Computer Task Group Inc (CTG) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CTG fourth quarter and 2008 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)

I would now like to turn the conference over to Debbie Pawlowski, Investor Relations for CTG.

Thank you. Good morning, everyone. We certainly appreciate your time and your interest in CTG. Ton call today we have CTG's Chief Executive Officer, Jim Boldt; and Brendan Harrington, Senior Vice President and CFO. Jim and Brendan are going to review the results for the fourth quarter 2008 and year and update you on the Company's strategy and outlook. And will 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 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 managements intentions, hopes, beliefs, expectations and predictions for 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 actual results to differ from those in the forward-looking statements is contained in our earnings release as well as in if Company's SEC filings. You can find these at our website or the SEC's web site at SEC.gov. Please review our forward-looking statements in conjunction with these cautionary factors. With that I would like to turn it over to Jim to begin his discussion.

Thanks, Debbie. Good morning everybody. This is Jim Boldt. I want to thank you for joining us this morning for our fourth quarter earnings conference call. As you saw in our release our earnings once again exceeded our guidance despite the fact that revenue in the fourth quarter of 2008 was below our expectations. High earnings from our solutions business and quick and aggressive cost management more than offset the current economic environments impact on our staffing business. I will talk more about our business and what we see for 2009 and beyond but first I will ask Brendan to start with a review of our financial results.

Thanks, Jim. Good morning. For the fourth quarter of 2008, CTG reported significantly higher profitability on a slight decline on revenue. Revenue was $83.3 million, a decrease of $1.2 million or 1.4% compared with fourth quarter of 2007. Operating income increased 75% in the quarter, to $3.2 million, largely as a result of the growth in our more profitable solutions offerings, and favorable operating leverage. These factors also drove the year-over-year 170 basis point increase in our operating margin to 3.9% of revenue. Net income in the quarter grew 90% to $2.3 million from $1.2 million in the fourth quarter of 2007. Net income per diluted share was $0.15 for the quarter, a 114% increase from last year's $0.07. Excluding a $0.03 gain from foreign currency exchange on inner subsidiary borrowing, net income per diluted share in the quarter would have been $0.12 a 71% increase compared with the fourth quarter of 2007 primarily due to the improved operating margins.

Solutions revenue in the 2008 fourth quarter was $29.9 million or 36% of total revenue. This represents 2.3% growth in our solutions revenue compared with fourth quarter of 2007. We had $23 million in revenue from IBM our largest staffing customer in the quarter, compared with $25.4 million in the fourth quarter of 2007. This represents 27.6% and 30% of total revenue in the 2008 and 2007 fourth quarters respectively. Total staffing revenue was $53.4 million in the quarter. Revenue from our European operations was $19.1 million in the fourth quarter a 3.8% decrease from the $19.8 million reported in last year's fourth quarter. Excluding foreign exchange fluctuations, European revenues in the quarter would have increased by 6.4% over last year.

On a sequential basis, had the US dollar remain unchanged during the fourth quarter compared with the exchange rates from the third quarter of 2008, our fourth quarter revenue would have been $2.7 million or 3.2% higher than our reported revenue. Direct cost was a percentage of revenue were 77.6% in the fourth quarter compared with 77.8% in the fourth quarter of 2007 and 78% in the third quarter of 2008. Both the 2008 and 2007 fourth quarters results include equity compensation expense of approximately $0.01 per diluted share net of tax. The tax rate for both the 2008 and 2007 fourth quarters was approximately 37%. The tax rate for the full year 2008 was approximately 41%. The expected tax rate for the full year 2009 is between 40 and 42%. The Company had approximately 3100 employees at the end of the fourth quarter 2008, of which approximately 88% are billable resources.

On the balance sheet, our days sales outstanding was 57 days compared with 58 days at the end of 2007 and with 56 days at the end of the third quarter 2008. Our cash flow from operations in the fourth quarter was approximately $4.9 million, as compared to $0.7 million in the fourth quarter of 2007. We had 620,000 in capital expenditures and we recorded depreciation expense of $465,000 in the fourth quarter.

