Computer Task Group Inc (CTG) 2007 Q2 法說會逐字稿

Ladies and gentleman, thank you for your patience. Welcome to the CTG Second Quarter 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 your host Mr. James Boldt, Chairman and Chief Executive Officer. Please go ahead.

Good morning, everyone. This is Jim Boldt. I want to thank you for joining us this morning for our second quarter 2007 earnings conference call. Joining me is our CFO, Brendan Harrington.

As you saw in our earnings release, our second quarter revenues were below what we had expected at the beginning of the quarter. Net income was up 24% and earnings per share were at the midpoint of our guidance. The revenue shortfall from our guidance was on the staffing side of the business. Our more profitable solutions business came in as expected resulting in higher earnings on lower year-over-year revenues.

I'm going to talk more about our business and expectations in a minute, but first I am going to ask Brendan to start us off with the review of our financial results. Brendan?

Thanks, Jim. Good morning.

Before I 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, 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 news releases and from time to time in the Company's SEC filings.

For the second quarter of 2007, CTG's revenues were $80.1 million, net income was $1 million, net income per diluted share was $0.06, and net income per diluted share excluding equity compensation was $0.07. Revenues in the second quarter 2007 decreased by $5.7 million, or 6.6%, compared to the second quarter 2006, while net income increased 24%.

Second quarter net income includes $155,000 after tax non-cash charge for equity compensation or approximately $0.01 per diluted share, which is excluded from the net income before equity compensation. The second quarter of 2006 net income included a non-cash charge for equity compensation of $144,000 after tax or also approximately $0.01 per diluted share.

The proportion of solutions revenue was approximately 31% of total revenues in the quarter compared to 27% in the second quarter of 2006 and 30% in the first quarter of 2007.

Direct costs as a percentage of revenues were 77.6% in the quarter compared to 78.2% in both the second quarter of 2006 and the first quarter of 2007. The lower percentage in the 2007-second quarter was primarily due to the increase in the solutions business in comparison to the other quarters.

Revenues from IBM were $25.6 million in the second quarter of 2007 as compared to $33.2 million in the second quarter of 2006. This year's lower revenue from IBM primarily reflects a reduction in their external staffing requirements from midyear 2006. Quarterly revenues from our European operations were $17.4 million in the second quarter of 2007 or a 21% increase from the $14.4 million recorded in last year's second quarter. Foreign exchange fluctuations accounted for 8% of the 21% increase in the European revenues in the quarter.

The tax rate for the 2007-second quarter was 38.9%. The expected tax rate for the full year 2007 is estimated to be between 38% and 40%. The Company had approximately 3,300 employees at the end of the second quarter of 2007 of which approximately 88% are billable resources.

On the balance sheet, our day sales outstanding increased to 64 days from 56 days at the end of the second quarter of 2006. Our day sales outstanding increased slightly from 62 days at the end of the first quarter of 2007.

Our cash used in operations was approximately $3 million in the quarter. We had $438,000 in capital expenditures, and we reported depreciation expense of $632,000.

During the second quarter of 2007, while adhering to SEC imposed volume limitations, we repurchased 141,000 shares of CTG common stock. The repurchases in the second quarter were made at an average price of $4.56 per share. We repurchased shares during the most recent self-imposed blackout period under our 10b5-1 plan and will continue to manage our repurchases in the third quarter of 2007.

Jim?

Thanks, Brendan.

The reduction in our revenues from last year's second quarter is clearly a function of the IBM demand reduction that occurred in the third quarter of 2006. Revenues from IBM declined by $7.6 million from the second quarter of last year. The IBM demand peaked in the second quarter of last year and began to decline in the third quarter of 2006; our quarterly revenue comparisons will be more favorable going forward.

