Computer Task Group Inc (CTG) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the second-quarter 2013 earnings conference call.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, Stacy. Good morning, everyone. We certainly appreciate your time and your interest in CTG.

On the call today we have CTG's Chief Executive Officer, Jim Boldt, and Brendan Harrington, Senior Vice President and Chief Financial Officer. Jim and Brendan are going to review the results for the second quarter of 2013 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 these at our website or the SEC's website at SEC.gov. Please review our forward-looking statements in conjunction with these precautionary factors.

With that I would like to turn it over to Jim to begin the discussion.

Thanks, Jim, and good morning, everyone. This is Jim Boldt. I want to thank you for joining us this morning for our second-quarter earnings conference call.

As you saw in our news release, our revenues were flat when compared to last year as we continue to experience delays in healthcare project starts as hospitals deal with lower reimbursements caused by sequester cuts and as we experienced a reduction in spending from a significant staffing customer. Fortunately, our focus on higher margin offerings and expense control allowed our earnings-per-share to come in at the midpoint of our guidance. And for the first time since we established our current strategy in 2001, caused our operating margin to be in our long-term targeted range of 6% to 7%.

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

Thanks, Jim. Good morning, everyone. For the second quarter of 2013 CTG's revenue was $107.1 million, an increase of $400,000 compared with the second quarter of 2012. Second quarter 2013 had 64 billing days, the same as the second quarter of 2012.

Solutions revenue in the second quarter of 2013 totaled $42.3 million, a decrease of $1.7 million, or 4%, compared to the second quarter 2012, primarily due to delays in project starts on electronic medical record projects. As a percentage of total revenue, Solutions revenue was 40% compared to 41% a year ago.

Staffing revenue in the quarter increased $2.1 million, or 3.4%, to $64.8 million, reflecting higher demand for technical resources from several clients, but offset by reductions in staffing from our largest client. Second-quarter revenue from IBM, our largest customer, was $26.6 million compared with $29 million in the second quarter 2012. As a percent of total revenue, revenue from IBM decreased to 24.9% in the 2013 second quarter compared with 27.2% of total revenue in the 2012 second quarter.

The revenue from IBM in the quarter was negatively impacted by approximately $1.4 million when compared with the second quarter 2012 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 did not have a negative impact on CTG's overall revenue since we have retained the business with this new client.

Revenue from our European operations was $18.6 million, an 11% increase from the $16.8 million recorded in last year's second quarter. The effect of foreign currency fluctuations during the second quarter of 2013 increased consolidated revenue by approximately $300,000. On a local currency basis, our European revenue increased by 9.4% compared with the 2012 second quarter.

Excluding the effect of the etrinity acquisition that we closed in February of 2013, the European revenues increased by 6% or 4.4% in constant currencies.

Direct costs as a percentage of revenue were 78.8% in the second quarter compared with 78.5% in the second quarter of 2012. SG&A expenses as a percentage of revenue decreased to 15.2% from 15.7% in the second quarter of 2012.

The billable travel expenses included in the second quarter 2013 revenue and direct costs were $3.1 million. The billable travel expenses for the second quarter 2012 totaled $3.7 million.

Second-quarter operating income grew to $6.4 million, an increase of approximately $300,000, or 4.2%, year over year. Operating margin in the second quarter increased to 6% of revenue, a 20 basis point improvement from last year's 5.8%. The year-over-year increases in operating income and margin were due primarily to the decreases in our lowest margin staffing business and increases in the higher margin business in our sales mix.

Net income in the second quarter was $4.1 million, an increase of $400,000, or 9.6%, compared to the second quarter 2012. On a per diluted share basis net income was $0.24 for the quarter, an increase of 9% compared to the second quarter of 2012, excluding the $0.025 per share nonoperational gain from $423,000 of nontaxable life insurance proceeds that we received in the second quarter of 2012.

The tax rate for the 2013 second quarter was 36% compared with 37% in the 2012 second quarter. The lower-than-normal tax rate for both quarters is primarily the result of federal tax credits recorded in the second quarter 2013 and the nontaxable proceeds from life insurance policies received in the 2012 second quarter. We expect the tax rate for the full year 2013 to be between 36% and 38% compared to 36.5% for 2012.

Excluding the effect of approximately $1.3 million of nontaxable life insurance proceeds received in the second and fourth quarters of 2012, the tax rate for 2012 was 38%.

