Computer Task Group Inc (CTG) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CTG second-quarter 2012 earnings call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for your questions, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I will now turn the conference over to Jim Culligan, Director of Investor Relations at CTG. Please go ahead, sir.

Thank you, Kathy, 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 2012, and then update you on the Company's strategy and outlook.

We will follow with an opportunity for a 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 is 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 would 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 news release, we had an excellent second quarter with revenue above our guidance and earnings per share excluding an insurance gain at the high end of our guidance.

Revenue in the second quarter of 2012 increased over 2011 by 9%, the operating margin expanded by 100 basis points, and earnings per share excluding the one-time insurance gain increased 29%. As we expected, our higher-margin solutions business continues to grow and increased 23% in the second of 2012, while revenue from our lower-margin staffing business was approximately the same as it was in the second quarter of 2011.

I am going to talk more about our results and what we see for the 2012 third quarter and full year, but first I am going to ask Brendan to start us off with a review of our financial results. Brendan?

Thanks, Jim. Good morning, everyone. For the second quarter of 2012, CTG's revenue was $106.7 million, an increase of $8.4 million or 9% compared with the second-quarter 2011. Second-quarter 2012 had 64 billing days, the same as in the second-quarter 2011.

Solutions revenue in the second quarter of 2012 was $44.3 million, an increase of $8.4 million or 23% compared with the second-quarter 2011. As a percentage of total revenue, solutions revenue was 42% compared with 37% a year ago. The continued improvement in our business mix is mainly being driven by revenue growth from our more profitable healthcare projects.

Staffing revenue in the quarter remained flat at $62.4 million. Second-quarter revenue from IBM, our largest customer, was $29 million compared with $29.6 million in second-quarter 2011. As a percent of total revenue, revenue from IBM decreased to 27.2% in the 2012 second quarter compared with 30.1% of total revenue in the 2011 second quarter.

Revenue from our European operations was $16.8 million, a 3% decrease from the $17.3 million recorded in last year's second quarter. The effect of foreign currency fluctuations during the second quarter of 2012 decreased consolidated revenue by approximately $1.9 million or 1.8%. On a local currency basis, our European revenue increased by 7.8% compared with the 2011 second quarter.

Direct costs as a percentage of revenue were 78.5% in the second quarter compared with 78.9% in the second quarter of 2011. SG&A expenses as a percent of revenue decreased to 15.7% from 16.3% in the second quarter of 2011. The billable travel expenses included in the second-quarter 2012 revenue and direct costs are $3,658,000. The billable travel expenses included in the second-quarter 2011 revenue and direct costs were $3,079,000.

Second-quarter operating income grew to $6.1 million, an increase of $1.5 million or 31% year-over-year, reflecting the favorable effect of operating leverage and our higher-margin solutions work. Compared with the trailing first quarter of 2012, the second-quarter operating income increased $544,000 or 9.7%.

Operating margin in the second quarter increased to 5.8% of revenue, a 100 basis point improvement from last year's 4.8%, and 40 basis points higher than the 5.4% operating margin in the first-quarter 2012. The year-over-year increase was primarily due to the increase in the solutions business in our sales mix and the additional operating leverage.

The Company received $423,000 of nontaxable proceeds from life insurance policies in the second quarter, which resulted in a nonoperational gain of approximately $0.025 per diluted share. Excluding this one-time gain, net income would have been $3.7 million in the quarter, an increase of 31% from $2.8 million in the second quarter of 2011, and a 10% increase from the first quarter of 2012.

On a per diluted share basis excluding the one-time gain, net income would have been $0.22 for the second-quarter 2012, a 29% increase from the $0.17 in the 2011 second quarter and $0.02 higher than the 2012 first quarter.

Net income including the gain from the insurance proceeds was $4.1 million, an increase of $1.3 million or 46% compared to the second-quarter 2011. On a per diluted share basis, net income which includes the gain was $0.25 for the quarter, an increase of 47% compared to the second quarter of 2011. Both the 2012 and 2011 second-quarter results include equity compensation expense of approximately $0.02 per diluted share net of tax.

The tax rate for the 2012 second quarter was 36.8%. Excluding the nontaxable one-time insurance gain, the tax rate was 39.4% compared with 38.9% in the 2011 second quarter. Both including and excluding the insurance gain, we expect the tax rate for the full-year 2012 to be between 38% and 40% compared with 37.6% in 2011. The increase in the rate in 2012 is primarily due to the expiration of certain federal tax credits that we realized in 2011.

Our headcount at the end of the second quarter was 3800, 100 people or 3% higher compared to the end of both the second-quarter 2011 and the end of the first-quarter 2012. Of those 3800 employees at the end of the second-quarter 2012, 90% were billable resources.