Demand for staffing has been somewhat inconsistent this year. Overall client demand was weak in January and February, and then was very strong from the middle of March through the middle of April. As April ended, we saw the surge that started in mid March end. We believe that the uneven demand that we've seen this year is a function of fluctuations in the US economy combined with project starts and stops. For the rest of the year, we expect that staffing demand will slowly pick up as the economy recovers.

As to our solutions business, we continue to make additional investments in our healthcare business in the second quarter of the year. In 2007 we are investing in expanded offerings, more healthcare sales territories, and additional sales staff in order to capitalize on our leading market position and the many opportunities in the healthcare market. While the sales cycles for most of our healthcare solutions is typically 6 to 9 months, there are several opportunities that are closing now in the third quarter; and we anticipate that others will close as the year progresses.

With respect to the National Healthcare System Project in the UK, the project is progressing at a slower than expected pace. We do, however, anticipate placing additional staff on the project when a new version of the software being implemented is available. Our German office is now up and running, and we are using it to assist the European software company with the development of a hospital related software package.

As to the third quarter of 2007, we are forecasting revenues in the range of $80 to $82 million. We had 64 billable days in the second quarter. One billable day equates to about $1,250,000 of revenue, and we will have 63 billable days in the third quarter of 2007.

In addition, through the effects of fewer billable days due to vacation, we historically have seen a decline in revenues in the third quarter of the year when compared to the second quarter. However, because of new business wins, particularly on the solutions side of the business, revenues in the third quarter of this year should be approximately the same or slightly higher than the 2007-second quarter.

Given the revenue forecast, we expect that our third quarter GAAP net income will be in the $0.05 to $0.07 per diluted share range and the cash earnings per diluted share which excludes equity compensation to be in the $0.06 to $0.08 per diluted share range.

As to the full year, we believe that CTG's 2007 revenues will be in the range of $320 to $330 million. We expect that GAAP net income in 2007 to be in the $0.25 to $0.29 per diluted share range, 19% to 38% above 2006. And the cash earnings per diluted share will be in the range of $0.29 to $0.33, an increase of 21% to 38%.

Summing up, from a profit standpoint the second quarter was exactly what we had expected. Our staffing demand was weaker than expected, but it is improving and we've closed on a couple of the large solutions projects that we were pursuing. There are also additional solutions projects, particularly in our healthcare vertical that we expect to close will benefit the second half of the year. Given so many opportunities that we are pursuing and are positioned in the market, 2007 continues to look like a good year for CTG, highlighted by an improving mix of higher margin solutions business and increased profitability.

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?

Sandra?

Yes.

Could you manage the question and answer period please?

Absolutely. [Operator Instructions]. And we have our first question from Rick D'Autevil.

Good morning, Rick.

First question is on the staffing side. Beyond the decline that you guys previously mentioned with IBM in the quarter, what was -- can you give some color to other incremental weakness in the staffing part of your business?

Sure. The issue with the third quarter of last year is well known. We had expected based upon the demand we were seeing in the month of the April that we would increase our headcount in the staffing side of the business in the second quarter and really it was pretty flat. It just didn't increase the way that we were expecting. And as I said in my introduction, we suspect that the GDP growth was little weak in the first quarter, so people started to cut back in the second quarter. Second quarter GDP is supposed to be better and we are seeing a pick up, actually now a little pick up in terms of demand. So, we think that it will get better as the year goes on.

Okay. So it's really more granular kind of across the customer base then?

Yes, it was on a specific customer basically.

Okay.

And I think you've seen others. I think Kelly came out yesterday and kind of lowered the forecast going forward, so I think it's just general staffing. There is a little -- I don't want to say it's soft, but just isn't going up the way that it was.

Okay. I mean is your assessment on the second half consistent with what you are doing on the hiring side for recruiters or what's -- in other words, is there room, are you thinking about cutting back, continuing to increase, what are you doing on the hiring front?

No, yesterday we actually decided that we would add a couple of recruiters because we have seen an increase in demand really in the month of July. So, we think that companies are starting to put more money behind staffing again.

