Computer Task Group Inc (CTG) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CTG conference call. At this time, all lines are on a listen-only mode. (Operator Instructions). At this time, I'd like to turn the call over to Debbie Pawlowski. Please go ahead.

Thank you, Kent. And, good morning, everyone. We certainly appreciate your time and your interest in CTG. Joining us on the call today are CTG's Chief Executive Officer, Jim Boldt, and Senior Vice President and Chief Financial Officer, Brendan Harrington. Jim and Brendan are going to review the results for the first quarter 2009 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 web site 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 the Company's SEC filings. You can find those at our web site or the SEC's web site at www.sec.gov. So, please review our forward-looking statements in conjunction with these precautionary factors. With that, I'd like to turn it over to Jim to begin the discussion.

Thanks, Debbie. And, good morning, everyone. This is Jim Boldt. I want to thank you for joining us this morning for our first quarter earnings conference call.

As you saw on our earnings release, once again we're at the high end of our guidance for both revenue and earnings per share. Expanded margins from our new solutions, combined with quick and aggressive cost management, offset the current economic environment's impact on our earnings. We're going to talk more about our business and what we see for the rest of the year. 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 first quarter of 2009, CTG reported improved operation margins and EPS stability on lower revenue. Revenue was $74 .6 million, a decrease of $12.1 million, or 14%, compared with the first quarter of 2008. Despite lower revenue, operating income remained unchanged at $2.4 million, largely as a result of an increase in revenue from recently introduced higher margin offerings, coupled with disciplined cost management. These factors also drove the year-over-year 50 basis point increase in our operating margin to 3.2% of revenue. Net income in the quarter declined 7.3% to $1.3 million from $1.4 million in the first quarter 2008. The 2009 first quarter included $0.1 million of net of tax loss from foreign currency exchange on intersubsidiary borrowings. On a per diluted share basis, net income was flat at $0.09, in both the 2009 and 2008 first quarters. Solutions revenue was $24.2 million, or 32% of total revenue, an 18.1% decline from last year's fist quarter. Total staffing services revenue was $50.4 million, down 11.9% in the quarter. Staffing represented 68% of total revenue.

IBM, our largest customer, provided us $19.1 million of revenue in the quarter, compared with $27.3 million in the first quarter of 2008. As a percentage of total revenue, IBM was down to 25.6% in the 2009 first quarter, compared with 31.4% of total revenue in the first quarter of last year. Revenue from our European operations was $17.7 million, a 6.9% decrease from the $19 million recorded in last year's first quarter. Excluding foreign exchange fluctuations, European revenue in the quarter would have increased by 7.7% over last year. Direct cost as a percentage of revenue was 77.6% in the first quarter, down from 78.4% in the first quarter of 2008, but flat with the trailing fourth quarter of 2008. Both the 2009 and 2008 first quarter results include equity compensation expense of approximately $0.01 per diluted share, net of tax. The tax rate for the 2009 first quarter was 42.3%, compared with 39.8% in the 2008 first quarter. We expect the tax rate for the full year 2009 to be between 41% and 43%.

We had approximately 2,700 employees at the end of the first quarter 2009, of which approximately 88% are billable resources. On our balance sheet, our day-sales-outstanding was 58 days, compared with 57 days at the end of 2008, and was 60 days at the end of the first quarter 2008. Our cash used in operations in the first quarter was approximately $0.4 million, as compared with $0.3 million in the first quarter of 2008. We had $842,000 in capital expenditures, focused mostly on solutions development, and we recorded depreciation expense of $433,000 in the quarter. CTG's financial position remains very strong. At the end of the quarter, we had approximately $8 million of cash on the balance sheet and no debt outstanding, on our $35 million revolving credit agreement in place through April 2011. That was especially notable because the first quarter ended on a payroll date.