At the end of the second quarter we had no debt and $23.6 million of cash on the balance sheet. At the end of the 2011 second quarter, we had no debt and $13 million of cash. Both the second-quarter 2012 and 2011 ended between a US biweekly payroll date.

Our days sales outstanding was 61 days at the end of the second-quarter 2012, slightly lower than the 62 days at the end of the second-quarter 2011. Our cash provided by operations in the second quarter of 2012 was approximately $6 million as compared with cash provided by operations of approximately $2.8 million in the second quarter of 2011.

In the quarter we had $283,000 in capital expenditures and recorded depreciation expense of $656,000. We repurchased approximately 204,000 shares of CTG common stock during the second quarter of 2012. During the third quarter prior to releasing earnings, we repurchased approximately 25,000 shares under our 10b5-1 plan. As of today, our repurchase authorization is for approximately 575,000 shares. And as it remains accretive to our earnings, we intend to continue our repurchase program during 2012.

Jim?

Thanks, Brendon. As mentioned, in aggregate our solutions business, which is significantly more profitable than our staffing business, increased by 23% in the second-quarter 2012. The solutions business was 42% of our total revenue in the second quarter. The growth in solutions work is primarily coming from healthcare projects and is continuing to drive margin expansion. Overall, our healthcare business was up 25% over the second quarter of last year.

On our conference call at the end of April, we mentioned we had received four RFPs for electronic medical record projects for which the hospitals had not decided what IT services firm would be awarded those projects. In addition, we received two RFPs for EMR projects in the second-quarter 2012. Of those six projects, we won one project.

One of the hospital systems decided to withdraw their RFP and will issue a new RFP shortly. One system decided not to engage an IT services firm and are trying to implement the EMR themselves, and we lost a project for a state-run hospital system that has selected a staffing company with lower hourly rates.

That means we still have two bids outstanding for which an IT services firm has not been selected. When we started the second-quarter 2012, we had 18 active EMR projects. During the second quarter we started two projects and two projects came to an end. Therefore, at the end of the second-quarter 2012, we had 18 active EMR projects. We also have one project that we won in the second-quarter 2012 that will not start up until the third quarter.

As we have mentioned before, currently we have a significant amount of opportunity for EMR business. Though we increased the EMR revenue by 30% in the second quarter and we expect further growth in EMR work, the limited number of resources with EMR experience challenges our ability to grow our EMR business to its full potential. Until the market begins to accept newly-trained staff, the number of experienced resources we can hire is going to be the limiting factor to our growth in our EMR business.

Our other healthcare solutions offerings continue to grow at significant rates. On June 29 of this year, we announced that we had won four new contracts. Those contracts were for our outsourcing, IT medical management model, health information exchange, and HealthEdge offerings. These four contracts alone should increase our total healthcare business by 9% over the next 12 months.

It is contracts like these and opportunities for similar projects, combined with our growth in EMR work, that reaffirm our belief that our healthcare business in total will grow at a 25% rate in 2012.

Having covered healthcare, I would also like to talk about the other three vertical markets on which we focus; our technology service provider market which is an all staffing business recorded a slight decline in the second quarter.

As to our energy vertical, it increased during the second-quarter 2012, while our financial services business declined. Most of the decline in the financial services business was a result of unfavorable foreign currency fluctuations.

Turning to our staffing business, its revenue was flat when you compare the second-quarter 2012 to the second-quarter 2011. While in US dollars are US staffing business did not show an increase when compared to the second quarter of last year, we depict our staffing business as improving slightly in the second quarter of 2012.

Most of our headcount increase in the second quarter came from our staffing business, and if you look at our staffing business in local currencies, revenue increased by 2% in the second quarter. The reason the staffing business was flat to last year was the unfavorable foreign currency adjustments that occurred in the second quarter of the year.

Looking at the third-quarter 2012, we're forecasting total revenue to be in a range of $105 million to $107 million for a 5% increase in the midpoint of our guidance over last year's third quarter. We are forecasting earnings per share in the third quarter of 2012 to be in the range of $0.21 to $0.23 per diluted share, or a 22% increase in the midpoint of our guidance over the third quarter of last year.

For the 2012 full year, we expect a revenue range of $420 million to $430 million, or a 7% increase in the midpoint of our guidance over 2011. Based upon our revenue forecast and the anticipated mix of business, we expect 2012 net income per diluted share excluding the one-time insurance gain of $0.025 to be in the range of $0.83 to $0.91, or a 23% increase from 2011 at the midpoint of our guidance.

