Computer Task Group Inc (CTG) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CTG fourth-quarter 2012 earnings conference call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference is being recorded. I would now like to turn the conference over to our first speaker, Director of Investor Relations, Mr. Jim Culligan. Please go ahead.

Thank you, Brad 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 fourth 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 our website at CTG.com.

Before we begin, I want to mention the 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 the 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 fourth-quarter earnings conference call. As you saw in our news release, we had an excellent fourth quarter with revenue increasing 7% over 2011 and earnings per share, excluding the life insurance gain, increasing 20%. Revenue was at the low end of our guidance and earnings per share, excluding the insurance gain, was at the high end of our guidance. As we expected, our higher margin solutions business continues to grow and increased 12% in the fourth quarter 2012 while revenue from our lower margin staffing business grew by approximately 3% when compared with the fourth quarter of 2011.

I am going to talk more about our results and what we see for the 2013 first quarter and full year, but first I am going to ask Brendan to start us off with a review of our financial statements. Brendan?

Thanks, Jim. Good morning, everyone. For the fourth quarter of 2012, CTG's revenue was $107.9 million, an increase of $7 million or 6.9% compared with the fourth quarter of 2011. Fourth quarter 2012 had 64 billing days, one more day than in the fourth quarter 2011. Solutions revenue in the fourth quarter of 2012 increased $5 million, or 12%, compared to the fourth quarter 2011 and totaled $45.3 million.

As a percentage of total revenue, solutions revenue was 42% compared with 40% 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 $2 million, or 3.4%, to $62.6 million. Fourth-quarter revenue from IBM, our largest customer, was $27.9 million compared with $27.4 million in the fourth quarter 2011. As a percent of total revenue, revenue from IBM decreased to 25.8% in the 2012 fourth quarter compared with 27.2% of total revenue in the 2011 fourth quarter. Our revenue from IBM in the quarter was negatively impacted by approximately $2.1 million when compared with the fourth quarter of 2011 as 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 retained the business with this new client.

Revenue from our European operations was $18.3 million, an 11% increase from the $16.5 million recorded in last year's fourth quarter. The effect of foreign currency fluctuations during the fourth quarter of 2012 decreased consolidated revenue by approximately $700,000, or 0.6%. On a local currency basis, our European revenue increased by 15.2% compared with the 2011 fourth quarter.

Direct costs as a percentage of revenue were 78.3% in the fourth quarter compared with 77.4% in the fourth quarter of 2011. SG&A expenses as a percent of revenue decreased to 15.8% from 17.2% in the fourth quarter of 2011. The billable travel expenses included in the fourth quarter 2012 revenue and direct costs are $3.2 million. The billable travel expenses for the fourth quarter 2011 totaled $3.3 million.

Fourth-quarter operating income grew to $6.4 million, an increase of $939,000, or 17% year-over-year. Operating margin in the fourth quarter increased to 5.9% of revenue, a 50 basis point improvement from last year's 5.4%. The year-over-year increases in operating income and margin were due primarily to the increase in the solutions business in our sales mix and the additional operating leverage.

Net income in the fourth quarter includes a gain on nontaxable proceeds from a life insurance policy of $845,000, or $0.05 per diluted share. Excluding this gain on life insurance proceeds, net income was $4 million, an increase of $735,000, or 22% compared to the fourth quarter of 2011. On a per diluted share basis, excluding the life insurance gain, net income was $0.24 for the quarter, an increase of 20% compared to the fourth quarter of 2011.

Both the 2012 and 2011 fourth-quarter results include equity compensation expense of approximately $0.02 per diluted share net of tax. The tax rate for the 2012 fourth quarter was 32% compared with 38% in the 2011 fourth quarter. The primary difference in the tax rate for the quarter is that the life insurance proceeds are nontaxable. We expect the tax rate for the full year 2013 to be between 37% and 39% compared to 38.4% for 2012, excluding the approximately $1.3 million of nontaxable insurance proceeds that we received in the second and fourth quarters of 2012.

Our headcount at the end of the fourth quarter was 3900, 100 people or 3% higher compared to the end of the third quarter 2012. Of the 3900 employees at the end of 2012, 90% were billable resources.

At the end of 2012, we had no debt and $40.6 million of cash on the balance sheet compared to $22.4 million of cash at the end of 2011. Both 2012 and 2011 ended between a US biweekly payroll date.

