Computer Task Group Inc (CTG) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CTG Second Quarter 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded.

And I would now like to turn the conference over to our host, Mr. Jim Culligan, Investor Relations for CTG. Please go ahead.

Thank you, [Kay] and good morning, everyone. We certainly appreciate your time and your 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 for the second 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 the Company's 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 second quarter earnings conference call. As you saw in our earnings release, in the second quarter 2011, we are at the mid-point of our guidance for both earnings and revenue. For the full year, at the mid-point of our revised guidance, we anticipate a revenue increase over 2010 of 19% and an increase in EPS of 35%.

Our revenue and earnings continue to grow as 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 third 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 second quarter of 2011, CTG's revenue was $98.3 million, an increase of $17.2 million or 21% compared with the second quarter of 2010. On a sequential basis, compared with the trailing first quarter of 2011, revenue increased 2.5% and was 4% higher per billing day.

Solutions revenue in the second quarter of 2011 was $36 million, an increase of $9.7 million or 37% compared with last year's second quarter. As a percentage of total revenue, solutions revenue was 37% compared with 32% a year ago, driven mainly by an increase in revenue from more profitable EMR work.

Continued strong demand in the quarter increased staffing revenue by $7.5 million or 13.7% to $62.3 million.

Second quarter revenue from IBM, our largest customer, was $29.5 million compared with $25.6 million in the same period last year. As a percent of total revenue, IBM decreased to 30% in the 2011 second quarter compared with 31.5% of total revenue in the second quarter of last year.

During the 2011 second quarter, the Company's current National Technical Services contract with IBM was extended for three months from June 30, 2011 to September 28, 2011. As part of this NTS agreement, the Company provides its services as a predominant supplier to IBM's Integrated Technology Services unit and a sole provider to the Systems and Technology Group business unit.

We expect the NTS agreement to be renewed in September 2011 and also that the Company will continue to drive a significant portion of its revenue from IBM throughout the reminder of 2011 and in future years.

Revenue from our European operations was $17.3 million, a 20.3% increase from the $14.4 million recorded in last year's second quarter. The effect of foreign currency fluctuations during the second quarter of 2011 increased consolidated revenue by approximately $1.9 million or 2%.

The recovery in Europe continues to lag that of the US, as indicated by the lower growth rate of our European business, which was 6.6% on a local currency basis as compared with the second quarter of 2010.

Direct costs, as a percentage of revenue, were 78.9% in the second quarter compared with 78.1% in the second quarter of 2010 and 79.4% in the trailing first quarter of 2011. The increase in direct costs, as a percentage of revenue in the 2011 second quarter, is mainly due to an increase in employee benefit cost, primarily unemployment insurance.

SG&A expenses, as a percent of revenue, decreased to 16.3% from 17.6% in the second quarter of 2010. This improvement reflects the operating leverage from higher revenue and continued discipline in controlling costs.

Second quarter operating income expanded at a greater rate than revenue and was $4.7 million, up $1.2 million or 34% year-over-year. Compared with the trailing first quarter of 2011, second quarter operating income increased $78,000 or 1.7%.

Operating margin in the second quarter increased to 4.8% of revenue, a 50 basis point improvement from last year's 4.3% and unchanged from the first quarter of 2011. Compared with last year's second quarter, our operating margin benefited from an increase in the profitability of the solutions projects due to a higher proportion of EMR work, cost controls, and the additional operating leverage.

Net income was $2.8 million in the quarter, an increase of 49% from $1.9 million in the second quarter of 2010 and unchanged from the first quarter of 2011. On a per diluted share basis, net income was $0.17 for the quarter, a 42% increase from the second quarter 2010 and unchanged as compared with the 2011 first quarter. Both the 2011 and 2010 second quarters' results include equity compensation expense of approximately $0.02 per diluted share, net of tax.

The tax rate for the 2011 second quarter was 38.9% compared with 44.3% in the 2010 second quarter, when a valuation allowance related to severance cost in our European operations caused a higher than normal raise. We expect the tax rate for the full-year 2011 to be between 37% and 39%.

