Computer Task Group Inc (CTG) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the CTG first-quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session; instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, IR for CTG, Mr. [Jim Culligan]. Please go ahead.

Thank you, Dimitria, and good morning, everyone. We certainly appreciate your time and your interest in CTG. On the call today we have CTG's CEO, Jim Boldt, and Brendan Harrington, Senior Vice President and CFO. Jim and Brendan are going to review the results for the first quarter of 2010 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, CTG.com.

Before we begin I wanted 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 these on our website or at the SEC's website at SEC.gov. So please review our forward-looking statements in conjunction with the cautionary factors. With that I'd like to turn it over to Jim to begin the discussion.

Thanks, Jim, 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 in our earnings release, in the first quarter 2010 we exceeded our guidance for revenue and were at the midpoint of our guidance for earnings per share. In the first quarter we added 200 or 7% to our staff bringing our total headcount to 3,100.

We continue to see strong demand for our services in the second quarter of 2010. The majority of that demand is coming from electronic medical record projects and our US staffing business. As we've said before, all indications are that CTG is going to have a good year this year. I'm going to talk more about our results and what we see for the second quarter and 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, everyone. For the first quarter of 2010 CTG's revenue was $78.5 million, an increase of $3.9 million or 5% compared with the first quarter of 2009. On a sequential basis compared with the trailing fourth quarter of 2009 revenue increased 16% and was 11% higher per billing day. First-quarter operating income expanded at a greater rate than revenue and was $3.1 million, up $682,000 or 28% year over year. Compared with the trailing fourth quarter of 2009, first-quarter operating income increased $519,000 or 20.1%.

Operating margin in the first quarter increased to 3.9% of revenue, a 70 basis point improvement from last year's 3.2%. Our operating margin benefited from an increase in the profitability of solutions projects and the additional operating leverage. Net income was $1.8 million in the quarter, an increase of 37% from $1.3 million in the first quarter of 2009 and a 9.6% increase from fourth-quarter of 2009 net income.

On a per diluted share basis net income was $0.11 for the quarter, a 22% increase from first quarter of 2009 and a 10% increase from the 2009 fourth quarter. Solutions revenue in the first quarter 2010 was $25.1 million, approximately equal to last year's first quarter. As a percentage of total revenue solutions revenue was 32% compared with 34% a year ago.

Driven by strong demand in the quarter staffing revenue increased $3.9 million or 8% to $53.4 million. First-quarter revenue from IBM, our largest customer, was $22.6 million compared with $19.1 million in the same period last year. As a percent of total revenue IBM increased to 28.8% in the 2010 first quarter compared with 25.6% of total revenue in the first quarter of last year.

Revenue from our European operations was $16.6 million, a 6.4% decrease from the $17.7 million recorded in last year's first quarter as the recovery in Europe continues to lag that of the US. Excluding foreign exchange fluctuations European revenue in the quarter would have decreased 12% from last year. The effect of the fluctuations on the US dollar during the first quarter of 2010 increased our revenue by approximately $900,000 or 1.2% as compared with the first quarter of 2009.

SG&A expense as a percentage of revenue decreased to 17.7% from 19.2% in the first quarter of 2009 and from 18.4% in the trailing fourth quarter of 2009. This improvement reflects the operating leverage from higher revenue and continued discipline in controlling our costs. Direct costs as a percentage of revenue were 78.3% in the first quarter compared with 77.6% in the first quarter of 2009 and 77.8% in the trailing fourth quarter of 2009.

Both the 2010 and 2009 first-quarters' results include equity compensation expense of approximately $0.01 per diluted share net of tax. The tax rate for the 2010 first quarter was 41.3% compared with 42.3% in the 2009 first quarter. We expect the tax rate for the full year 2010 to be between 40% and 42%.

As Jim noted, our headcount has been increasing. We had approximately 3,100 employees at the end of Q1 2010 of which 89% were billable resources. On the balance sheet our days sales outstanding was 61 days at the end of the first quarter 2010, an increase of three days compared with the end of the first quarter of 2009 and slightly above the 60 days at the end of 2009.