The 2013 second-quarter results include equity compensation expense of approximately $0.03 per diluted share net of tax, while the second quarter 2012 included equity compensation expense of $0.02 per diluted share net of tax.

Our headcount at the end of the second quarter was 3,900, a decrease of 100 people, or 2.5%, compared to the end of the first quarter 2013 and a 100 person increase compared to the end of the second quarter of 2012. Of the 3,900 employees at the end of the second quarter 2013 91% were billable resources.

At the end of the second quarter 2013 we had no debt and $34 million of cash on the balance sheet compared to $23.6 million of cash at the end of the second quarter 2012. Both the second quarter of 2013 and 2012 ended between a US biweekly payroll days.

Our days sales outstanding was 64 days at the end of the second quarter of 2013 compared with 61 days at the end of the second quarter of 2012. The increase in the DSO was due to the timing of cash proceeds received at the end of the comparative quarters.

Our cash provided by operations in the second quarter of 2013 was approximately $4.9 million, as compared with approximately $6 million in the second quarter of 2012. In the quarter, we had $1.2 million in capital expenditures and recorded depreciation expense of $660,000.

We repurchased 59,000 shares of CTG common stock during the second quarter of 2013. As of today, our repurchase authorization is for approximately 475,000 shares. As it remains accretive to our earnings, we intend to continue our repurchase program during 2013.

Jim?

Thanks, Brendan. In aggregate, our Solutions business decreased by 4% in the second quarter of 2013 and was 40% of our total revenue. The decline in our Solutions business came from our healthcare vertical where our hospital clients, faced with a reduction in income and cash flow due to the sequester cuts to Medicare, have been reducing spend.

On our conference call at the end of April 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. We received one new RFP for an EMR project in the last three months. We won two of those projects and lost one project.

One of the projects that we won will not start until the third quarter of 2013. We are still waiting on a decision on one RFP as to what IT services firm will be chosen for that project.

When we started the second quarter of 2013 we had 15 active EMR projects. During the second quarter four projects started and three projects ended in the quarter. Therefore, at the end of the second quarter 2013, we had 16 active EMR projects.

We also mentioned on our last several conference calls that one of the systems that we bid on that had not picked an IT services company has approximately 5,000 beds, significantly more than our average client. Though we still think we are in a good position to get some of that work, the timing of the starting of that project has been delayed. Also, the very significant system that we previously talked about that was originally expected to start in early 2013 continues to be delayed.

While in the short term we believe that our EMR business growth will be constrained due to hospitals having to deal with the reimbursement cuts that have occurred, long-term we still see tremendous opportunity for growth in our EMR business. There is still 1,000 to 2,000 hospital bed systems EMR projects that we are pursuing. In addition, the very large systems EMR projects have to eventually start up.

Further, there has been very little work done on small hospitals in the United States. In order to achieve the kind of savings that the US federal government has projected the healthcare system is going to have to exchange health records and that means that the health information exchanges, or HIEs, will have to be built. And, finally, we believe that European hospitals will ultimately install US software and that will likely create EMR work for CTG for another decade, given our recent acquisition in Europe of etrinity.

Given work that still needs to be done, I think you can see why we remain optimistic for the long-term growth potential for our EMR business.

Fortunately for CTG, EMRs are not our only healthcare offering and our acquisition of etrinity and other healthcare offerings continue to have a positive impact on our business. We started two new healthcare outsourcing engagements in the second quarter of 2013. In the second quarter of 2013 our SaaS offerings increased our revenue by approximately $1 million and our EPS by $0.02 over the second quarter of last year.

Most notably, while the previously disclosed contract that we signed with a payer for our fraud, waste, and abuse offering in April of 2013 did not produce any revenue in the second quarter. We expect as the year progresses this new engagement will add to our revenue and profitability.

In addition to this engagement, we anticipate closing at least one additional fraud, waste, and abuse engagement in 2013. Based upon the new business we continue to estimate that our SaaS offerings will contribute $0.15 per share at the midpoint of our guidance in 2013 and that $0.11 of the profit from our SaaS offerings will occur in the second half of the 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, declined 1% in the second quarter of 2013 when compared to the second quarter of last year.

Our financial services vertical had another excellent quarter. Most of the revenue gained in financial services came from our European operations. Our energy business revenue also increased when compared to the second quarter 2012.

Turning to our staffing business, its revenue was up 3% when you compare the second quarter 2013 to the second quarter of 2012. The staffing business was negatively impacted by staffing reductions made by a significant customer in the middle of the second quarter.

