Computer Task Group Inc (CTG) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CTG First Quarter Conference Call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Jim Culligan with Investor Relations for CTG. Please go ahead.

Thank you, Kira, and good morning, everyone. We certainly appreciate your time and interest in CTG.

On the call today we have CTG's Chief Executive Officer, Jim Boldt, and Brendan Harrington, Senior Vice President and Chief Financial Officer. Jim and Brendan are going to review the results of the first quarter of 2011 and then 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 our website at 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 these at our website or the SEC's website at sec.gov. 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, 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 of 2011 we exceeded the upper end of our guidance for revenue and were at the high end of our guidance for earnings per share. For the full year, we're now projecting at the mid point of our revised guidance a revenue increase over 2010 of 18% and an increase in our earnings per share of 35%.

Our revenue and earnings continue to grow as the demand for our services expands, both as a result of the continued need in the United States for staffing services and as the healthcare industry invests in electronic medical records.

I'm going to talk more about our results and what we see for the 2011 second quarter and the full 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 2011, CTG's revenue was $95.9 million, an increase of $17.4 million or 22% compared with the first quarter of 2010. On a sequential basis compared with the trailing fourth quarter of 2010, revenue increased 10% and was 5% higher per billing day.

Solutions revenue in the first quarter 2011 was $33.7 million, an increase of $8.6 million or 34% compared to last year's first quarter. As a percentage of total revenue, Solutions revenue was 35% compared with 32% a year ago, driven mainly by an increase in revenue from a higher level of EMR work.

Continued strong demand in the quarter increased Staffing revenue by $8.8 million or 16.5% to $62.2 million.

First quarter revenue from IBM, our largest customer, was $28.7 million compared with $22.6 million in the same period last year. As a percent of total revenue, IBM increased to 29.9% in the first quarter 2011 compared with 28.8% of total revenue in the first quarter of last year.

Revenue from our European operations was $17.1 million, a 3.1% increase from the $16.6 million recorded in last year's first quarter. The recovery in Europe continues to lag that of the US, as indicated by the lower growth rate of our European business.

The effect of the foreign currency fluctuations during the first quarter of 2011 had only limited impact on our overall revenue and was equal to approximately $170,000 or 0.2% as compared with the first quarter of 2010.

Direct costs as a percentage of revenue were 79.4% in the first quarter compared with 78.3% in the first quarter of 2010 and 78.1% in the trailing fourth quarter of 2010.

SG&A expenses as a percent of revenue decreased to 15.8% from 17.7% in the first quarter of 2010 and 17.1% in the trailing fourth quarter of 2010. This improvement reflects the operating leverage from higher revenue and continued discipline in controlling costs.

First quarter operating income expanded at a greater rate than revenue and was $4.6 million, up $1.5 million or 49% year-over-year. Compared with the trailing fourth quarter of 2010, first quarter operating income increased $364,000 or 8.6%.

Operating margin in the first quarter increased to 4.8% of revenue, a 90 basis point improvement from last year's 3.9%. Our operating margin benefited from an increase in the profitability of Solutions projects due to the higher proportion of EMR work, cost controls and the additional operating leverage.

Net income was $2.8 million in the quarter, an increase of 58% from $1.8 million in the first quarter of 2010 and a 6.6% increase from the fourth quarter of 2010 net income.

On a per diluted share basis, net income was $0.17 for the quarter, a 55% increase from first quarter 2010 and a 6% increase from the 2010 fourth quarter. Both the 2011 and 2010 first quarters' results include equity compensation expense of approximately $0.01 per diluted share, net of tax.

The tax rate for the 2011 first quarter was 38% compared with 41.3% in the 2010 first quarter. We expect the tax rate for the full year 2011 to be between 37% and 39%.

As noted in the news release, our total headcount has been increasing. We added approximately 200 employees in the first quarter. Of the 3,600 employees at the end of the first quarter 2011, 90% were billable resources.

On the balance sheet, our days sales outstanding was 62 days at the end of the first quarter 2011, an increase of 1 day compared with the end of the first quarter of 2010 and 2 days above the 60 days at the end of 2010. The increase in the accounts receivable in the first quarter of 2011 related primarily to the increased revenues and the change in the mix of the business.

