Computer Task Group Inc (CTG) 2012 Q3 法說會逐字稿

Ladies and gentlemen, good morning. Thank you for standing by and welcome to the CTG third-quarter earnings conference call. At this time, all lines are in a listen-only mode and there will be an opportunity for your questions. (Operator Instructions). At this time, I would like to turn the conference over to our host, Director of Investor Relations, 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 third quarter of 2012 and then update you on the Company's strategy and outlook. We will 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 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 those on 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 third-quarter earnings conference call. As you saw in our news release, we had an excellent third quarter with revenue at our guidance and earnings per share at the high-end of our guidance. Revenue in the third quarter of 2012 increased over 2011 by 5%. The operating margin expanded by 140 basis points and earnings per share increased 28%.

As we expected, our higher margin Solutions business continues to grow and increased 13% in the third quarter of 2012 while revenue from our lower margin Staffing business was approximately the same as it was in the third quarter of 2011.

I am going to talk more about our results and what we see for the 2012 fourth quarter and the 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 third quarter of 2012, CTG's revenue was $106.4 million, an increase of $5.3 million or 5% compared with the third quarter of 2011. Third quarter 2012 had 63 billing days, the same as in the third quarter 2011. Solutions revenue in the third quarter of 2012 was $44.2 million, an increase of $5.1 million, or 13% compared with the third quarter 2011. As a percentage of total revenue, Solutions revenue was 42% compared with 39% a year ago. The continued improvement in our business mix is mainly being driven by revenue growth from more profitable healthcare projects.

Staffing revenue in the quarter increased $200,000, or 3/10 of 1%, to $62.2 million. Third-quarter revenue from IBM, our largest customer, was $28.3 million compared with $30.8 million in the third quarter 2011. As a percent of total revenue, revenue from IBM decreased to 26.6% in the 2012 third quarter compared with 30.4% of total revenue in the 2011 third quarter.

Approximately $1.2 million, or 46% of the decrease in revenue from IBM in the quarter was a result of IBM's spinoff of its retail business to another large company. Although this change lowered our revenue from IBM, the spinoff had no impact on CTG's overall revenue since we have retained the business with this new client.

Revenue from our European operations was $16.3 million, a 2% increase from the $16 million recorded in last year's third quarter. The effect of foreign currency fluctuations during the third quarter of 2012 decreased consolidated revenue by approximately $2.1 million, or 1.9%. On a local currency basis, our European revenue increased by 14.7% compared with the 2011 third quarter.

Direct costs as a percentage of revenue were 78.3% in the third quarter compared with 79.3% in the third quarter of 2011. SG&A expenses as a percent of revenue decreased to 15.8% from 16.2% in the third quarter of 2011. The billable travel expenses included in the third quarter 2012 revenue and direct costs are $3.312 million. The billable travel expenses for the third quarter 2011 totaled $3.074 million.

Third-quarter operating income grew to $6.3 million, an increase of $1.7 million, or 38% year-over-year. Compared with the trailing second quarter of 2012, operating income increased $180,000, or 2.9%. Operating margin in the third quarter increased to 5.9% of revenue, a 140 basis point improvement from last year's 4.5%. The year-over-year increases in operating income and margin were due primarily to the increase in the Solutions business and our sales mix and the additional operating leverage.

Net income was $3.8 million, an increase of $822,000, or 27%, compared to the third quarter 2011. On a per diluted share basis, net income was $0.23 for the quarter, an increase of 28% compared to third quarter of last year. Both the 2011 and 2012 third-quarter results include equity compensation expense of approximately $0.02 per diluted share net of tax.

The tax rate for the 2012 third quarter was 39% compared with 35.3% in the 2011 third quarter. We expect the tax rate for the full year 2012 to be between 38% and 40% compared to the 37.6% in 2011. The increase in the tax rate in the quarter and in the full year 2012 is due to the expiration of certain federal tax credits that we realized in 2011.

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

At the end of third quarter, we had no debt and $29.4 million of cash on the balance sheet compared with $12.6 million of cash at the end of the third quarter last year. Both the third quarter of 2012 and 2011 ended on a US biweekly payroll date.

Our days sales outstanding was 60 days at the end of the third quarter, one day lower than at the end of the third quarter last year. Our cash provided by operations in the third quarter of 2012 was approximately $6.2 million as compared with approximately $2.8 million in the third quarter of 2011.

In the quarter, we had $471,000 in capital expenditures and recorded depreciation expense of $672,000. We repurchased approximately 38,000 shares of CTG common stock during the third quarter of 2012. As of today, our repurchase authorization is for approximately 550,000 shares.

As it remains accretive to our earnings, we intend to continue our repurchase program during the fourth quarter of 2012. Jim?