Looking to the third quarter 2013, we are forecasting total revenue to be in the range of $105 million to $107 million. We are forecasting earnings per share in the third quarter 2013 to be in the range of $0.22 to $0.24 per diluted share.

For the 2013 full year we now expect a revenue range of $428 million to $436 million, or a 2% increase from the midpoint of our guidance over 2012. Based upon our revenue forecast and the anticipated mix business, we now expect 2013 net income per diluted share to be in the range of $0.93 to $0.99, or a 9% 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 have set our recent guidance for the year.

First, we think our healthcare business will grow by approximately 2% in 2013. For our non-healthcare solutions business we are projecting a revenue increase of approximately 3%. We are forecasting a 1.5% increase in our staffing business in 2013.

We continue to remain optimistic about CTG's long-term growth potential. While going through a transitional period, we expect our US healthcare business to continue to grow, particularly when some of the larger hospital systems begin their EMR projects. With the recent acquisition of etrinity, a Benelux health insurance company, we have positioned CTG to participate in the adoption of US package software by European hospitals.

We have been working on a number of betas with states and payers over the last year or so for our fraud, waste, and abuse application, and we expect another one of those betas to close before year-end. We are currently building out our IT medical management model for four more severe and chronic diseases. That means by the end of 2013 the IT medical management model will be capable of handling five of the 10 diseases that currently account for approximately 70% of all healthcare costs in the United States.

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 how CTG is positioned in healthcare, the world's fastest growing industry, you can see why we continue to be optimistic in our future growth opportunities.

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) Vincent Colicchio, Noble Financial.

Good morning, Jim and guys. So, Jim, what portion of healthcare revenue in the quarter came from EMR? Can you talk about the non-EMR healthcare business and characterize the pieces that are on that side and what the growth outlook is for them?

Those are two obviously good questions. The EMR revenue in the quarter was about $16.5 million, or about 15.4% of our total revenue. It was down from last year. Last year in the second quarter of the year our EMR business had been 17%, so it dropped about 2% versus a year ago. Most of the decline that we saw in our healthcare business was actually in the EMR section of the business.

The other side of the business was relatively flat when you figure out the dollars. We had two new outsourcing engagements start up and we had some other kind of ancillary business, and so they kind of offset each other.

Okay. On the ICD-10 side are you working on any projects today?

We continue to have two projects. We have one ICD-10 project conversion with a payer and one with a provider.

Is there more? Do you think that you are doing a good job on that side, or is it still -- despite that we appear to be on track for next year as far as the deadline, could you be doing a better job on that side, or is it still relatively slow there?

I suspect it is relatively slow. I think most of our clients -- most of our hospital clients were laying off people in the quarter and I suspect that they were probably more focused on trying to get their operating margins back where they were or closer to where they were. And also they were protecting their cash. So I am not sure as many were concerned about launching an ICD-10 project.

The ICD-10 work, we are trying to get that with our existing customers. However, we are not trying to build a huge ICD-10 presence. It is much like Y2K. If the date really is October of 2014 but the conversion happens you are going to see a Y2K effect when one quarter that business goes away and we won't have anything perhaps to do for the people that we have hired.

So we are definitely supporting our current clients, but our sales force really is focused on EMR projects, outsourcing, and the SaaS offerings.

Back to the EMR a second, could you remind us -- you used to talk about I think the year that Cerner expected a peak in terms of license revenue as a gauge for when your peak year could be.

Cerner projected a peak in 2014 for their sales, but you have to appreciate that software companies get to record their revenue on the first day of a project so we record our revenue over a couple of years. So we lag them by a couple of years.

Cerner has actually come out, I heard in one of their conferences, and said that they expect continued growth in the EMR business but it is going to be from outside the United States. Like us, I believe that they suspect that Europe particularly will start to buy US software starting in 2014.

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

Thanks, Vince.

Kevin Liu, B. Riley & Company.

Good morning. Could you just talk a little bit about the utilization rates for your healthcare solutions folks at the moment? Are you seeing a loosening up in kind of the supply of labor on that so the business that might give you some opportunity to hire in front of anticipated growth later on?

Right. Those are good questions as well. Our utilization has dropped just slightly from what it was before. We have been holding people as projects delay to start on the next project, so it does have an impact on us.