CTG's financial position remains very strong. At the end of the quarter we had no debt outstanding on our $35 million revolving credit agreement that is in place through April 2011. With we had approximately $11 million of cash on the balance sheet at the end of 2008. During the fourth quarter 2008, while adhering to SEC imposed volume limitations we repurchased 444,000 shares of CTG common stock. During this most recent self imposed black out period prior to releasing our earnings we repurchased shares under our 10-B-5-1 plan. As indicated by our Board's new 1 million share repurchase authorization announced yesterday we believe CTG share remain under valued at recent prices and we intend to continue our repurchase program through the remainder of 2009. Jim?

Thanks, Brendan. As I mentioned the primary driver of this significant increase in our profitability in the fourth quarter was our solutions business. Our new health care offerings are yielding a much higher operating profit than our traditional solutions business. The higher operating margin on the new health care offerings we introduced over the last year was one of the main drivers in the improvement of our operating margin during the fourth quarter. The last two years we have also been working on several new health care offerings such as our solution to detect and reduce medical fraud measures. We see this offering and others we expect to go commercial in 2009 as break through solutions that bring a new and better approach to helping our health care clients achieve strategic and operational objectives while lowering costs. We believe the innovative nature of these solutions combined with our significant experience in supporting both the health care provider and payer markets give CTG a real competitive advantage.

At the same time our solutions business is not completely immune from the recession and we have seen a reduction in demand in 2009. Particularly from the health care provider market. Not for profit hospitals finance a significant portion of their needs through the issuance of tax exempt bonds. Due to the credit crunch and rating downgrades these hospitals are not currently able to access the tax exempt markets for capital. According to a recent American Hospital Association survey, 50% of all hospitals in the US have deferred or eliminated capital projects in the last few months due to their inability to access financing. These deferrals are impacting our business as fewer IT capital projects are started. We expect in the latter part of the year that revenue from our health care vertical will grow again as hospitals gain access to the credit markets and our new health care solutions business become commercial.

Turning to our solutions business, a decline by 3.3% in the fourth quarter of 2008. The global recession began to have an impact on our staffing business in the fourth quarter and has continued to decline in the first quarter of 2009. As we indicated in our fourth quarter earnings release, a significant customer who told us in mid October of an immediate reduction in their need for approximately 250 CTG billable staff in the last few months has incrementally reduced its need for another 175 CTG billable staff for a total of 425 staff. This represents a $36 million annualized reduction in revenue in our staffing business, many of our other staffing clients have implemented similar though less severe reductions in our staffing needs. We have been very aggressive in reducing our costs ahead of the expected revenue decline, rather than look to the past we look forward to estimate our revenue for the next quarter and then appropriately adjust our costs to those revenue levels. The fourth quarter of 2008s earnings actually benefited from the fact we downsized our operations in the fourth quarter of last year to meet the levels needed to support the revenue in the first quarter of 2009.

Since October 1 of 2008 we have reduced our direct costs and selling, general, and administrative expenses by approximately $50 million on an annualized basis. Aggressive cost management is one of the key reasons that our 2009 projection for operating margin were approximately 3.2%. While we don't have any additional cost reductions planned at this time, it is our intention to quickly reduce costs as needed going forward.

Before I go over our guidance let me review the assumptions we are are using for 2009. First, as to the economy overall, we are using the average assumptions from a recent Wall Street Journal survey of economists. Those assumptions indicate that the economy will continue to slow for the first half of 2009, bottom out in the third quarter of the year as the economic stimulus package takes effect and then begin to grow again in the fourth quarter of the year. Second our new offerings will be commercial in the second half of 2009 and benefit our revenue and profitability in the later part of the year. Third we are assuming that as a result of the federal financial stimulus package hospitals will begin to have access to the credit markets again in the third quarter of the year.

