Computer Task Group Inc (CTG) 2008 Q2 法說會逐字稿

Ladies and gentleman, thank you for standing by and welcome to the CTG 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 first speaker, Debbie Pawlowski from Investor Relations for CTG. Please go ahead.

Thank you, Linda, and good morning, everyone. We certainly appreciate your time and your interest in CTG. On the call today we have President and Chief Executive Officer, Jim Boldt, and Brendan Harrington, Senior Vice President and Chief Financial Officer. Jim and Brendan are going to review the results for the second quarter of 2008 and update you on the Company's strategy and outlook. We'll follow with an opportunity for Q&A. If you don't have the news release discussing our financial results, you can access it at the Company's website at www.ctg.com.

Before we begin, I want to mention that statements in the course of this conference call that state the Company's or management's intentions, hopes, beliefs, expectations and predictions for 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 earnings release, as well as in the Company's SEC filings. You can find them at our website or the SEC's website at www.sec.gov.

So please review our forward-looking statements in conjunction with these precautionary factors. So with that, I'd like turn it over to Jim to begin the discussion. Jim?

Thanks, Debbie. Good morning, everyone. This is Jim Boldt. I want to thank you for joining us this morning for our second quarter earnings conference call. As you saw in our earnings release, our second quarter revenue and earnings were both well above our guidance. We're pretty excited about the fact that revenue from our health care business increased by 20% over the second quarter of last year. The growth in our solutions business has been the major contributor to the 200-basis-point improvement in our operating margin in the quarter. The favorable outlook for our solutions business has caused us to raise our guidance once again for the year.

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

Thanks, Jim. Good morning. For the second quarter of 2008, CTG's revenue was $94.1 million, an increase of $13.9 million, or 17.4% compared with the second quarter of 2007. Operating income increased 126% in the second quarter to $4 million, largely as a result of the growth in our more profitable solutions business. This growth also drove the 200-basis-point increase in our operating margin to 4.2% of revenue, its highest level in several years.

Net income was $2.1 million in the quarter, an increase by 105% from $1 million in the second quarter of 2007. Net income per diluted share was $0.13 for the quarter, a 117% increase over last year. Both the 2008 and 2007 second quarters' results include equity compensation expense of approximately $0.01 per diluted share net of tax.

Solutions revenue in the second quarter of 2008 was 34% of total revenue, or $31.9 million. This represents 14% growth in our solutions revenue compared to the second quarter of 2007. Direct costs as a percentage of revenue were 77% in the second quarter compared with 77.6% in the second quarter of 2007 and 78.4% in the first quarter of 2008.

We had $29.3 million in revenue from IBM, our largest staffing customer in the quarter, compared with $23.6 million in the second quarter of 2007. This represents 31.2% and 29.5% of total revenue in the 2008 and 2007 second quarters, respectively.

Revenue from our European operations was $21.4 million in the second quarter, a 23% increase from the $17.4 million recorded in last year's second quarter. Excluding foreign exchange fluctuations, European revenue in the quarter would have increased by 7.6%. The tax rate for the 2008 second quarter was approximately 48% compared with 39% last year. The rate was higher than normal due to the increase of valuation reserves for net operating losses of our foreign subsidiaries. The expected tax rate for the 2008 full year is between 40% and 44% compared with 38% in 2007.

The Company had 3,500 employees at the end of the second quarter of 2008, of which approximately 89% are billable resources. On the balance sheet, our days sales outstanding was 59 days compared with 64 days at the end of the second quarter 2007 and was 60 days at the end of the first quarter 2008.

Our cash flows from operations in the second quarter was approximately $36,000. We had $792,000 in capital expenditures and recorded depreciation expense of $490,000 in the quarter.

During the second quarter of 2008, while adhering to SEC-imposed volume limitations, we repurchased 176,000 shares of CTG common stock. The repurchases in the quarter were made at an average price of $4.97 per share. During this most recent self-imposed blackout period prior to releasing earnings, we repurchased shares under our 10b5-1 plan. We intend to continue our repurchase program throughout 2008.

Jim?