We thought it would be helpful to once again recap the assumptions we use to set our 2012 guidance. We continue to see significant growth opportunities in our healthcare solutions business. We think our healthcare business will grow by approximately 25% in 2012. For our non-healthcare solutions business, we are projecting a revenue increase of approximately 8% in 2012.

For the reasons I mentioned earlier today, we're not forecasting a change in our staffing revenues for the year.

Our revenue forecast for the full year takes into account the effect of foreign currency exchange rates on our European business. Given that the euro and British pounds have dropped in relationship to the dollar, we are now assuming a 10% negative impact on our European revenue in US dollars when compared to 2011, due to foreign currency exchange fluctuation.

To sum it up, despite a slowing US economy and Europe's financial problems, CTG is performing very well based upon our strategic focus on higher growth industries, particularly healthcare. CTG's net income in the second quarter of the year increased by 29% before the one-time gain, and we continue to expect another excellent year in 2012.

With that I'd like to open the call for questions if there are any. Operator, please manage our question-and-answer period.

(Operator Instructions) Bill Sutherland, Northland Capital Markets.

Thank you. So on the third-quarter guidance, not to focus too hard on just a single quarter, but just, Jim, provide a little more backdrop on the growth rate not being at the same level that we saw in the first half.

Probably a couple of things are coming into play. One, we always have a seasonal drop in the third quarter. We lose about 3% of our revenue just because people take vacation now. For the last probably four or five years we have been able to make that up by getting additional business, but there is always some drop off in the third quarter.

We have said since the beginning of the year, if you go back even to our February conference call, that we expect that the European financial crisis was going to back up and hurt the US economy. And it has done that. I would think in the third quarter we will probably see our staffing business, perhaps, off slightly.

Now the fourth quarter of the year has one additional billing day so the one additional billing day causes about a 2% increase just from having that additional day. So it will probably make it up in the fourth quarter of the year and we will essentially, we think, be flat for the entire year.

Part of our healthcare growth in the second quarter of the year was from overtime, and we just don't get as many people to work overtime in the third quarter as we do the second quarter because of vacation. So we will probably see a slight dip there as well.

Well, I was actually -- I didn't mean to confuse the question. I didn't mean quarter-over-quarter sequential; I was thinking year over year. It looks like the growth is just --

Blowing a bit, yes.

Blowing a bit, yes.

It is the foreign currency adjustments probably being even worse than they were in the second quarter of the year. As I said, the staffing business may actually go negative slightly in the third quarter and then pick it back up again in the fourth quarter of the year.

It is pretty much though what we -- when we started the year this is pretty much what we expected, that the third quarter probably would show the least amount of increase. If you look at last year, the third quarter of last year actually was our highest revenue so (multiple speakers) comparison.

I was thinking you have got a tougher comp and then I was just thinking, particularly away from healthcare solutions, the other solutions business looked like it had been at kind of an unsustainable growth level through first half. Extraordinarily high. Is that fair?

It is much higher than the industry. It is about what we would expect. We expect for the year an 8% increase in the other solutions business and in the second quarter of the year it was 7.2%.

Okay. Can you update us on the ICD-10 implementation, the developments there and how that is developing for you?

Certainly. We do have one project that is ongoing and then we have done some assessments. The government's postponement of the deadline, the proposed date now has been moved from October of 2013 to October of 2014, has definitely slowed the hospitals down. We have actually have some of the hospitals that we thought would probably begin their projects by now say that they had reallocated the money to more urgent IT needs in the short term because they have got longer term to do it.

We think that at some point the government, and I suspect it is probably this October 1, 2014, date, is going to have to put their foot down and say we got to make a change for a couple of reasons. One, CMS has run out of numbers and we are not tracking all the diseases the rest of the world has.

It is also causing structural problems in billing. Probably the best example is in stents. When ICD-9 came out in 1977 they didn't exist, so though there is one code for stents in ICD-9. There is 80 codes in ICD-10.

So currently when hospitals are billing for putting a stent in they kind of get an average reimbursement. They may be putting in a much harder one, a much more complex operation but they can only get the average reimbursement. So they got to make the change at some point.

I think some of the hospitals that we have talked to said that they are kind of going to take it seriously because they think that CMS is going to eventually say this is it, though they know they have got a little bit more time. So I think we are probably not going to see a tremendous amount of ICD-10 work in 2012, but starting in 2013 I think we will start to see some of the larger hospital systems start to do some.

Okay. And then last one for me is just an update on the fraud, waste, and abuse product offering.

We are still working with one small payer that we have a contract with to look for fraud, waste, and abuse, and they are still analyzing what they're going to push back to their provider network. They happen to be the payer that we used to develop the application.