We have seen a dramatic change in the market in the last -- it was probably most noticeable in the last 30 days, but definitely in the last 90 days in terms of supply and demand. 90 days ago there were lots of reqs out there, requirements from hospitals not to do an entire EMR project but they needed additional people.

When our clients began to lay people off, obviously, they took some of their IT people and rather than laying them off used those people for the reqs. We also know that two of our EMR competitors had fairly sizable layoffs during the second quarter as their projects ended and no project starts. So the supply and demand for people has definitely gotten back in balance.

We know about the layoffs because we actually were hiring some of their better people to use for our projects.

Then you mentioned the need for HIEs to start getting involved. What sort of opportunities are out there on the HIE side, and anything that you see could start up either later this year or perhaps early next?

Well, it definitely could start up but it is really a decision by the federal government. HIEs haven't started up because they don't have funding sources. As you know, most of the states, many of the states at least, are running deficits. They haven't been granting as much money to the hospital system.

The federal government and the ARRA legislation put $19 billion for EMRs, $300 million of that was to be spent to set standards. The rest of it could be spent at the discretion of Secretary of HHS. They did release about $600,000 to the states a couple of years ago to begin to study their HIEs.

So the federal government still has $18 billion approved in the ARRA funding that they could release whenever they wanted to. We think a good part of it is probably going to go to the HIEs, but up to this date they haven't released any directly.

All right. And just one last question on the fraud, waste, and abuse side. The contribution you expect in the back half of the year to what extent is that dependent on signing up that last prospect in the pipeline? Or does all of that business come from the small payer plus the one existing one you already had?

Actually, there is both an IT medical management SaaS offering and a fraud, waste, and abuse payer that we have had for the last four quarters plus this new one. Part of the increase that we are expecting comes from a payer we already signed up, but part of the increase is expected from an additional client that we have yet to sign.

Great, thank you.

Thanks.

Rick D'Auteuil, Columbia Management.

Good morning. If you can break down the decline or the adjustment in revenues between the two items that you cite for the shortfall, so IBM's impact and then the healthcare delay impact. I think you were looking at $23 million; how would you split that?

The cutback from the staffing customer happened in the middle of May so there is really six-and-a-half months or so. That is probably about $9 million and the rest comes from --

From the healthcare?

Yes, that is correct. From the lack of growth we are expecting.

So remind me of any critical deadlines that the hospitals are trying to meet on the EMR and whether -- as it relates to being able to avoid penalties. And then share your thoughts on whether it's sort of penny wise and pound foolish by employing these delays.

Under the HITECH Act the incentives for hospitals to put in EMRs go away in September of 2014. Then on October of 2014 if they can't prove a meaningful use, and that is stage III meaningful use, which no one even knows what is required under that, then they face a penalty. It starts out at 1% of their Medicare and Medicaid and then Congress granted the administration the authority to go up to 5% over a period of time that has never been defined.

So starting in October of 2014 if they don't have an EMR system they are going to lose another 1%.

Is the expectation -- are these hospitals sort of calling the bluff and saying I expect that to be pushed out so, therefore, I have more breathing room, or --?

I honestly think that they are just dealing with the problems that they have to currently. Many of the hospitals in the United States are losing money. When the government cuts their Medicare by 2% they are losing more money. A lot of them no longer have any capacity to borrow so they are trying to figure out how they are going to make -- the smaller ones -- payroll now.

The larger ones, in addition, they are concerned because most of them have maybe a 2% or so operating margin, 2% to 3%. They lost 0.5% of their operating margin. Many of them are concerned that they are going to begin to lower their cash, so the combination of dropping their operating margin plus having cash drop is going to lower their bond rating. And they finance much or all their IT projects usually.

They also have the other concern, which somewhat surprised me, but we have heard it from a couple of hospital systems. All the large systems in the United States are talking to smaller hospitals in their area. Those smaller hospitals can't survive; they are talking about emerging.

If a small hospital system merges into a larger one, the small hospital system has basically negative cash so the larger system usually has to put in an influx of cash in order to make the hospital stable, do things like EMR projects, etc. So they are also trying to conserve their cash because they are negotiating with hospitals and they know that they are going to need it.

Okay. So I mean, again, is the feeling that the large hospitals are far enough along that the October 2014 deadline for penalties isn't going to affect them? In reality if you haven't started a two-year project and you have 15 months to go you really against the eight ball, right?