Thanks, Brendan. As I mentioned, in aggregate, our Solutions business, which is significantly more profitable than our Staffing business, increased by 13% in the third quarter 2012. The Solutions business was 42% of our total revenue in the third quarter. The growth in Solutions work is primarily coming from healthcare projects and it is continuing to drive margin expansion. Overall, our healthcare business was up 17% over the third quarter of last year.

On our conference call at the end of July, we mentioned that we had received two RFPs for electronic medical record projects, which the hospitals had not decided what IT services firms would be awarded those projects. In addition, we received two RFPs for EMR projects in the third quarter of 2012. Of those projects, we won one project and we still have three bids outstanding for which an IT services firm has not been selected.

When we started the third quarter of 2012, we had 18 active EMR projects. During the quarter, we started two projects, one of which we had won in the second quarter of 2012 and two projects came to an end. Therefore at the end of the third quarter of 2012, we had 18 active EMR projects.

Our EMR work continues to grow as the size and scope of the engagements continues to increase. As we mentioned before, we currently have a significant amount of opportunity for EMR business. While we increased our EMR revenue by 25% in the third quarter and we expect continued growth in EMR work, competition for 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 that we can hire is going to be the limiting factor to growth in our EMR business.

Our software as a service, or SaaS offerings are beginning to contribute to our improved profitability. While still only approximately 1% of our total revenue, two of our SaaS offerings, our IT medical management and fraud, waste and abuse offerings, added approximately $0.02 to earnings per share in the third quarter of 2012 when compared to the third quarter of last year.

Having covered healthcare, I would also like to talk about the other three vertical markets that we focus on. Our technology service provider market, which is an all staffing business, declined by 8% in the third quarter. As to our energy vertical, it increased during the third quarter of 2012 while our financial services business was approximately the same as it was last year. The lack of growth in the financial services business in US dollars was a result of unfavorable foreign currency fluctuations.

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

If you look at our Staffing business in local currencies, revenue increased by 3% in the quarter. The reason the Staffing business was flat to last year in US dollars was the unfavorable foreign currency adjustments that occurred in the third quarter of 2012.

Looking at the fourth quarter of 2012, we are forecasting total revenue to be in a range of $108 million to $110 million or an 8% increase from the midpoint of our guidance over last year's fourth quarter. We are forecasting earnings per share in the fourth quarter of 2012, excluding the gain from life insurance proceeds, to be in the range of $0.22 to $0.24 per diluted share, or a 15% increase from the midpoint of our guidance over the fourth quarter of last year.

For the 2012 full year, we expect a revenue range of $424 million to $426 million, or a 7% increase from the midpoint of our guidance over 2011. Based upon our revenue forecasts and the anticipated mix of business, we expect 2012 net income per diluted share, excluding the gains from life insurance proceeds, to be in the range of $0.87 to $0.89 or a 24% increase from 2011 at the midpoint of our guidance.

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 earnings per share in the third quarter increased by 28% and we are on pace for another excellent year in 2012.

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

(Operator Instructions). Matt McCormack, BGB Securities.

Good morning. I guess the first question just on the SaaS offering, I don't believe you've really discussed this much in the past. If there is any detail that you can provide, it looks like for it to be $0.02 accretive and 1% of revenue, you are looking at about a 32% net margin. So obviously very profitable. Is that just one client? Is it -- is it in full production or are you just testing it with one client? I guess what is the possibility -- how much can this grow to I guess is the question.

Okay, that is a very difficult question. But in terms of what it is currently, we have one client for both offerings, so two different clients. One of the clients is the IT medical management model; it is the original client that we are working with to develop it. And under a grant from New York State, we are in the process of installing it in a couple hospitals in western New York. We are also building the model out for other diseases. So we have end-stage renal disease developed and that is actually being used by the same client.

And then the other diseases we are building it out for are congestive heart failure, diabetes, chemical dependency and mental health. The fraud, waste and abuse also is with one client. I think we announced probably at the end of the first quarter that we had one small payer who had signed up to use the application -- it is commercial -- and given the client our findings and the client is now working through pursuing getting the money back from the providers for some of the claims that we have indicated. And we received our first payment. That is based upon what they save is the way that we are marketing it, so we get a percent of what they save. So we received our first payment in the third quarter of the year. That is the first time commercially that we have ever received a payment for it.

These two applications are totally new to us. For our existing offering, we think that we have a pretty good method of estimating our future revenue and profitability. If you look for instance at the midpoint of our guidance for this year, while many companies have changed the midpoint of their guidance, that has been the same midpoint that we have had really since the end of the first quarter.