During the first quarter of 2009, while adhering to SEC imposed volume limitations, we repurchased 173,000 shares of CTG common stock. During this most recent self-imposed blackout period, prior to releasing earnings, we repurchased shares under our 10b5-1 plan. At this time, our repurchase authorization is for approximately 1.1 million shares. We believe CTG's shares remain undervalued at recent prices, and intend to continue our repurchase program through the remainder of 2009. Jim?

Thanks, Brendan. In the current economic environment, we're pleased that despite a 14% decline in revenue, CTG maintained earnings per share at the same level as last year, due to our margin expansion and financial discipline. In aggregate, our solutions business declined by 18.1% in the first quarter of 2009. As we reported on the February conference call, the tight credit markets have negatively impacted demand for our solutions business. Particularly from the healthcare provider market, not-for-profit hospitals funding 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. Without the needed capital, they are deferring many of their IT capital projects. These deferrals are clearly impacting our business.

The good news is that in the first quarter 2009, we began to see some increase in request for proposals from the hospital market. Many of the proposals are for electronic medical record applications, which leads to us believe that hospitals that were considering doing an electronic medical record project moved those projects to the top of their list as a result of the US federal stimulus package. We currently have three new solutions for the healthcare market that are in beta testing and scheduled to be released for commercial use in the second half of 2009. The first offering is for the detection of fraud, waste and abuse, which is estimated to account for 3% to 10% of all healthcare expenditures annually. The second offering is for an actuarial tool for the more accurate underwriting of group medical plans, resulting in more equitable pricing across the healthcare system. And the third is an IT medical model that improves patient's outcomes while lowering costs. All of the new offerings appear promising, and we'll update you as to their sales success as the year progresses.

Turning to our staffing business, that business declined by 11.9% in the first quarter of 2009. The global recession began to have an impact on our staffing business in the fourth quarter of 2008, and it continued to decline in the first quarter of 2009. Historically, our staffing business has been a leading indicator, and starting in March, we saw the rate of reduction in our staffing business begin to slow. We now suspect that our staffing business will bottom out in the second or third quarters of 2009. We continue to be very aggressive in reducing our costs ahead of the expected revenue decline. Given our revenue outlook, we decided to continue to reduce costs throughout the first quarter.

In aggregate, the total cost reductions that we've made since October 1st of 2008, in our direct costs, and selling, general and administrative expenses, were $71 million, or 21% of total expenses on an annualized basis. Disciplined cost management is one of the key reasons that our projection for 2009 is for an operating margin of approximately 3.3%. But we do not have any additional cost reductions planned at this time and do believe that we are nearing a bottom. It is our intention to continue to quickly reduce costs if needed going forward.

Before I go over our guidance, let me once again review the assumptions that we're using for 2009. First, is the economy overall. We're using the average assumptions from the Wall Street Journal Survey of Economists. Those assumptions indicate that the economy will slow further in the first half of 2009, bottom out in the third quarter of the year as the economic stimulus packages start to take effect, and then begin to moderately grow in the fourth quarter of the year. Second, that our new offerings will be commercial in the second half of 2009 and benefit our revenue and profitability in the latter part of the year. Third, we're 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 2009. Lastly, that the $19 billion included in the stimulus package in the United States for healthcare IT should significantly advance our business. We're basing this assumption on the fact that CTG is one of the largest providers of IT services for electronic medical records and one of only seven companies that are running projects to install electronic medical record systems for an entire community. However, based upon previous government initiatives, we believe it'll take about six months before IT services companies will be engaged for those projects.

