Computer Task Group Inc (CTG) 2012 Q1 法說會逐字稿

Ladies and gentlemen, good morning. Thank you for standing by and welcome to the CTG conference call. (Operator Instructions). As a reminder, today's conference is being recorded.

I would now like to turn the conference over to our first speaker, Director of Investor Relations for CTG Mr. Jim Culligan. Please go ahead.

Thank you, Tom, 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 first quarter of 2012, 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 projections 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 at the SEC's website at SEC.gov. Please review our forward-looking statements in conjunction with these 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 news release, we had a solid first quarter with revenue and earnings per share both at the midpoint of our guidance. Revenue in 2012 increased over 2011 by 8%, the operating margin expanded by 60 basis points, and earnings per share increased 18%.

As we expected, our higher-margin solutions business grew by 22% in the first quarter of 2012, while our lower-margin staffing business was approximately the same as it was in the first quarter of 2011.

I'm going to talk more about our results and what we see for the 2012 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, everyone.

For the first quarter of 2012, CTG's revenue was $103.4 million, an increase of $7.5 million, or 8%, compared with the first quarter of 2011. First quarter 2012 had 64 billing days, one less day than the first quarter 2011. On a per billing day basis, revenue increased by 9.5%.

Solutions revenue in the first quarter of 2012 was $41.2 million, an increase of $7.5 million, or 22%, compared with the first quarter of 2011. As a percentage of total revenue, the solutions revenue was 40%, compared with 35% a year ago.

The improvement in our business mix was mainly driven by revenue from more profitable healthcare projects.

Staffing revenue in the quarter remained flat at $62.2 million.

First-quarter revenue from IBM, our largest customer, was $28.4 million, compared with $28.7 million in the first quarter of 2011. As a percent of total revenue, it decreased to 27.4% in the 2012 first quarter, compared with 29.9% of total revenue in the 2011 first quarter.

Revenue from our European operations was $17.2 million, a 1% increase from the $17.1 million recorded in last year's first quarter.

The effect of foreign currency fluctuations during the first quarter of 2012 decreased consolidated revenue by approximately $728,000, or 0.7%. On a local currency basis, our European revenue increased by 4.9%, compared with the first quarter of 2011.

Direct costs as a percentage of revenue were 78.9% in the first quarter, compared with 79.4% in the first quarter of 2011. SG&A expenses as a percent of revenue decreased slightly to 15.7% from 15.8% in the first quarter of 2011.

First-quarter operating income grew to $5.6 million, an increase of $1 million, or 22% year over year, reflecting the favorable effect of operating leverage and our higher-margin solutions work. Compared with the trailing fourth quarter of 2011, first-quarter operating income increased $141,000, or 2.6%.

Operating margin in the first quarter increased to 5.4% of revenue, a 60 basis-point improvement from last year's 4.8% and the same as the 5.4% operating margin in fourth-quarter 2011. The year-over-year increase was primarily due to the increase in the solutions business and our sales mix and the additional operating leverage.

Net income was $3.4 million in the quarter, an increase of 19% from $2.8 million in the first quarter of 2011 and a 2% increase from the fourth quarter of 2011.

On a per diluted share basis, net income was $0.20 for the quarter, an 18% increase from the $0.17 in the 2011 first quarter and the same as the 2011 fourth quarter.

The 2012 first-quarter results include equity compensation expense of approximately $0.02 per diluted share, net of tax. The equity compensation expense in the 2011 first quarter was $0.01 per diluted share, net of tax.

The tax rate for the 2012 first quarter was 39.4%, compared with 38% in the 2011 first quarter. We expect the tax rate for the full year of 2012 to be between 38% and 40%. The increase in the rate in 2012 is primarily due to the expiration of certain federal tax credits that were realized in 2011.

Our headcount at the end of the first quarter was 3,700, the same as at the end of 2011. Of the 3,700 employees at the end of the first quarter of 2012, 90% were billable resources. Year over year, headcount increased by 100 people, or 3%, from the end of first-quarter 2011.

At the end of the first quarter, we had no debt and $19.3 million of cash on the balance sheet. At the end of the 2011 first quarter, we had no debt and $8.9 million of cash. Both the first quarter of 2012 and 2011 ended on a U.S. biweekly payroll date.