So for our existing offerings, we have a pretty good method of we know how many clients are interested, how many bids we are going to get, how many times we are going to win, etc. These are totally new to us. And we are also marketing clients that we have never really done business with before. So on the fraud, waste and abuse side, for instance, we are marketing that product to payers, which we have a lot of experience with, but we are also marketing it to states and we have really never done any business like this before with states. So on year or two, we will probably be able to come up with a pretty good model to estimate what the future is going to look at. But until we have got more history, that is just impossible to do.

Okay. And turning to the healthcare vertical, if I did the math right, it looks like, for the quarter, it was down slightly, $1 million or $1.5 million sequentially. First of all, is that accurate and if it is, what is going on there? Is that mainly seasonality or something else?

It sounds like you did the math correctly and it is seasonality. We have mentioned when we had the second-quarter conference call that we had worked a lot of overtime in the second quarter of the year and our people work a lot of overtime when hospitals go live because if anything needs to be adjusted or if anyone has any questions, our people have to be there on the spot to be able to deal with that.

In the third quarter of the year, this is for the whole Company, we generally lose about 3% of our revenue just because more people take vacation. We also don't work much overtime, including in healthcare, in the third quarter of the year. I don't ever remember a hospital scheduling a significant go-live of a hospital in the third quarter of the year because people just, because of the summertime, they want to be with their families. The weather is nice, they don't want to work a lot of overtime.

So we expect, and in our guidance, we have a fourth quarter -- less vacation time. We always experience less in the fourth quarter than the third quarter and we have more overtime booked for the fourth quarter of the year.

Okay, okay. And then the contraction in the technology vertical, I guess could you talk about what the drivers are there? I mean I think it has been -- I think the demand for IT professionals has been pretty strong. So to be down 8%, I guess I was just curious is there any color that you can provide there?

Right. And this is all public information, so almost all of our technology service provider business is really with IBM. The vast majority of it is with IBM. Our IBM business, if you do the comparison -- Brendan gave out the number -- is down 8% when compared to last year. It is actually 8.2%.

Part of that is because our business with them is down. Most of our business, about 75% of our business, is with their systems and technology group, STG. That is their server group worldwide and their business is off after you adjusted for divestitures that they did and exclude currency exchange fluctuation. If you look at IBM's release from last week, STG was down about 9% and that is not just IBM's server business. If you look at any of the server manufacturers, their business is down, particularly in the European market.

Because their business is down, they are launching less projects and that is really when they need our people, but the STG division used to have a component of it, which was called RSS, the retail stores systems, a business unit of IBM and at the end of July of this year, that was sold from IBM to Toshiba and we still retain that business. We have the business with Toshiba. It didn't go away. Actually it is fine and growing a little bit. However, it comes out of the IBM's numbers.

So if you adjusted for that and said, okay, take the RSS business unit out of the 2011 quarter, IBM's business with us is down 4.4%. So part of it is just a switch in classification in my mind that is going from technology service providers into the other category and part of it, 4.4%, is a real decline from IBM and it is just based upon the fact that the business unit that we are serving, their revenue is off.

Okay. Great. And then the last question, very strong cash flow quarter, now $30 million in cash or so on the balance sheet. I know you haven't particularly been acquisitive. So just your thoughts on returning cash. I know there is I think 500,000 shares authorized, but that would only account for about $8.5 million worth of stock given the current share price and you continue to be cash flow positive. So I guess what are your thoughts on returning that cash to shareholders?

Well, our first preference would really be to buy something, to buy a small, very small IT services company that has solutions for the healthcare market. Something that perhaps would expand us geographically or something that would be an offering that we currently don't have or that would enhance one of our current offerings.

Unfortunately, because the large aggregators bought up most of them over the last few years, there aren't many of them for sale. So we are still looking and we are still hopeful that we will buy something. It just hasn't happened yet and if we do buy something, our preference would be to use cash to pay for that.

In terms of the stock buyback, it is true; there is about 550,000 shares left. Our Board has tended to give us authorizations in 1 million share increments. I haven't really talked to them about what happens when this authorization runs out, but I suspect that they would be favorable to at least considering increasing the authorization going forward. This is about the third or fourth authorization that we have actually had from them. So if you go back probably to 2007, we've probably repurchased between 3 million and 4 million shares.

The other thing that I know the Board has been looking at and I think that they will continue to look at is the possibility of a cash dividend. Before 2008, very few, actually less than 10% of the technology companies with revenue market caps our size actually paid a cash dividend. But more and more as we go out and talk to shareholders, more and more of them are asking if we would consider a dividend. So I am sure that our Board will take that under consideration.

Okay, great. Thank you so much.

Brian Kinstlinger, Sidoti & Company.

Hi, good morning, guys. The first question I wanted to talk about, first couple of questions on EMR. I am wondering with the discussions you are having in hospitals that are not yet going to an implementation, what are they saying, what are their plans, what are the timelines? When do you expect to see a surge from some of those hospitals out there?