We also know that following selection to run a large project, we 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 we can fully staff up an engagement. That means while we expect to see some of the benefit from the healthcare IT stimulus project from the fourth quarter of 2009, a significant increase in our revenue from the stimulus package will not likely occur until 2010. Using these assumptions, we're forecasting revenue in the second quarter of 2009 to be in the range of $66.5 million to $68.5 million. In the first quarter of the year we had 66 billing days, while the second quarter of 2009 has only 63 billing days, as one billing day equates to approximately $1.1 million of revenue. The loss of three billing days quarter to quarter impacts second quarter revenues by approximately $3.3 million. The remainder of the reduction is attributed to the fact that the number of billable staff was declining as the first quarter progressed. Given the revenue forecast, we're forecasting earnings per share in the second 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 will be in the range of $275 million to $295 million. The $10 million reduction in revenue from our previous forecast has to do with the fact that we lost more billable personnel on the staffing side of the business in the first quarter than we had previously forecast. Due to our strict financial discipline, we still believe the net income per diluted share in 2009 will be in the range of $0.30 to $0.40. To sum it up, both our staffing and solutions businesses have been impacted by the global recession. We expect that our business will begin to grow in the second half of the year as the economic stimulus package begins to improve the general economy, as our new solutions become commercial, as hospitals regain access to the credit markets, and as the $19 billion in the stimulus package aim directly at IT for healthcare benefits our business. Even though we expect our profit to decline this year compared with 2008, our current estimate is that 2009 will be the second best earnings year that we've had in a decade. 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?

Certainly. It would be my pleasure, sir. (Operator Instructions). Our first question this morning comes from the line of Bill Sutherland with Boenning Scattergood. Please go ahead.

Thank you. Good morning, Jim.

Good morning.

On that $19 billion estimated spend on healthcare IT from the stimulus package, about how much of it is going to electronic medical records, do you think?

Virtually all of it. There's a couple hundred million dollars that are allocated to the government to look at standards and things like that but virtually all of it. Actually in my opinion there's more than that really in this legislation because the legislation says that they're going to spend $19 billion. Let me step back.

President Obama originally asked for $50 billion, $10 billion a year over five years. The government's estimate is it'll cost $100 billion, $10 billion a year for ten years, in order to do electronic medical records for the entire population in the US. The bill says that there's $19 billion in the stimulus package that is paid in, that is intended to be spent in the next two years. In addition to that, it also says that the hospitals are going to get a reimbursement from their Medicare and Medicaid bills in 2011 through 2014. And at the minimum a hospital gets two million, a maximum is $11 million.

There are 5,000 hospitals in the United States, so if you multiply 5,000 hospitals, kind of towards the middle of the estimate, six million dollars, right that's $30 billion. There are 800,000 physicians in the United States. They're going to get $44,000, again, of an increase really, I'm sorry, I said reduction. If you take the lower number, and say it's $44,000 per doctor, and multiply it times 800,000 physicians, that's, you know, $35 billion.

So what I believe, and it's kind of logical that they do that because the government believes that if we do this that you will reduce medical costs in the United States between $200 billion and $300 billion a year, and government agencies pay for about half of it. So while their increasing their reimbursements to the physicians and hospitals, they should also be getting a reduction in their costs. So, I think if you look at the entire legislation, it's set up for $19 billion for the first two years, and then the next four years after that, it's probably $60 billion to $70 billion.

As far as penalties, just pocket change as far as netting against the outflow from the government?

Yes, that's what I would guess.

In your staffing revenue reduction in Q1, Jim, I'm kind of curious, besides your largest client, what kind of reduction did you see across the smaller clients?

We saw probably on average a pretty good reduction across all of our clients. It obviously varies company to company, but I would think most of the staffing customers probably reduced their needs by 15% to 25%.

But if your revenue is down 11, does that mean the largest client was down single digit?

No. What happened was the reductions came as the quarter went on. So, you're going to see more of a reduction in our revenues in the second quarter than you did in the first quarter. And, I think you'll see that in our guidance.

Because most of the incremental fall off, Q1 to Q2, is staffing not solutions?

Yes.

The UK , you're not talking about anything unfolding there, as far as any disability into the rest of the year with their healthcare project.

No, we've made the assumption, I think our run rate is still around two million a year, selling services directly to the trust, not to the primes, to the national health system. There hasn't been any movement in selecting a new prime for the southern region. We thought the logical person would probably be BT because they're doing the London region closest, and they're also using Cerner which is what the southern region started to do. The only thing that's happened so far is that the government announced that for the eight or nine hospitals that we actually installed systems in, sent our application in, that they were going to switch from Fujitsu maintaining those systems to BT, which is kind of logical. But other than that, there's just no news.