Our cash used in operations in the first quarter of 2010 was approximately $5 million as compared with cash used in operations of approximately $400,000 in the first quarter of 2009. The increase of cash used in the comparative quarters was primarily attributed to fluctuations in the accounts receivable balances at the end of the comparative periods. We have $572,000 in capital expenditures focused mostly on solutions development and we recorded depreciation expense of $392,000 in the quarter.

CTG's financial position remains very strong. At the end of the first quarter 2010 we had $945,000 of long-term debt and $4.2 million of cash on the balance sheet. The increase in accounts receivable in the first quarter 2010 related to the increased revenues coupled with the first quarter 2010 ending on a US payroll date resulted in the outstanding debt balance at the quarter end.

During the first quarter of 2010 we repurchased approximately 131,000 shares of CTG common stock. And during this most recent self-imposed blackout period, prior to releasing our earnings we repurchased approximately 30,000 shares under our 10b5-1 plan. As of April 27, 2010 our repurchase authorization is for approximately 390,000 remaining shares. Because it remains accretive to our earnings we intend to continue our repurchase program during 2010. Jim?

Thanks, Brendan. In aggregate our solutions business was essentially the same in the first quarters of 2010 and 2009. As we reported on previous calls, the tight credit markets have negatively impacted demand for our solutions business, particularly from the healthcare provider market.

Without the necessary financing hospitals have been deferring many IT capital projects including investments in electronic medical record applications. These deferrals clearly affected our business in 2009. However, in mid-2009 we started to see a change in that trend.

In the third quarter of 2009 we started up six new electronic medical record implementation projects, in the fourth quarter of 2009 we started up the seventh project, and in the first quarter 2010 we started the eighth new project. Currently we have a total of 12 electronic medical record projects underway and in the first quarter of 2010 electronic medical record projects accounted for 11% of our total revenue.

We are seeing more credit become available for the financing of electronic medical record projects. As you know, not-for-profit hospitals have historically used the tax exempt bond market to finance their capital needs and the tax exempt bond markets are starting to make a comeback. As a consequence, we recently bid on an EMR project in the month of April and have been told by several of our other clients that they expect to issue RFPs for EMR projects in the next few months. As such, we expect to start up more EMR projects as the year progresses.

As we disclosed in our news release, during the first quarter of 2010 one of the largest states in the US notified as that we'd been selected to perform statewide planning for their Health Information Exchanges. This award is funded by the American Recovery and Reinvestment Act of 2009, or ARRA, to the office of the National Coordinator for Health Information Technology.

We believe that this is the first time that some of the $19 billion in the federal stimulus package has been spent as this first engagement is for planning and won't have a significant impact on our financials. However, after the planning has been completed we would expect that larger implementation projects would follow. That should happen starting in the fourth quarter of 2010.

We have three new solutions for the healthcare market that employee data analytics to identify ways to improve the quality and efficiency of healthcare delivery. The first offering is for a medical care management model that improves patients' outcomes while lowering costs. Second offering is an actuarial tool for the more accurate underwriting of group medical plans resulting in more equitable pricing across our healthcare system. And the third is for the protection of fraud, waste and abuse which is estimated to account for 3% to 10% for all healthcare expenditures annually.

As the offerings are being sold as software as a service, we'll recognize revenue as we deliver those services to customers over the terms of those contracts. We started an engagement for our medical care management model in the first quarter of the year and expect to close on an actuarial underwriting engagement shortly.

Turning to our staffing business, it increased by 8% in the first quarter 2010 when compared with the first quarter of 2009 and by 18% sequentially. Staffing demand was surprisingly strong in the first quarter of 2010 and we attribute some of that strength to be from pent up demand as many of our customers reduced their IT staff significantly more than needed during the global recession. We expect strong demand for staffing in 2010 but don't expect we'll see a continuation of the surge we saw in the first quarter throughout the year.