Regarding our headcount, we added approximately 100 employees in the second quarter. Of the 3,700 employees at the end of the second quarter of 2011, 90% were billable resources.

CTG's financial position continues to be strong. At the end of the second quarter of 2011, we had no long-term debt and $13 million of cash on the balance sheet. Both the second quarter of 2011 and 2010 ended between a US payroll date.

Our days sales outstanding was 62 days at the end of the second quarter of 2011, an increase from 57 days at the end of the second quarter of 2010 and equal to the 62 days at the end of the first quarter of 2011. The increase in the accounts receivable in the second quarter 2011 compared to the second quarter of 2010 was related primarily to the change in the mix of business.

Our cash provided from operations in the second quarter of 2011 was approximately $2.8 million as compared with cash provided from operations of approximately $6.7 million in the second quarter of 2010. The decrease in the cash provided from operations in the comparative quarters was primarily attributable to the timing of payments for life insurance premiums, income taxes, and employee compensation at the end of the comparative periods.

We had $626,000 in capital expenditures and recorded depreciation expense of $543,000 in the quarter. We repurchased approximately 44,000 shares of CTG common stock during the second quarter of 2011. And during this most recent self-imposed blackout period, prior to releasing our earnings, we repurchased approximately 16,000 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 the second half of 2011.

Jim?

Thanks, Brendan. In aggregate, our solutions business increased by 37% in the second quarter 2011. Our percentage of solutions business, which is more profitable than our staffing business, was at its highest level in more than a decade.

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 second quarter of last year.

At our conference call, at the end of April, we mentioned that we bid on four RFPs for electronic medical record projects, but that the hospitals had not decided what IT services firms would be awarded those projects. Since that call, we were notified that we had won two of those projects and lost two of those projects.

When we started the second quarter of 2011, we had 17 active EMR projects. During the second quarter, in addition to the two projects that started that I just mentioned, we started a project that we had announced that we had won in the first quarter of the year and three projects came to an end. That means at the end of the second quarter 2011, (inaudible) had 17 active EMR projects.

As the sizes of the new projects that we have been winning are significantly larger than the sizes of the engagements ending, we remain very optimistic about our EMR business. Add to that the RFP that we received in the second quarter, which the client has not yet picked an IT services firm, and the EMR engagements our sales force are pursuing, you could see why we have every expectation that our EMR business will continue to grow.

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

Currently, we see our new offerings for ICD-10 and accountable care organizations, known in the industry as ACOs, as our next major revenue growth opportunities.

Our ICD-10 offerings supports conversions in the United States from ICD-9, the current US standard for diagnostic and billing codes, to ICD-10, the international standard, which the federal government is requiring providers and payers to adopt by October 1, 2013. We currently have one ICD project for a payer underway.

Our ACO offerings 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.

Demand for our EMR offering remains very strong now and we expect that to continue for quite some time. Going forward, however, we believe that the mix of the offerings we are selling will begin to change.

Hospitals need to start their ICD-10 conversion projects or they'll not be ready to go live with the new codes on the October 1, 2013 conversion date. We believe, in the later part of 2011, we will see hospitals needing support with their ICD-10 assessment.

In 2012 and 2013, a larger part of our revenues will be derived from ICD-10 project, as hospitals begin implementing the changes they need in their environment to accommodate the ICD-10 codes.

Another trend we see emerging has to do with the smaller hospitals. As you know, we've been focused on the 500-bed to 2,000-bed hospital market and have not been actively marketing the 100-bed and less hospitals, which constitute approximately half of the hospitals in the US. Unfortunately, most of those hospitals have been slow to implement their EMR projects due to their limited capital.

In general, these smaller hospitals often lack the financial resources to implement EMRs or to fund the ICD-10 conversion and do not have adequate capital structures to form their own accountable care organization.

Recently, some of our clients have begun acquiring smaller hospitals and while we had finished the EMR work for the larger system, we are being engaged by the larger systems to implement EMRs at their newly acquired hospitals. As such, we are beginning to access the smaller hospital market without [even going through] the normal sales cycle.