Our cash used in operations in the first quarter of 2011 was approximately $7.2 million as compared with cash used in operations of approximately $5 million in the first quarter of 2010. The increase of cash used in the comparative periods was primarily attributable to fluctuations in the accounts receivable and the accrued compensation balances at the end of the comparative periods.

We had $570,000 in capital expenditures and recorded depreciation expense of $435,000 in the quarter.

CTG's financial position continues to be strong. At the end of the first quarter 2011, we had no long-term debt and $8.9 million of cash on the balance sheet. Both the first quarter 2011 and 2010 ended on a US payroll date.

During the first quarter of 2011, we repurchased approximately 51,000 shares of CTG common stock. During this most recent self-imposed blackout period prior to releasing our earnings we repurchased approximately 19,000 shares under our 10b5-1 plan.

As of today, our repurchase authorization is for approximately 1.1 million shares. Because it remains accretive to our earnings, we intend to continue our repurchase program during 2011.

Jim?

Thanks, Brendan.

In aggregate, our Solutions business increased by 34% in the first quarter of 2011. The growth in Solutions work is primarily coming from EMR projects and is continuing to drive margin expansion. Overall, our healthcare business was up over 30% over the first quarter of last year.

In our conference call at the end of February, we mentioned that we'd bid on 6 RFPs for electronic medical record projects but clients had not decided what IT services firms would be awarded those projects. Since that call, we were notified that we had won 1 of those projects, lost 1 and 4 are still undecided.

When we started 2011, we had 13 active EMR projects. On our February investors call, we said that we had won 4 additional EMR projects, all of which started in the first quarter 2011. That means that at the end of the first quarter of 2011, we had 17 active EMR projects. In addition, we have won 1 EMR project that I just mentioned that will start up in the second quarter of the year and have 4 open RFPs for EMR projects for which the clients have not yet selected an IT services firm.

For the first quarter of 2011, electronic medical record projects accounted for approximately 15% of our total revenue. EMR project revenue was up 61% in the quarter and our pipeline for EMR projects remains strong. However, we do have some EMR projects coming to an end.

In the third quarter of 2009, we started 6 new projects, all of which were targeted to be implemented in two years. Starting in the second quarter of 2011, we expect those projects will begin to wind down.

We believe data analytics will be another major opportunity for growth in serving the healthcare industry. We have a solid head start in this opportunity, having already developed three new solutions for the healthcare market that employ data analytics to identify ways to improve the quality and efficiency of healthcare delivery. All three of those offerings are now commercial and we're actively marketing them.

As mentioned in our news release, we now have offerings for ICD-10 and accountable care organizations, known in the industry as ACOs. Our ICD-10 offering supports conversions in the United States from ICD-9, the current US standard for diagnostic codes, to ICD-10 the new international standard. We currently have 1 ICD-10 project for a payer underway.

Our ACO offering supports the formation of accountable care organizations to improve the quality of care and reduce unnecessary cost, a concept conceived as part of healthcare reform. Our sales staff is also actively marketing these new offerings.

I'd also like to talk about the other three vertical markets that we focus on. Demand from the technology service providers market was very strong during the first quarter of 2011 and we expect demand to continue to be strong during the year. As to our financial services and energy verticals, we depict those businesses as stable and we're not expecting that to change in the near future.

Turning to our Staffing business, which generates the majority of its revenue from the technology service provider market, it increased by 17% in the first quarter of 2011 when compared with the first quarter 2010. The Staffing increase in the first quarter of the year was more than we were expecting and accounted for most of the excess revenue above our first quarter guidance.

Although we believe the revenue growth rate for Staffing will moderate as the year progresses, we clearly expect to see a double-digit increase in revenue from our staffing business in 2011.

We're forecasting revenue in the second quarter of 2011 to be in the range of $97 million to $99 million, or a 21% increase from the midpoint of our guidance over last year's second quarter. We're forecasting earnings per share in the second quarter of 2011 to be in the range of $0.16 to $0.18 per diluted share or a 42% increase from the midpoint of our guidance over the second quarter of last year.