That is a difficult question to answer because each one of the hospitals actually is looking at it differently. A lot of the hospitals decided that they were not going to avail themselves of the ARRA funding; the funding actually came out of the HITECH bill. So those hospitals that wanted to get the reimbursement from the government kind of jumped on the process early.

The hospitals now though are facing a potential penalty if they don't have electronic medical records by the beginning of 2015. And I suspect most of the larger hospitals that can't afford to put in an EMR system will probably do so and try and avoid that penalty because it starts off at 1% of your Medicare/Medicaid and runs up -- it can run up to 5% over a period of time as the government sees fit.

So I think you're going to see the second batch of systems that, and this time, they'll want to avoid the penalty instead of getting the payments, are going to start their projects up. If you really wanted to be up and running on January 1 of 2015, you really should start up probably January or first quarter of next year.

The other thing that we do know is that some of the larger hospital systems who didn't start up are planning on starting up. There is one hospital system that is quite large, for instance, that we know is targeting January 1 of next year and the larger the hospital system obviously, the more people that they need. So we think that the resources are probably going to be certainly tight through next year, even maybe through 2014.

Do you think that the date that compliance starts will hold and do you think there will be an announcement that, A, it will hold or B, or moving it? Is it some hospitals don't necessarily believe that that date will hold?

Some hospitals are very hopeful that they won't hold. The government in the past, when hospitals as a group said that they couldn't do something, government has been pretty accommodative in moving the date. For instance, the ICD-10 conversion date, while it is needed for the system, has been postponed three times. So a lot of the hospitals think that the government is going to back off and perhaps not impose the penalty.

As to whether they move the date or not, first, tell me who is going to win the Presidential election because you'd probably get a different answer depending on who you assume wins the election. That is largely a political decision and really that can go just anyway from here.

I tend to think that the government is serious about it. I mean the federal government believes and has a report out from them that it will cost the United States about $100 billion to provide everyone with an electronic medical record and the report estimate that if everybody in the United States had an electronic medical record, it would reduce healthcare costs by $200 billion to $300 billion a year. Government agencies pay for 55% of all healthcare in the United States because of Medicare and Medicaid for veterans, etc. So most of that or the majority of that savings would accrue back to the government and as we all know, the government is looking for ways to reduce the deficit. And getting healthcare costs to drop because you are eliminating duplicate payments would be one that would definitely be politically acceptable.

So I suspect that eventually they will use it, but the whole HITECH Bill was kind of a [carrot and a stick]. Do it early, you get paid. Wait and we're going to penalize you. That is pretty unusual for Congress. It is hard to tell whether they will actually enforce it in '15 or not.

Since you brought up the Presidential race, so is it fair to say that you think that if Romney wins that there will be extensions more so? Or maybe take us through -- if one candidate is better for your business or another so we could figure out what we think about November.

Well, I am not a political analyst, but certainly Romney has indicated that if he were to become President that he would try and have Obamacare, that legislation overturned and certainly President Obama is in favor of it. And if you take a step back and say, okay, that makes sense, I suspect that Romney would be a little bit more accommodative to the hospitals, particularly if they said we are not ready for this.

Even though Romney faces the rising healthcare costs and the budget deficits. So again if -- he is a business person -- if he can reduce government cost by a significant amount by having hospitals use electronic medical records and you have got the tools to be able to do that, he probably would do it, but I think he would be a little bit more accommodative then perhaps President Obama would be.

In terms of -- sorry -- in terms of our business, healthcare costs are going up and all of our major offerings, the SaaS offerings and the electronic medical records, are really designed to help reduce healthcare costs. So whichever Presidential candidate gets in, I suspect our healthcare business is going to be good going forward.

Okay. Now two other questions and I will get in the queue and ask you some more. But the first one is can you talk about pricing in EMR, especially once that large customer, potential customer in January for the entire industry given there will be even less supply left? Is everyone raising prices at that point?

And then second, in the EMR side, you only have three projects that you have bid on right now. That is small compared to I think sometimes in the past. So I am wondering are there a number that you expect to put out an RFP in the next six months? Can you quantify that number?

Okay, in terms of the number in the next six months, that is hard to say. We still have a pipeline of hospitals that say that they are going to -- that they are going to put out RFPs. It is really the size of the systems like the one that I mentioned, which is one of the top 10 systems in the country. That particular hospital system going live with an EMR project is equivalent of 43,000 bed hospitals, starting up their project at the same point in time. So when you look at the size of the systems that are talking about doing RFPs, it kind of dwarfs maybe the backlog that we have had in the past.