Our days sales outstanding was 61 days at the end of 2012, one day lower than at the end of 2011. Our cash provided by operations in the fourth quarter of 2012 was approximately $11.4 million as compared with approximately $10.2 million in the fourth quarter of 2011. In the quarter, we had $778,000 in capital expenditures and recorded depreciation expense of $943,000.

We repurchased approximately 25,000 shares of CTG common stock during the fourth quarter of 2012. As of today, our repurchase authorization is for approximately 535,000 shares. As it remains accretive to our earnings, we intend to continue our repurchase program during 2013. Jim?

Thanks, Brendan. As I mentioned, in aggregate, our solutions business, which is significantly more profitable than our staffing business, increased by 12% in the fourth quarter 2012. The solutions business was 42% of our total revenue in the fourth quarter. The growth in solutions work is primarily coming from healthcare projects and is continuing to drive margin expansion. Overall, our healthcare solutions business was up 15% over the fourth quarter of last year.

On our conference call at the end of October, we mentioned that we had received three RFPs for electronic medical record projects for which the hospitals had not decided what IT services firms would be awarded those projects. In addition, we received four RFPs for our EMR projects since then.

Of those seven projects, we won three projects, lost one project, one RFP was withdrawn and we still have two bids outstanding for which an IT services firm has not been selected. When we started the fourth quarter 2012, we had 18 active EMR projects. During the fourth quarter, one project came to an end. Therefore, at the end of the fourth quarter 2012, we had 17 active EMR projects.

In 2013, we expect our EMR work will continue to grow as the size and scope of the engagements continues to increase. As we mentioned before, currently, we have a significant amount of opportunity for EMR business. While 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.

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

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 increased by 1% in the fourth quarter. As to our energy and financial services verticals, both increased during the fourth quarter 2012.

Turning to our staffing business, its revenue was up 3% when you compare the fourth quarter of 2012 to the fourth quarter of 2011. We depict our staffing business as improving in the fourth quarter of 2012. If you look at our staffing business in local currencies, revenues increased by 4% in the quarter.

Looking at the first quarter of 2013, we are forecasting total revenues to be in the range of $107 million to $109 million, or a 4% increase from the midpoint of our guidance over last year's first quarter. We have one less billing day in the first quarter of 2013, which is limiting our revenue growth.

We are forecasting earnings per share in the first quarter 2013 to be in the range of $0.23 to $0.25 per diluted share or a 20% increase over 2012 at the midpoint of our guidance. For the 2013 full year, we expect a revenue range of $450 million to $460 million, or a 7% increase from the midpoint of our guidance over 2012.

Based upon our revenue forecast and the anticipated mix of business, we expect 2013's net income per diluted share to be in the range of $1.02 to $1.12 or a 22% increase from 2012 at the midpoint of our guidance, excluding the gains from life insurance proceeds in 2012.

We thought it would be helpful to briefly share our thinking on how we set our guidance for this year. We currently are seeing a tremendous amount of opportunity in our healthcare business. We think our healthcare solutions business will grow by approximately 20% in 2013. Given the opportunities in the market, we could grow faster than that; however, there are significant shortages of experienced IT labor in the market with healthcare experience and our customers are not yet willing to accept recently trained staff. We, therefore, believe resource availability will continue to be the limiting factor for our growth in our healthcare business in 2013.

For our non-healthcare solutions business, we are projecting a revenue increase of approximately 3% in 2013. We are forecasting a 2% increase in our staffing business in 2013. This assumes that there is a slow tepid growth in US and European economies. We are very optimistic about CTG's growth going forward. Our staffing business is showing signs of improving and will continue to do so as the world's economies improve.

Our US healthcare business continues to grow, particularly as some of the larger hospital systems begin EMR projects. With the recent acquisition of etrinity, a Benelux health IT consulting firm, we have positioned CTG to participate in the adoption of US packaged software by European hospitals.

While those implementation projects will most likely not start until the latter part of 2013 or the beginning of 2014, the European adoption of US software gives us the potential to create a European healthcare business, which conceivably over time could grow to the size of our US healthcare business.

We have been working on approximately half a dozen betas with states and payers over the last 12 months for our fraud, waste and abuse application. While these opportunities have very long sales cycles, we are hopeful that we will begin to close some of those opportunities in 2013.

We are currently building out our IT medical management model for four more severe and chronic diseases. That means that by the end of 2013 the IT medical model will be capable of handling 5 of the 10 chronic diseases that account for approximately 70% of all healthcare costs in the US.

We are also working with a client to combine genomic sequencing with electronic medical records. This will only be the third time that we know of that this combination has been done. This work will position CTG with one of the first of its kind cutting edge offerings in the genomic science field.