Lastly, that the $19 billion included in the stimulus package in the United States for health care IT should significantly advance our business. We are basing this assumptions on the fact that CTG is one of the largest providers of IT services for electronic medical records in the world and one of only seven companies that have run projects to install electronic medical record systems for an entire community. However, based upon previous Government initiatives, we believe that it will take the Government at least six months to set set up the mechanisms required to begin to disperse funds. We also know that to run a large project you first have to create a vision of the end result and then build a detailed project plan of all the tasks to be completed before you can fully staff up an engagement. That means while we expect to see some of the benefit from the health care IT stimulus project in the fourth quarter of 2009 a significant increase in our revenue from the stimulus package would not likely occur until 2010.

Using these assumptions we are forecasting revenue in the first quarter of 2009 to be in the range of 73 million to $75 million, given the revenue forecast we are forecasting earnings per share in the first quarter of 2009 to be in the range of $0.07 to $0.09 per diluted share. For the year we currently believe that CTG's 2009 revenue also be in the range of 285 million to $305 million. We are expecting net income per diluted share in 2009 to be in the range of $0.30 to $0.40.

To sum it up despite our health care strength and focus we are not completely recession proof. Both our staffing and solutions businesses have been impacted by the global recession. We expect that our business will begin to grow in the fourth quarter of the year as the economic stimulus packages begin to improve the general economy, as our new solutions become commercial, as hospitals gain access to the credit markets and as the $19 billion in the stimulus package aimed directly at IT for health care benefits our business.

Even though we expect our profit to decline this year our current estimate is that 2009 will be the second best year that we've had in a decade from an earnings perspective. With that I will open the call for questions if there are any. Operator, would you please manage our question and answer period.

(Operator Instructions) Our first question comes from the line of Rick D'Auteuil from Columbia Management, please go ahead.

Good morning, Rick.

Thanks, Jim. Good morning. Just, a couple of things, one, you mentioned timing for the $19 billion Government stimulus package as it relates to health care IT spending and I think specifically upgrading patient records electronics, electronic records. So, where are you getting the timing because I have seen some things in print that look like maybe available funding for that is further out. Where are you seeing that, maybe you will have even some late '09 impact from that?

Well, and you are probably looking at the reimbursement schedule which doesn't start until 2011.

That may be what I saw then.

It probably is. That's true the reimbursements don't but our reading of this. We still have people and I think the devil is in the details, and the Government still has to come out with a lot more details. But the doctors for instance begin to get reimbursed starting in 2011. Once they have their systems up and operational. So if you want to get reimbursed, starting in January 1, of 2011, you have to get your system up and running in 2010.

The other thing is that, I mean it makes no sense. If, if all of the doctors in the country simply take their paper files and put them on a little PC based office system, that doesn't achieve any of the savings that the Government is looking for. So, the only way to do it really is to put up community wide systems, and we're actually working on one as you know right now to put up a community-wide system. There's a lot of planning and a lot of things have to be done before the docks actually go operational, a year to a year and a half worth at least. So if you want to start putting docks up on systems in 2011, you had better start doing something in 2010 and even 2009 would be helpful.

There are many communities where the payers and providers I can think of one community where the payer has already said they would kick money in to get their doctors up on those type of electronic medical records, and I think what we think might happen is because the payers are the beneficiary of this you may see some of the payers put up the money up front to do the work so that the doctors can get reimbursed and they get reimbursed for the moneys that they advance, when the systems actually go live in 20111. We are working right now on one physicians practice for instance, it is about 450 doctors I think of putting them on a community wide system. And it just takes a long time to get the system up, design and get the system up and actually have to train the doctors on how to use it.

Is there a certain standardization or is it all, so if you do the next community, will that be custom or will you be able to use the learning curve that you have come up with, with the one you are doing right now?

Yes. Well, clearly the first one was the toughest right. We learned a lot of things so far. We have been working on it almost for a year now. There are standards that have come out, some standards but in this bill the Government has said that they're going to issue standards by the end of 2009. I'm assuming it is record lay outs and things like that. So once that is standardized and you have kind of selected which software packages you are using the second and third, fourth implementations are going to go a lot faster than the first one.