Thanks, Brendan. The primary driver of the significant increase in our profitability in the second quarter was our solutions business. There's no doubt that we're realizing the benefits from the investments that we made in our solutions business over the last few years, particularly in the health care market. Several new health care projects began in the second quarter 2008 and will continue to ramp up in the third quarter of the year. There's proposal activity in the pipeline, and our health care vertical continues to be strong. We expect to see additional health care business come online as the year progresses. Health care solutions business has been the main driver of our margin improvement and, quite frankly, it allowed us to achieve an operating margin above 4% a lot sooner than we anticipated.

Our staffing business increased 19% in the second quarter of 2008 when compared to the second quarter of last year. The increase was higher than we anticipated, and we believe it to be significantly higher than that experienced by the US staffing industry. Growth in our business to the technology service provider market, as well as additional revenue we generated from taking over the staffing responsibility for a new area at an existing customer site during the first quarter of the year, were the major contributors to the growth in our staffing business.

As to the third quarter of 2008, we're forecasting revenues in the range of $89 million to $91 million, 10% to 13% higher than last year's third quarter. As you know, we had 64 billable days in the second quarter. One billable day equates to about $1.450 million of revenue, and we will have 63 billable days in the third quarter 2008. In addition, as the billable staff takes more vacation in the third quarter than in the second, we generally lose about 3% of our revenue quarter to quarter due to the additional vacation time.

Given the revenue forecast, we're forecasting earnings per share in the third quarter of 2008 to be in the range of $0.10 to $0.12 per diluted share, 67% to 100% above the third quarter of 2007.

As you know, we've also increased our guidance for the year. We currently believe that CTG's 2008 revenue will be in the range of $363 million to $367 million, 12% to 13% above 2007. We expect that net income per diluted share in 2008 will be in the range of $0.44 to $0.48, 76% to 92% above last year.

To sum it up, our second quarter performance was significantly better than we expected. We expect our solutions business will continue to advance as additional solutions projects ramp up, primarily in our health care vertical. As our health care solutions proposal activity remains strong, we continue to expect that our improving mix and more profitable solutions business will drive higher year-over-year earnings in the second half of the year.

The bottom line is that despite a weaker economy, we believe that CTG is on track to have a very good year in 2008. Even more importantly, as we look beyond 2008, we see further opportunity as CTG capitalizes on its excellent traction in the growing health care industry by developing new and innovative solutions to improve patient care and lower cost of the technology.

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

Okay. (OPERATOR INSTRUCTIONS.) Our first question will come from the line of Rick D'Auteuil from Columbia Marketing. Please go ahead.

I think that's D'Auteuil. Good morning, Rick.

Good morning. That's actually Columbia Management, too, so--.

Okay.

We're two for two. A couple of questions. First of all, excellent quarter and great progress. Love to see the operating margin improvement and progress that we've been hoping for. To start on that subject, I think last time I asked you what your guidance implied for operating margin in Q2, and prior guidance was around 3.3% to 3.7% band. Clearly, you blew that away. What I guess was incrementally that much more positive to get you to 4.2%? You referenced health care, but you knew health care was strong going into the quarter, too.

We actually had more health care and solutions projects start up in the quarter than we anticipated. And the other thing--and I suppose we should have anticipated this--but these are new, many of them are new projects that we've never done before to new customers. The margins on the new projects are significantly higher than we expect. We've told people--and actually, in the quarter, pretty much the solutions business was now starting to hit its target margins--but we've told people on average we expected operating income from solutions of about 10%.

The new projects that we're starting up are significantly higher than that, and they are higher than that because the things that, we're the only person, perhaps, in the market that's offering, or they're solutions where there's a tremendous return and therefore the margins are just better. So the margins have been better on the health care business, and we have more than we expected. And even on the staffing business, we really did not expect a 19% increase in our staffing revenue in the quarter. The margins there didn't improve; they're still running around 3% or so, but they did add incrementally to the income.

Okay. That was another question I had. The staffing margins in fact stayed relatively flat?

Yes. They were almost identical to last year.

Okay, and so the bill rates and pay rates are fairly stable on the staffing side?

I'd have to do that separately. In the US, I would answer that yes, they are stable with where they were last year. In Europe, because of shortages that are starting to occur over there, we're actually starting to see some inflation, more like general inflation--you know, 2% or 3% increases.