We think that if you look at where CTG is positioned in healthcare, the world's fastest-growing industry, you can see why we are so optimistic about our future growth opportunities. Given our optimism about the future, we thought that it was time for CTG to pay a dividend. As you saw in our news release, our Board declared a quarterly dividend of $0.05 per share. On an annualized basis, a quarterly dividend at that rate would represent an approximate return to shareholders of 1%.

Given CTG's strong earnings and cash flows, we believe we can pay a dividend at that rate and still provide adequate cash for operations, fund our stock repurchase program and allow us to do strategic acquisitions.

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

(Operator Instructions). Brian Kintslinger, Sidoti.

Great, thanks so much. You mentioned two RFPs you are still awaiting awards. I am interested in the pipeline outside of RFPs. How many large hospitals would you say you are in discussions with that you expect in the first half of the year will come due starting an RFP process?

That is difficult to say. As a matter of fact, even internally, we can't come up with that number. The problem is we can talk to a hospital for a year and they seem interested, but if they don't have their funding or they are just not ready to do it, they don't issue an RFP.

What I can tell you is that the size of the hospital systems is getting larger and we expect that to continue this year. One of the two, for instance, hospital systems where we've received the RFP -- actually, on this particular one, we haven't answered it yet, the RFP just came in recently -- is about 4 times the size of our average engagement currently. So it has about 5000 beds and on average, we are probably close to around 1200 to 1300 beds. So if we win that particular one, I will probably need 4 times the number of people.

And there is another system that we have talked about before that is even larger than that. They are in their planning phase now. We think that they are probably going to come out with an RFP in [RECs] in the second quarter of the year, but that hasn't happened yet. It isn't going to be so much the number of RFPs this year; I think it is going to be more the size of the opportunities that is going to drive our business.

Brian Kintslinger And it seems that those two large projects -- it doesn't seem that you or your competitors probably have the capacity to meet that. So how do you envision those kind of events playing out once they want to start those projects and what kind of conversation is going on about the supply between you, your competitors and those at least two hospitals?

Well, I think everybody has told the hospitals they are dealing with that they would be much better off to take some newly trained people. As we have talked about before, the CIOs just aren't ready to do that, so they are insisting they want to see the resumes of experienced people. Right now, we have far more RECs than we can deliver on. I mean I wish we could deliver on all the open RECs that we have. We are in the process of getting more recruiters in the healthcare area to try and deal with the number of RECs we have now. And once those two systems come on live, if we win both of them, it is just going to make the problem even worse. And we will just try and kind of steal as many people from our competitors as we possibly can.

Brian Kintslinger And so then are you constrained from bidding on certain projects at this point? Are you passing on a few and then when you do start a new project, that consultant that rolls off an old project presumably and starts a new one, how much higher is the bill rate do you expect in 2013 versus what they were previously billing as a percentage?

Okay, I will answer the second question first. Last couple years, we have seen bill rates go up 5% to 10% and I suspect that is what will happen this year as well. If the shortage becomes acute, the percentage will obviously go up incredibly.

When we bid on a project, there is -- it's usually assumed that the IT services firms will probably provide about a third of the people needed and the hospital will provide two-thirds. What usually happens is we will come up with enough people to start the project, so our third and then the hospital can't pick all the people they thought of from their clinics and their IT, so we will get additional RECs. We are committed to provide the people our one-third and we always have. We have been able to come up with those people. The additional RECs that we have with the other two-thirds that we didn't actually commit to on signing.

For these larger projects, nobody can supply them with the people alone. There isn't any vendor out there that can take this one hospital system with 5000 people, for instance and provide all the staff that they are going to need. So we actually don't have to sign up more people. We just get to supply as many people as we possibly can.

Brian Kintslinger Great. Last question I have -- well, I have a bunch more, I will get back in the queue though and let some others take a stab at it. Healthcare revenue growth has slowed in each of the last three quarters and I guess I am just trying to understand, A, the reasoning for that, when you expect it will hit the 20% range you are talking about and take us through the scenario of that outsourcing contract in the third quarter that stalled given they were changing systems. Did that impact the fourth quarter as well?

No. I am not sure which healthcare system --

Brian Kintslinger There was an outsourcing contract in the third quarter. They were transitioning to a new system and so you guys were rolled off temporarily and you said would probably be rolled back on.

Right. We did -- that actually was a different system that was kind of replacing that. It did start up not as quickly as we thought. It is actually going quite well now and it is probably going to be through the second quarter that we will be begin to staff up that additional outsourcing engagement.