I guess what we have learned from this is that smaller payers are much more hesitant to charge money back because they don't have the power in a particular market that one of the larger payers might. So we have kind of refocused our efforts into states and larger payers.

We have about six, I think, betas going on where we have data for a shorter period of time from either the state or the payer. And we are analyzing it and giving them back data as to how much money they can expect to save.

Great. Thanks again.

Matt McCormack, BGB.

Good morning. I guess just on the staffing side I guess could you just talk about your visibility there, both with IBM and your other US business. And then also if you could provide some insight into the staffing business in Europe that would be great.

First, the staffing in the United States. It definitely got slightly better in the second quarter than it had been. We saw a pickup; we added more people certainly in the second quarter.

The IBM business we are the sole provider to one of their divisions, so we are not losing market share, it is just how many people they need. They go through periods of times when they start a lot of projects and they get through periods of time when they just don't start as many, and that is when our people are needed when they are starting up a new project.

So we think that going into the summer months -- and the summer months are always tough because they are always -- a lot of people are on vacation, a lot of project managers so they don't take on as many staff. But we think that the slight increase that we saw in the second quarter appears to be holding at least into the third quarter of the year, so in the United States we are seeing more demand than we certainly had in almost a year. The staffing business really fell off for us in August of 2011 and really didn't pick up in the United States until April of 2012.

Europe, in the commercial business in Europe staffing is a little weak. You would probably expect that given the economy over there. Fortunately, because we are headquartered in the Flemish part of Belgium where the new European Union is starting up, we are seeing demand from the European Union. A lot of their work is solutions, but some of it is staffing.

So I actually was pretty pleased. If you look at the European numbers in local currencies, it was up 7.8% in the second quarter. So given what is happening in Europe I was very pleased that they were up that much in Europe.

Okay. Then you mentioned headcount as of the beginning of the year was up 3% and I know revenue or you pushed revenue up 9% year over year. Should we continue to expect to see revenue growth exceed headcount growth, and is that a function of greater leverage on the solutions side? Or should we see those growth rates kind of equalize over time?

Well, certainly for this year it is going to continue and it is a function of the mix. One person on the solution side of the business bills two to three times what a person does on the staffing side of the business, so as our solutions business grows faster than staffing it doesn't take as many people to drive revenue growth.

Okay. Then you had mentioned in terms of the EMR wins and losses, I guess you mentioned the staffing company that you lost to. I recall a few quarters ago there was maybe two other deals that you lost to those staffing agencies.

Do you have any, I guess, color or indication on how they have been in terms of their implementation for EMR? I know it is difficult for a staffing company to come in and do that type of work.

Right. We have heard that they have problems. Actually, in the last five-and-a-half years we have won 30 bids and RFPs out of 40, so we have lost 10. I think nine out of the 10 were state-run hospital systems where at the end of the day the state had to follow or the hospital had to follow the state rules of picking the person with the lowest cost.

So virtually every time that we lose, like this one, it is a state-run or municipality-run institution where the procurement says you got to pick the person with the lowest rates. And from what we have heard later on from, and sometimes we even hear this when we are being told -- the CIO knows that it is going to cost them more money to do this and it is going to take longer, etc., but they have to follow the state rules.

Okay. Then in terms of capital, obviously you have been buying back shares. You have talked for a while about the supply constraint in terms of qualified healthcare IT professionals.

I mean are there any acquisitions that you think you could make in that area? Are there any small, $5 million to $10 million, revenue consultancies that you could potentially purchase to continue to grow that practice?

We have been looking. We have been actively looking for particularly healthcare solutions business, not so much to pick up additional EMR people, but to actually expand our offering in some way, geographically or the offerings themselves.

The problem with buying a small company or a staffing company, all of the people that they have are generally on engagements. They don't carry a bench. So you pick up their revenue, but all their people are already booked. It is not like you pick up a huge bench of people that you can use on your projects.

Right, okay. All right, thank you so much.

Thank you.

Frank DiLorenzo, Singular Research.

Thanks, good morning. I had a couple questions. One about the potential, just looking out over the next 12 to 24 months if you could provide us with some color on the potential for health insurance exchanges and sort of your thoughts there.

Was also wondering about the recent Supreme Court ruling and the possible implementation of the healthcare act, if that has changed maybe your strategic thinking over the mid to long term in any way? Thanks.

Yes, I will answer them separately. In terms of the health exchanges, these are exchanges that are going to be run essentially by the states to set up an ability for individuals to shop electronically to buy medical insurance. When we looked at healthcare reform we decided that we would not build an offering for that, and really a couple reasons.