As the dates approach for the EMR penalties and the ICD-10 conversion, we expect to see more of the smaller hospitals to be acquired by the larger hospital networks. And as a consequence, we see the potential for more EMR work at multi-hospital organizations, where we've already completed their initial implementation.

Having covered healthcare, I'd like to also talk about the three other vertical markets that we focus on. Demand from the technology service provider market was very strong during the second quarter 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 most of its revenue from the technology service provider market, it increased by 14% in the second quarter of 2011 when compared with the second quarter of 2010.

Looking at the third quarter, we're forecasting revenue to be in the range of $98 million to $100 million or a 17% increase from the midpoint of our guidance over last year's third quarter. We're forecasting earnings per share in the third quarter 2011 to be in the range of $0.16 to $0.18 per diluted share or a 31% increase from the midpoint of our guidance over the third quarter of last year.

For the 2011 full-year, we expect a revenue range of $390 million to $396 million or a 19% increase at the midpoint of our guidance over 2010. Based upon our revenue forecast and the anticipated mix of business, we expect net income per diluted share in 2011 will be in the range of $0.67 to $0.73 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 second quarter in 2011. We're expecting 2011 to be another excellent 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?

(Operator Instructions) Rick D'Auteuil, Columbia Management.

Hi, Jim and Brendan.

Good morning.

Good. The status of the Texas assignment, has that ever reached the second -- the next stage?

No, it hasn't. We did complete the study when we helped them ascertain how many HIEs they need, where they should be, et cetera. And that was completed really in the fall of last year. It then went to the legislature and they have not yet dispersed the rest of the money they get from the federal government to the HIEs to start their projects, but the HIEs are definitely getting ready for it. We've been talking to them about what they needed to do next.

So, is that a -- you think 2012 ramp or -- ?

I think that -- well, it's hard to say. It could happen in the fourth quarter or more likely it's probably 2012.

Okay. Is there any other states that you are working with at this point?

Not at the statewide level, no. We have been engaged by HIEs in other states and are doing proposals for them. But Texas is really the main state where we actually kind of did the assessment for the entire state.

Okay. Going back, so the IDC-10 (sic - see press release), as they're training -- I mean, on the EMR projects, you need to either find people with those skill sets or you need to train people to staff those projects. Is the same true of the IDC-10 (sic - see press release) or is that -- can you draw from a broader technical base that's out there?

Yes, for certain skill sets, you can draw from a broader base, but for a lot of it, really the base is smaller. There were a lot of EMR projects. For instance, Kaiser Permanente had the largest project out on the West Coast for Epic. So there were a lot of people trained that had done some EMR work.

When you look at the ICD-10, to do the assessment, you need some high-level people, some of them have to be familiar with the ICD-10 code. So that's not a particular problem doing the assessment. Once you get into the actual

remediation, a lot we think that the work will be in doing version upgrades, as hospitals aren't always on their latest version and only be a migration path most likely from the latest version to the ICD-10 compliant version.

We've done implementations for years. There are a lot of people in the industry that know the implementation part, that should be -- that there should be a good pool of people available to do their part of it. When you look at the actual

ICD-10 coding part of it, there aren't as many people available and it's a tough skill set to train for. We actually think and we've read some on it that to train someone on the ICD-10 codes, all 69,000, it takes about nine months.

We don't think that people have to be trained in all of them. What we most likely do is train people on codes for one specific department. The radiation department tends to use codes that are associated with radiation, not all of the codes that are in the system. So you can end up with a mix of people and I think the labor market for healthcare, just in general, has played now and it's probably getting it tighter as they start to do the ICD-10 conversion.

So is your competition in that niche similar to the EMR niche, [these seem the] same folks?

Yes, definitely it's going to be the same six players we're seeing. I suspect some other people who try and enter the healthcare market, who aren't there now, using the ICD conversion as their point of entry.

Where you -- are you aware of who won those other two EMR assignments? Was it one of those five competitors or -- ?

No, it wasn’t. We have noticed the pattern and I don't know if there's anything we can do about it. So -- the two that we lost were both university systems that are controlled by the state and the state procurement people send out the RFPs to solutions companies and we're suspecting it was probably all seven of us. They also sent them out to staffing companies. And when they get the bids back, the staffing companies' hourly rates were lower than the solutions companies. So they both pick staffing companies to do their implementation.

