanning before they start to move forward. The southern region where Fujitsu is the prime actually that has been most of our focus they are by far the farthest ahead. They actually have a few installations that are starting. But the project just isn't ramping up as quickly as we expected.

So rather than a steep ramp that we were hoping for, we're probably going to get a very gradual ramp that will go through 2007. Obviously we're trying to penetrate the other regions. The next that we expect that we might be able to start placing some people on is the London region.

In the other three regions because there doesn't seem to be much visibility in when the software will be ready, it's just too difficult to tell. So I think this is probably going to ramp up over a couple of years.

Government pushed to the right an ultimate deadline or --?

No, we have not heard that they've moved the deadline at all.

But it is now becoming almost silly, right?

It is. Because originally each region was putting in maybe 50 to 75 installations in 50 to 75 hospitals at a time. And every time they push the date back, the number goes up, they've got to be into the hundreds into the last couple of years. And I don't know how it's going to be very difficult to staff that. I don't know how they are going to deal with it, but --.

Overstaffed there right now?

I'm sorry?

Are you overstaffed?

No, absolutely not.

Okay. I'll let others ask. Thanks.

(OPERATOR INSTRUCTIONS) Bill Sutherland, Boenning & Scattergood.

Rick hit the questions but I was also curious or actually I wasn't listening closely. What did you say Europe was? And what was it comparing to as far as percent of revenue?

Okay. Our European revenues last quarter were $14.3 million in the third quarter of this year. A year ago they were $11.4 million, they're up 26% but about 5% of that is actually just exchange fluctuations. They are up 21% in constant currency.

Constant currency --

Yes.

Okay. And what proportion -- you said that healthcare is particularly strong over there. What proportion of the 14.3 roughly -- is it like half healthcare?

Oh no, it is much smaller than that. It's probably more like 5 to 7%.

Oh, is that all?

Yes.

Of Europe?

Of Europe, yes.

Oh, okay.

Well the problem is that -- maybe 7.5% -- the problem is the projects started up stopped and we're now just starting to deploy the people again.

I guess healthcare means just UK, doesn't it?

Yes.

In Europe?

Yes, right now we don't have a healthcare practice anywhere else in Europe.

Okay. So it's not even 1 million a quarter right now?

Actually it's a little over 1 million a quarter.

Okay. Now to Rick's question you said that you lost on the 450 headcount reduction you lost in the Q3 about 3.4 million in revenue.

Correct.

What's -- not knowing the timing of severances what is the impact in Q4 roughly likely to be just from that bent?

Of the severances?

In other words let me rephrase -- it was a partial quarter impact at $3.4 million.

No, that was the total impact. If you took the 450 people and looked at all the revenue for the third quarter, it was $3.4 million.

As if they had been taken out July 1?

Right.

Okay. But you didn't specify how much fell in the quarter of that impact?

Well, the 450 people -- let me rephrase that. I'm not sure I'm answering your question. If you looked at them on an annualized basis, it's $35 million and on a quarterly basis it would be around just less than $9 million. What they actually billed in the third quarter was $3.4 million. So for the period that they were here the 450 people billed $3.4 million in the third quarter.

Oh, okay. I was looking at it backwards, thank you. So mathematically it was about five that was that was missing in that quarter and it will be closer to eight or nine in the fourth quarter?

From what it was in the second quarter, yes.

-- from the loss of those techs, from second quarter, right.

Yes.

Yes. Okay. I think that is all I've got. Thanks.

(OPERATOR INSTRUCTIONS) Carter Newbold, Rutabaga Capital.

I had a question about the bid margins on the new solutions business that you are winning. I know you can't be too specific but generally speaking given how soft that business has been, are you pleased with the pricing that you are getting in the marketplace?

Yes. It's not where it was in the late '90s when people were getting really egregious operating margins but it is back to what it historically has been for the business what it was an early '90s. So I'm pretty pleased with the margins we are getting on that.

Okay. So all other things being equal as you improve your mix and solutions are a greater percentage of total sales --

Margins will continue to --

-- we should see a margin impact be positive?

Yes.

Okay. And then on this latest vendor consolidation that you mentioned where you won out at another technology service provider, I guess using the -- I'm wondering how comparable you expect that to be to the IBM experience? To me I guess the great surprise there has been that the volume exploded but the contribution margins remained actually very low. And I know there's a lot of stuff going on in the income statement around that so I may not be reading it particularly accurately.

But when you survive a vendor down select in those instances do you think there is actually more operating profit on the table or do you just win a budget of profitless revenue dollars?

No, if we didn't think we could make operating income we wouldn't bid it, quite frankly. It is -- obviously the staffing business, there's a lower operating margin than the solutions. And then the Strategic Staffing of the large technology and service providers even lower than our average staffing business but it is still profitable for us. It is a good situation for us.

This would be one of the top five technology service providers. The situation is very similar to what IBM was 10 years ago where they had over 1000 companies and they are now going down to a dozen or so companies. But it will take time as it did back in the mid-90s before you actually see that in our revenues. It is not a transfer of those people to us as a person leaves or a new person is needed we get a rep and we fill it so it will ramp up over a period of time. But it will be a profitable business for us.

Okay. I guess just lastly I was interested to know whether on either the staffing or the solution side of your business whether you are seeing any further consolidation or meaningful exits from the lower low end of the business that are in either instance helping or hurting the competitive dynamic?

Well, with the large technology service providers, what's happening is they are going to companies that can meet their needs across the United States so there is a tremendous transfer happening between the local suppliers that they historically have used and larger companies like CPG. We haven't really seen any of the larger companies exit the market in the last year. About a year ago Cyber and [Keene] made announcements, they both pretty much got out of the strategic staffing business but there hasn't really been anybody since then.

Okay, thanks, Jim.

(OPERATOR INSTRUCTIONS) There are no further questions. Please continue.

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

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