Just because the economy being in such dire straits over there, they just can't talk about what they're going to do with trying to pick it up again?

And I suspect they're having a hard time having anyone step up and say we're going to take on a region. Most of the people, all of the people really, have taken on as the prime so far have lost money.

Wondered if since we're a little closer to the new solutions getting rolled out at least in beta, if you can provide us a little more color on expectations, kind of what their potential opportunity could be and that kind of thing?

Yes. I'm afraid I can't provide much color on that. I'll go through them one by one. Fraud, waste and abuse, we think has a tremendous opportunity for growth. Obviously, the targets, the 240 health insurance companies in the United States, and all hospitals, because hospitals are now going through an audit process by the federal government and they, too, have to look and self-evaluate better their fraud, waste and abuse incidents.

The application that we built in antology, which is an expert language that pulls data from all of the databases that are available and provider for payor's environment. Most of the fraud, waste and abuse applications just look at billing codes. They want to make sure if you have this particular medical problem, only certain billing codes are paid for that. Ours does that, too. It'll also evaluate the billing codes. We actually look at all of the rest of the databases. We look at the person's age, their sex, just about everything. The really good news for us is that the payers are starting to get copies of your blood work. Your blood work is kind of the report card of your body. If you have, most medical problems, it shows up in your blood work. If you take drugs it shows up in your blood work, prescriptions, etc.

So using the antology, and using the blood work, we think we can take the pursuit of fraud, waste and abuse to a new high. Obviously we'd like to sell all 240 of the payers, every hospitals in the US, but it's going to get rolled out over a period of time. The next one is an actuarial system that better assesses risk really when you're under a group medical plan. We've had it in beta now for a while. We had one of the blues that are actually willing to attest they would have made a lot more money if they had used our system along with their own underwriting, when for a two-year period, writing all of their group plan. So, we think that it looks pretty promising.

And a third one, which is a little farther out, is an application that monitors a patient's progress when they have certain chronic diseases, and will at least highlight some possible intervention points, and also better identify which doctors cost more for the same type of treatment than another doctor. And everybody in the medical area is probably a potential client for that. We're having a hard time figuring out exactly how much revenue we're going to get from any of these because there aren't systems out there that do this now.

I think the fraud waste is an actual market, right?

Yes.

So there you've got a sense of your opportunity, don't you?

Well, we have a sense of our opportunity. The question is, how much of a differentiation will being able to use blood work make our system versus the others that are out there? I mean if they are the only ones out with a system that uses blood work to look for fraud waste and abuse, you would expect that we would get a significantly higher number of hits than the other people. That's really what this beta is for, to figure out exactly. The payer that we're doing the beta with already has one that will look at codes. So, now the questions is how much more will we produce in terms of fraud, waste and abuse and their existence?

So the actuarial system, and the fraud, waste and abuse one, are in beta, the other one is not yet?

No it is not.

So the other two, you think they'll go commercial before year end?

Yes.

Okay.

And it's quite possible. We're working diligently on the medical model. So, it's possible that the other one will be commercial before year end as well.

Okay. Good. I'll jump off. Thanks, Jim.

Thank you.

Thanks. We have a question from the line of Rick D'Auteuil from Columbia Management. Please go ahead.

Hey, Rick, how are you?

Hey, Jim, how are you. Just a couple things. You didn't mention CTGX Talk on this, at least I didn't hear it, but are you seeing any progress there? I know that was one of the areas you were fairly positive on, and it was featured in your annual, also.

Actually, I didn't mention it. CTG Talk had an excellent talk first quarter. We sold a lot of additional licenses to a client that we had been working with for all of last year. And, there are at least two other clients that we're starting pilots on, where they'll take a look at how much they can save by installing it. It really had a very good quarter.