We like to have offerings where we either have relationships that we can use or we have a differentiation that allows us to be better in the marketplace. The health exchanges were going to be purchased by states; they are a lot of the large aggregators with long relationships with states. We didn't have any particular differentiation, so we decided that we would not pursue those and we haven't pursued that part of the market.

The rest of healthcare reform though we have. The biggest benefits, I think, in healthcare reform to us are going to be the products that we have launched in the last couple years. And also we have an ACO offering that would help an entity set up an accountable care organization with IP.

The reason for -- there is a big change that is going to occur we think. If you think about it, right now there is not an incentive for a hospital to figure out ways to reduce the number of days that somebody stays in a hospital bed. I mean that is how they get paid. The more nights that people stay the better off the hospital system is.

The medical management application that we built for end-stage renal disease calculates an intervention point where the kidneys are just about to fail. By doing that the patient avoids going to an emergency room and avoids an overnight stay in a hospital. So a hospital today probably isn't going to purchase that application because it is not to their benefit. When the hospital as part of an ACO system that is their profit; there is going to be incentive to do that.

The application also calculates the cost versus the progression of the disease. By doing that we have realized that when patients are being sent from the primary physician to the specialist it is costing more money. The payers have taken a position that they want patients to stay with their primary physician because their hourly rate is less.

When you actually look at the cost versus the progression of the disease, you realize that if the patient were shifted earlier that the total cost would be less. Even though the specialist is charging more, his treatment is more effective. It also measures for all the doctors in a community their cost versus the progression of the disease.

And by looking at all those elements and routing people to more efficient, lower-cost solutions we think that we may be able to save 10%, maybe even 20% of the cost of treating end-stage renal disease by using the application. At least that is what our modeling has indicated.

So today a hospital has no incentive to put that in because it would cost them revenue. As the ACOs are formed that is going to be their profit. We think that is the perfect market, actually, for that application.

Even the fraud, waste, and abuse, if you think about it, hospitals and physicians, other than the states, have been on kind of their case to reduce fraud, waste, and abuse. They haven't really had a big incentive to do it because it lowers their revenue, it lowers their profitability.

When they become part of an ACO and you are sharing the profits amongst the players, everyone in the ACO wants to eliminate fraud, waste, and abuse, because why should the person who is the perpetrator of fraud, waste, and abuse get paid more of the money for treating a patient than the people who are honest about it.

Then the ACO offering itself to install IT systems, I think we have it. We have the methodology; we have people to do implementations. We are not doing very much of it now and it is going to be a while really before that kicks in.

There is only about 60 I think, 57 maybe, ACOs that have been approved. They are in the conceptual stage. They are trying to figure out how they get a relationship with the physicians and how they are going to share revenues. Do they have enough dialysis centers inside their system or do they have to go out and buy them, or contractually somehow agree that the dialysis center that they are using is going to share some of that revenue?

They are far away from the IT system, so I think it is going to be a while. I don't see a lot of work from the ACO offering in 2012, but 2013/2014 I think that one will kick in, too. So in terms of revenue growth, I think healthcare reform is going to be good for CTG.

Okay, thank you.

Thank you.

Rick D'Auteuil, Columbia Management.

Good morning. One of the EMR losses you attributed to the hospital taking it in house -- and I know they generally have staff, but I wouldn't think they would have sufficient staff without supplementing with outside resources. How are they suited to deal in a tight market for resources with a painting that shows incremental people?

Not well. Sometimes they will go out and try and get additional people from staffing company. Most of the hospital systems that we have seen this will go for about six, nine months, realize that it is not progressing the way they want, and we often will see a subsequent RFP to do the project again.

Even some of the larger hospital systems in the country have started and said we can do this ourselves, then realized after working on it and really using a lot of money for six months to a year will go out and get somebody to come in and help them on the solution. So I suspect it is quite possible we will see an RFP from that hospital system again at some point.

Is it a financial decision that drove decision to do -n house? I mean they did go outside with an RFP, but ultimately --?

I don't specifically know on that hospital because they did not tell us exactly why, they just announced they weren't going to engage a firm, but generally it is. They kind of get sticker shock.

That happened to be around a 1,000-bed hospital so in total IT services was probably $10 million from most of the players at least, and it was probably another $20 million for the software and the hardware. When they looked at the number that is a big number for a hospital system, so they kind of go through the rationale that they can do this themselves a lot cheaper. They start down the process and then realize they can't.

I mean if you think about it, most likely no one in that hospital system has ever worked on an EMR project before and they don't have the methodology to install it.

You provided an ICD-10 update to an earlier question. My understanding is many of those projects are likely to be two years in duration, so even if you're talking October 2014 as the new deadline don't these hospitals need to start something relatively soon?