Our days sales outstanding was 59 days at the end of the first-quarter 2012, down from 62 days at both the end of first-quarter 2011 and the end of 2011, due mainly to the timing of payments from our customers at quarter-end.

This reduction in DSO also improved our cash flow from operations. Our cash used in operations in the first quarter of 2012 was approximately $2.4 million, as compared with cash used in operations of approximately $7.2 million in the first quarter of 2011.

In the quarter, we had $340,000 in capital expenditures and recorded depreciation expense of $648,000.

We repurchased approximately 59,000 shares of CTG common stock during the first quarter of 2012. During the second quarter, prior to releasing earnings, we repurchased approximately 34,000 shares of our -- under our 10b5-1 plan.

As of today, our repurchase authorization is for approximately 770,000 shares. As it remains accretive to our earnings, we intend to continue our repurchase program during 2012. Jim?

Thanks, Brendan.

As I mentioned, in aggregate our solutions business, which is significantly more profitable than our staffing business, increased by 22% in the first quarter of 2012. The solutions business was 40% of our total revenue in the first quarter.

The growth in solutions work is primarily coming from EMR projects and is continuing to drive margin expansion. Overall, our healthcare business was up 19% over the first quarter of last year, with the solutions component of our healthcare business rising 26%.

On our conference call at the end of February, we mentioned that we had received four RFPs for electronic medical record projects in the first quarter of 2012 for which the hospitals had not decided what IT services firms would be awarded those projects. In addition, we had been on three RFPs last year for which the IT services firm had not been selected.

Of those seven RFPs that were undecided in February, we won two and lost one project. That means we still have four bids outstanding for which an IT services firm has not been selected.

When we started the first quarter of 2012, we had 18 active EMR projects. During the first quarter, we started two projects and two projects came to an end. That means that at the end of the first quarter of 2012, we had 18 active EMR projects. We also have one project that we won in the first quarter of 2012 that will not start until the second quarter.

As I have mentioned before, we have a tremendous amount of opportunity for EMR business currently. While we expect significant growth in EMR work, unfortunately the limited number of resources with EMR experience challenges our ability to grow our EMR business to its full potential.

In response to this competitive market, we continue to add to our healthcare recruiting team. While this will help bring on new EMR consultants, until the market begins to accept newly-trained staff the number of experienced resources we can hire is going to be the limiting factor in growth for our EMR business.

We are currently marketing our ICD-10 conversion offering that supports conversions in the U.S. from ICD-9 to current U.S. standard for diagnostic code, the ICD-10, the international standard. CMS, the federal agency that regulates the ICD transition process, has recently proposed delaying the conversion date by one year to October 1, 2014.

As most hospitals have not started their ICD-10 projects, we think the delay is needed. We also believe that by providing more time for the conversion, we should achieve more in aggregate revenue as we'll be able to better utilize our resources.

Longer term, we believe healthcare informatics will be a major opportunity for growth in serving the healthcare industry. We have a solid head start in this opportunity, based upon our strong data analytic experience and the three solutions that we've already developed for the healthcare market that employ medical informatics to identify the ways to improve the quality and efficiency of healthcare delivery.

Having covered healthcare, I'd also like to talk a little bit about the other three vertical markets that we focus on. Demand from the technology service provider market was relatively weak in the first quarter of 2012. As to our financial services and energy markets, we depict those businesses as stable, and we would expect they'll remain so in the near future.

Turning to our staffing business, which generates most of its revenue from the technology service provider market, its revenue was flat when you compare the first quarter of 2012 to the first quarter of 2011. Since the summer of 2011, demand in our staffing business has moderated, consistent with our expectation and also due to some clients being concerned about the impact of the European financial crisis on continued U.S. economic growth. We therefore do not expect an increase in personnel in our staffing business in 2012.

Looking at the second quarter of 2012, we're forecasting total revenue to be in the range of $104 million to $106 million, or a 7% increase at the midpoint of our guidance over last year's second quarter. We're forecasting earnings per share in the second quarter of 2012 to be in the range of $0.20 to $0.22 per diluted share, or a 24% increase at the midpoint of our guidance over the second quarter of last year.

For the 2012 full year, we expect a revenue range of $420 million to $430 million, or a 7% increase at the midpoint of our guidance over 2011. Based upon our revenue forecast and the anticipated mix of business, we continue to expect net income per diluted share in 2012 to be in the range of $0.81 to $0.91, or a 21% increase from 2011 at the midpoint of our guidance.