Now, we [know] that it will cost them more money in the end, because they don't have a methodology in order to do the implementation or what to do when there is a problem with the software, what people have done in the past. But if the state procurement people are just looking at rates, the small, local, and sometimes even national staffing companies will always send in rates lower than ours.

Okay, but they don't even have the team leaders to lead the projects, do they?

Sometimes, no. They don't.

Okay.

It's not something that I would recommend somebody do. But clearly, if you go back and look at the other ones we have lost in the past, I think that's the fourth time that that's happened to us. But they picked -- the procurement people have just [put] their rates and picked the staffing companies.

Okay. How about -- we haven't talked about large physician practices. Are there any of those that are in the pipeline?

No. Actually, right now, we're concentrating more on large hospitals, because our revenue from those will be larger than if we do a large physician's practice. So we have done large physician's practices in the past, but given their resources are so scarce and that CIOs are still demanding resources with experience, we think we're better off to put our people to the larger hospital projects.

Okay. And then, how do you feel about your staffing levels, given the pipeline? And specific to healthcare, given the pipeline of potential RFPs, I mean, maybe, you can even update us on that, what is pipeline of bids that you're looking at?

Well, we still have a pipeline, which is very healthy. We so far have been able to staff every physician. There's not one physician yet that I'm aware of. I'm actually very proud of our recruiting people. They've done a tremendous job being able to recruit. We do have some advantages. When we recruit people, we point to the fact that our class ratings are better than anyone else's. Therefore, if you come to us, you can -- eventually, even if you're leaving CTG, which we hope they don't, point to the fact that you know the best methodologies or at least you know parts of it. And the fact that there are people working for staffing companies, where when they end an engagement, they won't keep people on the bench, where we and our solutions business will.

So, we have been able to attract people still from other companies to come with us. So, right now, at least in the near term, we think that we've got all the positions that we need staffed, but there's quite a bit of work even in the projects that we've just won, that hasn't been staffed up yet. So we got ways to go yet.

And then, you mentioned class ratings, what -- can you update us on those, because I think they change from time-to-time?

All right, we still continue to be at the top of the class ratings. And often, it's significantly more and sometimes double the rating that one of our competitors will be rated at.

And that is one of the key factors in the RFP process or the decision process?

Yes, it is. First, we point to the class ratings and most hospitals believe them, because they actually submit their data to them. And then, secondly, we point to the price, because we are smaller and our corporate office won significantly less than a large aggregator, who we compete -- one of the large aggregators who we compete with. We're able to bid less than they do, but still point to the fact that our quality [is number one].

Okay. And just on the staffing side of the business, what are you seeing with bill rate, pay rate on that and margins there?

Well, let me break that up, because it's different than the staffing side of the business in Europe, because of the system that they have in some countries, where everyone gets at least an inflationary raise each year, we did see some bill rate increases there at the beginning of this year, probably just slightly less than 3%.

And then in the United States, things are getting very tight for technical workers. And we think that -- I don't think that it's going to be huge, but we think that as we go along, we'll probably see some modest inflation in both bill rates and wages as we go forward.

And I'm not asking to get to any specifics, but does your IBM negotiations contemplate that too?

It's definitely a factor in the IBM negotiations. I mean, if we can't pay a competitive rate, then we can't get people when IBM needs the people. So, they are probably in a better position than anybody in the world to know what's happening [to] the prices of technical workers in the United States. So, they are well aware of the fact that rates are going up.

So, back to overall staffing, do you expect, given the tightness of the market, maybe some expansion in margin there or do you --?

I really don't. I think in aggregate, we are at about a 3% margin now and I think that's probably where we're going to be long term. I think, what's more probable is that the bill rates will go up, but most of their money -- we'll maintain our 3% margin. Most of the money is going to have to go in increased wages on the staffing side of the business.

The solutions side of the business, particularly the healthcare side of the business, based upon what's happening in the shortages, we think are going to happen over the next couple years, I think, that's where we might see some margin expansion.

Okay. Thank you.