Okay. And that's on both bill and pay rates?

Yes.

Okay. Okay, and then how do you feel, so I think, if taking your comments and your prepared remarks on the health care solutions business, you expect to see more assignment ramps in the coming quarter, and the pipeline continues to be strong. And if new projects are having better-than-average operating margin, it sounds like you'd feel pretty good about the sustainability and probably even opportunity to continue to increase the operating margin as the year progresses, right?

Well, we are somewhat cyclical, unfortunately. If you were to rank the quarters, second quarter's the best because you don't get many people taking vacation compared to other quarters, and there's only one holiday. In the third quarter of the year, you've got a couple holidays, lots of people taking vacation. So in some years, we've actually ramped our SG&A expenses down to somewhat adjust for that. And to some extent, we probably will this year.

But because we have so many opportunities, we want to keep the investments, particularly in the solutions business, going. So in the third quarter of the year--if you looked at the midpoint of our guidance, for instance--we're projecting about 3.6% in terms of operating margins. And it's really dropping because the fixed cost as a percentage of revenue is staying relatively flat, and the revenue's dropping because of the vacation and the one less billing day.

In the fourth quarter of the year at the midpoint of our guidance, we've indicated about a 4% margin. Fourth quarter we get hit by the holidays at the end of the year. So we are somewhat cyclical.

Okay, more seasonal, I guess.

Seasonal, seasonal. Yes.

Okay. Okay. That's helpful. And then the other thing, I think, that held you back a little bit this quarter, and you made reference to it in your release--again, I'm sorry. I missed the first few minutes of your prepared remarks. But the tax rate--I'm a little confused by that. Can you elaborate on that?

Yes. Unfortunately, there's going to be a fairly long explanation, so if you have follow-on questions, please ask, because I'm sure other people are thinking the same thing. As you know, we've been on the NHS contract in the UK for three years, now, since basically its inception. Part of our business over there--the largest part of our business over there--has been with Fujitsu, one, the prime contractor in the southern region. At the very end of the second quarter, and they both announced at the same time, either the NHS terminated Fujitsu, or Fujitsu were through. Those were the two comments that the two parties made. And therefore, Fujitsu's no longer the prime vendor for the southern region, and they haven't selected a new vendor yet, and I suspect it's going to take them a little bit of time to do that.

In the UK, we had decided that we were going to create a health care practice, and we actually looked at it as an investment, long-term investment. And as a consequence of that, we had more salespeople, et cetera, than you would normally have for the revenues that we're getting. Unfortunately, the revenue didn't ramp up as quickly as we originally anticipated because the software wasn't available. So we actually have run losses in the UK.

Under the accounting rules, if you have a loss and you anticipate that at some point you're going to get the money back, a net operating loss carry forward, at some point you'll apply that to future earnings. You're allowed not to recognize the loss currently. You can basically put it on the balance sheet as a deferred tax asset, and when you get the money back, it just kind of goes away. It never hits your income statement.

When you get to the end of each quarter, you have to forecast what your earnings are in each one of the countries that you do business. And in the past, we always forecast that certainly those NOLs would be retrieved as the NHS project ramped up and as Fujitsu started to do more and more hospitals.

Well, we can't do that at the moment, because, while I'm very hopeful that we will supply the next vendor with people--and we do have people currently in the London region and we have people directly with the Trust--it's not as easy for us to forecast, but we're definitely going to make income in the next few years in the UK and therefore be able to use the net operating loss.

And the accounting rules take a more conservative approach. If you're in that position, you write the NOL off at that point in time, which is what we did during the quarter. So that it's about $0.02 a share, really, that in the second quarter of the year we wrote off with NOLs, losses we had accumulated, mostly previously, though there was a loss as well in the second quarter, that now we can't look at the future and say we're sure we're going to get that money back from the government.

Okay. And have you done anything, are you retaining the infrastructure over there, still, in anticipation of an eventual ramp, or has anything changed regarding that?