We thought that it would be helpful to once again recap the assumptions we use to set our 2012 guidance. We're currently seeing tremendous opportunities in our healthcare solutions business. We think that our healthcare business will grow by approximately 25% in 2012.

As we mentioned before, given the opportunities in the market, we could grow faster than that. However, there are significant labor shortages in the market, and our customers are not yet willing to accept recently-trained staff. We therefore believe that resource availability will be the limiting factor in our healthcare business in 2012.

For our non-healthcare solutions business, we're projecting a revenue increase of approximately 8% in 2012.

For the reasons that I mentioned today and on our February conference call, we believe our staffing customers' concern about economic growth will limit adding additional personnel to our staffing business in 2012. For that reason, we're not forecasting a change in our staffing revenues for this year.

Our revenue forecast for the full year also takes no account the effect of foreign exchange rates in our European business. Given the fact that both the euro and the British pound dropped in relationship to the dollar, we're assuming a 5% negative impact on our European revenues in U.S. dollars when compared to 2011, due to foreign exchange fluctuations.

To sum it up, CTG had a great year in 2011 and a solid first quarter. Given our strategy and position in the marketplace, we expect another excellent year in 2012.

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). Kevin Liu, B. Riley & Co.

Great results in the quarter. Looking at your outlook, though, your Q1 numbers seem to come right in line with where you thought. It sounds like the assumptions you've made in terms of the overall environment and the impact on your business hasn't changed much. So maybe if you could walk us through a little bit about why your guidance was taken down slightly on the high and low ends for the full year?

Sure. It really was totally the staffing business.

When we finished February, we had clients concerned about the European situation and we had forecasted a slight increase, about 2% of an increase in our staffing business, and as we got into the month of April, particularly, and if you read The Wall Street Journal, I think more of our clients are now concerned about it. So basically, it went from saying we'd have a 2% increase in staffing to having a flat increase in staffing this year.

Got it. And in terms of some of the medical informatics knowledge that you guys have put out there, maybe you could walk us through which ones you're actually starting to see more traction on, whether -- how effectively you've moved from clients in pilot mode into actual commercial deployments?

Yes, we actually have commercially deployed all three of the applications. We currently have one client that is in the process of doing a fraud, waste, and abuse. It is lower than we thought because it's a new process for them and also for us, but it is moving along.

And we have a lot of people interested actually in the fraud, waste, and abuse. We also have at least one proposal out on the medical management model and we're waiting to hear back on that one.

And on the actuarial underwriting, we have got several insurance companies that are interested that we're basically doing betas with. We have had one insurance company use it real time so far, and we're hoping to get additional clients.

Got it. And you talked a little bit about the ICD-10 delay. I'm just kind of curious as to how much activity you're putting into marketing, given that that's probably not going to be a near-term revenue driver. And then, also, how interested some of your EMR customers are in engaging you for those, once their implementations are done.

Yes, the ICD has been kind of a roller coaster because as they thought, as the hospitals thought, that CMS wasn't going to defer the date, everybody got interested in it. Then when CMS came out and said they would defer it but didn't announce how long it was going to be of a deferral, everybody kind of just stopped because their whole planning cycle was based upon, okay, I've got to switch over on a particular date.

And even with the current date, CMS didn't come out and say, it is October 1, 2014. They just proposed it. So they haven't quite decided yet.

So, we currently are working on one assessment and we're working on one actual remediation, and we have a whole bunch of clients that are sitting there saying, what is the date going to be so we can figure out when we need to start?

Great, and then just one last housekeeping one for Brendan. Wondering what the reimbursable expense number that contributed to revenues was for the quarter?

It was $3.2 million, Kevin, $3,229,000.

Great. Thanks so much.

Rick D'Auteuil, Columbia Management.

So, a couple of questions. On the update on the EMR projects, you talked about seven active RFPs still -- or seven were open, two wins, one loss, four undecided. Were the two wins in the -- can you characterize the size of the two wins relative to (multiple speakers)

Yes, they were (multiple speakers) larger. Yes, we continue to seem to be winning larger ones.

Okay. In the pipeline of the four undecided, are they also -- do they also look (multiple speakers)

Yes, tend to be larger, on average.