How are you selling that? How are you actually reaching the end user?

It's a direct sales. We hired people who had experience selling other voice recognition systems, and we're marketing it directly. We're actually picking industries and saying okay we're going to go after these industries first.

So the nature of how you recognizing revenues, it's a -- is it a one-time licensing agreement or is it more of an annuity?

It's both. It's a little bit of everything. Generally there's a fair amount of services required that we have to deliver in order to do the install. So those would be delivered as we deliver those services. So, that will take a quarter or two for most companies. When we sell the license for the product that sells, obviously there's a one-time hit for that. And, like any license, there is some maintenance.

So you're seeing some momentum there. A couple others are testing it, and likely, is there a bigger pipeline than just two or three?

The pipeline is -- we only have two that are starting pilot. The pipeline's obviously bigger. One of the things that happened to us, we had more companies that were interested, But when the credit crunch came, they kind of put the kibosh on their IT capital projects. So, we're hoping as the credit markets even out a little bit that they'll go back and start the projects back up again.

Okay. I saw something, it may have been in the Wall Street Journal, the military is adopting an electronic healthcare records system. So what, obviously the government is spending money on this. Has anything specifically been said about the military, and then what are you guys addressing there if anything?

I saw the same article you did. Obviously, the government's had the VA system up for decades now. We're not pursuing that at all. Obviously, you'd have to sell the government. We're just not -- we don't have a unit that directs its efforts towards the federal government. They're a little bit different to deal with.

I think you're going see lots of people say they are going to put up electronic medical records. You are also seeing a lot of different companies that were never in this business before, making the front pages of newspapers by saying we're going to get some of the stimulus money. From our perspective, we don't actually make the software. So if we have to learn a new software to put it up, that really doesn't bother us at all.

Maybe if you could talk about, I know there haven't been that many out there, but it was like 7% of your sales last year, the electronic medical records business, right?

Yes.

Maybe if you talk about the sales cycle, and some of the pipeline is starting to fill with the government stimulus in place, and walk us through the time frame, and relative revenues at each stage of the time frame, as a project matures.

Okay. I'll give you the time frames in the past, but we expect they'll accelerate some going forward. And, I'll explain that. The normal cycle in the past, generally we sold them to hospitals. Normal cycle is that the hospital put out an RFP, generally to help them select what system they're going put in first. So you bid on that. That cycle takes probably two or three months, usually, before they actually select you. Then you do a study which is usually, probably no more than 60 days.

A lot of it has to do with what other packages they have in their environment. So, if for instance, they have a Cerner clinical system, obviously there is a lot of integration between that and the electronic medical records system We take a hard look at Cerner because all of the interface is already built into their system. You pick the right one for the environment. Then, sometimes the customer will do an RFP. More likely, they're going to pick the company that did the initial study to do the implementation work. When you start a large project, most of these, our client base for hospitals tends to be more than 1,000, beds, more than $1 billion for hospitals. Generally, it tends to be a multiple hospital environment.

Most of those projects put up electronic medical records run probably three years, because they often have a physicians practice that has to get integrated in. So would you start the project up, generally with a senior project manager and a couple of healthcare consultants. They have to build a detailed project plan of all the steps you have to take, create a vision of exactly what it's going to look like, because everybody's looks a little bit different, get buy-in from particularly from the doctor community. And, that could take 60 to 90 days. Then generally, you begin bringing in the masses of people and actually doing the implementation. What we've seen in the first quarter is a little bit different. Starting in March, we began to get more requests for proposals from hospitals and to us, it seems like there were hospitals who'd already done an evaluation. Instead of getting a request to take a look and decide what system they were going to put in, the request is for a specific system, for putting in the system. You have to bid on the people to do that. You're still going have to go through the building of the project plan and things like that.