I think you are right. Many of the hospitals, because they haven't done their assessments, don't realize how many version upgrades they have to do.

I think in general the hospitals, and maybe even the physicians, believe that the AMA has been successful three times in pushing the date back and they are hoping for another date push back. We are not so sure that they are going to be able to get it again.

Another problem is that ICD-11 -- the WHO has come out, World Health Organization has come out and said that it is going to be announced January 1, 2015. So not only will the US be one version behind, they are going to be two.

And it doesn't make sense just to wait till that is out and just leap ICD-10 and go right to 11?

It is possible. I mean maybe that is the conclusion at the end of the day, but they won't issue what it is until January of 2015. That means that if it does take two years to do an implementation you wouldn't be live until 2017. So it pushes it out more than a couple months.

Then as it relates to that one point this year you thought ICD-10 was likely to be a more meaningful part of your growth this year in healthcare. That hasn't transpired. So do you have excess -- do you have bench time with people with those skill sets, or you don't have them on the payroll?

We do have people with those skill sets, but they have multi-skills, so most of them we put on other projects or the project that we have currently. If the question is are we caring a large bench for ICD-10 people, the answer is no.

Okay. On the EMR side of the business the competitive universe -- I know you are only looking at certain size hospitals, but the other bigger competitors that provide the service is the feeling that they are all-out with the project that they have won over the last several years?

Yes, we don't think anybody has a bench.

Okay. Good quarter, guys. Thanks.

Thank you.

(Operator Instructions) Vincent Colicchio, Noble Financial.

Good morning. Nice quarter, Jim. A couple for me that weren't asked.

Of your EMR, the two deals that you are bidding on, are any of them state hospitals? Then also related to that of your -- to the market where you focus, what percentage of the hospitals would you say are state hospitals?

Both are good questions. I'm trying to think of the names of the two hospitals that we bid on in the quarter that we don't have an answer. One definitely is not, and I cannot remember the name of the other hospital so I am going to have to actually look at a sheet.

No, neither one of them looks like it is a state hospital. So that was your first question. So neither one of those are state hospitals. Then what was your --?

The overall universe that you target in terms of the size hospitals you go after, what does the landscape look like in terms of what portion of those are state hospitals?

Based upon the bids that we did over the last five years, it was about 25%, so I would suspect that is probably the universe.

Then how many EMR projects do you anticipate will be completed by you in the third quarter?

I don't know. There will probably be a couple. The reason we don't know, there is always scheduled targeted go-live dates but they often get pushed back.

Then the other problem, it is a good problem to have I guess, is often when the hospital goes live they have told us just focus in on meeting meaningful use. So as an example, one of the meaningful use requirements is to get 30% of the doctors to use CPOE, computerized physician order entry, for prescription.

So we just trained 30% of the doctors, get them up and using it so they meet meaningful use. Then, of course, the hospital says it is kind of silly to just have the 30% do it. Go train the rest of the hospital; go in the areas that we didn't have to do for one reason or another to meet meaningful use for most of the hospital systems.

Very often we get engaged to continue on to do further work to get more value out of the EMR system. So just because we have got a go-live date doesn't necessarily mean we are going to have a project in in a particular quarter.

We seem to be averaging about two a quarter. If you go back for two or three quarters in the past that seems to be the average kind of internally; that is what we are thinking.

We have one project that is not counted in the 18 that we won in the -- at the very end. I think we might have found out that we won it the last week in June. It will start up in the third quarter and then we have got the two RFPs and we will probably get other RFPs that could potentially start in the quarter as well.

Could you remind me of the margin on your EMR business and your non-EMR healthcare business, how they compare?

Well, we have never actually given them out so that is probably why you don't remember them. The EMR has one of our highest offerings, highest margins of all of our offerings, but all of our healthcare offerings are significantly higher than our average solutions. We have some older solutions in other parts of the business that just don't have the operating margins that healthcare has.

Okay. And then what portion of your revenue guidance for healthcare for this year comprises booked business?

That is an excellent question. It has got to be at least 75% I guess. I am looking at Brendan to see if he comes up with a different number.

Probably in the 75% range.

Okay.

Okay. So fairly high obviously?

Yes.

Then one last one for me and I will go back in the queue. The outsourcing of existing applications is that a large business for you? And is that a business that -- you mentioned in your prepared remarks that that is starting to improve, so I'm wondering if that is a new development and if you have a big pipeline for that kind of work.

Outsourcing is 6% of our total revenue and growing at a rapid rate. What is happening is -- and it is not just the EMR people, but in all of healthcare hospitals are having a hard time retaining their people because there is so many new opportunities. And as they are experiencing more turnover they are looking to us.