The Government estimates and I will use their estimate. Quite frankly I think their numbers are a little exaggerated. They think it will cost $100 million, $10 million a year for ten years to put up electronic medical records for all people in the United States. And they believe it will take 212,000 people to do that. I think that number is higher than I would estimate. Our estimate is that working consulting firms all of their consultants working in all the hospitals in the United States there probably aren't 10,000 people. So the opportunity that is out there is just huge.

Okay. And I mean has anybody addressed that? I mean I guess, it is nice to put the words down, but if it is unachievable, I guess given the constraints from the labor pool, it is kind of, it is kind of silly, isn't it?

Well, the money will be spent. I have all of the confidence of that. I think what you are going to see is the 80/20 rule. The larger cities, the medium to large cities in the United States will at least get their medical records up. And we have a training program, I mean we will be training people, we already have a group of people, kind of outline what areas we think there will be shortages in and what training they have to do.

Okay. What is embedded in your, for operating margins in your $0.30 to $0.40 for 2009?

Well, the midpoint is 3.2%, the low end 2.9 and the high end is 3.6.

Okay. So you're looking to keep most of the gains that you've accomplished?

Yes. As I said we have already cut $50 million out of our operations and we can't cut our fixed costs. I wish we could. That's why the margins are declining a little bit but we think we will stay pretty close to where we were.

The large customer that did an incremental downsizing, when asked a quarter ago, whether they were likely to come back to the well, you didn't think that was likely because of how disruptive it is to do these kind of cuts. And yet they did. I know they're not great communicators but what is your current thought and what is, I guess the run rate of your exposure today there?

I -- we think that they cut as much as they're going to. I don't know because they didn't tell us but I suspect the same thing happened to us that happened to them. We originally thought that the first quarter was going to be higher than it was so we did a series of cuts, got our overhead balance to their level and then about a month ago discovered that the revenue was going to be lower. We went through and did a second series of cuts. I think that probably happened to them too. They cut to what they thought they would have in terms of revenue going forward and then got into the first quarter and realized that it wasnt' that high so they cut again.

When did you learn of the 175?

We may have learned of a few last year, but the bulk of them really were early in 2009.

Okay. So, and how, I mean so are you in Q1 still seeing revenue from that -- from that group?

A little but not very much. It was very early in 2000. We are, but most of it actually was cut before the quarter started.

So I guess lastly, that, can you tell us what the run rate is with what you have left? You said--?

If you want to ask me a customers run rate I would be glad to tell you.

Okay. What is IBM's run rate?

Our estimate for this year is that IBM will be about 23% of our total revenue. It might be a little bit higher in our first quarter because as I mentioned it was coming down in the first quarter, but it is not going to be that much higher.

Okay. Were any of the resources, reemployable or are they really so specific to that--?

It is very difficult in the current environment to redeploy staffing resources. So, no.

Okay. And bill rate, are they under pressure I assume, and then, pay rates, give me a sense of where you think staffing margins are going?

Bill rates are definitely under pressure, but if we do have a customer where we lower the bill rate in the United States at least we adjust the wages by the same amount. So, pretty much the margin stays the same.

Okay. I will pass it on. Thanks.

Okay. Thanks, Rick.

Thank you. (Operator Instructions) And there are no further questions I will turn it back for closing comments.

Thank you. In closing, no one likes what is happening as a result of the current economic downturn. At the same time, CTG's provided significantly better, has performed significantly better financially than many other companies in and outside of our sector. We have proven in the past to be very adept at managing our business and our cost in economic downturns. For us the good news is these difficult times is that we have new offerings and we expect to lead to our profitability in the second half of the year. In addition we are extremely well positioned to directly benefit from the $19 billion in US federal stimulus for the health care IT which we strongly believe will drive our revenue growth in 2010 and beyond. Quite frankly, given the size of the opportunity that's in front of us I can't think of a Company other than CTG that I would want to be with right know. I would like to thank you for your continued support and for joining us this morning. Have a great day.

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