I don't know that it is uniform among them though. I have talked to some who were expecting the government to give them a break to delay that penalty and I think that is what some of them are counting on.

Wow.

Where they have got -- and I don't know that it's going to happen because at the moment the government is trying to raise as much revenue as possible and this is legislation that has already been passed. So at the moment they are dealing with the facts and, literally, laying off their own employees to try and get their operating margins back up.

So here is another question on those layoffs. Are you hearing or seeing resumes that the IT department is being hit directly so, therefore, it will push to more outsourcing?

Yes, we have gotten or seen people laying off people in IT departments and we think this will push hospitals even further along towards outsourcing. We think the outsourcing business is going to be pretty good for the next couple years.

Okay. The same deadline holds true for ICD-10, right? That has been pushed out a number of times and now isn't that October 2014 also, right?

Yes, it is. Then on top of it, for an EMR project it is a capital project because you are installing software. ICD-10 they have to expense so it is further eliminating their operating profit.

But the alternative is to have even more of your operating profit eliminated by being only able to code at the lowest common denominator, right, if they don't do it?

That is correct. You can map from 9 to 10 but you are probably going to lose at least 3% of your Medicare and Medicaid revenue while you are doing that.

Okay.

You have articulated it pretty well. They are basically choosing between problems.

Right. On the fraud, waste, and abuse SaaS model, the second customer that you are going to start getting revenue in the third quarter was nicely larger than the first customer, is that correct?

Right, it is about twice the size of the first customer.

Can you characterize the third customer expected there and the relative size?

Well, it is a couple of billion dollars which is still considered to be a small payer.

Okay. So more like the first one?

The first one was about half that size. The first one was a small payer, even in the small payer group.

How about is there a pipeline of other beta tests beyond those three?

The original set that we set up had six in it, which we started to try and solicit in the second quarter of 2012. Those six were a combination of states and larger payers, so every one of those is significantly larger than the two payers we are currently doing business with.

In addition to that I wanted the sales force to focus so we started with those six. In January of 2013 we opened the aperture and there are actually payers in states that we have begun to call on.

Those are in beta or are you just calling them?

Most of them we're in the initial stages of talking to them about it. I think that there is probably a few of them that may have given us data to do a beta.

I believe that the original five, it is more likely that -- I am sorry, of the six we sold one, so there are five left -- that it is more likely that one of those will close before the end of the year than the ones that we began to talk to in January of this year. It is a long sales cycle.

Okay. So going back, just so I have the count right. So one you had last year, one you are going to start this quarter, another one you are expecting to start sometime this year, and then the one you just referred to is that in addition to that third one or is --?

No.

Okay. So that is the third out of the six. So are the other three likely to go forward or not?

Let me go back and restate this. So in the second quarter 2012 we had six betas.

In addition to that we had the customer that we sold last year, although they didn't actually begin to use the model until the third quarter. So they weren't one of the six betas that we talked about. They are actually a payer that we had worked with to develop the application.

The payer that we signed up in April was one of the six, so now there is five left. And we think one of the five will likely close before the end of the year.

And, again, the other four are they proceeding, just going slower or --?

They are just going slower. We had only put one small payer into the six and it closed quicker than either a state or a large payer.

Okay. That is helpful, I appreciate it. Thank you.

(Operator Instructions) Bill Sutherland, [EGE].

So the hospitals that are involved with the EMR projects that you have just started up with are they kind of slowing their ramp up or are they just providing more resources internally?

I think they're trying to provide maybe a little more resources internally. We are not getting the reqs that we usually get from them.

A typical 1,000-bed hospital, for somebody who hasn't heard this before, needs about 75 people on their project. Generally, they will get 25 from us. We will have kind of the top of the pyramid. And then they will get 25 from their IT department and 25 from their clinicals, often nurses.

Usually what happens when we start the project is they realize they can't staff those 50 people that they thought they could, so they will actually give us reqs. We are not obligated to fill those additional reqs because we didn't commit to them originally.

We are not getting as many of those reqs as we used to and I suspect they are trying to fill it with some of the people they are doing layoffs. So they are moving some of their own people around and they definitely are starting them up slower.

We have hospitals that normally when we start up a project we will have project manager and maybe a high-end consultant for the first 60 days to do the project plan. The third month out -- that will take about two months. Third month out we will put another maybe eight to 10 people on the project.

They are telling us, no, we are conserving our cash. We only want to add three or four people and let the project end date slip some.

So are you providing the standard top-of-the-pyramid people?