We have adjusted it some, because we're kind of in this, "we're not sure what's going to happen next" mode. The people that were in health care that were from England, we've basically sold either to the London region or to some of the individual hospitals or trusts, as they call them. We had some people that came from the United States who actually were getting close to their three-year commitment anyway, and we decided to bring them back into the United States and place them over here. But we still are in an investment mode, actually. We're still forecasting for the rest of the year that we'll lose money in the UK until we see what happens with the NHS, who are they going to pick for the next provider and then--for the southern region--and then whether we can market additional people to them.

Okay. And then--?

In the long term, we still think that there's an opportunity for us in England in the health care market.

So the guidance on tax rate for the full year is 40% to 44%. What is the implied rate for the second half in that?

44%.

44%. So it stays high, and there's still more--I guess you took an NOL write-off, but then you take the write-offs as they are incurred for the balance of the year?

That's correct.

Okay. All right. I'll let others ask. Thank you.

Okay. Thanks, Rick.

The next question comes from the line of William DiTullio from Boenning and Scattergood. Please go ahead.

Good morning. Thank you for taking my question. A somewhat quick number question. What was the total FX impact on total revenue?

In the second quarter--okay, I'll give it to you both ways. So Europe, we reported a 23.1% increase in the revenue; 15.5% of that was because of the exchange, so 7.6% was the real growth if you use the same exchange rate in both years. For the entire corporation, our reported increase in revenue was 17.4%; 3.3% of that was the exchange, so if the rates had stayed the same, our growth would have been 14.1%.

Great. And just to kind of add onto the previous question about the UK project, could you give us an idea what the revenue run rate was for the second quarter?

Sure. The--and this is an annualized run rate. In the first quarter of the year, it was about $5 million. Actually, Fujitsu started to ramp down a little in the second quarter, so our run rate went to about a $4 million run rate in the second quarter of the year. For the third quarter, we're projecting about a $2 million run rate. So the Fujitsu business is impacting us for about $2 million a year in revenue, so it's about $500,000 a quarter.

Okay. And do you expect that to kind of level off after Q3?

I wish I had a forecast going forward. We still have opportunities in the London region, we still have opportunities with the individual hospitals, but the thing that we have no way of predicting is who, if anybody, will step up and be the prime for the southern region.

Okay, great. Okay, those are basically the only two questions I had here. Congratulations on the strong quarter.

Thank you.

The next question will come from the line of Frank Sparacino from First Analysis. Please go ahead.

Hi, Jim. I had a question on the southern region. Is it your impression that the other trusts are simply not moving forward or sort of standing still until someone is replaced, or what's the general sort of trend in that marketplace right now?

Well, just so everybody knows, there are five regions in the NHS. The London region, the prime is BT. For the other regions, it's CSC. And each one of them has a contract, and there's delivery dates on all of them. So my impression is that everything's moving forward as quickly as it can.

The issue really is that the software, while it's improved greatly, that the NHS is looking for isn't available. They're not willing to sign off that this software meets all of their requirements and we can go ahead with the full-blown implementation. There's about 1,000 hospitals alone. They're redoing all the software for the hospitals, the clinics, and the doctors' offices. Hospitals probably are going to go first. There's about 1,000 hospitals in the UK. In the southern region they've done, I figure around nine, and it's probably all the hospitals that they've done so far. So I think it is moving forward, but the issue continues to be that the software's not ready, at least not in the eyes of the NHS.

And Jim, did I hear you correctly, saying there's 1,000 hospitals in the UK, and there's only nine in the southern region?

No. They've actually, there has been one--there's been three versions, actually, of the--I'm sorry, there's been two versions of the software that have been installed, kind of a beta of, "Does this software meet the NHS's requirements?" There was a version zero and then a version one, and they actually have installed some software in nine hospitals, but it's our understanding that the NHS won't sign off and say, "That software meets all of our requirements, and therefore you can go full-blown and install it in all the hospitals."

Okay.

Also, just a reminder that the software being used is different, region to region. So in the southern two regions, it's Cerner software, so that's the software that I know has been inside, installed , and then in the northern three regions, it's iSOFT.

Sure. Okay. And then the last question. You talked about some new opportunities in health care. I may have missed it, but I was just wondering if you'd be more specific in terms of what some of those new opportunities are.