The healthcare costs, wages and bill rates have been increasing. Probably this year, it is in the 5% to 10% kind of range, I would think. I think that if the large system goes live, that resources are going to even be more constrained and I would expect to see more wage inflation. Now, everyone in our industry, when we have to give out an increase to one of our employees because we have to keep them in market, goes to the customer and says basically, look, you are going to lose this person unless we give them this increase. So having the wage inflation at the moment is probably more of a good thing for us than a bad thing.

Okay, thanks.

Frank DiLorenzo, Singular Research.

Good morning Frank.

Mr. DiLorenzo, your line is open.

Hi, can you hear me?

Yes.

Oh, hi, thanks. A quick question on SG&A. It looks like this year you have done a nice job controlling your SG&A costs and going back to last year, there was a little bit of a spike in your fourth quarter. My question was with regards to the SG&A situation, if you think it will be well-controlled or relatively flat going into this fourth quarter here and also into fiscal 2013. That was my first question. Thanks.

Okay. We did get a spike in the fourth quarter of last year. There are more days, so you would expect the absolute amount of it to go up. We actually timed some of our SG&A expenditures, particularly on marketing and development, based upon what we think our profit levels are going to be. So when we got to the fourth quarter of last year, as we started it, we realize that our profit levels were going to increase. As you know, last year in 2011, we went from $0.18 to $0.20 in the fourth quarter and we elected to put more into marketing and more into Solutions work automatically because the profitabilities were going up. Our incentives also in total were higher in that quarter.

Longer term in terms of a target, if you will, and this goes back probably 11 years ago, we had targeted around 16% for our SG&A expense and then we were shooting for 22% to 23% in terms of our direct profit. And we achieved that obviously. We are going to hit an operating margin of 6% to 7%, which has been our long-term objective.

Okay, that's helpful. Thanks. Also another question regarding your 18 EMR projects, you had an announcement earlier in the month about an expansion of one deal. I was wondering if you can give us a little more color on your ongoing agreements, what the potential might be for expanded deals regarding your current agreements going forward. Thanks.

Right. I think you can assume -- you have seen in the past, we often have been seeing an increase in the amount of work once we have won one of these deals. What happens is, just so you can kind of understand it, and I will use 1000 bed hospital system because it is just easy math. You actually need about 75 people to do an EMR for a 1000 bed hospital system. 25 of those people are generally IT consultants from the outside, our people and imagine that you are staffing a pyramid. All of our people have at least one to three EMRs that they have done before and they will staff the entire top of the pyramid.

The client usually will estimate that they can provide the other 50 people. Generally 25 of those are trying to get out of their IT department. Their people need to learn those applications. If they don't, when we leave, who is going to maintain them? 25 of those people they try and take out of their clinical area. Often what happens to a hospital, while they think they can do it, when they actually go and yank people out of clinical and take people out of IT, they discover that it is very difficult to do, that they can't totally staff their 50.

We have agreed to provide them with the 25 people and we do. They then come back to us with additional requirements and say, look, can you fill these positions that we originally were trying to fill. I would love it if we could fill all those positions. The problem we are having at the moment is that because resources are scarce, we are filling some of those additional requirements, but not all of them.

So to the extent that the labor market is constrained and remains constrained for people with EMR skills, we will probably get some of that additional revenue, but not all.

Thanks.

Kevin Liu, B. Riley & Co.

Your healthcare business outside of EMR, just wanted to talk a little bit about what you are seeing in terms of upgrades of clinical systems ahead of potential ICD-10 adoption. And then also just anything with respect to growth in your application outsourcing piece.

Yes, that is a good question. We are not seeing anything in terms of ICD-10. It was kind of funny. We actually had a lot of clients that had budgeted money to do remediation this year and we were expecting to get it. As soon as the government delayed it a year, they took that money and they used it for another one of their projects. Most of our clients think that they can get their ICD-10 remediation done in about 12 months.

So when we talked to our clients, most of them are talking about starting projects up in the second or third quarter of 2013 in order to get their ICD-10 compliant and we still have a lot of clients out there that are hoping that the AMA is successful and gets the government to postpone the date again. I think that is possible, but I suspect this time that that date is probably going to stick for a while.

In terms of our outsourcing, we have two relatively large, we call them transitional outsourcings where the client was going to a new application and our people came in and maintained the old application until the new one was up and running. That actually ended in the second quarter of the year. We had expected a larger permanent outsourcing to start up in August. Unfortunately, it was delayed, so it is actually starting up now in the month of October.

So our outsourcing business was actually a negative. Revenues were negative in the third quarter, but we are expecting once this other outsourcing is fully staffed that it will pick back up again and we see a lot of opportunity in outsourcing going forward. Our clients historically have not had much turnover in their IT departments and particularly because wages are rising for people with IT experience, they are seeing much more turnover than they have in the past and we think that they are going to look to us to do outsourcing in order to address that.