What is really happening to us is that we are being impacted by the shortage of people. The constraint is not the number of opportunities. We literally probably could grow our healthcare business, if we could fill all the RECs right now, probably by about 50% maybe, if we could fill the RECs we just have in-house, but we just can't find the number of people and that has really been the constraint.

We think by -- we are kind of trying a couple of different things obviously, but by focusing in on outsourcing, in addition to the EMR, those people are much easier to find and that is going to drive our healthcare business and get us up to the 20% mark in 2013.

One change that has kind of happened within the last six months or so, our clients used to say, okay, I am going to engage you for the implementations, let's say it is an EPIC or a Cerner implementation and when you get done, my people are going to take over and we will maintain systems and do the help desk and everything else you have to do to keep the systems going. We are now just starting to see customers say, okay, maybe you should do the outsourcing of those applications going forward. So a lot of our business in the past has been legacy outsourcing. We see the newly implemented EMR as an opportunity going forward, which we haven't had in the past.

Brian Kintslinger Great. Thanks so much. I will get back in the queue.

Bill Sutherland, Northland Capital Market.

Just real quickly on the RFP status as you stand today, or I guess you said you won three -- of the seven outstanding in Q4 (multiple speakers).

We won three, we lost one. This happens occasionally. They pulled the RFP for one and we have two that we are waiting to hear whether we were selected or not.

And you have received another one or two quarter-to-date?

No, no, no. That is the count through today.

Okay. So that RFP with 5000 beds is one of the two outstanding?

That is correct. So when I say we are waiting, that particular RFP came in relatively recently. We counted it as one of the RFPs that we received. We haven't actually responded to it yet.

Okay. And then the [BIX] system, that you expect the RFP in Q2?

Yes, they are going to have to start -- they are doing their planning now because it is such a large system. It is going to take 90 days to 120 days to finish planning and then we would expect them to put out RFPs and start to hire people.

Where does the ICD-10 project cycle stand as far as RFPs or however it's being developed?

Yes, we don't have any current RFPs in-house. The fact that the government extended the date again is causing a lot of hospitals to wait and see. The American Medical Association has come out and said they want CMS to extend the date forever, that they want the government to agree that the US will never go off of ICD-9. We don't think that is practical, but that is what they are pushing for. I think they are probably negotiating trying to get the date extended again. So some hospitals are doing a little bit internally. A lot of hospitals are kind of sitting on the sidelines seeing if the AMA is successful again in getting the date pushed.

Okay. And could you give us a little color on the margin mix. I was thinking, with the impact -- the slight impact of software in particular and then just healthcare solutions, that gross margins would be part of the lever here in EBIT and they are up a little bit. It seems like it is mostly coming from G&A. I am just curious about that and what do you think going forward.

Well, we have some, but not as much maybe as you are anticipating of the newer SaaS type software that's in our estimate for the year. Clearly, if the newer SaaS offerings kick in, the increase is going to show in our direct profit margin. I don't -- the last couple years, we have been successful in holding our revenue -- our SG&A expense down given the revenue growth and I think we will see a continuation of that to some extent because our corporate office expense doesn't grow as fast as our revenues, for instance, where a lot of our fixed costs are. But, clearly, long term, to meet our profit objective, it is going to be the direct profit line that you see the increase in.

That is what I was thinking just given the mix -- the shift in the mix of business. I was just surprised it wasn't a little bit more in 2012 (inaudible). What are the days (inaudible) the quarters in 2013?

Okay, the first quarter has 63 days. The second quarter has 64. The third 63 and the fourth 65. So there is 255 billion days in 2013, same as the last couple years. The first quarter though loses one day. There were 64 in '12, there are 63 in '13. The fourth quarter picks that day up. There were 64 days in '12 and there are 65 days in '13.

You know what, I will get back in queue as well. I have a few more. Thanks, Jim.

Okay, thanks, Bill.

Vincent Colicchio, Noble Financial.

Hi, guys. It is Vince from Noble. Jim, what were some of the key factors driving the European strength? I mean that was quite strong, 15% in local currency.

Right. Well, there is two things really driving the results. One, we are in the Flemish portion of Belgium. That is where they are locating the new European headquarters for the European Union and we are one of the largest -- we have over 500 people in that office. We are one of the largest IT services companies there, so more and more, we are selling solutions actually into the new European Union. That is kind of like they are building Washington DC 200 years later. Every month or two, they will open a new ministry and they need IT support.