Okay. Let me give it to you both ways. I'm not sure where you picked it up in my presentation, but in the second quarter, we had projects start up in the areas of electronic medical records for the first time. We've done a lot of work in electronic medical records. In 2005, it was 1% of our revenues. Last year it was--I'm sorry--in 2007, it was 5% of our revenues. But it's all been in hospitals, so we've been installing it just for the hospital to use.

Starting in the second quarter, we actually started a project up to work on doing a community-wide electronic medical records system for RHIO. So it's the first time that we've ever done that and probably the first time anybody's ever done that, actually. We also started up a project in the area of a [asset] redesign. That's a version upgrade and testing for one of the payers. We started up several implementation and integration projects of putting software in the hospitals, which is kind of an ongoing business we've had for many years, we did some outsourcing work for a payer, and then we're doing a mainframe migration over to servers for a payer. So those are some of the projects that I talked about that started up in the second quarter that are going to continue to ramp up, really, during the third quarter.

And going forward, we have a series of offerings. We actually had worked on offerings for three years, and then this year, in 2008, the offerings actually became commercial. The electronic medical record, for instance, for the RHIOs is a good example of that. Going forward, we have some other offerings for the health care market that the methodology and tools that help do that are just being completed now. An example would be of an offering we expect will become commercial in the second half of the year would be in the area of fraud, waste and abuse. It's a tool set that will help both payers and hospitals identify Medicaid and Medicare fraud, waste and abuse.

Great. Thank you.

Okay.

Our next question will come from the line of Ben Lichtenberg from Noble Financial. Please go ahead.

Good morning, gentlemen. Good morning. Congratulations on a wonderful quarter.

Thank you.

A couple questions. When you go to your press release and you talk about the coming quarter, excuse me, your guidance for the year, you say it's a combination of three components. Let me see if I can reference it here--the strength of your current business, proposed activity, and solutions pipeline. I would think the first two items are perfectly clear for the balance of the year. The solutions pipeline is probably where you're getting some guesswork. But just give me a little idea about how it all works. If you have pipeline business, I assume you're referring to proposals that are out there?

Right. And it's sales opportunities going forward.

Certainly. Okay. And if, essentially, what's the lag time? It's late July right now. If you were to, you know how many proposals you have out there, you know the time it takes to close the proposals, and then you know the time it takes to generate the first dollar from those proposals. Is that in fact '08 activity?

That is, but let me just explain the history. And I'm going to be specific to the health care solutions business, because it's probably the biggest area that we have going forward. We have a system that's, I think, a fairly good system, of kind of handicapping items in our proposal. It's based upon whether we've done business with the customer before, the fact that we've done that offering before and how many times we've won and things like that.

And if you look back and look actually at our quarterly guidance, for six years, so 24 quarters, we were within our guidance range for all of those. And the only reason we weren't before that, in the seventh quarter, we had a tax benefit from a tax court case, so that the system works, we think, very well. And we've been very consistent of being able to estimate what our revenues are going forward up until the first quarter of this year.

And in both the first quarter of this year and the second quarter of this year, we did better than we anticipated. And the primary reason was that in the health care area, we are proposing new offerings that we may never have done before or no one has ever done before--for instance, the regional electronic medical record plan. And often the customers are bringing a new customer, one we've not dealt with before. And under our system, they get a very low probability of being successful--it's kind of a factoring system--because of the fact that it's a new offering and it's never been done before.

Now, on both the first quarter and the second quarter--and we believe that the right thing to do at the moment is to forecast in that manner--now, the first quarter and the second quarter were above our guidance in both quarters, and the reason was that one of those projects actually delivered.

But in one of, part of your question was, what's the cycle? Well, on some of these things, like the electronic medical record for a RHIO, the sales cycle was probably 12 to 24 months. Even the fraud, waste and abuse, we've been working on that and actually selling it, at least to the first customer, for I think 18 or 19 months. That's a relatively long sales cycle. We feel pretty comfortable with our guidance going forward. And as I said, in the past our system has been relatively accurate.