Yes.

So this -- what you are talking about is the additional reqs; you are getting just half of what you would normally get?

Actually, it is less than half. At the moment we are not getting many reqs at all from the additional people, where before it was common for a hospital system that size when they actually went to staff it to discover that they were 10 or 15 or 20 people short.

And looking into Q3, based on your expectations for projects that may finish up and stop, and then as you build out the four that began in Q2, do you think EMR starts to grow again? I guess added into that would be you are going into the quarter with how many RFPs?

We have one RFP that hasn't been answered and then we have one project that we won in the second quarter that is actually going to start up in the third quarter. We will probably have -- well, generally in the third quarter anyway we get more vacation so that tends to -- even with the healthcare folks it tends to lower our revenue in the third quarter.

Right now, I think with the projects starting up and the projects ending we are probably fairly balanced in terms of our headcount for the third quarter. So I think it will be more like the second quarter is another way to put it I guess.

Then you have got the one RFP you mentioned that is open, but also you have got those two that you referenced, one large and one larger.

Actually, the one that is open is the 5,000-bed project that we bid on at the end of March. The other project, while everyone has been expecting it to start up, they have never put out an RFP. The RFP was supposed to be out in January of this year and they just keep delaying it.

Is there a pipeline that you can kind of point to that suggests the pace of RFPs for the balance of the year?

There actually is. We don't like to disclose that but, quite frankly, the pipeline at the beginning of this quarter is the same as it has been for the last four quarters. The number of RFPs that hospitals are telling us they are going to issue is just about the same. Actually it is a little bit more maybe than it was a year ago.

Okay. One question on the data analytics, the medical management side. So between -- I guess with the end-stage renal one in particular what -- how should we think about that moving into a commercial phase? Then also on the genomic sequencing capability, when does that impact revenue?

We actually are getting some revenue from there now because we are working on the project with the one hospital system that we are really developing the offering with. I don't think the genomic sequencing, other than that one hospital, is probably going to start until the first or second quarter of next year. Because there aren't that many -- we haven't seen that many hospital systems looking for that kind of work at.

This is kind of leading edge. Though the hospital that we are working with actually plans on creating an institute that you will be able to send them the DNA test and perhaps a sample of the tumor. They will do the genomic sequencing for you and will tie it into your EMR, so we may get some revenue in 2014 from that.

And that was your second question. The other one was the SaaS offering, the IT medical management model. We are actually now trying to put together an offering and we are doing exactly what you suggested.

The science that is most mature, if you will, is the end-stage renal disease. When a person has end-stage renal disease most people's kidneys fail, there is a crash it's called, and they end up in an emergency room. And the emergency room has to treat them for that. The cost of doing that is on average between $30,000 and $40,000.

We can prevent those crashes. We actually can plot it out and say this is the point that the patient is going to crash, and if you send them to a specialist before that the specialist can intervene.

So we have developed an offering. We have doctors, nephrologists, that are willing to say that they have already used it and it works. Now we have to get somebody to pay for it.

The logical client really are payers. We can reduce the cost, their cost in treating patients by switching the patients to a specialist before the crash occurs. And we have the technology; we are really marketing that.

So you are going to the payers with something that is a real offering, in other words?

Yes.

Okay. That is it for me, thanks.

Rick D'Auteuil, Columbia Management.

Just for some clarity, I know that you made the acquisition in Europe. What was the organic growth in Europe in the quarter?

Brendan, I think you gave that out.

It was 6%, Rick, and then in constant currencies it was 4.5%.

Okay. The buyback -- I know you do a 10b5 while you are in the quiet period. The last execution on that plan was around $20. You have broken that today.

Presumably you are interested in activating or being active in the market again, is that fair?

Yes, we won't know until tomorrow, but I suspect that today under that plan that they probably bought some shares.

Okay. On the Solution side of the business you mentioned financial was getting better. We have heard that has improved materially. Are you seeing that, or --? Give me a sense of how much that has improved.

In the quarter our financial services business was up 9%, so that definitely is an improvement from what it has been in the past. But our financial services business 90%, 95% of it is actually in Europe, so we may not always track to the trends here in the United States.

Okay. Are you seeing the United States piece pickup or that is just not a focus?

It's not a focus. We have some staffing business in the United States but we don't go to market with solutions. They do go to market with solutions in Europe.

Okay. Energy that is the domestic, actually it was Canada too I think before. But has the big customer come back there or is this other customer strengthening?