Got it. And then shifting gears a bit, you talked a little bit about the fraud, waste and abuse earlier. I just wanted to get as much color as possible around who within your organization has been put in charge of the initiative. Are you guys looking to hire aggressively on the biz (inaudible) side just to bring on board more folks with relationships to the payers and kind of what does the pipeline look like in terms of how many payers you are planning on going after say in the next year or so?

We have a national salesforce that calls on payers. So on the payer side, we have certain geographies that I know that are looking to perhaps fill with a person that has stronger payer relationships perhaps, but we already have people calling on many of the payers, so we are pretty well set on that front.

The market that we are not as really well structured is actually the states. Historically, we have not sold directly to state governments. We do not have as many people there with relationships. We do have relationships in a few of the states that we are marketing to, but that is an area over the next 12 months that we will probably increase our capability to.

We currently have six betas for either states or payers underway, so we have six betas for either states or payers that are underway and obviously the guys and gals are trying to close those. One of the things that we have found though, it is a much longer sales cycles than we are accustomed to. An EMR might be a lot of spadework to get in position to get an RFP and then probably 60 days later, you come to the end of it. When dealing with a state, I think they tend more to think in terms of year cycles versus two-month cycles. So we have got a good pipeline. Everyone we have showed the application to has basically told us, yes, you are right, it works and now it is a matter of just closing more.

Great, thank you.

Vincent Colicchio, Noble Financial.

Good morning, Jim. Just a couple. Most of mine were answered. On the European business, if you could talk about that a little bit. How visible is that? Is that a short-term agreement and is it just a matter of the EU staying intact and you will see a nice flow of business there from the government? Does the economy impact that? What are the factors we need to think about?

Sure. And let me just give some background on Vince's question. The increase in our business over in Europe is primarily related to business with the European Union. The headquarters for the European Union is in the Flemish portion of Belgium. That is where our European operations are headquartered and most of our European revenue actually comes from the Flemish part of Belgium. We are one of the largest IT services companies in that part of Belgium.

And basically the EU government is rebuilding Washington DC 200 years later. Every month, they announce that they open a new government ministry or agency and that agency needs IT support. So we have been selling more and more to the EU. The contracts tend to be longer in term, not shorter actually. Their contracts can go on as far out as four or five years in terms of supporting some of the needs that they have.

It is definitely a good market for us. We are a player in that market, obviously a recognized player and I think that we have opportunities going forward as the European Union government is established to sell more and more IT services. So it definitely is a bright spot.

Our commercial business over in Europe has been somewhat weak because of the European economy and obviously, we are being hurt by the foreign currency exchange. This quarter, I am pleased as punch this quarter that our European revenues and US dollars were up a couple of percent. I don't think I have heard another IT services company that can say that.

And on the Toshiba business, I know it is early, Jim, but any sense for how secure that is?

We are one of their primary providers. That business has been going very well. Actually its revenue is up. They are taking on more people. We believe we have maintained or perhaps even improved our position going forward. So we are pretty optimistic about it continuing into the future and growing.

Last question. Healthcare solutions revenue as a portion of total revenue, does anyone have that number handy?

Healthcare, I' have to look that one up. Healthcare was --.

33%, but just the healthcare solutions piece.

Oh, it is about 30%.

Okay, thanks. Nice quarter, guys.

Thank you.

Bill Sutherland, Northland Capital.

Thanks, Jim. I'm on a bit late, but I caught some of your commentary about the software sales. So is this -- should we think about kind of the same kind of impact for Q4 from the two initiatives that moved the needle in Q3?

Yes, actually in our guidance for the fourth quarter, we assumed that the profitability would be the same in Q4 as it was in Q3.

Okay. And are they contributing somewhat equally or disproportionately?

It is a little disproportionate. I really don't want to disclose the actual numbers for two reasons. Actually one is we don't disclose profitability numbers for any of our offerings, but in this particular case, if I disclose the numbers, there is only one client. So I'm actually disclosing profitability for a client. So I would rather not do that.

Okay. On the medical management solution, the grant funding I think is the primary source of funding there and does that, as far as you can see, take you through '13?

No, that project -- there will be some revenue through the end of '13, but the development of the application has to be finished by June 30 of 2013. And then in the last six months of 2013, the hospitals and our medical group are actually using the application on patients kind of creating beta groups, patients created using the application without the application and then they are supposed to write white papers on the first quarter 2014 on how well the application worked.

So I am just trying to understand, will it be -- how are you thinking about this sequencing out as far as revenue if you -- once you finish development midyear next year, will there be a drop-off while the commercial -- real commercial revenue builds?