For the 2011 full year, we expect a revenue range of $380 million to $400 million or an 18% increase at the midpoint of our guidance over 2010. Based upon our revenue forecast and the anticipated mix of business, we expect that income per diluted share in 2011 will be in the range of $0.65 to $0.75 or a 35% increase from 2010 at the midpoint of our guidance.

When you compare CTG to companies both in and outside of our industry, we had a strong first quarter in 2011. For the year, we're expecting 2011 to be another great year for CTG, with strong double-digit revenue and earnings growth.

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?

Yes. (Operator Instructions). The first question comes from the line of Frank Sparacino with First Analysis. Please go ahead.

Good morning, Frank.

Hi, guys. How are you?

Good.

I have a question on the EMR side of things. I know you've talked about this in the past, but I just want to revisit it in terms of your expectations for the next few years. Obviously, there's a lot of hospitals moving forward today to attest in 2011 and 2012, but I'm just curious how you see the rollout over the next few years. I think there's a belief by many that as we get into the back half of, perhaps, 2012 and clearly 2013 that we're kind of on the other side of the growth curve as it relates to EMR and, perhaps, IT spend in general with hospitals. But I'd be curious in your perspective.

Well, we, like everybody, would like to have a crystal ball and figure out exactly how this is going to roll out. I think when you get to the end of '12, the larger hospitals, certainly, a lot of them will have started their projects, at least. They won't be done, but they'll have started.

The smaller hospitals we haven't seen them do much. So we easily could see a huge demand in 2014. They're all paranoid about the penalty that starts in January of 2015. So we could see demand, we think, pop back up again for small hospitals as they get closer to that date.

And really to get a system up and running in a small hospital, it's probably going to take 12 to 18 months, so they're going to have to start those projects in the middle of 2013 to the end of 2013 to avoid the penalty.

In addition to that, though, we don't see the spend dropping. Our -- all of the hospitals that we are doing EMRs for currently have not started their ICD-10 projects yet and the reason is that they have their entire staff working on the EMR project. That's a big project for them and they can't run two at once.

So what we expect to happen is that hospitals will almost immediately go from their EMR projects to their ICD-10 projects and then, for the larger hospitals, we've already started to talk to some of them about what they're going to do for the accountable care organizations that start under healthcare reform in '14.

So, in aggregate, we really don't see hospitals lowering their spend over the next few years, but we do see them switching what they're spending it. Does that make sense?

That does and thank you. Maybe just one follow up. Are you -- as it relates to your small hospital comments, are you just not targeting that segment of the hospital marketplace yet? Or is that something you're actively sort of monitoring if there are opportunities? I don't how much bandwidth you have from a resource standpoint. But I don't know if that's a market you're actively going after right now.

Yes, resources definitely are getting tight. No, we really haven't targeted it yet. Our target market at the moment remains 500 bed to 2,000 bed hospitals. One of the reasons we haven't targeted it is, we're not really hearing or seeing of many of the smaller hospitals start their projects up. It's much easier for the larger hospitals to get financing, for one reason.

And, as I said before, it seems that the smaller hospitals are more concerned about avoiding the penalties than they are about getting the reimbursement for the government for meaningful use.

Thank you, guys.

Thank you.

The next question comes from the line of Rick D'Auteuil with Columbia Management. Please go ahead.

D'Auteuil. Hi, Rick, how are you?

Hi, Jim and Brendan. How are you?

Hi, Rick.

So just to get into -- we know what a typical EMR project generates in revenues and the duration of it. The ICD-10 projects, what would be the expectation there, both in -- on an average kind of basis on the spend and the duration?

I would love to tell you that, but I honestly don't know and none of our guys know at the moment and I'll explain why. The -- from our standpoint, the ICD project, first they have to go in and do an assessment of what needs to be done. Most hospitals operate with probably at least 50 different software packages and the ICD code, next to the patient code, is the most commonly used code in a hospital, because it's not just the diagnostic code, it's also the billing code.