The other thing that's quite noticeable, I think I mentioned a 1,000 bed hospital. I'm thinking of one specifically. It's kind of typical client, a little over 1,000 beds, 250 people. They already decided what system they were going to pick. In the proposal itself, they said that this has to be done in 24 months, which is possible. You have to put more people on it, obviously, but it is possible to get it done in 24 months. Obviously there are hospitals out there, I think that probably looked at electronic medical records last year or the year before, and were considering it. If you look at it from a CFO's perspective, it probably wouldn't be at the top of my list. The cost savings is generally in the elimination of duplicate testing.

I asked the doctor in charge of an emergency room once, that was on a panel, how many tests, if I went to a hospital emergency room, would you duplicate like my doctor did in the last year? He said all of them, because if your doctor did a test, obviously there's an issue with them. If you have an electronic medical records system for a community, the emergency room is just going to pull those records up and look at those x-rays and CAT scans, blood test, etc. that was done previously. So, the elimination of the duplicate test often is going to be a hospital's duplicate test, If I were the CFO of a hospital in the past, I'd look at it and say there's not much of a financial payback here unless it significantly improves treatment of the patient. Now all of a sudden, the federal government comes in and says we're going to pick up the tab. To get the full amount, you really should be up and running by 2011. We think those that have already done the work to select the applications, etc., we're kind of already thinking about it in the past, kind of rushed those proposals to the top of the list and now they're out on the market.

So going back to interesting on ,you said it could be done in 24 months, but, you know, we'd have to throw more bodies at it to get it done in 24 months. Is that fair?

That's fair.

What has to be in place by 1/1/2011, because that is less than 24 months?

It will be interesting when they come out with the regulations that's not out there yet. They said to get the maximum reimbursement which starts January of 2011, you substantially have to be up, and we think when the regulations come out, its going to be substantially up on a electronic medical records system where the records are being shared by a large community. Not just your hospital, but you're tied in to something bigger than that.

The government's assessment, they believe that only 8% of the hospitals in the United States have electronic medical record applications that meet the requirement, and only 17% of all physicians, in the government's opinion, have electronic medical record systems that are going to meet the government requirements. But the regulations still aren't up.

So when a hospital endorses this, to get credit for it, they need the community to also endorse it?

Or, at least, I would think a lot of the other hospitals. In a lot of mid-size cities, there are two or three hospital chains that control most of the docs -- 75% of the docs, 75% of the beds. If just the three of those were exchanging, my guess is, not even seeing the regulations, my guess is your sharing enough of those records. The devil's in the details, and the government hasn't come out with those regulations yet.

Okay. So now walk through the dollars a little bit. So, people have said roughly half the dollars are software and half the dollars are implementation? Is that fair guess on the split?

Well, our rule on any project is that a third is hardware, a third software, and a third services.

Okay. So now let's go through what it means, pick average hospital, or if you look in the inquiries you're getting, pick a mind point of that and say what you're likely to recognize in that two month study with just the senior project manager and two consultants or whatever the body count is. And then what revenues turn into as you go live, or go with the full team.

Okay, in the first couple months you probably have maybe three people working on it and maybe you'd be billing $500,000 a month during those months. 1,000-bed hospital, you're probably looking at maybe $5 million a year, so it'll be about 8 times, $400,000 a month, of billing and services.

And that's likely to be something like a 24-month project?

Yes.

Okay. That's all I have.

Thank you. At this time then, we have no further questions in queue, Mr. Boldt.

Thank you. Since the recession began in the latter half of 2007, CTG's performed significantly better than many companies in and outside of our sector. We've proven ourselves in the past to be very adept at managing our business and our costs in economic downturns. For us, the good news in these difficult times is that we have new offerings and we expect (inaudible) to our profitability in the second half of the year. In addition, we're extremely well positioned to directly benefit from the $19 billion in the US federal stimulus package for healthcare IT, which we strongly believe will drive our revenue growth for 2010 and beyond. Quite frankly, we're truly looking forward to getting through the next quarter or two so that we can go back into a growth mode. 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 that does conclude our conference for today. (Operator Instructions).