Okay.

So, for the rest of the year we are kind of predicting that staffing is going up slightly, not going to be a double-digit, but staffing will go up slightly; and most of the gain that we will see going forward in our revenue is going to be on the solution side of the business.

Okay. And then the margins. If you were to look at the staffing margins, are they consistent with your expectations? Where do you stand there?

Yes, they are fairly consistent. They are really about the same as they were last year. The solutions margins actually are increasing because we've made some investments and now we are starting to get the revenue associated with those investments.

Okay. Anything on the -- were we on a payroll cycle or off cycle this quarter?

We had a payroll on the last day of the quarter.

Okay. So, the balance sheet -- that's probably as negative as it's going to look probably, right?

I would think so.

Okay. Is that why the source of cash, you said you use $3 million in cash, is that the primary reason or...?

Yes, it is. Because at the end of the year we were off of the payroll cycle.

Okay. Okay, that's all I have for now. Thanks.

Thanks, Rick.

Our next question is from Bill Sutherland. Please go ahead.

Good morning, Bill.

Thanks, hey Jim. Using the midpoint of your new full year guidance on revenue, we get a nice step up in Q4 revenue. And today -- well let me ask first of all on the days, the billable days, Q3/Q4, 63?

63 in Q3 and 64 in Q4.

Oh, it is 4. Okay. What was it in Q2?

64.

64? So, okay, well that's one factor.

Actually if I could just comment on that. Actually it doesn't look like it but we were really growing revenues as well in the third quarter. Just because of vacations our revenues usually declined by 3% in the second quarter and then we lose about $1,250,000 because we have one less billable days. So, just the fact that we are saying the flat to going up a little means that, we are actually gaining new business moving forward.

Right, less billable, let me catchup. One last billable day equals...

$1,250,000 million of revenue.

Right.

And then, generally we lose about 3% of our revenues just because people take more vacation in the third quarter than they do in the second quarter.

Okay. So, that's about a 4% delta?

Yes.

Okay.

And that's why and then the fourth quarter comes along and, of course, the vacations go back to normal and the number of billing days is the same as the second quarter, and that's why you are seeing the revenues...

Okay. So, there is nothing heroic in your assumptions?

No.

Where was healthcare as a percent of total in Q2?

It was 25% of the total revenue.

Was that inline or up from first half?

The first half I think was also 25%; yes it is.

Okay.

I think it was 24% though at the end of the first quarter, so it did come up slightly.

The initial [inaudible] quite a vertical?

Yes, it is.

20% growth. I think that's what you told us.

Yes. Actually for the first six months of the year, the payer and provider side of the [inaudible] life sciences, but the payer and provider side is going in about 15% for the first half and that's really where we are investing the money.

That includes the UK?

Yes, it does.

Give us I guess a little color on how you are positioning yourself in the healthcare market you said with your investments?

Okay. First, we are adding just geographic coverage. We've got parts of the country that we really haven't covered very well, and we are significantly increasing the number of sales people so we'll have better coverage. We still rank, if you look at all of the rankings and class that ranks IT services companies [inaudible], we are still #1. So we've got the rankings. Now we are putting more sales people in the call and more hospitals. That's one way that we are doing it.

Now you are #1, obviously not in outsourcing, but in enterprise implementation is that...

Last time I looked, it comes out I think once a month, I think we are #2 in outsourcing. But, if you take all of the ratings and were to add them all up and see who has the highest ratings, that would be us.

Okay.

So, that's on the hospital side. On the peer side, really we are beginning to work with RHIOs, the Regional Health Information Organizations. We are just now starting to get funding and money, and we are also working with some of the Health Insurance Companies. You know many of them did combinations; they tended not always to combine our IT departments and now they are going back and kind of rationalizing their systems and those tend to be very big multi-year projects when they do that. So there will be two areas that we are concentrating on.