If you are a hospital and you don't have dedicated healthcare recruiters in the IT space, you don't have lists of people who have those skills in a particular community. So you advertise in papers and things like that, but it is often very difficult to get some of those skill sets. So more and more our current clients, and particularly clients that are coming at the end of their EMR implementation, are asking us about outsourcing.

If you look, most of the wins in the country are for epic. Epic probably is most severe shortage of qualified people out there that are trained in EMR. When you take your own internal hospital people and you put them on an EMR project, they work on the EMR project for two years. They probably can make 50%, 100% more if they go work for a consulting company at that point, so our clients are starting to lose people.

We have databases full of, obviously, Epic people and all the skill sets required to run a hospital, so we are in a better position than they are to find people as turnover. I think that outsourcing in hospitals will probably accelerate over the next couple years as they experience more problems with turnover.

I will go back in the queue. Thanks, Jim.

Thanks.

B. Riley & Company.

Good morning. On the healthcare side, specifically EMR, the number of RFPs you currently have outstanding does it typically drop off from the first half as we go into the back half of the year? And what are you expecting in terms of new RFPs coming through for the remainder of the year?

We have tried to come up with patterns for that before and there is no rhyme or reason. What is happening is large hospital systems have many different projects. When they get done, for instance, some of the large ones were doing revenue cycle when incentive money came out from the federal government. And they are finishing their existing projects and then starting up the RFPs.

So we don't have much visibility into how many RFPs we will get. Obviously our salespeople are out calling on customers; we have got lists of people who haven't done their EMR projects yet. We are expecting them to do an RFP but what quarter it is going to come out in. We just don't have much visibility to it.

Got it. And healthcare, I think you said the non-EMR related stuff was or those deals you announced anyway were going to contribute 9 percentage points of growth. Just curious, as you continue to see growth on some of those newer offerings that you have and EMR continues to grow for you, do you expect EMR to still be north of 50% of the healthcare revenues or do you think that starts to tail off over time?

I am sorry, I missed the end of the question. Do you expect --?

The EMR revenues to be over half of your healthcare business or do you expect that some of these newer categories can start to pick up in terms of the percentage of healthcare revenues?

In the next year I think that the EMR will still stay at close to 50% of our healthcare, but over time obviously they are going to pick up. Particularly one of the offerings we mentioned in that is the IT medical management model. As our staff offerings become more commercial, I would expect them to kick in a lot more in terms of revenue.

Same with ICD-10. By next year I would hope that the hospitals will realize that they are going to have to do this at some point and start their ICD-10 project as well. For this year EMR probably will stay 50% of the total healthcare practice.

The demand that we see -- at some point EMR has to peak and we would love to tell people when that is. We have no idea. I mean it is probably the software vendors picked either 2013 or 2014. They get their revenue at the beginning of a project; we get our revenue over the project. So if they are right and it is 2014, for us it might be 2015 or 2016 in terms of the peak of the EMR.

It is going to have a long tail. Even the federal government thinks that 30% of hospitals in the United States will not have EMR systems by 2019, so there is going to be a lot of additional work over a period of time.

The demand that we are currently seeing for outsourcing in the next couple years I think will be able to offset, more than offset, any decline that comes after the peak in the EMR business. Because more and more when I go out and talk to CIOs of hospitals they are saying, look, hospitals are used to tremendous turnover; they tend to have people sometimes for their entire careers.

But because the market has become so hot and because they can make so much more money by leaving and going someplace else, they are experiencing turnover that they have never seen in the past. Then when they go out in the market they can't find a replacement. So I think the -- I am expecting the outsourcing part of our business to grow substantially over the next couple years and then also the SaaS offerings.

I think this was the first quarter where you guys reported an increase in headcount in a few quarters, and I am sure that is probably mostly due to rounding. But how many of the headcount additions are more so on the solutions side as opposed to staffing? And as we look forward to the back half and into 2013 at what pace do you expect to continue hiring?

Actually we did add about 100 people during the quarter, so it wasn't rounding. I mean we really did add around 100 people. I didn't look up the exact numbers, but I would guess probably 70% to 75% of them were on the staffing side of the business.

I said before, the revenue per person in the healthcare business is several times what it is in the staffing business, so we don't need as many people to increase revenues in the healthcare area.

Great, thanks a lot.

Rick D'Auteuil.

Just on that topic first, so what has been the trend in the recruiter headcount on the staffing side?

You mean the average hire per recruiter?

No, the number of recruiters that you are using.

On the non-healthcare --?

On the staffing side.

It is about the same number of recruiters that we had last year. We haven't changed substantially the number of recruiters in the last year.