It is possible, but the end-stage renal disease application, the beta groups -- that was completed in the past, actually it was completed in 2011, and the beta groups are occurring between July 1 of 2012 and December 31. So in the first quarter of next year, they will actually -- in the first quarter of 2013, they will actually write the white papers on how well the application did in terms of end-stage renal disease.

So our hope would be, by the third quarter of next year, that we would be in a position to -- we certainly are now in a position to commercially sell the application, but that we would be able to actually make sales and implement the application because the white papers would already be out and the application is done.

Right, okay. I think that is all I had. Thanks so much.

Rick D'Auteuil.

Hi, Jim. Good morning. I actually am getting in the back of the queue; almost all my questions have been answered. Just to go back, probably three or four years ago, there was a big opportunity in front of you in European healthcare, the hospitals updating. What is the status of that? I know it never really happened, but is that still out there or what is -- maybe bring us current on that.

Sure. The opportunity that Rick is referring to was the National Health System project in the UK, essentially a centralized national health system organization was putting US software in all of the hospitals or trusts as they are called over there in Europe and we were supporting a vendor, who was Fujitsu, who was in the southern region and doing installs. And actually we put the application -- it was Cerner who was being installed in the southern region and we put it in at two or three hospitals. And as far as I know, it is up and running.

This is more a political problem. It wasn't a technology problem, for political problems reasons that that project ended, that there was the central part of the National Health System had taken all the capital spending away from the hospitals and was controlling that project. It was estimated it would cost more than $10 billion. They had never run a project like that before and it was divided into five regions where you had different IT services companies and even different software being installed.

So it isn't the way -- if I was in charge of running the project, I wouldn't have done it that way. It would have been one IT services company and it would have been one software. At any rate, there was a change in the UK government. The NHS has released the money to the local hospitals now, so the hospitals or trusts are now in charge of spending their own money and we actually are talking to some of them about putting in US software packages.

The same is true in the continent of Europe. The US software is so much farther ahead than the software that they are using, they should be able to implement it and reduce costs. Epic, which is one of the software vendors, a private company, but certainly a big winner in the EMR space, open an office in Amsterdam in the Netherlands last November and they actually installed their software in two hospitals. The very first hospital that came live, so it is fully functional with it, is reporting significant savings as a result of putting the software in.

So Europe has the same -- it is actually worse. Their population is aging quicker than ours is. They have the same healthcare problems that we do in terms of costs rising and we think that the European market starting probably now over the next couple of years is going to start to install US software and we would like to be a large player in doing that.

All right, so you have done -- have you worked with Epic over there on these few opportunities that have gone forward?

No, the first two hospitals, they actually did the installs themselves. We do work with Epic. We work very well with them. We know the person that runs their European operations. Actually was one of the guys that used to be in the United States. Epic, like all the software manufacturers, would love to do all the services themselves. It doesn't work out that way because we do something a little bit different than they do.

When they go into a hospital and install it, the doctors and nurses have to change their workflows in order to match up with the workflows that are already set up in the version of the software that they are putting in, where we go in and change the software so that it matches their workflow. So we expect the European market will probably go the way of the US market, that people will want the software adjustments that works best in their environment.

How about available talent there that would help you tackle that market?

Well, Europe does have some EMR packages. They are not perhaps as robust as the Epic package or what we are using in the United States, but there are some people with those skills. There are people with PACS skills. Radiology has stored images for a long period of time. It is called PACS. Those skills are very close to what we need. When we did the installs in the UK, 50% of the people on the projects were from the United States. They were our consultants that, for a two or three-year period, moved over to the UK and 50% were people that we trained in the local areas. So we suspect that, in Europe, we are going to have to do the same thing. It is going to be a combination of ex-pats from the United States plus locally trained people.

So maybe that starts to pick up late '13, you think?

It is quite possible. There are a lot of hospitals looking at that software today.

Okay, thank you.

Michael Needleman, Preservation Asset.

Gentlemen, a lot of the questions have been answered, but just a couple. On the fraud aspect, as far as revenue guidance for the fourth quarter, I know you are not breaking it down on those two SaaS products, but it is my understanding that you collect the revenue after the process or billing issues have been kind of found. How do you guide on revenues on that type of market if in fact you are receiving the revenues after the process? And how do you have visibility in that process?

I mentioned that before. Unfortunately, we don't have a good model currently and in order to be able to do that, other than just talking to the customer and asking them, hey, what do you think that we found, you are going to push through that's kind of the way we're doing it currently. Eventually, we know exactly how much money we found in various categories and what we are starting to do is keep track of how much the payer is willing to go back to the provider and ask for their money back again. So eventually, I think we will have a model like we do for all the rest of our offerings.

So in other words, if I could interrupt and pardon me, the process of you guiding towards about the same amount of money for those two SaaS opportunities, some of that is -- it is not on a true SaaS basis, but there is some type of revenue that you think that you will achieve on that fraud business, is that correct?