Okay, great. And one unrelated question; see if you can answer it. Now that your stock price has catapulted over $5.00, what might be the stock repurchase plan expectations for the Board? In other words, would they reconsider it or is there, will there be an ongoing program?

Well, we've purchased stock at these levels and higher, actually, in the past. So certainly $5.00 or above $5.00 doesn't bother us. What we look at is, as an IT services company, we have to look at our investments. And in terms of capital, usually--for the last couple of years, at least--our CapEx and our depreciation's been about the same, so there's no significant investment really required there. We are looking for acquisitions, particularly in the health care space, but we're very kind of picky as to what we're looking for. We're looking for a health care acquisition solution, and a particular solution, so it's going to take us longer to find that.

Once we get beyond those two, there really isn't much else we can invest in in terms of the business and in terms of a balance sheet type item. We look at the stock, and even today, when I signed on, I think it was around $5.18, to the call. You know, the P/E was only, trailing was like in 14.8 and future was 11. That is still, in my estimation, a good buy, so I don't think, certainly at $5.18, that our opinion as to what's going to happen in terms of the stock repurchase plan changes at all. We still think it's undervalued.

Very good. Thanks again.

Okay. Thank you.

The next question will come from the line of Bill Sutherland from Jennings--pardon me--.

Boenning and Scattergood. Hey, good morning, Bill.

Hi, Jim. A couple of just clarifications, I guess. The health care revenue was up 20%, and that was net of the decline in the UK. So domestic health care revenue growth was more like 25% to 30%?

That's a good question. I actually did not figure that out separately.

I mean it's pretty simple math, I suppose.

Well, the thing you have to remember, though, is that the $5 million--well, the $5 million and the $4 million are annualized numbers.

Right.

So really, in the quarter, you're talking about $250,000. So it probably is like 1%--1% to 2%--higher. So 22% or 21%, something like that.

Okay. What are you assuming for your health care growth in Q3? I know you're going to be down $2 million annualized, more or less, in the UK.

Well, let me step back. Brendan just handed me a report, and actually, in the United States health care was up 24%-- (multiple speakers).

Okay. That's good to know.

-- over the previous year. I don't really want to give out a projection for that.

Okay.

And it's because of this unknown, how many of the items in the pipeline are actually going to close. I just don't feel comfortable about giving that out for the year.

Okay. The staffing business--I wonder if you can just give us a little more color in terms of the strong results in Q2 and kind of how you're feeling about extrapolating on that?

Okay. The two areas that I mentioned, the technology service provider business, which (inaudible) most in our IBM business, and this new area that we took over for a customer, not in any one of our three primary verticals, are the biggest drivers of the revenue growth during the quarter. And actually, the new area that we took over, we kind of took it over mid first quarter, so you're seeing quarter to quarter, at least, having that business in our revenue for the full quarter versus only half a quarter the quarter before.

I think, as most people know, our IBM business is primarily to one IBM division. It's the STG division, it's their server division, and that business is more driven by projects. It's the number of projects they start up versus the number of projects that end. And it definitely was strong for us in the last year. I think that they had reached a low point. They had a lot of projects that finished in the third quarter of 2006, and that impacted our revenue at that point in time. And I think that they just got back to a more normal number of projects, probably, in their mix. Now, I actually don't have a view into their projects. All that we know is the demand that we get from them. And so I really don't have a demand forecast going forward.

I really don't believe that we're going to run at a 19% increase for the next couple of quarters in our staffing business. I think it will drop down; I think it will definitely drop down below the solutions side of the business. But it could easily, based upon the number of people that we have added during the first six months of this year, be a double-digit gain, even for the next couple of quarters.

And any notable--last question--any notable solution offerings either being rolled out commercially or just in a good cycle outside of health care for you right now? Thanks.

We do have some other ones. We have one that I think has a tremendous potential. It's a voice recognition system that can be used in a warehouse so you no longer have to input numbers into a laser gun that's kind of reading the bar code, bar code gun or write things down manually. And it is a system that can be used in areas where there's a lot of ambient noise around you, so it's very good at hearing the person and communicating with the person via computer.