ICD-10, so you said -- you just gave a little more detail, one assessment, one remediation. Did you have people fall out that had begun the process or just the pipeline never went anywhere because of the push-outs?

Well, we've had a couple of different things. One, a lot of -- you know, the AMA is lobbying never to make the conversion, right? I don't think that's going to happen because they just have to be able to continue to follow diseases.

So some hospitals are sitting back, saying, we want to see what the next deadline is. Some hospitals did assessments. I think we finished two assessments, actually, and then when they said they were going to delay the date, they said, okay. We're just going to stop and see what the date is before we figure out how long -- you know, we want to know how long we have to do this before we actually start.

And we haven't seen as many hospitals in the first quarter start their assessments as we would've expected, and we think the reason is they're just waiting to find out what the final date is first.

And as far as the talent base there, it's not the same -- necessarily the same people that you're using on EMR, right?

No, it isn't. Kind of the talent skills they need, they need people who can do version upgrades and then integrate into the rest of the packages that they have, so some of the people in our EMR group obviously can do that because just putting EMR in, it requires that you're going to integrate with the other packages. But most of the people in the EMR are specific to EMR.

And the other skill set that you need is people who understand ICD codes because at some point you're actually going to have to train the physicians, et cetera. And just in general in the marketplace, those people have always been in very short supply. There's just never been enough people that know the ICD codes.

And it's going to be particularly difficult this time because it takes nine months to train somebody so that they would know all of the ICD codes. Now we don't think we're really going to do that. People probably get trained for an area in a hospital. Most areas -- like radiation doesn't use 14,000 codes. They probably use 25 and they're not going to use 140,000 codes; they're probably going to use maybe 50 or 75 codes when the day is over.

But those are basically the two skill sets that you need primarily, people that can do integrations and package upgrades and then people that know the ICD codes.

Somebody brought up, I don't know where I saw it, but is there an issue potentially with -- is there an ICD-11 that's now out there?

Yes, well, the WHO came out with ICD-10 in 1993, so they're -- the WHO is -- announced that they're going to come out with ICD-11 on January 1, 2015.

I mean, could that muck up things there?

It could, but if you think about it, 11 is going to have everything that 10 did, plus some stuff. So it really all depends on CMS. I mean, when they say the date is and actually stick to it, that's going to be the date that people have to hit.

Will they now specify likely ICD-11 instead of 10?

I know people have speculated on that. The problem is that they're having a hard time now not being able to assign codes or having to stop following diseases because they run out of code numbers, so that would basically mean that they'd have to go -- well, they're only October of 2014, I guess. I suppose you could -- it's only a few months. I don't know.

But I -- if they're going to change the date because of 11, I suspect that it will just be three months later, right?

What are the assumptions imbedded in your operating margin for the year? Is it in the mid or upper fives (multiple speakers)

Yes, at the mid -- that's a good question. At the midpoint of our guidance, it's 5.6%, and what we're really basing it on is that we think that by -- for the entire year that our solutions revenue will be about 42% of our total.

Okay. Still no positive signs on the energy side?

No, not really. Unfortunately for one of our largest customers, their work is off. We are getting some traction on other customers, but it's still a relatively weak market for us.

Alright, I will circle back, let others. Thanks.

Richard Close, Avondale Partners.

Yes, thank you for taking the questions. With respect to the EMR implementations, how many -- and I don't know if you gave this, how many open slots do you have in terms of people, I guess, that you need to really take advantage of the growth opportunities that exist out there?

We don't generally give out that number because it literally changes every day, but if we filled all of the open reqs that we currently have, we'd grow more than 25% our healthcare business this year. So clearly, it's the supply that's limiting us at the moment.

And then, so you talked a little bit about the bids and the decisions yet to be made. I guess my question would be, in looking at the pipeline of things that are maybe coming down the road once these decisions get made, has everyone chosen a vendor or -- and begun the process or is there still some people out there that still have yet to go through this process of selecting an IT vendor, software vendor, and implementor for this?

No, there's still people who haven't selected the IT services vendor yet, that's for sure. As a matter of fact, one of the top 10 systems in the United States, one of the largest, actually, is still trying to decide between two different software packages. They're actually running a beta, and it's not scheduled to finish until the beginning of next year.

So we haven't necessarily started the downhill descent in terms of adoption at this point?