You guys tend to flex with trends in the market. With the market leveling off here do you feel like you are overstaffed, or how do you feel about your current position?

A year ago we probably would have continued to add recruiters, but elected not to. So a year ago we actually look at the average number of reqs per recruiter and we have a target, so last year the recruiters had more reqs than they should have which means you should add to the number of recruiters.

From the beginning of 2011, go back and look at our first conference call, we said the staffing business had to slow. So rather than bring on new recruiters and then lay them off, we elected just to incur more overtime of the recruiters that we had and now we are back in balance. The number of reqs that recruiters have is just about our target, so I don't really see us flexing the staffing recruiters. And as I mentioned before, actually the volume seems to have picked up in the last couple months on the staffing side.

Is the bill rate/pay rate spread steady too or are you seeing contraction?

No, actually I would say the reverse. For the first time in almost 11 years we are seeing a slight amount of inflation. Now the margin is the same, but the bill rates are going up. The wages are also going up.

We think that less than 2% of programmers and analysts in the United States are unemployed at the moment. The market -- when you go and talk to a person about a non-healthcare staffing engagement, they will use you usually tell you they are looking at three or four offers now.

Okay. So one of the other themes that we talked about on a prior call I believe is the thought that some of the smaller hospitals are not going to be able to deal with their obligations to meet the deadlines on EMR and then I guess ultimately some other things that might come up. And that was generating some consolidation. And some of your customers that you have already done work with in healthcare could be on the consolidator side.

Have you seen any of this so that you are getting -- maybe some assignments you have finished up, you are getting around to with an acquisition to bring them up to the current requirements?

Absolutely. That is one of the reasons that projects haven't ended when they were supposed to. When they acquire one of these smaller hospitals they want us to put in the same EMR system that the larger system has. So we are seeing that and when we talk to our clients they are pretty open about telling us that they are talking to other hospitals in their geography about merging.

Okay. So that trend is likely to continue then?

Yes.

And the good thing there is once they have done the first project with you it makes no sense to do an RFP for the second phase, right?

No, absolutely not, because you want exactly the same methodology and EMR put into that new hospital.

Has there been any lightening up on customer side or the prospect side on requiring trained people as opposed to some folks that are newly hired to do EMR work.

No. (multiple speakers) We haven't seen any hospitals say they will take newly trained or recently trained people, and we are still sitting with a tremendous amount of requirements that we can't fill because of that.

It is interesting because a couple of points. They are hiring -- you have lost several assignments over time to staffing people, some of it you mentioned from the state hospitals that are doing it in-house.

You would think that is a money-saving kind of decision. You can almost present two responses to their RFPs; one with a blend of newly trained or newly hired that might save them some money and yet they are not even considering that. I would think when they are doing their own projects they are getting that anyway, right?

Yes, the RFPs are specific that they want experienced people. So the CIOs they know what the state rules are, right, they don't want people submitting newly trained people.

The staffing companies are supplying them with trained people. They can do that at a lower cost than we can because they don't have to maintain the methodology and some of the other, the delivery people -- the delivery management structure that we do, because they are just providing the person and the hospital is supposed to supply the methodology and the delivery oversight, etc.

But, ultimately, if the hours get run up, even at a lower bill rate, they don't end up saving money in that scenario.

That is right. And it is really ironic to actually talk to a CIO and have him acknowledge he knows that but he can't do anything about it.

Your class ratings have been maintained?

They change every month. We spend a lot of time trying to make sure that we have very high class ratings.

Okay, thank you.

Frank DiLorenzo.

Thank you. There was a previous question about potential acquisitions on the staffing side. Could you talk about if you are looking anywhere on the acquisition front? Aside from staffing, any other areas -- analytics, software solutions, things of that nature? Thanks.

The actual question I think was have we thought about buying a staffing company to get more people for our solutions business. And the answer is no because their people are already on engagements; it doesn't help you.

The acquisitions that we would be looking at are all in the solutions area. They are all healthcare IT services companies that focus in on solutions for their customers. We really don't have any interest at all in buying a staffing company. I don't think it would help the Company long term.

Really what we are trying to do is either buy something that expands our offering some or perhaps our geography some that makes more strategic sense for the Company. We have talked -- we have seen some companies, we haven't really seen anything yet that is a good fit for us though.

Okay, thanks.

Gentlemen, we have no one else in queue. Please go ahead with any closing remarks.

Thank you. At midyear CTG is firmly on track for another year of double-digit earnings growth, our sixth of the last seven years.

CTG is firmly established in healthcare, one of the fastest-growing US 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. As such, we remain very excited about CTG's future growth prospects.

I would like to thank you for your continued support and for joining us this morning. Have a great day.

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