As you can tell from our income statement, we're being very disciplined about our spending in 2010 as one of our objectives is to increase our operating margins from the 3.6% return on revenue that we saw in 2009 to the 4.4% return used at the midpoint of our updated guidance. We plan on continuing that strict financial discipline throughout the year.

Currently we are forecasting revenue in the second quarter of 2010 to be in the range of $78 million to $82 million. In the second quarter of 2010 we'll have 64 billing days versus the 63 billing days in the second quarter of 2009 and the 65 days in the first quarter of the year.

If you look at our projected daily sales in the second quarter of 2010, our daily sales are expected to increase at the midpoint of our guidance by 4% sequentially. Given the revenue forecast and expected mix of business, we're forecasting earnings per share in the second quarter 2010 to be in the range of $0.11 to $0.13 per diluted share for an increase at the midpoint of our guidance of 33% over the second quarter of last year.

As for 2010, we expect to start up new electronic medical record projects during the year as financing is becoming more readily available to our customers. In addition, in 2010 we expect we'll benefit from the initial sales of our new data analytics solutions for the healthcare industry as these offerings continue to move from the pilot stage to full commercialization. We also anticipate continued strong demand throughout the year for staffing.

Due to the increases we're forecasting in both our staffing and solutions business we anticipate a return to double-digit revenue and earnings growth in 2010. As a result we expect 2010 revenue to be in the range of $314 million to $322 million or an increase at the midpoint of our guidance of 15% over 2009. Due to the higher margins for the new solutions projects and our strict financial discipline we expect net income per diluted share in 2010 will be in the range of $0.47 to $0.55 or an increase at the midpoint of our guidance of 34%.

As I mentioned earlier, at the midpoint of our guidance we would expect our operating margins to increase from 3.6% in 2009 to 4.4% in 2010. To recap, all indications are that CTG is going to have a good year in 2010 with a return to double-digit growth in revenue and profit and a further increase in our operating margins. With that I look to open the call for questions if there are any. Operator, would you please manage our question-and-answer period? Operator?

(Operator Instructions). Bill Sutherland, Boenning & Scattergood.

Thanks very much. Hey, Jim and Brendan. A couple model questions to start. What's the headcount kind of assumption range in your outlook there for 2010?

Actually we're assuming that in every quarter we'll add net 100 people for the next three quarters. And then of course there's one less billing day in every quarter going forward. And in the third quarter of the year we lose about 3% due to people taking vacation. If you run those numbers you should come up with the midpoint of our guidance.

And how many of those adds, Jim, are hires or I should say trained?

It's probably going to be 10% maybe or less.

(multiple speakers) trained?

Yes. Right now we haven't actually changed assumptions for the solutions business for the year. We think we're going to start up some electronic medical records projects as we go forward. A lot is going to depend on the financing.

Okay. And then I noticed the lion's share of the staffing revenue increase was with IBM (multiple speakers).

That is correct, yes.

I know you work primarily with two groups there. Are both groups really lifting for them significantly?

Well, yes, it was pretty uniform across the two business units that we support.

And I mean do you feel like -- because I'm seeing it's kind of an uneven playing field as I look at some of the reports coming in as far as the IT tick up for at least staff. And can you kind of provide any color from what you guys are seeing?

Yes, just in general in terms of staffing, many of our customers have told us that they cut too much because of the global recession and even got to the beginning of the second quarter of last year and thought Armageddon was coming. And they (multiple speakers).

It was.

True. And they just cut as deeply as possible. So they're re-staffing probably positions that they cut that they didn't need to. And in addition to that, many of them, after having gone through the trauma of laying their people off, told us that they're going to increase the mix of outsiders versus their own staff that's doing work. So we right now have customers that are basically telling us, look, if we need additional people in IT it's coming from you guys not -- we're not going to go out and higher. And I suspect that's probably going to continue for most of the year.

And are they -- I'm sorry, go ahead.

Well, we do think though in the first quarter, because of new budgets and things like that, we saw a bit of a surge in terms of demand. We don't think that we'll continue to add 200 people a quarter.