No. You know, I don't know remember who it was, but somebody actually surveyed the software vendors as to what they thought, and the smaller players tended to think that their peak year would be 2013. The larger vendors, Cerner, for instance, thought that their peak year would be 2014.

If you think about it, they actually record their revenue on the day the project starts and we record our revenue over the implementation period, which is at least two years, sometimes a little longer. So if Cerner is right and their peak year is 2014, ours will probably be 2015.

The other thing we haven't talked much about, because there's not a tremendous amount of traction, is Europe. Europe is looking very hard, most of the countries in Europe, at electronic medical records. You know, the United States government's belief is that if -- it will cost $100 billion for everyone in the U.S. to have a electronic medical record. They also came out with if everyone had an electronic medical record, they believe it would reduce health care costs by $200 billion to $300 billion a year, mainly just from eliminating duplicate tests.

Europe is in the same situation, and there it's their governments' problem because it's socialized medicine, generally, so many of the European countries are watching what's happening in the United States.

Epic, which is a private company, but clearly the biggest winner in the EMR space, has already opened an office in the Netherlands and they're beginning to market their product over in Europe. So we think that it's quite possible, and we're actually hoping Europe doesn't click in until after the peak in the United States because we would be -- we would want to take some of our U.S. resources and bring them over to Europe to help those projects once they start up. So there may actually be kind of a second peak for us, if you will, if Europe starts up their conversion of electronic medical records.

I guess final question for me is, what are you guys doing about trying to add to your bench strength with respect to EMRs? Is there any type of programs you're working with in terms of educational institutions, anything along those lines? And then, I guess the competitiveness, I would assume, is pretty significant?

Yes. The problem really is that the marketplace isn't willing to accept newly-trained people.

We actually have the capacity, the trained people, and we've run projects with 50% newly trained and 50% experienced, probably averaging 15 years' experience actually in healthcare. But the clients, particularly the CIOs, are looking at it and saying, it's my neck if I don't get this done on time. I've already missed a lot of government funding and I only want experienced people on my projects.

To get more experienced people, we actually increased our recruiting for healthcare by -- the number of people by 70%, 70%, in the last 12 months to get more people with experience into the Company, and we have all kinds of programs to help attract people and retain them, etc.

But until the marketplace changes and is willing to accept newly-trained people, the market is going to be limited. And it's not just us. I mean, every -- we know all of our competitors are having exactly the same problem.

And so, do you envision that -- growth of 70%, do you think you have to accelerate that to execute? Let's say you get a bunch of projects here. Will you have to accelerate that, do you think? Does it have the potential to cramp margins?

First, could the number of people we need increase? I hope that it does because that just means we're winning more business.

I don't see it cramping margins. The margins in the bill rates are going up because of the shortage. In our industry, like I think all industries, when there is a scarcity, the price goes up and the margins go up. So I think actually that if we have more wins and we have to add more recruiters, I think that our margins probably will still go up, not down.

Okay, great. Thank you. Congratulations.

Thank you.

I understand we're at the end of your time slot for questions today.

No, we can take more questions.

Take another one? Okay.

Sure.

Bill Sutherland, Northland Capital Market.

So, I'm just trying to understand, I guess, the components of your healthcare growth in the quarter and as you see the year. So, total growth was 19%?

Correct.

And then, you had the solutions component of healthcare in the 25% range.

26%, actually. Yes, let me (multiple speakers) -- that's an excellent question. Let me explain that.

We do have staffing in our healthcare business. It's mostly in life sciences. So the provider side of the market, which is the EMR side, for instance, we really are virtually all solutions.

What happened was the provider side, the solutions side of the business, grew at 26%. We had a life sciences customer who we'd done business with for a long period of time who decided that they would outsource to one of the large aggregators, mainly to take the business offshore, and that caused our staffing side of the business, which, like the rest of our staffing business, isn't as profitable as solutions, to decline by 18% in the first quarter. And then, our other solutions were growing at 11%.

So you kind of blend all that together, and you get a 19% increase in healthcare overall, a 22% increase in solutions.

And healthcare, do you differentiate as far as talking about percentage of total between solutions and total healthcare? In other words, healthcare solutions?

Yes, we generally don't. 70% of the business in healthcare is in the provider side of the market; 20% is now on the payer, which is mostly solutions, too; and then, about 10% is in life sciences, which is the staffing component.