The other thing that has been very favorable in Europe has been our testing practice. We have somewhat of a unique automated testing practice and that business also has been growing.

And do you expect Europe to continue to be strong in '13?

Yes, actually we do. Those two factors are going to continue and then at some point, we think that we will start to land some of the hospital business. We are very optimistic about buying the etrinity. The etrinity people actually have EMR experience using local packages that aren't as robust as the ones from the United States. But when you marry those people with some of our US expertise, we think that we will be very successful in selling to the hospitals in Europe.

Just to that point, I mean it kind of surprised me, there is a large show in the United States, it is called HIMSS. It's Health Information Management Systems Solutions, I think, or Society. And everybody goes to HIMSS, probably almost every one of the CIOs that we deal with from a large hospital system will be there. No one ever comes over from Europe. This year, there are 16 hospitals just in Belgium sending 35 people to HIMSS to look at software. So in the Netherlands and Belgium particularly, they are really starting to seriously take a look at the US software. And that was one of the reasons that we bought etrinity when we did. We want to be in the process of helping them select the software that they are going to use and then hopefully getting the implementation into them.

We are starting to hear in the press more and more about the healthcare information exchanges. Any movement on that side of things?

We still have customers; we are doing HIE work. Some of them have actually begun to bring up communitywide EMR systems. The problem is that they don't have steady funding sources. New York State for a while was funding them a lot and one grant they gave the HIEs in New York State; the 11 HIUs that they appoint $100 million to start up their HIE projects. But they need a more sustainable revenue source in order for them to really start up and do what they need to do.

There is still about $18 billion left in the stimulus package, the (inaudible) spending and that can be spent at the total discretion of the Secretary of HHS. So what we expect ultimately is the federal government will take some of that money and release it to the states to give to their HIEs and that will be the stimulus to get the HIEs going. Until you have a lot of the hospitals in an area though that have their EMR systems up and running, it is not worth it to give the money to the HIEs because they are no records to start to share.

Could you help us directionally with the segments for the 1Q? I assume staffing will be lower. Will solutions be higher sequentially?

Yes, we expect -- well, in the first quarter, both the solutions and the staffing lose about 2% of their revenue growth just because there is one less day to bill and that day, as I said before, kind of accrues to the fourth quarter this year. So the staffing business will probably be flattish and the solutions business we will continue to see some growth in.

And one last question. I missed what you said about the contribution of waste, fraud and abuse in the quarter.

Oh, it was $0.02 again per share when compared to the fourth quarter of 2011.

Okay. Thanks. I will go back in the queue.

Kevin Liu, B. Riley.

Hi, good morning, guys. Hey, Jim, regarding the RFPs that you guys won on the EMR side, could you just talk about how those compare with the projects that are starting to roll off in terms of size and scope?

They are more our average size or above, so they are actually -- the projects that are rolling off were started a couple of years ago. So they are smaller. These are larger. We didn't start any of the projects though until the first quarter of the year, and actually a lot of them are starting up in March. So they will start to build staff in March, but it won't be -- the staff increase won't be completed actually until the second quarter.

Got it. And what sort of contribution have you assumed from the acquisition of etrinity both in the Q1 and fiscal '13 results?

Well, etrinity will add probably close to $3 million to our revenue in US dollars in 2013. It is going to be flat to very slightly accretive, so flat to $0.01 in terms of earnings this year.

All right. And in terms of kind of their regional focus, you have talked about some opportunities as US software gets adopted over there. Are there plans to expand beyond kind of their current regional focus and maybe just talk about how other opportunities for you to grow either organically or inorganically within the European marketplace on the healthcare side?

Yes, good question. Actually etrinity does business currently not only in Belgium, but also the Netherlands. I think there are 43 hospitals in the Netherlands that have more than 500 beds. I am not sure of the count in Belgium, but I think it is probably 15 to 20 additional hospitals. Those hospitals seem to be farther ahead. Those are the ones in the UK are farther ahead it seems in looking at the US software.

Part of the reason for that we suspect is that EPIC who has been the big winner in the United States on EMRs opened an office in Amsterdam in November a year ago. So they actually did an install, two installs of hospitals -- EPIC did themselves in the Netherlands and the first hospital that is up and running is reporting significant cost reductions because of the US software. So we think that is why probably the Netherlands and Belgium are kind of moving quicker than some of the other countries.