Okay. So, what we will see is, I guess, a pickup in SG&A costs, I mean whereas most of those are going to be on the direct cost side?

You are going to see a little bit of both because as we get more revenue on the solutions side of the business, it has a higher SG&A.

Right.

But we would expect our margins to continue to increase as the year goes on.

So, improving further from the 2.2%, well you may have a little -- those could be issues in Q3, you may not be flat, flattening it down?

Yes, in Q3 because of the billing days etcetera, it's probably going to be relatively flat to Q2. And in Q4, we look and even back into the midpoint of our guidance, the midpoint of our guidance is around 2.6% and the upper end of our guidance is 3% and that really depends on how many of these large healthcare projects we are able to close and how quickly there is (inaudible).

Right. Okay.

Okay.

Thanks, Jim.

Thank you.

[Operator Instructions]. We do have a question from Rick D'Autevil. Thank you.

As the year progresses, where do you hope to end the year? I guess this is probably going to be driven by mix, but where do you hope margins end the year, just to give us a sense of the run rate going into '08?

Well, if we are at the midpoint of our guidance, we think will be at 2.6% operating income as a percentage of revenue. If we can land a couple more of these large healthcare projects and hit the high end of our range, we will be around 3%...

Jim, is that for the year or is that for the full quarter?

No, I am sorry. That's for the fourth quarter.

Okay.

So the midpoint of our guidance is going to be 2.2%, 2.3% for the year.

Okay. And is that predicated on what, 30 -- a third of the business being solutions related or...?

Yes, probably. I didn't actually figure out the percentage, but it probably would be up around a third.

Okay. If -- we've been waiting for this UK project to kickoff, but if that were to kickoff early '08, is that likely to be a big enough swing factor that by the end of '08 we get into the mix of maybe 45% solutions or where could that be in '08 if the UK business were to kick-in?

Okay, actually we haven't done our '08 plans, so I don't really have a good feel for that. But the potential in the UK is we believe for us is very large, so it definitely is going to increase the solutions side of the business. I don't know if next year we would be 45% solutions, but it's quite possible if it and some of these other health insured projects go that way we could get up another 40% range next year.

Okay.

The problem with the -- by the way just as long as you brought up the NHS, I mean the whole problem is the area that we have the most expertise or opportunities, probably the clinical which is the largest and the software for the clinical is two years late. There is software out there, but there is a new version -- another new version that they are working on that we think will get to the point that NHS will say, okay, go ahead. And right now we don't think that version will be ready until published sometime in the first quarter of next year. So, we actually didn't put much in the forecast for the fourth quarter for the NHS above what it was currently doing and currently our run rate is still around $6 million.

Okay. Have they officially moved out the deadlines or they have just been silent on that front?

No, they haven't moved them out. I think there is going to be a lot of negotiations between the prime vendors and the NHS because if that software becomes available and that's just in the Southern two regions, that software would be utilized. I mean next year they are already three years behind in getting the software ready. There is no way they can do the total project in five years.

Okay. I mean is it a political issue, or is it just the scope of the project is bigger than people anticipated?

That fits the latter. You know, over a $10 billion project, the world's largest IT project, and the software wasn't available; and I think the software vendors thought that the software used in the United States was a lot closer than it turned out to be.

Okay. How big are you in Germany right now?

We are not tremendously big. Our current run rate in Germany is probably around $1 million. The office only opened up in February or so.

Okay. And there is opportunity to grow that or...?

Yes, absolutely.

All right, that's all I have. Thank you.

Okay. Thank you.

There are no further questions at this time. Please continue.

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

That does conclude our call for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect. This call will be available for replay starting today at 11:45 a. m and continuing through July 28th at midnight. You may access the AT&T Teleconference Replay System at any time by dialing 1-800-475-6701 and entering your access code of 853903. International participants dial 1-320-365-3844. Those numbers again are 1-800-475-6701 and 1-320-365-3844, access code 853903. Again that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.