It is a combination actually of both. It is our existing large customer who, after a period of reducing their spending, is coming back. And we have got some other customers in not our typical area, so they are not all oil anymore. There is some of the newer technologies.

Okay. Then, given the tightness of the market on healthcare IT talent, we have seen billing rate increases. You are saying just over the last 30 days you have seen a lot of supply. Has that impacted rates at all?

No, not yet, no. And I don't know that there is a surplus out there, though it is much easier to find people than it was before. We think the market has now probably gone back more in equilibrium, but it's definitely not tightening.

Okay. And had you built in incremental inflation, labor inflation that maybe we shouldn't be thinking about now?

Well, the rates tend to go up in the early part of the year and we think that those will stabilize. So the inflation probably will occur that we are expecting.

All right. That is all I have, thanks.

Frank Sparacino, First Analysis.

Hi, Jim. I was curious, at some point hospitals will obviously have to address ICD-10. Do you feel that once they begin to do that that there is risk to further delays on the EMR side of the business? I am just trying to figure out from an IT budget standpoint, if the budgets aren't growing or shrinking, are we just seeing the dollars being reallocated and what is sort of the priority list right now?

I suspect that the hospitals who did their EMR project and are up at least to meaningful use 1 will start the ICD projects up quicker than the ones that haven't. This is kind of the damned if you do, damned if you don't. Which one are you going to pick? Are you going to pick the penalty that you are going to get if you don't make the ICD-10 date, or are you going to pick the penalty you get if you don't make the EMR date?

Hospitals still -- it is kind of amazing sometimes to be talking to somebody in a hospital and they still think they are going to pass -- the government has given them a pass so the government will give them more time to get this done.

It would seem to me the ICD-10 issue would be much more painful in terms of impact dollar-wise from a billing perspective than simply the EMR side of things.

It is. It is also more painful when they are doing it because they have to expense it. So it is larger -- you're right; the date is the same. It is larger, it is 3% probably versus 1%, and they have to expense it now or when they start.

Okay. Thank you, Jim.

Frank DiLorenzo, Singular Research.

Good morning. On the EMR side, do you have a figure for the average number of beds per project for second quarter of 2013, also the second quarter of 2012?

I was also wondering if you have any visibility going into next year as far as what that figure could potentially be; based on your current projects, what might be in the pipeline?

I don't have a figure in front of me on the average number of beds. I don't think that it has changed very much. We have been running between 1,000 and 1,500 beds on average on the projects for quite some time now.

If the large projects start up obviously that number is going to go up, but they keep getting delayed.

Okay. What is potentially out there? Are they mostly larger deals or is there a potential for maybe some smaller projects moving forward?

I think your focus may have been on some bigger EMR-type deals and was wondering if that is the trend or if there is anything opening up on the smaller side of the business potentially.

No, we -- actually in our pipeline right now we have as many 1,000 to 2,000-bed systems in the pipeline that are looking at EMR projects as we have had in the past. In addition to that what we have is some larger projects. We haven't really seen a change in terms of the pipeline in terms of the 1,000 to 2,000-bed projects.

That's fine. Just one other follow-up. Visibility, is there better visibility potentially going into the first half of 2014, the second half of 2014, and on the EMR side? Do you have the potential to have this -- maybe it is too much detail, but the potential to have the same number of deals currently being worked on as you do today?

Is there the potential to see the number of deals you have under your umbrella increase, the number of beds per deal increase? Or is that a little too early on to look at that type of detail?

I think it is too early to tell. The hospitals are dealing with what happened to them in April. I think that they have to -- and every CEO that I've talked to, certainly for a hospital, says that they have got a group together trying to figure out how to cut their cost.

I think they have to get through that process. They have to get through the process of how to deal with the sequester before they start to think about next year.

Okay, thanks.

Speakers, I will turn it back to you for any closing comments.

Thank you. CTG is firmly established in healthcare, one of the fastest-growing major US industries. While in the short-term our hospital clients have to deal with the reimbursement reductions imposed on them by the US federal government, they still have significant long-term information technology needs.

We have offerings to meet the needs of the IT providers and payers including electronic medical records; fraud, waste, and abuse; ICD-10 conversions; accountable care organizations; genomics sequencing; and IT medical management models for chronic diseases. All of which are expected to be in strong demand for several years.

As such, we remain excited about CTG's long-term 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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