Those packages may or may not be able to take the newer ICD code, because the old ICD-9s are 5 character and 10 goes out to a 7 character ICD. 9 was a numeric and ICD-10 was an alphanumeric. So it's quite possible that they'll have to do an upgrade of -- and it could be all, but it's certainly some of their packages in order to take the new codes.

It's very common for not just hospitals, but most IT shops in the United States to not be current on their version upgrades. Some organizations, for instance, because they want to customize so much what they're doing, literally get to a point and just stop doing version upgrades and they add additional functionality as they need it themselves.

If -- let's say that a hospital is two or three versions behind, they're probably going to have to do three version upgrades simultaneously on that package in order to get it in compliance and then do the same thing with all the packages that they have in the hospital environment. So the amount of cost is going to -- and we do, as you know, that's our core business in hospitals, is doing package implementations and version upgrades.

So, in some of the hospitals there's going to be a considerable amount of work just getting them on to the latest version so that they can use the code. In other hospitals, if they're current with the version, they may have to do just one version upgrade, which may not be that significant. So the amount of spend by hospital is going to vary considerably, based upon what their philosophy has been in the past based upon version upgrades.

The other problems that the hospitals are going to have to deal with, one is certainly in coding and teaching physicians. There's about 14,000 codes under ICD-9 and there's 69,000 under ICD-10. So there's going to be a lot of coding to go back into the systems and do that.

Another significant problem for them is going to be pricing. You used to have a code and it was $1,000 and now you have eight codes. Now how do those eight codes break down? And do they always happen simultaneously or can one of the sub-codes happen multiple times?

It's quite possible, when a hospital first runs through what their billings are going to be that they discover that they're 3% off. Maybe they're 3% higher than they were last year, which the payers are going to have a problem with, or 3% lower than they were last year, which the hospital is going to have a problem with.

So they're definitely big projects. We really -- we have seen some of the payers start their work. We really haven't seen any of the hospitals start to do their work yet. So it's probably going to be six months to a year before we can actually come out and say we think the average for us is going to be this on a particular project.

They're clearly multi-million-dollar projects. They're going to last at least a year or more, depending on the version upgrades. I'm sorry I can't give you a number, but --

No, that's all right. So -- just so I understand on the other side, is -- are there -- if they're out of compliance, are there penalties? What is the, I guess, the driver to force them into making the transition?

Well, the worst driver is, if CMS stays with the date, they can't bill anybody, because they don't have the right codes.

Okay, so the January 2015 is sort of the --

No, the ICD-10 conversion date is October 1st of 2013.

Okay, 10-1.

There are people out there that think that CMS will push the data again, but the reality is that the World Health Organization, the WHO, came out with ICD-10 in 1993. So it's almost 20 years ago. And the first date, in 2008, that CMS set was the date in 2010. Then they postponed it to 2011 and now they're postponing it to 2013. And the problem is, they're running out of digits. They're going to run out of codes and not be able to introduce any new diagnostic codes. Now quarterly they introduce new diagnostic codes. So, it's not like the CMS has a lot of choice in this, either.

Okay. Do they have the -- do some of these hospitals have the internal people to implement this? Or they're going to have to -- most will rely on outside resources?

I think most are going to have to come from the outside. They clearly have people inside the hospital who know the codes and will learn the new codes, et cetera, but when you're doing a version upgrade for 1 of 50 packages, you have to re-integrate that package into the other 49 packages and not many hospitals have a lot of people who are really good at doing the integration in the packages that they may not use. And that's really where our people come in. They're very good at doing that kind of integration.

Okay. So, likely I think you made a case that even when EMR kind of starts to tail off there's going to be between continued updates on that and some of these other requirements are going to likely extend the hospital spending on your kind of services, okay?

Yes. The estimate in the United States, the government estimate, is it will cost $100 billion to have everyone in the United States have an EMR. The estimate for ICD-10, the only one that's out there, is it's $12 billion to $30 billion. There's no estimate out there for the accountable care organizations that are required under health reform that start in January 2014, but most people who have written about them think it'll cost more than electronic medical records. It's over $100 billion.

Okay.

So there's a lot of things for them to spend on.