So, we have a couple percent in staffing now -- it's actually dropped, and most of it is actually solutions and healthcare (multiple speakers)

And so, total healthcare as a percent of total is --

31%.

The 31%, okay. And then, the last question I had on this is, I see EMR revenue was up 12%. What was -- and solutions was up 26% in healthcare. What was --

Driving the rest?

Yes.

It's two things. One is the ICD project is a fairly large -- the remediation project is a very large project that's for a payer. Actually, it's a very large project for us. So that's one component.

And then, the other, the second largest offering that we have overall in healthcare is outsourcing. Often it's transitional outsourcing, so we maintain their old applications while they migrate to new ones. And that business also is up, and that's causing healthcare to be up faster than EMR this quarter.

And was the EMR -- I realize it was a balance of adds and ends, so I guess the preponderance of growth was just an increase in average size, but -- so how do we think about the rest of the year for EMR? 12% isn't a function of the labor constraint, correct? I mean, you could do -- you could do more than 12% even with the labor issues, right?

Yes, for the year, definitely. Yes, we believe that we can.

In the first quarter, though, it was probably partially -- it's partially labor and it's partially just a function of the larger couple -- we had -- the couple big projects ending. And unfortunately, it would be great if a project ended and a project started. It doesn't work that way. So they ended, and then there may have been a delay before the new one started.

You know, I suspect that in order for us to hit a 25% growth in our revenue in healthcare this year that the EMR business is probably going to have to grow at least 20% to 25% this year.

So you had a brief air pocket when the ends ended before the starts.

Yes.

Okay, I get it. And then, finally, on the FW -- I'm sorry, the fraud, waste, abuse. Can you -- a little more color on -- you said the clients have been just working slower?

Well, slower than we would have expected. Maybe it isn't slow in terms of the industry.

The kinds of fraud, waste, and abuse that we look for are very different than other people, and providers have a very unusual relationship with -- our payers have an unusual relationship with the provider side of the market. They need to have the providers, the individual doctors, in their network in order for them to be able to market their products. So they're not as used to going back to them and saying, hey, you billed us twice or you billed this for this and looking at the data, it's not correct.

So, there's just much more hesitancy on their part to go through the process of confronting them and saying, we have a problem here and you owe us money instead of us owing you money on this one.

I am convinced it will happen, but it's -- and I also would've thought that it would've mainly been at lower levels in the organization, but it turns out almost the entire organization because it affects the relationship with the providers actually is getting involved.

Jim, so I understand, are they determining how they're going to solve these -- or collect these balances (multiple speakers)

Yes, how and even if, and in some cases, I think that they'll probably decide that they won't go after what they could've gotten in the past, but they will change their policy so that it can never happen again.

And they're looking at each one of them, I think, separately, and that's really what is taking the time. (Multiple speakers). At the end of the day, I think that they'll actually go back and get the money. They're just trying to figure out how to do it in a way that is most amenable to the provider side of the market.

Right. And then, is there another -- are you proposing or developing business with another insurance company at this point?

Yes, we have actually a number of betas underway where they have given us a sample of their data. We run the data. We don't go through and give them specifics of exactly who it was, but we'll go back to them and say, okay, we found this amount of money and here is how it breaks down. And that's the way that we sold this first payer, too, exactly the same thing.

So you would hope, before year-end certainly, that you might be signing up one or two more?

Yes.

Matt McCormack, BGB Securities.

You clarified the healthcare vertical in terms of the growth of the solutions and the staffing business. I was wondering if you could go through the other verticals and generally give us what percentage of revenue was in the quarter for each vertical and if there's any major discrepancies.

I know most of it is staffing, but if there is any discrepancy in the staffing versus solutions growth rates in the other verticals.

Sure, just roughly. And they actually -- the only two that changed were healthcare and the technology services. So the rest of them are pretty much the same as you've probably seen in the past.

Healthcare, as we already announced, was 31% of the total. Technology service providers was 32%. That would've declined. Last year, there was 35%; last year, healthcare was 28%. Energy remained at 6%. Financial services was at 6%. That is down a little bit from last year, and then other was around 25%.

Okay, and then, was there any -- so financial services, can you -- what was going on there? And then, also, if you'd talk about the other vertical as well?

Yes, as I was previously asked, anything happening with energy, and we do have one customer who is cutting back, and it has nothing to do with us. They're cutting back in general and that's been impacting us the last couple of years in energy.