Thank you.

Vincent Colicchio, Noble Financial.

Hello, Jim. Couple questions for you. You said your EMR project size is growing. I assume that relate to the new projects you've won and also what you're seeing in the pipeline. Question is, why is that happening, is it you are targeting or is it -- is competitive positioning a factor? Any detail is helpful.

I think, it's more competitive. We're still in our 500 to 2,000 hospital range. But the projects that were falling off tended to be between 500 and 1,000 and a lot of the new projects we're taking on and even the ones in the pipeline are 1,500 to 2,000 that hospital changed. So, it almost doubles. The size of hospital is twice as much. It almost doubles your work effort. So we're definitely seeing in a favorable mix increase to a larger hospital.

Shifting gears towards the ICD-10 side, there could be more training involved in that side of things. Does that mean that margins will be lower in ICD-10 versus EMR?

No, I don't think so. I think the margins will be as high in ICD-10 and if there are other shortages that we anticipate, they could be higher than they are [today, so --]

To what extent do you think your existing base of EMR clients will become ICD-10 clients?

Well, quite frankly, we are hoping 100% of them will be. I mean, they all need to do the ICD-10 conversion. As we're finishing the EMR projects, we're actually approaching them and asking them if we can give them a quote on an assessment. So we expect to be able to convert a lot of those clients over and get their ICD-10 work.

The new project you announced, was that an EMR client?

I'm sorry, the new project --

The new ICD-10 project that you?

No, it isn't. It's a payer and it's been an existing client. And actually, we proposed I think last year and they are ICD-10.

Okay. Do you -- what was the utilization rate on your billable professionals of the solutions business? Is there something you can disclose?

It's running very close to around 88% and 88% assumes the person has kind of normal vacation and holidays, et cetera. We're not experiencing much bench time at all. If a person finishes on an EMR engagement for instance, we immediately transform to another one.

And so you're able to -- as you ramp up hiring, is it easy for you to maintain? Will that rate decline as you rev up hiring for some new areas such as ICD-10?

Well, clearly, in the second quarter, we do have some ICD-10 bench time, if you want to call it or marketing time, I guess, depending on how you look at it. If you look at our SG&A expense, for instance, between the first and the second quarter, the fact that we're starting up these new ICD-10 and accountable care organization offerings is causing the SG&A to go up.

At the same time, we're hiring billable people and they are sitting on the bench or helping -- they are actually helping doing proposals and things like that, but they're not billable. So, we're getting more bench time out of them too. It probably will go up again perhaps in the third quarter. By the fourth quarter, we think the number of assessments will utilize those people and then next year, they are going to be fully utilized.

Okay. And lastly, any movement, new clients, or improvement in pipeline for your proprietary products?

No, we've got a lot of betas and people that we're talking to, but we didn't actually sign any new -- of the new products, contracts for those in the second quarter.

Thanks, I appreciate it.

Thanks, Vince.

Matt McCormack, BGB Securities.

Yeah, good morning. In terms of the trend of the larger deal in the EMR space, could you also talk about the average life of those deals and how much longer, I guess, the larger deals will take to fully implement?

Good question, but actually it takes the same amount of time. If it's an 800-bed hospital or 1,800-bed hospital, it's going to take them two years to finish the project.

Okay. So net number of active projects this quarter was the same as the first quarter. So, those other projects you've had for two years now are starting to roll off, is that fair?

That's correct, yes. And the new (inaudible) larger, but in the first quarter we have a project, we only have a couple of people on them. So we haven't really seen the revenue growth from them yet.

Okay. And then as you look out, as it relates to this year and your guidance, I mean should we expect that number to grow throughout the year or in terms of your current portfolio, are you expecting a few to start rolling-off as well?

We started six new projects in the third quarter of 2009. Three of them pretty much has rolled off in the second quarter. We may have another three roll off either in the third or fourth quarter, but we're pursuing additional RFPs. So, I'm hoping that the number of RFPs will offset any jobs that are ending. If that does happen, our revenues definitely are going to increase, because of the size of the jobs often are double with the size of the job rolling off.