Okay. Unrelated to this, in your release you said there were several large new business wins in our healthcare practice in the quarter. But when you outlined on the RFPs you had just one win. Maybe you can help clarify that.

Certainly. And part of the problem is, when we do the calls and even the releases, we often talk about from the last release to the current release. So there's only 60 days, really. In that 60 days there's only one win. But you probably recall that on the first -- on the call that we had in February, we announced that we had won four new projects. So actually in the quarter, we won five projects, the four projects that we announced in February and the one that I just announced.

Okay. And a couple of those you're calling out as large?

Yes.

Okay. Just -- I can probably back into this, but I'm sure you have it at the tip of your tongue, so on the guidance on the year, what's the implied operating margin? Is it around 5%?

It's 4.9%.

4.9%. So you're not really looking for much progress, even though there's probably going to be some mix improvement over the year?

Right. At the moment in our guidance we are still using 66% Staffing and 34% Solutions and we have, we think, a reasonable number of EMR projects starting up as the year goes on. It's really going to depend as -- and we're comfortable with the number that we have, but do we get more RFPs than we're expecting or that we have in our guidance and are we going to start up those projects? It's really dependent on that.

Okay. All right. Appreciate it. I'll get back in line. Thanks.

Okay. Thanks, Rick.

The next question comes from the line of Matt McCormack with BGB Securities. Please go ahead.

Yes, hi, good morning.

Hi, Matt.

I wonder if you could just clarify. Your Solutions -- and please verify that my numbers are right -- but your Solutions grew 34% year-over-year but yet your healthcare grew 30%. So did you break out what EMR grew or what's going on in the healthcare segment that it's not growing faster than your overall Solutions?

Yes. That's a good question. We have three components, really, to our healthcare business. There's the provider market, which is actually about 70% of the total, the payer market and life sciences. And the other two are fairly evenly split.

The provider market has the EMR business and, as we mentioned, it was growing at 61%. Particularly life sciences has some Staffing in it, so of the 28% total revenue that we have from healthcare, probably 2% to 3% is actually Staffing. And that's the part that's not growing. Actually, it's slightly negative and that's what brings the total down.

Okay. And then in terms of your -- the upside that you saw on the Staffing business, could you kind of -- could you tell us what was going on at your client or clients that saw that unexpected demand?

Well, I think -- we think a couple of things going on. One, for a long time, many of our clients had an 80/20 rule. They wanted, on any project, because you have to staff up and down, 80% their people and 20% outside contractors from companies like CTG. When they went through the Great Recession, they realized that it was incredibly painful for them and that 80/20 ratio was actually probably set 20 years ago.

And many of our clients have told us that going forward they have a core group of IT people. Any additional people that they need, they're going to get outside. So they're going to go from 80/20 to maybe 70/30. And I think that's driving part of the demand.

And our customers' businesses, I think, are picking up and, therefore, they need more people. It's not a secret. We don't give out any information, obviously, about IBM, our largest customer, but we've told people before and it's of public record that about 75% of our IBM business comes from IBM's Systems and Technology Group, STG, and if you look at IBM's release, that business grew by 19% in the first quarter. So, obviously, their business was good.

Okay. And so -- I mean, so there's a structural change, if you will, in terms of the percentage going from 80/20 to 70/30?

Yes. And I think you'll find, in general, outside of IT staffing, just general staffing articles saying that more and more people are more probably going to use more staffing than they did in the past to avoid the pain that they went through during the Great Recession.

Okay. And in terms of the net adds of 200 in the quarter, can you just kind of talk about the current labor market and the type of wage increases you're having to provide, if any, and what's baked into your guidance?

Okay. Most of the people in the first quarter came as a result of the increase in the Staffing business, though the headcount, obviously, for healthcare was also up. Our healthcare people generate 2 to 3 times as much revenue as a Staffing person. It's just the difference in the bill rates is that great.

In terms of wage inflation, I'm going to do that separately by our businesses, because it is very different. Healthcare, starting in probably July of 2010, because of the fact that resources are getting scarce, we started to see some wage and bill rate inflation, not to the extent that we did in Y2K, but it was still maybe 5% during the last six months of last year. The shortage of people is getting worse, not better, so we expect that may accelerate as 2011 progresses.