Right, but you saw the surge mostly from one customer is where I'm going. I'm just kind of -- I mean the others -- the more normal sort of trend out there is just a little bit of uptick in Q1?

Well, many of the other customers (inaudible) in the third and fourth quarter of last year that our bigger demand in the third and fourth quarters of last year was in the non-IBM customers actually.

Okay.

I think we've just kind of caught up in terms of IBM.

And then one last model question and I'll get back in queue so a couple others --. But the gross margin, I'm guessing not too much change there in this year if the staffing growth is up -- is disproportionate, maybe a little shift towards year-end?

Right. We expect the gross profit margins at the end of the year to be better than they are now. But because the staffing business has grown at such a rapid rate that's impacting the margins. There are two other things on the solutions side of the business that are impacting it as well. One, in the past couple years we really haven't held much of a bench even on the solutions side because if a new project started up we would just go out and hire the people that we needed to start roughly when we needed them.

So they might be on the bench for a couple weeks, but not too long. As the healthcare EMR market gets tighter we found that we have to carry more of a bench. When we find a person that's good we hire them, we know that a projects coming. The other thing that's hurting the margins a little bit is the training, when we have people in training obviously there's no revenue associated with them. The biggest factor in that though is obviously the mix of the staffing business.

You didn't have any issue pricing up the [SUDA] increases, did you in the quarter?

I'm sorry, the SUDA increases?

State unemployment that went up so dramatically in those states?

No, we really didn't -- we haven't had a problem with our fringes.

Okay. I'll jump off and thanks a lot.

Okay.

Rick D'Auteuil, Columbia Management.

Good morning. So a couple things, mostly healthcare related. The wins in the third quarter of last year, are those -- in the EMR space -- are those six assignment tracking as you'd expect?

Yes, they are.

Okay.

So is the -- actually the ones we got in the fourth quarter and first quarter.

Okay. So still the feeling is $2 million to $3 million a year for two or three years?

Yes, that's correct.

Okay. And the large physician practice that you referenced in this release, was that tied to a hospital that you had already won or what's the status of the hospital that that practice is operating out of?

Actually that is not tied to a hospital; it's a 500 physician practice that isn't associated with any hospital.

Okay. In general I think you said the physician practices are not three years, they're more like two years or --?

That is correct. The physicians practice usually runs more 18 months to two years.

And this is expected to be consistent with that?

Yes.

And then the billings per year were a little higher than the hospital, right?

Yes, they would be, yes.

And what kind of range in general?

Just slightly probably higher than a hospital. So maybe the first year you get $3 million of billing.

Okay. And the utilization on your current healthcare resources -- you mentioned bench time. I would think your utilization is pretty high and there probably isn't a lot of bench time, right?

No, that's correct. The utilization actually has been increasing as time went on. But the farther we go at this the more we're just convinced that many more EMR projects are going to start up. So starting in the first quarter we deliberately began to hire people to the bench. I actually can envision that we'll have crews for a couple hospital systems sitting on the bench waiting for us to start the next project in the second and third quarters of the year, so it will have an impact.

Okay. Are some of the resources that were assigned to the early -- to the 2009 projects starting to get freed up for maybe I guess at the leadership role maybe a project manager or something, are they being freed up to begin to be deployed in new projects?

No, actually not. Usually the project manager and the high-end consultants that kind of do the planning phase, they'll roll onto that project which all of them did for last year. The ones that started up last July probably won't free up until sometime towards the end of 2011.

But you have -- say you have several more wins through 2010, you'll have the resources in house today to address at least the leadership of the project?

It depends on how many we win. If we win a couple, yes we absolutely do. One of the things though, as I mentioned before, that we're doing is deliberately hiring project managers, for instance, to make sure that we've got enough going forward and we'll put them on the bench.

How is your retention of your existing talent?

Very good.

Okay, so but to higher up other folks you're talking about taking them from some of the competitors I assume, right?

Correct. And there's also other projects that are ending, so they're rolling off of somebody else's project.