Same with the UK. Because of the national health system project, those hospitals are much more familiar with the US software. Now the NHS has released its central controls, so the project itself is dead, but they transferred capital expenditures back to the individual hospitals in trust and they are starting to look at putting US software in. So we think that probably Belgium, the Netherlands and the UK are going to be the first adopters of the US software.

Beyond that, we are going to have to get into how do we get into the other countries. Obviously, there are language differences. You can't just walk into France and speak Flemish or English. Fortunately, a good part of our Belgian people also speak French fluently. So that actually is a help in terms of France. We may ultimately want to buy something small in some of those countries. We haven't really worked that out yet. We want to get our feet on the ground first in Belgium, the Netherlands and the UK.

And on the two healthcare IT products, I guess, for both the fraud, waste and abuse, as well as IT medical management model, while I am sure you probably won't provide specific revenue guidance, maybe if you could talk about the number of commercial deployments you are in today and how you expect that to expand over the course of the year.

Right. Actually it is one for each. We are in one IT medical management engagement and we have one contract with a pair that is above a beta. I think we are actually beginning to market the IT medical management model to some institutions, hospitals, etc. that are looking for better ways to treat patients. And it is possible we could have another engagement there before the end of the year. It is a longer sales cycle because what you're really doing is changing the way that physicians treat patients and it is a lot harder to get them to change than it is to sell, I think, fraud, waste and abuse.

Fraud, waste and abuse, we only have one, but we at least have six betas where people are actually giving us data and are running the application and telling them how much money they would save. So I suspect that we will probably land more fraud, waste and abuse this year than we will IT medical management models.

If you look at what I think of as the shorter term, which would be the one to three-year period, I suspect the fraud, waste and abuse will do better. Personalized medicine is coming. The ACOs are going to come. They are going to look for things like the IT medical management model in genomic testing in order to help reduce cost. So longer term, I suspect that the personalized medicine offerings will probably produce more revenue and profit, but I think that they will start up slower than the fraud, waste and abuse.

Got it. Thank you.

Frank DiLorenzo, Singular Research.

Good morning. Thanks for taking my call. I had a few questions. One, with regards to guidance, is it safe to assume that the guidance doesn't include any potential movement on the ICD-10 front in 2013?

There is probably a little -- there is some revenue in there, I suspect. For instance, we have one project with a payer that is ongoing. That revenue for sure is in there. We actually take all of our opportunities. This is done at the salesman and sales manager level and we factor how much revenue based upon probabilities that we are going to get this year. So I suspect that there is a little bit beyond the project that we are already working on.

But nothing above and beyond that at this point?

No, I doubt it.

And with regards to staffing for 2012, you grew approximately 0.7%. Can you give us a little more detail going into 2013? Is that a reference point, can you grow at that level? Will it be a little lower, maybe above the 1% level? Do you have a range or is that too hard to predict at this point in time?

No, we put into our estimate for the year that we would grow our staffing business by 2% in 2013 over what we had in 2012. If you look at the national estimates that are out there -- Gartner, etc. -- I think that they are probably predicting about -- not probably. I looked at January's projection and they are predicting about a 3% increase in staffing in the US in 2013, IT staffing in '13.

A good part of our business, 35%, 40%, is tied to the server industry and the server industry has not been robust for any of the players. If you look at IBM, HP, Dell's results for last year, it has just not been a good place to be. So we think that our staffing business, because we are so concentrated in the server business, will grow slightly less than the national trend in 2013.

Okay, thanks. Well, one other thing with regards to this genomics initiative, is there any long-term potential to branch out in this area, maybe in other parts of the country?

Yes, we have actually started to talk to other hospitals in other parts of the country. We are doing -- not only tying it into EMRs, which is important, but we are also doing a lot of data analytics on the genomic sequencing. So we think that that is a viable offering going forward.

Okay, thanks.

Rick D'Auteuil, Columbia Management.

Good morning. A lot of my questions have been answered, but just to fill out on the SaaS, I think you are still expecting that to be up year-over-year. Overall, it contributed --

$0.04 last year.

$0.04 last year. Is it twice that this year in your thoughts or --?

Well, yes, that is actually about right at the midpoint. I think it depends on where you are in our earnings estimate, the low end or the high end. I think we are thinking that it would probably be between $0.05 and $0.10 in earnings per share in 2013 and last year, it was $0.04.

Okay. The one we haven't talked about is that just slow to develop or is the third one that you don't have any active commercial assignments on?

Yes, the third one, it has been limited really by legislation. What the third one did, it was an IT -- it was an IT application that did better actuarial estimates on groups less than 50 people and every actuary that we showed it to, every actuarial department, including some of the biggest insurance companies in the United States, said it was dead on. We started working on it in 2006. We actually finished it in 2009.