In Europe, most of our people are actually in Belgium and they have a statutory wage increase that's actually by law. For all IT people, they received a 2.9% increase in wages at the beginning of 2011 and we passed that along in terms of bill rate increases, as well.

So for about 46% of our total business, the healthcare business plus the business -- most of the business in Europe, we're seeing wage and bill rate increases. In general, for the rest of the business, most of which is Staffing, we're not seeing any significant increases. There are certain of the newer skills where there are shortages of that app in certain markets or (inaudible), the kind of languages where are seeing wage increases, because of the shortages, but there's no doubt in our mind that the market's getting tighter and tighter.

It's getting harder to find people, even on the general staffing side of the business and we have seen, in many cases, much more turnover, not only of our people than we did certainly a year ago, but also even of our clients' people.

So it wouldn't surprise us, when we get into the second half of 2011 that we start to see some increases, wage and bill rate increases, in our Staffing business, as well. But to date, we really haven't seen any -- a significant amount outside of that, that occurred in Europe.

Okay. And then you referred to one EMR deal that you lost. Could you just kind of give us just a little bit of color around why you thought you lost that deal?

Yes. Actually, we've lost 3 deals in four years, so out of -- our win rate's been actually about 88%. We bid on 25 RFPs over the last three years and a quarter and we lost three of those and we've won 22 of them.

In that particular case, the client, we think, just felt more comfortable with somebody's else's project director. The project director's a key person on an engagement and for whatever reason, they seemed to click better with one of our competitors than ours and they won the engagement. It doesn't happen to us very often, but it's going to happen.

Okay, great. Thank you.

Thank you.

All right. The next question comes from the line of Bill Sutherland with Boenning & Scattergood. Please go ahead.

Thanks very much.

Good morning, Bill.

Good morning, Jim and Brendan.

Good morning, Bill.

So on the ICD offering, just to wrap up on what Rick was going over with you, can you characterize how it might be different, from a resource perspective, from kind of how you're approaching AMR?

Sure. Some of the resources are absolutely common. What you need -- we think you're going to need the most is people who are good at doing integration between packages, because we envision many of the hospitals having to do multiple package upgrades at the same time.

Now normally, when you go in and do an upgrade, you're only doing one package, right, and the other ones are stable. In this case, you may have to do multiple ones. So clearly, people with strong package version upgrade and integration skills are going to be required for the ICD work.

You're going to need people that are more financially oriented, perhaps. Right now the EMR people, for instance, are clinical people, generally. So you'll need people that are going to be able to figure out what the impact is on billing, et cetera, plus working more with some of the systems that actually bill, so the revenue cycle kind of packages.

And you're definitely going to need more people in coding. Right now in the EMR work we have very few coding people. We do have coding people in the US in our healthcare practice, but in order to do an ICD-10 conversion, you're going to need more of those people.

So, yes, that's exactly where I was headed with the question, Jim, is it sounds like it won't be going exactly into the same pool of people that you're going to still be drawing on for EMR, correct?

No, that's correct. But I suspect we're going to see shortages there, too. I mean, I look at the -- for instance, the coding people, it's kind of regular that a normal basis, you'd go into a hospital and they'd be short on people who could do the coding to begin with.

The last time there was a change like this, I mean, the last time ICD or WHO came out with ICD-9 was 1977. So I don't think there's a surplus in the labor pool to do this kind of work. And because there's 69,000 codes, I mean, it's going to take a while to train people on how to do this.

And then just to wrap up on ICD, so initially it's going to be with payers, though, is your thinking?

Yes.

Okay.

Payers have a more complex issue, because often each one of the medical plans that they have -- for instance, CTG has a medical plan and what we pay for is totally different than most other companies. So you actually have to go in to each specific plan and change the codes and say, okay, we're going to pay for this code now, but we won't pay for that code.

And I don't want to tie up the call too much on things that are still in formation, but just give us a quick sense of what the ACO offering might be from your -- from CTG's perspective?