Okay. And then, can you talk about the pricing environment with those deals -- with the EMR deals? And then, specifically, you mentioned that staffing companies are starting to surface. So, are other solutions providers see lowering their price to try to be more competitive versus the staffing providers? I guess, how are those dynamics playing out?

We have not seen any of the solutions companies lower their prices whatsoever. Actually, it's going the other way. Because of the shortage, people are raising their prices, because they're harder to find. The staffing companies that do this actually have been around for years. They're not brand new. They're just getting a lot of these university jobs, because it's totally based upon the bill rate of the individuals and they are lower.

And to your knowledge, have any of them been successful as they're doing this?

Not to my knowledge, no, but most of the projects that they've gotten have been in the last six to nine months. So, you don't really find out a project [went bad and tilt] towards the end.

Right, okay. So that could be an opportunity down the road. Just I'm switching gears, you mentioned the IBM contract, could you talk about this negotiation being possibly different than in the years past? It sounds like it's just a three-month extension. And I think normally -- how long do you expect, I guess, to reassign?

I don't really -- I wouldn't really describe it as any different than it has been in the past. IBM came to us in the middle of June and basically procurement has been very busy. They're growing at a rapid rate and asked -- they said that they wanted to extend the contract for three more months to give them more time to take a look at it.

They've done this in the past, but it hasn't been for a long time. I think it was a decade ago, it was the last time that they [did and asked a bit] more time to go through the contract. So, it's hard to tell until you get to the end exactly what will come out. But, we really expect that our revenues from IBM and our profit levels will end up about the same level as they are now.

Okay. And then, you did -- in the release, you talked about share repurchases. I guess, could you just -- I mean, it sounds like there's opportunity to invest in the solutions side. And so could you just kind of talk about the logic of buying back shares rather than reinvesting it into the solutions business?

Right. We are investing some -- certainly more now than we were last year, even in the first quarter in building out our new offerings. And when I say building out, the methodologies, et cetera, are already in place. The people are working on bidding on assessments, et cetera, to get projects started. That actually gets expensed, that isn't capitalized. It's not something they have been capitalized.

Right now, we don't have any significant products that we're developing. We are waiting until we have more sales of the products we've already gotten. So there's not really much of an investment to use our cash flow. Our depreciation probably runs a little less than our amortization. We're making money, obviously. So, we've got free cash flow. And we're using it to buyback our own stock. I mean, we could let it build up, I guess, on the balance sheet. Some day, I would like to buy something in the healthcare space, the healthcare solutions company, but there's not much available at the moment. So, I suspect that we'll continue to buy back our stock as long as that makes sense.

We think it's a good thing for everyone that Company usually waits until that there's maybe a little pressure on the stock price. So we -- from the Company standpoint, we get a good price, because maybe the price has dropped a little and from our shareholder perspective, they get some additional liquidity.

Okay. Thank you very much.

Thank you.

Frank Sparacino, First Analysis.

Hi, good morning, Frank.

Hi, guys. Just a couple of questions. I'd be curious if or what you've seen in terms of the impact with Stage 2 of Meaningful Use now being rightly pushed out a year, if that's had any impact in terms of what the hospitals are doing?

No, most of our hospitals are still struggling to get up to Stage 1. We didn't really had any significant engagements to work on Stage 2 yet. I think, everybody breathe a sigh of relief, because it's going to take some work to get up to Stage 2 as well.

So, when you talk about some of the projects ending, what I'm curious about is, I see most of those are just hospitals completing Stage 1 of Meaningful Use. What's the intention for Stage 2 and Stage 3? Is that for you to get re-engaged again or what do you think will happen?

We should get re-engaged. The hospitals that -- the majority of the hospitals we've been dealing with know that they have to go to their ICD-10 conversions next. So, we've had some hospitals flat out telling us that they need to take a small breather, because they've got projects that have been on hold for a period of time. But they are looking to do their ICD-10 assessment next, and then, they've got to do their ICD-10 work, and then they're going to flip back and do the Meaningful Use 2.

So, I think this probably answers my next question, but -- so when you look at your commentary about the business, sort of, shifting, the mix of the business shifting, are you assuming that the overall hospital IT budget stays the same and those dollars are now re-allocated or you don't see the overall pie in terms of budget dollars actually getting bigger to accommodate for ICD-10?