So we started a demo, got everybody excited and Obamacare came along and one of the provisions in Obamacare is that for groups less than 50, you cannot charge people you charge the most to more than three or four times the amount that you charge the least for. So it significantly narrows the actuarial range that is allowed and they are already above the 3 to 4 times in many of the accounts that they are underwriting. So they are going to have to change that in 2014 when the law kicks in.

So we have had an insurance company use it for a couple of years, but going forward, unless that law is changed, you are just not going to be able to use it because the legislations prohibit it.

Okay. The healthcare pricing you said was up 5% to 10% last year.

Yes.

What is the expectation for this year?

Probably about the same, 5% to 10% unless there is a critical shortage that pushes it up more, but right now 5% to 10%.

And the capture rate -- so the billing is going up 5% to 10% and the pay rate is going up 5% to 10%?

Yes, that's correct.

So you are gaining a margin on that in general, right?

Yes.

Okay. I am scratching my head a little bit on this ICD-10 answer that I think Bill Sutherland asked. What is the current deadline? Is it October of '14?

Of '14. Most of (multiple speakers).

Okay, that is still -- I mean I know that changed, but it didn't change again from that at this point?

No, but that is the third time CMS has postponed it. That is why I think hospitals are optimistic that they are going to postpone it again. I don't think that they are, but it is really a political decision.

But you have talked in the past about how complicated it potentially is to upgrade to ICD-10 and it could be very significant contracts for you to do the work that is necessary to upgrade to that. And many of those assignments are likely to be a year or two and we are already inside the two-year window to meet the new deadline. At some point, doesn't somebody -- I would think you can't extend it forever. You talked about the American Medical Association saying that let's just stick with ICD-9 forever. But I thought that the issues around that were the constraints around the number of applicable procedures that you could bill under that. It's limited, right?

Yes, it is. And we are also limited in what diseases we can follow. Everything that you have said is correct. The -- and I don't know why, but many of the CIOs and CEOs of hospitals that I've talked to think that they can do it in a year. That may be wishful thinking, maybe not. Some of them have kind of taken the approach of saying we can map actually from ICD-9 codes into ICD-10. The problem when you do that is that you don't have the documentation to support a higher reimbursement, so if you did a procedure, all you can do is map to the lowest cost procedure. There might be 10 of them or in stents, there is 80, but you have got to map to the lowest cost because all you can do is say we put a stent in.

We have got to pick the lowest cost and in models people have run, a hospital will lose 3% to 5% of their revenues if they are mapping like that, but it means that there is a solution where the hospital doesn't go away. So I think a lot of the hospitals have said, look, it is only going to take me a year to do it. This is the third time that the AMA has been successful and they got it -- it was originally 2010, then it went to 2011, then it went to -- I'm sorry if I skipped a year. '13 and now it is '14. So they have been successful in getting it extended at least three times. I think that they think that there may be a fourth.

And they have other needs. Most hospitals, they have got EMR, they have got to get ready for accountable care. The government has put a lot of work on hospitals.

Okay. I have got to think, in the next six months, there is a window, somebody is going to call a bluff there, right?

One would hope so.

That does -- CMS, that is the policing agency or --?

Yes, CMS controls both Medicare and Medicaid affectively. So that is 50% maybe of healthcare in the United States. So the date that they picked the payers and everybody have to switch.

I mean, at some point, CMS has got to see that nobody is doing it, right?

Right. Well, most of the payers hit a bigger problem and a lot of them are working on their projects. It has really been the hospitals that have been digging their heels in and waiting.

Okay. I appreciate the answers. Thank you.

Frank Sparacino, First Analysis.

Hi, guys. Wanted to go back on the EMR work. I am just curious, Jim, the type of work that you are doing in 2013, is it still stage one related? Have you started some stage two projects? And then I would also be curious on what you are seeing from a replacement standpoint given a lot of folks have talked about a pretty vibrant replacement market on the EMR side.

All good questions. We still are doing initial implementations and that is still the bulk of our business. I suspect we are going to start to get some Meaningful Use 2. We have some of that now, but it is not a big part -- we are not counting -- we only count the significant implementations actually in the count that we give out for the number of projects we are working on.