Okay. At one point you thought the non-EMR healthcare would begin to fall off as people have CapEx constraints, or hospitals, etc., have CapEx constraints. It doesn't appear that that's actually happening, because EMR I guess hasn't kicked in in a big way yet. But it doesn't feel like any of the other things are being cheated from the budget.

Well, actually we have seen quite a bit of that. Almost every project that we've bid on in the last year has been an EMR project. And normally most of them would be clinical redesigns or something else. So it's clear that hospitals are constrained for capital and that they're dedicating most of the availability of capital that they do have towards EMR projects.

And we are getting somewhat of a shift actually in our healthcare revenues. Our healthcare revenues in the first quarter this year are roughly the same as they were in the first quarter of last year. What happened was that in the first six months of last year we didn't have any sizable projects starting up and then the EMR project started up. So the provider side of the market was actually dropping in the first six months of last year and then coming back up.

The provider market in the first quarter this year is about 9% more than it was in the first quarter of last year. What's happening though is the payer and life sciences markets actually have declined, it's a function of the global recession and particularly in the payer space because of health reform. The payers went through a prolonged period of time where they just were kind of frozen, not sure what to do until health reform came through.

So, if I dissect -- I think you mentioned 28% healthcare, is that right, in the quarter?

I think it was -- that sounds about right, yes.

Okay. And the 32% solutions; not all healthcare was solutions, but the majority of it is, right?

Yes, the vast majority of it is.

Okay. And so the non-EMR healthcare in the quarter was 17% I think, 11% for EMR, 28% -- so you'd expect that 17% to come down pretty materially as the year progresses?

No, I think it's come down. I think it's going to bottom out. Actually I just looked, it was 27% in the quarter, I think we (multiple speakers).

Okay. So you've seen the decline, so that 16 stays in place and the EMR piece, the 11% should continue to increase through the year?

Yes, that's right.

Okay. And anything new from a big picture -- the stuff that's coming out of the government that's supposedly driving all this? The healthcare bills that have been passed and the allocation to EMR and other things that pertain to you?

No, that hasn't really changed the meaningful use definition. The interim final definition, as the government calls it, has pretty much stayed the same for several months now. As I mentioned though, we did -- last summer Vice President Biden announced that immediately the government was going to spend $1.2 billion of the $19 billion, half of that about $600 million was in an allocation to the states to begin their projects. And that money actually was let in the month of March, late in the month of March to the states. And one of the projects we're starting up is using some of that [RO] funding.

I mean is that a -- is that a project that's likely to be consistent from a revenue standpoint to one of your hospitals or bigger, smaller, I mean just relative size?

Well, the initial project is actually a plan of how the states are going to establish their HIEs and governance and what they're going to do, sustainability models, etc. So it's totally planning really for them. So there's not a tremendous amount of revenue or profit associated with it. That project should be done by the end of the third quarter.

And then -- and that's a small part, by the way, of the money the state received, obviously. At that point they'll give money, we suspect, to the HIEs to actually begin EMR projects, also to establish the transfers of information work that's needed between hospitals and physicians practices and the HIEs. So we think that the bigger spend for that actually will start up in the fourth quarter of the year.

But is that a multi-year kind of thing or what is the --?

I would definitely think it would be a multi-year thing.

Okay. And several million a year kind of once you get into the fourth quarter run rate?

It would depend on how many of those HIEs we pick up. If we pick up one it certainly would be several million dollars, if we pick up more than one in the state it will be more than that.

Okay, okay. And it looks like your publicity and your rank within the peer group for healthcare solutions continues to be strong and benefiting you in the bidding process, is that still true?

Absolutely. Actually that was enhanced by an article that Information Week published where it flat out came out and said that if you're going to do an EMR project you should take a look at these three vendors and we're one of those three.

Can you mention the other two?

Oh, sure, it was ACS and Deloitte Consulting.

Okay. And the 500 -- last question -- the $572,000 on CapEx you said was mostly solutions related. Is that going into one of the three SAS applications you spoke of or is this -- are you developing something new?