I personally think it's an amazing system, because I, when they were developing it, I was very concerned about the fact that in various areas of the country, you have different accents, which is a problem. In parts of the country, you have some workers that might speak Spanish that are using the system and that it would be very difficult for the system to pick up. Our guys did a fabulous job, I think, of programming it so that it would take different languages, different dialects.

I actually got hooked up to it for an hour or two, and I could not fool it. And you know, even saying things like "Yeah" instead of "Yes." It correctly realized it. And then it repeats the answer back to you, so if it had picked me up incorrectly, I'd have an opportunity to fix it or say "Si" instead of yes, and it still picked it up.

So that's one that is outside of the health care area that I think has some potential going forward, and we do have some opportunities in the pipeline for it going forward. But again--we have it installed, by the way, at one very large customer, and we're finishing off the installation for all of their warehouses, and I think we'll have it operational, certainly by the end of the year in at least 200 of their warehouses.

But going forward, I think that we'll be able to sell that, but it's another offering where we have very little experience with that particular offering, so the forecast going forward, it's weighted very low.

Is there a good productivity gain for the customer?

Huge. It's unbelievable, actually, the productivity gain. The productivity gain that I know one of the customers in the sales cycle indicated was actually a lot more than what we probably--we would have told him we're probably more conservative, but I think one of the customers I know that I got feedback from, he was thinking it was probably 5% to 10% of his labor cost.

Really?

Yes. Now, you've got to remember, different people are at different stages. Some people, now, are still doing everything manually, so the savings is better.

Interesting. Good work. Thanks, Jim.

Thank you.

Our next question will come from the line of Jason Schacht from Heartland Advisors. Please go ahead.

Hey, good morning, guys.

How are you?

Good morning.

The first question for you guys--now, I think you had mentioned that the insurance fraud detection service might be ready to go commercial in the second half of this year. Does that mean that the testing of this service has been showing results as you have been expecting to see here?

Yes. The testing's gone very well, and we're actually, we have a client in the payer space who is our first targeted client, and they were excited about it. They've actually been providing us with real data so that we can test it on live data. Testing's gone very well, and that client will probably run a beta of it, so actually--when I say "testing," we're using relatively small bits of information. You know, we're running 100 of their claims through it at a time just to make sure that the system seems to be working correctly. And in the third quarter of the year, where they're, we'll most likely do a full-blown beta, which is we'll install it at the site and run it against all of their claims to see how it's handled, and we're anticipating by the fourth quarter of the year that it actually will be commercial, and we'd like to sell it, obviously, to that payer. We'll also get the sale force to go out and start calling on other payers and then providers.

Okay. Excellent. And then lastly, how much is left on the stock repurchase authorization?

Brendan?

900,000 shares, roughly, Jason.

Oh, okay. Thanks, guys.

Your next question will come from the line of Rick D'Auteuil from Columbia Management. Please go ahead.

Thank you. Just to follow up on a few of the things with the UK, I saw today that Cerner reported and took $178 million out of their backlog related to the Fujitsu termination. Is there any--I know you guys aren't necessarily the best source of information, you guys are kind of hearing second-hand like we are--but what does that mean? Does that mean they won't be tied to the new provider or prime there? And how will that impact you guys if it's not Cerner in that region?

I'm speculating on part of this, particularly as it applies to Cerner, but it's speculating, having guys that have been in that environment, that the primes had deals with the software vendors. So I would imagine--now, Cerner's been in there. The prime is gone. They don't have a deal with the next vendor. No one knows who it's going to be. If CSC picks it up, I could easily see them saying they're going to use iSOFT, right, because that's what they're using in the three northern regions. If BT picks it up, they're still using Cerner in the central region, so I could see them using Cerner. And if it's somebody else, God only knows what they'll use. But they do, if hospitals already, with the version running that's pretty good--I mean, it gets most, maybe not everything the NHS was looking for, but it is functioning and the hospitals are operating under it, et cetera.

In terms of us, we are absolutely vendor neutral. We actually started with Fujitsu when they were going to install IDX and we were advising them as to how to do the implementations. We actually did the original implementation plan for IDX in the southern region. When they switched to Cerner, we did have to change some of our people. We have experts in Cerner, IDX--if you name a software package, we have experts in it. So we did have to switch the people because they had changed software vendors. But we really aren't tied to any particular software, so I don't think it would impact us if they switched to IDX or another software.