We are also seeing hospitals who elected to put it in kind of vanilla and have the software manufacturer do the implementation. Kind of one way, you have got to change the way you practice medicine to our software. They are starting to switch over. We have seen some of the hospital systems that actually -- well, the one that we have talked about, the very large one that we are waiting for had put in a hospital system years ago. They have been getting Meaningful Use reimbursement for it. But they are now looking to switch over to EPIC because EPIC is so much more robust.

There is also some concerns out there, I don't know if this is true or not, but that the big guys in this space, so EPIC, Cerner, Siemens, will make -- everybody believes they are going to make their dates so that they have the Meaningful Use 2 out and available in time. But some of the other ones, there is a concern that, because of the designs of the systems, it is going to be very difficult for them to do it. So you have got some people looking and saying, hey, maybe I should switch because I am never going to get to a level 2.

Good, that's helpful. And then on the international side, I would be curious, I mean there have been a number of software vendors that have failed. I mean even Cerner has reports of failed implementations primarily in the UK. I am not sure about the rest of Europe and then a lot of the healthcare IT consulting firms have had some serious issues over there. So I am just curious what your thoughts are on the international side when you look at those risks. Is it primarily EPIC work you are going to be seeing internationally, but just some thoughts around that, Jim?

Well, I suspect it is going to be EPIC and Cerner and probably most of our EMR work at the moment is EPIC actually because they have been just winning huge marketshare in the United States. We actually -- we supported Fujitsu in the southern region. We put two Cerner packages into two hospitals in the southern region and they were up and running fine last time that we checked. So it definitely is doable.

EPIC has translated their packaging to at least all the major languages. So they can do Dutch, French, German, etc. So the language part of it has been done. A lot of the -- believe me, at one point -- while we weren't a prime, and we got paid, which was the nice part, we were very involved in all the NHS discussions, etc.

And a lot of the problem really was the position that the NHS was taking. The NHS basically when we put in an initial version of Cerner said that didn't meet all the requirements. We got a list of requirements. Cerner changed the application. They then looked at the system and said it doesn't do all the stuff that we would like, which was never in their initial requirement.

The expectations I think of the NHS and some political factors, there was a lot of contention because they had taken the capital expenditures away from the individual hospitals and trusts and centralized it for the first time ever and of course, the individual hospital staffs didn't like that. It had a lot to do I think with what ultimately happened. Now you have got the individual hospital saying, yes, I would like this.

The software itself, EPIC or Cerner, is very configurable. That is really what we do. We go in and say, okay, you are the radiology department. This is your workflow. We can get at 95% to 99% close to your workflow. We really think that long term the European hospitals are just going to be much better off if they use the US software because we have not seen anything at all in the European market that could stand up against an EPIC or a Cerner.

Thank you.

Brian Kinstlinger, Sidoti.

Brian Kintslinger Hi, two quick ones. The first one is do you have any projects in the first half of the year that you expect to go live and if so, how many?

That we expect to go live? The three projects that we just won that we reported will all go live in the first --.

Brian Kintslinger I'm sorry. I mean of the 17 that will expire, will end, be completed when I say --.

We don't have a good system of figuring that out. We can figure out when the day will come, but often the hospital will engage us to do optimization. The other trend that has started is we will think that we are coming to an end of a project and the hospital will buy other hospitals, smaller hospitals, often a bunch and our people just move over to the other new projects. So if you think about it, they are two-year projects, so in any year, theoretically, we should -- if there is 18 projects, we should have nine that finish. It doesn't always happen that way.

Brian Kintslinger And the one that expires, did you start an outsourcing contract with them? You said that traditionally -- well, not traditionally. You are saying now that your EMR contracts as they end, you are trying to get the outsourcing work. Did that actually occur with your customer that rolled off?

It did not occur with that customer. It was actually a different customer that -- we are still working on implementing some of their hospitals that -- they have hospitals up on the new system and they have some of the hospitals we are still implementing.

Brian Kintslinger Okay, and then finally on the European hospital side, do you expect to face the same supply constraints or do you think that would be different? And if so, why?

Yes, ironically, no. When we did the work in England, there weren't people who knew the US software. So half the people we brought over from the United States that had done a couple of implementations in whatever package we were putting in. And then half of the people we hired locally and trained and the hospitals accepted them because that was the only choice they had.

Brian Kintslinger Great. Thank you so much.

(Operator Instructions). At this time, it does appear there are no further questions from the phone lines. Please continue.

Thank you. We expect another year of double-digit earnings growth for CTG, our seventh out of the last eight 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 organizations, genomic sequencing, fraud, waste and abuse and IT management models for chronic diseases, 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 for joining us this morning. Have a great day.

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