Well, it starts off, really, with high-end consulting. Because if -- even if you're a large hospital in a community, you don't have everything that's needed to run an ACO. Sometimes there'll be a physicians' practice associated with it. Sometimes there isn't. So you're going to have to bring a physicians' practice in. You've got to bring specialists in. You've got to bring certain centers like dialysis centers and things like that into the ACO.

And so strategically you've got to look at the market and decide competitively which groups should I align with in order to have the strongest ACO in a particular community. Once you get beyond that, then you have to figure out how you're going to run the ACO.

And an ACO -- well, first, under the current legislation, at least, a payer cannot be an ACO. It's got to be a provider. If you think about it, an ACO is a combination of a payer and a provider. I mean, the government is going to give you a capitated payment. You're going to have to have actuaries to figure out what the incurred but not reported claims are. So you get a payment to handle a patient that has end-stage renal disease, a lump sum payment of $100,000, let's say, and you may have to handle that patient over the next seven years. So you're going to need totally different systems than exist in a hospital environment today.

And then you're going to need, somehow, to integrate your systems with the other people that you've combined with, the physicians' practice and the clinics and the specialists, et cetera, so that you have this nice, smooth integration between everyone. It's never been done before, but it's definitely complex.

Well, there's template organizations out there, right, that are kind of operating like an ACO or not?

Yes. There are managed care organizations and that's probably what you'd start with, their systems.

So you hope to put together a team that can -- with the capabilities kind of like across the spectrum here or are you going to focus?

Yes, actually, we've already finished the methodology. We've already hired a very competent leader for the team, someone who's been -- both run a hospital and been an Executive Vice President of an insurance company, a health insurance company. And she's put together a team and we're actually out talking to customers about what we can do for them.

Okay. And on headcount, do you expect further increases this quarter?

We do, but, quite frankly, it's not going to be as dramatic. If you look at the midpoint of our guidance, and you can back into this, we added 200 people in the first quarter. We're probably going to need, to hit the midpoint of our guidance, maybe another 200 people during the year. So we're probably going to add 50 to 100 people a quarter going forward.

Okay. Just for my sheet, if I plug in for the first quarter on EMR five wins, what's the right number for Q4? Because I think I'm getting a little confused between report dates and quarters.

The right for Q4?

Of last year.

Of last year.

Of wins.

In --

And if that's too -- we can circle back on that rather than put you on the spot. That's --

No, that's okay. In the fourth quarter of last year, we won four, as well.

Okay.

I'm sorry. No, in the fourth quarter of last year, we won one.

One? Okay. That makes the math work, I think. Okay.

And I guess the last thing, just stepping back and thinking about the deadlines and so forth and the work ahead of them, do you -- I know that you all were thinking it could get pretty frenetic here this year. Are you still thinking that as far as the whole release of -- or the startup of projects and so forth?

We, at the moment, quite frankly, were -- I think that we've put forward a conservative but definitely doable estimate of the number of EMR projects we're going to start up. In our original thinking -- and usually when you do a forecast you assume every -- your customers are thinking the same way you do, so if I was running a hospital, I would have started my project two years ago, because I'd want all the federal money, right?

Right.

Most hospitals were more concerned and still are more concerned about the penalty than they are about getting the high-tech money back. So, they waited.

Our logic was that if the compliance date for ICD-10 is October of 2013 and you're a 1,000 bed hospital, you need to have your EMR done before you can finish your ICD, so they'd have to start two years before. So certainly they'd have to start by June of this year. And, therefore, we thought a lot of hospitals would start between January and June.

Now, you've got 5,300 independent hospitals making different decisions out there. And I've actually talked to people. A lot of people in healthcare believe that CMS will blink and push the date back again.

Right.

But they've been trying to set this date for five years and what are they going to do when they can't say we've got a new code here. We've got a new disease, but we don't have a code for. I've actually talked to people who think that they'll never convert over from ICD-9 but have no idea how they'll deal with the coding system.

If you didn't have to deal with ICD-10 and you were mainly concerned with the penalties, then you really could start your project up to the beginning of 2013 and be done just in time before the penalties kicked in. So I think you've got different hospitals, just a lot of different hospitals, thinking about this differently and making different decisions.