Financial services, almost all of our financial services, at least 5% of our total revenue, is in Europe, and as the currency fluctuation, that's actually causing that to drop.

The technology service providers, as we mentioned the demand was weak in the first quarter. That's actually been true since probably last August, and it's -- I think that that one is the one that is most sensitive to the European markets and what's happening over there.

Okay. In terms of the supply constraint or the headcount issue, is there any -- are you looking for resources offshore? Is there any possibility to use those types of assets? Or is this all on-site with the client, or the client doesn't want any of those assets at this point?

The client really isn't looking for any offshore assets, and even if they were, we probably couldn't use many of them.

About 80% of this work -- remember, you're not writing code. You're just flipping switches on a software package, which doesn't take as much time. 80% of it, roughly, you're actually sitting in front of the client saying, okay, how do you want this done? And then, 20% is flipping the switches.

So theoretically, I guess, if you wrote something up and sent it offshore, you could probably get it back. Because these are EMR applications, the hospitals are incredibly sensitive about their data and they don't want to take it offshore. So it's -- although there isn't much data, actually, in the system at this point, but most of the hospitals are more comfortable if it's done on their site.

Vincent Colicchio, Noble Financial.

So just a couple, Jim, for you. Are you seeing any movement on the healthcare information exchange front? I haven't heard about that from you in a while.

No, we're not seeing a lot, and I think the problem there is funding. I'm convinced -- there's still about $18 billion in the ARRA funding that the federal government hasn't released yet.

The spur that we saw was when the federal government gave the states about $600 million to give to their HIEs to at least start them up and take a look at things. They need a source of funding, and that hasn't been readily available. I'm hopeful at some point the federal government realizes that and releases some of the stimulus money.

How do you expect the IBM business to track on the staffing side versus the rest of the staffing business for the rest of the year?

I'll tell you what's in our projection, that it's basically flat for the rest of the year.

It's very difficult, though, for us to forecast because we are kind of the flex point for IBM. I mean, if they need additional people on a project, we're the additional people. If the project finishes and they don't need as many people, we're probably the people that come off. So it depends on how many new projects IBM starts this year, and there is no central point that we can go to and find out what that number is.

At the moment, we're going with flat. We're hoping, and there has been some discussions about they may have more projects in the second half of the year than they did in the first half of the year, but we've really got to just wait and see on that.

Fortunately, that side of the business isn't as profitable. I don't know if that is fortunately or unfortunately. But when we lowered the revenue guidance by $5 million because it's only, at best, on average, a 3% operating margin, it really had no impact on that income.

Within the healthcare revenue piece, the rather large piece that's outsourcing, is there any -- are there any -- I assume that's several clients. Are there any large contracts coming up anytime soon?

No, and it's lots of clients. It tends to be not as big as the EMR engagements, so it's just a number of clients.

While we originally sign up to maintain those systems during the transition, it quite often happens that they get to a point and they decide, we're just going to continue to use those old systems or parts of them forever because it's too expensive. They're working; it's too expensive to make the conversion.

So those engagements, while originally when we sign up for them we think they're going to be a two- or three-year period, it's not unusual that they go five or even 10 years.

One last question, what are your expectations for the European business for the balance of the year?

I'm actually very pleased with our European operations. In euros, they were up 4.9% in the first quarter.

Now when it comes through in U.S. dollars, it's basically flat because of the currency exchange, and that's really our expectation for the year, that in euros they are going to be up, but because of the exchange rates they'll probably look like they're flat in the U.S. books.

The reason that we're up, the commercial business, as you know, is soft in Europe. Ours is, like everybody else's. Our headquarters for Europe are in the Flemish part of Belgium, and we are one of the largest IT services companies in the Flemish part of Belgium. And the new European Union is starting up there, and we're getting additional business from the European Union. That's really why their revenues are up, and we expect that will continue throughout the year.

Thanks for answering my questions.

Okay, thanks, Vince.

Gentlemen, there are no further questions at this time.

CTG is firmly established in healthcare, one of the fastest-growing U.S. industries. We have offerings for electronic medical records, ICD-10 conversions, accountable care, and medical informatics, all of which are expected to be in strong demand for several years.

We remain very excited about CTG's future. I would like to thank you for your continued support and for joining us this morning. Have a great day.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using the AT&T executive teleconference. You may now disconnect.