No, actually it's going into all three of them. We're just finishing off the applications.

Okay. And you expect all three to be revenue producing this year?

Yes.

Okay. Thank you.

Okay, thanks, Rick.

(Operator Instructions). Frank Sparacino, First Analysis.

Good morning.

Good morning, Frank.

Bill Sutherland, Boenning & Scattergood.

Thanks. So, Jim the sales cycle probably improving here in the -- particularly in the EMR space looking ahead?

I would suspect so. Particularly with the tax-exempt bond markets improving. We think more hospitals are talking to us at least about doing EMR projects. I think that we probably in the second quarter may bid on more projects than we bid on all of last year.

Okay, so you're coming down to a cycle that's a little more typical like a month or two?

Right, usually between the time that we get the RFP and the time we get a decision it's probably about 90 days.

Okay. On the cash flow front, I realize you had a payroll date impact in Q1, but as you look at your growth rate as you move into the mid teens do you think that's a cash flow neutral kind of growth rate or kind of just how does the model work here?

I think this year we've been projecting that we're going to need to use cash in order to finance the buildup in receivables. I think it will be probably a little bit worse than maybe it was the first quarter, but not significantly. The first quarter also ended right on a payroll date, which obviously hurt us. I would think by the time we get to the end of the year because we won't be on a payroll date we should be back out of debt again.

Okay. And on the state Health Information Exchanges, I haven't heard too much about this opportunity. If you can just give us a little more color there and that's it for me, thanks.

Okay. On the state, as I mentioned, the government basically allocated about $600 million to give to the state from the ARRA funding from the $19 billion in order for them to help get the EMR projects in their state done.

And what the federal government did was probably sometime early in the third quarter of last year go to the states and say we'd like a proposal from you as to what you would like to use this money for. And the state was going to get between $2 million and $40 million depending on the size of the state, the population of the state, rather.

They had to have their proposals done by the end of November and they're different. Some of the states already for instance have established HIEs, they've been up and running for a while, the state actually gave them money to begin their EMR projects. So those states, we believe, will most likely funnel most of the money into their existing HIEs to do projects.

Some states are just starting up their HIEs, they really hadn't established them before and the state that we're dealing with is in that situation. So they're using the money first to plan exactly what they want the HIEs to do and then after that they'll most likely give money to the HIEs to start their EMR projects.

So I guess this is isn't New York State?

No, it's not New York State. It is one of the five most populated states though in the country.

Okay. Actually one quick one here on the new software solutions. People are wondering kind of the revenue impact; I know it's going to be very gradual given the model. What's realistic here as a run rate leaving the year do you think?

I don't think we're prepared to give out a forecast on that. Also, the offerings will have more of an impact on our profitability than our revenue. Because it's going to be more like the kind of gross margins a software company would get. And we're still trying to ascertain how many projects -- how many of those offerings we'll sell even in this year.

Yes, okay. Thanks, Jim.

Okay, thank you.

(Operator Instructions). We have no further questions. Please continue.

Thank you. Looking forward we expect that the strong demand that we saw in the last three quarters for our staffing business in the US will continue throughout 2010. On the solutions side of our business clearly the largest opportunity for us over the next several years will be in the electronic medical record work. As I mentioned before, in the first quarter 2010 we saw the US federal government release some of the $19 billion in the stimulus package for EMR projects for the first time and anticipate that more will be spent in the latter part of the year.

We are seeing the credit markets turn around and, as a consequence, have more customers talking to us about starting up their electronic medical record projects. Given the magnitude of creating electronic medical records for everyone in the US we believe the electronic medical record work will most likely drive our solutions business for the next three to five years.

Couple the EMR work with the additional profitability from our new offerings you can see why we have every expectation of not only having a good year in 2010 but, given our leading position in the healthcare IT services market, we think the same can be said for 2011 and 2012 as well. We believe our strategy and our ability to execute it well provides us with strong prospects for growth for the foreseeable future. I would like to thank you for your continued support and for joining us this morning. Have a great day.

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