So will there be a -- will more and more hospitals be convinced that ICD-10 is real and they're not going to -- it is real, but is it going to stay at October of 2013 is hard for us to evaluate.

Right. Well, it's just -- what you're saying, I think, it sounds like to me, is that over the next two years, it will, just logically, get that much more active. I mean, you can't not do the EMR.

Right.

You've made -- the ICD may be something that, you're right, is a little more of a push. Anyway, thanks for all of the comments.

Okay. Thanks, Bill.

All right. The next question comes from the line of Gary Brager with NelsonHall. Please go ahead.

Good morning.

Hi. Good morning. Thanks very much and congratulations on a very good first quarter.

Thank you.

I think most of the questions I had were answered. I just have one additional one on the Staffing and that's really, I was just curious, I mean, besides IBM, what size companies in terms of number of employees are you seeing most of your demand for staffing services come? Would it be considered maybe large market companies of more than 10,000 employees or more mid-market companies?

No, we -- our -- that's a good question. Our business is clearly to large companies. A number of years ago, probably 10 years ago, we decided that marketing to small companies and only providing one or two staff required a tremendous amount of SG&A expense and we could make more money if we focused in on large companies.

Now they're not all, obviously, as large as IBM, but they're definitely larger companies. So, at the second largest Staffing, for instance, customer that we have, we probably have 150 to 200 people of ours and it's a very, very large company.

Okay.

So most of our business is managed Staffing to larger companies.

Okay, great. Thanks. And larger companies you're defining as greater than 15,000 employees?

Probably most of them are in the Fortune 250.

Okay. All right, thank you.

All right. (Operator Instructions). And we do have a follow-up question from the line of Rick --

D'Auteuil.

D'Auteuil, yes.

D'Auteuil with Columbia Management. Please go ahead.

Thank you. So one thing we didn't talk about in any detail, can you bring us up to date on your successes in the software-as-a-service offerings that you have?

We did, as you know, at the end of the first quarter, sell our first fraud, waste and abuse. We have a couple of medical model engagements that are continuing on. And we've sold one payer on the underwriting, actuarial tool. We have not had any new wins since we had the last call in the last 60 days, but we've got a lot of people that are interested in the products and we just -- we now kind of view that more as part of our normal business, I guess.

Would -- do you think you're resource constrained on the sales side there? If there's a pretty good pipeline, or is it just inability to sort of close the deals because there's no deadline hanging over their head?

There's no deadline and most of this has never been done before. The medical management model has never been done before. So physicians are beginning to use it now.

We need on that one for the university that we worked with to begin to write white papers on this as a better way to treat patients. That would be most helpful, because from the white papers we think we'd get pull marketing where people would want to use it because it's a better way to treat the patients.

The other two, while there's fraud, waste and abuse applications out there, they all look at ICD codes and to go in and tell a payer, for instance, we can run your data for six months and we'll tell you the number of items we'd pick up, even after you might have run it through two of the ICD code fraud, waste and abuse applications, it's just -- we're selling something that no one else is going in and selling them. And I think that's causing us to have a longer sales cycle.

Okay. But you said the pipeline in all three is --

It's still good, yes.

It's still good. Okay. And on the resources for the healthcare space, do you have any training classes planned in the next 90 days?

We don't. The only reason for that -- the resources are definitely getting scarce. There's no doubt about it. If we didn't have the six projects coming to an end, I think that we probably would be looking at training, but we're taking the employees that were on those contracts and we're shifting them to the projects that are staring up and that's why we don't need training in the next quarter.

Okay. All right, thank you.

There are no additional questions. Please go ahead.

Thank you. CTG is firmly established in health care, one of the fastest-growing major US industries. Our electronic medical record practice is among the largest in the US and growing at a brisk pace. We've also developed and are marketing a robust suite of new healthcare solutions offerings for which we have high expectations.

I think you can see why we're very excited about the future for CTG. We believe the strength of our business, the growing opportunities in the healthcare market, and our strategy and ability to execute it well, provide CTG with strong growth prospects for the foreseeable future. I would like to thank you for your continued support and for joining us this morning. Have a great day.

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