Yes, we actually think that dollars will get bigger that between ICD-10 and what they have to do for their ACOs, et cetera, but they're actually going to have to budget more money for that in total, plus they've got Meaningful Use, the second phase of Meaningful Use that they got a plan for. So, we think in general, hospitals are going to have to spend more on IT going forward than they have in the past.

Okay. And then and maybe lastly just around your comments in the small hospital market. As you're getting pulled down to that marketplace, I assume, basically the health system is dictating, let's say in this case, Epic or maybe even a Cerner, that that's the system that's going to be rolled out in terms of some of the smaller hospitals or is it the small hospitals are actually independently able to choose and go through an RFP process and select a different vendor or is it pretty much standard there?

No, it's definitely the former. The larger hospital system [putting] Epic, as an example, the smaller hospital may have hit something like MEDITECH and they're going to convert all their systems over to Epic.

And in those instances, are the large hospitals, Jim, just basically subsidizing the cost for the small hospitals?

Absolutely, yes. The small hospitals don't often have the cash even to be able to do it. Even 1,000-bed hospitals, probably, get a couple hundred million dollars of cash in their balance sheet. They usually can do the work for the smaller hospitals. We really think this is a win-win quite frankly, because if you look at the smaller hospital, they don't have the money for their EMRs. They can't afford the penalties. They don't -- the ICD-10 conversion, as they are behind in doing their version upgrades, it could cost them a fortune. They don't have the money for that and there's nothing that they can finance. All the work really is basically in services and then they can't become an ACO at least on their own.

When you look at the larger hospital chain -- if you go to a smaller -- the small hospital may be losing cash, maybe 1%, 2% of their total revenue. You don't need a standalone CFO, CIO, IT department, et cetera, because you're going to use the larger systems, generally applications. So, you probably can get the smaller hospital to at least a breakeven, just by acquiring [-- having emerging] at a larger hospital system and then you have the [referral panel].

I mean, if the estimate in the industry is $1.6 million of additional business, every time you can have one doctor switch the referrals from one hospital to another one. So, obviously, the larger systems, which is 100% of the docs referrals under their system, they're close to it. And they make their money after that. So everybody [wants this] scenario.

Okay. Good. Thank you.

Thank you.

(Operator Instructions). Steve Shaw, Sidoti & Company.

Hi, guys.

Good morning.

Hi, Steve.

What are some of the cost controls that were helping drive the SG&A down as a percentage?

From a year ago or -- it must be from a year ago.

Yes.

We actually -- one was, for instance, in our sales area. In 2009, in the first six months, when healthcare cut cost, they couldn't launch any new projects, because the tax re-exempt bond market was not there. We actually -- when everybody else in the

industry was kind of cutting their staffs down, we went out and hired the best salespeople that we can find from our competitors. So, we actually beefed-up our sales force, so that it could -- we had an adequate sales force for what we need today. And we actually -- I guess, we did it by the math (inaudible) 2009 certainly, your sales force was larger than it should be. That's probably one of the more significant areas.

Another area is in our corporate office, where corporate office was largely fixed cost, so as our revenues increased, we don't have to proportionally add to the corporate office. It's another large area where we've been [savings] and also picking up some margin.

And then, I'm sorry, I don't know if you guys said this. In terms of the business mix, do you guys have an expectation for a hard number on the percentage split that you had for the year?

Well, we think that the solutions businesses here probably grow by about 27% and the staffing business probably about 14%. So, the aggregate growth for the whole company be around 19%. And if we did that for the full-year, our staffing would be about 64% of the business and the solutions around 36% of the business. That's at the midpoint of our guidance for those numbers.

Thank you.

Okay.

There are no further questions at this time.

CTG is firmly established in healthcare, one of the fastest-growing major US industries. We have offerings for electronic medical records, ICD-10 conversions, accountable care organizations, and medical informatics, all of which are expected to be in strong demand for the next several years. We're therefore very excited about CTG's future.

We believe the strength of our business, the growth 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.

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