Yes, based upon talking to the customer and asking them what they are going to do in the fourth quarter.

You have mentioned a number of times in the whole process here about being I guess deterred -- not deterred, but hard to find people in the areas of the EMR as far as people that are capable. What exactly on the technology standpoint is required or needed that you are finding it so difficult to find people that are able to put these in?

Okay, we can train people to do this. We have done it. I just mentioned in Europe, 50% of the people were newly trained. The problem at the moment is that the CIOs are saying, look, I have to get this in, we are late to the game. I don't want to be late and I want to see the resume of every person that is going to be on my project and all of the people that I will accept have to have at least worked on one EMR project before from start to finish. And that is generally a two-year process. So what they are looking for are people that understand hospital workflows and that have actually worked on one EMR project in the past.

Okay. And then just to follow up, if I heard you correctly, you just mentioned that to install one of these is about a two-year process, is that correct?

In a 1000 or 2000 bed hospital system, that is correct.

So of the 18 that you currently have, would you kind of say that, and I am not asking for a percentage, but are more than half well into that process as far as the implementation of that program?

Yes, I don't have the project sheets in front of me, but my guess is it is half.

Okay.

They usually figure it is about half. For the last couple of years, we have been ending two projects in a quarter roughly and starting two.

Two as well? Okay. And two last quick questions, if I might. The process of how you are able to -- your utilization in EMR, is it basically you are running -- what kind of utilization are you guys running in that area?

If a person gets a couple weeks vacation and has normal sick time, etc. and takes the normal holidays, you get 88% utilization and that is roughly what we are running.

Okay. And then just to come back on the price, and this is my last question, if it is so tight right now with people from the standpoint that are qualified in terms of the customer, why aren't prices actually accelerating up more?

They are. Well, more, I don't know, but prices in both 2011 and 2012 have been increasing about 5% to 10% and we are not the only person out in the market. So the market kind of determines how much of an increase.

But they are all in the same boat, are they not?

Yes, absolutely.

All right. Thank you so much, gentlemen.

Thank you.

Brian Kinstlinger, Sidoti & Company.

Thanks. A couple of quick follow-ups. First of all, we talk about 5% to 10% price increases and 5% to 10% wage inflation. So you are not able to capture anymore margin; it still holds at about 10% for healthcare solutions in this part of your business as well?

No, that is not actually true. Usually what happens, we probably, while a project is live, we don't capture anymore. So if we start a project with a customer, we will keep the margins the same. As those people move to a new project, their bill rates generally tend to go up and often we will increase our margins at that point.

Okay. And then you talked about that large hospital. There are like 43 1000 bed hospitals. If I calculate that right, at 25 people per 1000 beds, that is 1075 people. Does the industry, not just you, have enough people given you're fully utilized basically outside of vacation have enough people to meet that and what happens at that point when they want those people?

Well, your calculation is correct. We think it will probably take about 3000 people in total, probably about 1000 from the outside with experience. This has never happened before. I don't -- the industry doesn't. No one -- I don't believe that any of our competitors have anyone sitting on the bench right now. Everybody with EMR experience is already in an existing project and the industry in total could supply 1000 people if we shut down all the rest of the projects or half at least of the other projects probably. So it is -- I think that it may be the point that people start to except new trained people, but we have to wait and see how that goes.

Has that been discussed with this customer?

No, because the RFP isn't even out with that customer.

Okay. And then just a last question, it is minor, but remind us on the other income line why you have cash and no debt and you have a net expense there.

(multiple speakers) bank fees, just for having the lines available to us, Brian, that we have a three-year commitment and it is just the amortization of the fees.

There is also smaller items that hit that item, that line item that cause it to be expensed too. But the biggest item in that line item is the cost that we pay to keep our revolver.

Okay, thank you.

Bill Sutherland, Northland Capital.

Thanks. A quick one. Any completions likely in EMR fourth quarter, Jim?

There probably are quite frankly. I usually figure that it is going to be two completions a quarter. The problem is that, although our customers have a date, often the date slides some and even when we hit the date, often the customer will ask us to stay and do optimization, but it is quite possible we will have a couple just like the other quarters.

And the current fraud, waste and abuse customer, I know you don't have much visibility outside of this quarter, but is it your sense that they will continue to try to kind of bring in the claims next year as well or are they running through their patch?

No, the data that we processed for them actually was old. I believe it was 2011 and they are very happy with the results. So they have given us every indication that they are going to continue with it.

Okay, thanks again.

Thank you.

Do you have any closing remarks?

Yes. CTG is firmly on track for another year of double-digit earnings growth, our sixth in the last seven years. 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 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.

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