As we look at your health care practice in the United States, it's obviously robust, with a strong pipeline. Is there an opportunity--I know you're doing some of this over in the UK--but given that these big, that the NHS's program is sort of slow to kick off due to the software issues that you spoke to, is there a one-off hospital opportunity? Can you just do regular business like you're doing here in the United States there while you're waiting for this big project to develop?

There is definitely opportunity. A year ago we opened an office in Germany. There was a client in Germany--I'm sorry, a client in Europe--that purchased a German software company that had a software product for hospitals in Germany. And we have been working with them since then.

In most of the rest of Europe, it's a socialized medical system, so that there are vendors that are providing them with services and the governments have relationships with various IT services companies. I think the door of opportunity for us is--and we truly believe this is going to happen--when the rest of the countries in Europe begin to put in more sophisticated software, perhaps than they're running currently. There is some sophisticated software, but by and large, the software that is probably state of the art is more from the United States. So as they do that, and European competitors have no knowledge of that software, that's a big opportunity for us to go in and open up, I hope, their practice in one of the other countries.

I've heard a lot of speculation that the primes all believe that that's going to happen. I don't know why--one of the primes was convinced a couple of years ago that Portugal would be the next country. I think it would be difficult for us to predict that on a kind of hit-and-miss basis. They will open an office in Portugal, hoping that they make the change first, because it's partially a financial decision. It's partially based upon when the UK looks like it's done.

You know, often the Europeans on various things, including IDOL and ISO, et cetera, the British actually went through the pains of working it out, and when it was working fine, then Europe began to [adopt] it. And I suspect that's what will happen here, too. The UK project has not gone as well as anyone had hoped. It's costing a lot of money, a lot more money than it was originally anticipated. We believe that eventually they will get the system in, though. They'll have the first countrywide electronic medical records system. It will be much more efficient, certainly, than the old legacy systems that they're throwing out. But I don't think you're going to see a lot of the other European countries start to move in that direction until they're sure that the UK has most of the bugs out of their system.

I could see them doing it--let's say that tomorrow, and this would kind of be maybe one of my wishes--but tomorrow, Cerner gets the system so the NHS says it is a go and they start to do all the hospitals in the southern region. It would take them a couple of years, probably, to do that, but once the software was available and the other European countries could see that it was working in the hospitals that they installed it in, I think you might see some of the other European countries step up and say, "Okay, we've got to begin our plan now."

This is once it starts, it's likely to be a five- to ten-year kind of run over there?

Absolutely. And it's in each country, too, because in the UK, it probably will take them 10 years in total to do it. So if another county starts up, it's 10 years from today, and another country waits five years and starts up, it's another 10 years. So this would be, I think you're going to see people or countries in Europe working on these kind of implementations for the next 20 to 30 years.

Right. And then, like I said before, I missed the beginning of the call. Can you just go over just quickly the IBM staffing and solutions split on revenues?

Yes, I'm going to ask Brendan to do that because it's in his part of the presentation.

Okay, thank you.

IBM was $29.3 million of revenue in the second quarter.

Yes?

That's 31.2% of revenue, and last year in the second quarter it was $23.6 million, and that was 29.5%.

Okay. And staffing versus solutions?

For the quarter, staffing was 66% and solutions 34%.

Okay. Thank you very much.

Thanks, Rick.

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

Thank you. In closing, I'd like to repeat that our strategy is to continue to increase CTG's solutions business, particularly in our health care vertical, by being opportunistic and growing our staffing business. To maintain the strong momentum in our solutions business, we're stepping up our sales and marketing activities while making additional investments in developing unique and innovative solutions to meet customer needs. As the solutions part of our business grows, we look forward to further earnings growth and margin expansion.

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

Thank you. And ladies and gentlemen, this conference will be available for replay after 11:30 a.m. Eastern time through midnight on July 26 of 2008. You may access the AT&T Executive Replay System by dialing 1-800-475-6701 and entering the access code 899689. International participants may dial 320-365-3844, access code 899689. That does conclude our conference for today. We thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.