Computer Task Group Inc (CTG) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CTG fourth-quarter 2013 earnings call. At this time, all participants 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, your conference is being recorded.

I would now like to turn the conference over to your host, Mr. James Culligan, Director of Investor Relations at CTG. Please go ahead.

Thank you, Lois, and good morning, everyone. We certainly appreciate your time and interest in CTG.

On the call today we have CTG's CEO, Jim Boldt, and Brendan Harrington, Senior Vice President and CFO. Jim and Brendan are going to review the results for the fourth 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 statement 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 fourth-quarter earnings conference call.

As you saw in our news release, our revenue decreased when compared to last year as we continued to experience delays in healthcare project starts as hospitals deal with lower reimbursements from the government and as we experienced a reduction in spending from a significant staffing customer. Our focus on expense control partially offset the impact from lower than forecasted sales revenue in the quarter, the net of which caused our earnings per share to come in at the low end of our guidance.

I am going to talk more about our results and what we see for the 2014 first quarter and full year but first I'm going to ask Brendan to start off with a review of our 2013 fourth-quarter and full-year financial results. Brendan?

Thanks, Jim. Good morning, everyone. For the fourth quarter of 2013, CTG's revenue was $102.7 million, a decrease of $5.2 million compared with the fourth quarter of 2012. Fourth-quarter 2013 had 65 billing days, one more than the fourth-quarter 2012.

Solutions revenue in the fourth quarter of 2013 totaled $40.4 million, a decrease of $4.9 million or 10.7% compared to the fourth quarter of 2012, primarily due to lower revenue from electronic medical record project. As a percentage of total revenue, Solutions revenue was 39% compared to 42% a year ago.

Staffing revenue in the quarter decreased by $0.3 million or 0.5% to $62.3 million reflecting reductions in staffing from a large client offset by higher demand for technical resources from several other clients.

Fourth-quarter revenue from IBM, our largest customer, was $22.4 million compared with $27.9 million in fourth-quarter 2012. As a percent of total revenue, revenue from IBM decreased to 21.8% in the 2013 fourth quarter, compared with 25.8% of total revenue in the 2012 fourth quarter.

Revenue from our European operations was $20.9 million, a 14% increase from the $18.3 million recorded in last year's fourth quarter. The effect of foreign currency fluctuations during the fourth quarter of 2013 increased consolidated revenue by approximately $900,000.

On a local currency basis, our European revenue increased by 8.7% compared with the 2012 fourth quarter. Excluding the effect of the etrinity acquisition that we closed in February 2013, European revenue increased by 10.4% in US dollars or 5.4% in constant currency. Direct costs as a percentage of revenue were 78.3% in the fourth quarter, the same as in the fourth quarter 2012.

SG&A expenses decreased approximately $900,000 from the fourth quarter of 2012 and remained at 15.8% of revenue, primarily as a result of fewer nonbillable personnel and lower incentive compensation expenses. The billable travel expenses, including the fourth-quarter 2013 revenue and direct costs were $2.8 million. The billable travel expenses for the fourth quarter 2012 totaled $3.2 million.

Fourth-quarter operating income was $6.1 million, a decrease of approximately $300,000 or 4.8% year-over-year. Operating margin in the fourth quarter was 5.9% of revenue, the same as last year. The year-over-year decrease in our operating income was due primarily to decreases in our health solutions revenue, offset by the lower SG&A expenses.

Net income in the fourth quarter was $3.7 million, a decrease of $320,000 or 8% compared to the fourth quarter of 2012, excluding a gain from life insurance proceeds recorded in the fourth quarter of 2012.

On a per diluted share basis, net income was $0.22 for the quarter, a $0.02 decrease compared to the fourth quarter of 2012, after excluding the gain from life insurance proceeds. The decrease in the earnings per share is due to lower operating income and a higher income tax rate in the fourth quarter of 2013.

The tax rate for the 2013 fourth quarter was 38.4% compared to 35.8% in the 2012 fourth quarter, excluding the effect of the life insurance proceeds. This lower rate in the fourth quarter of 2012 was primarily the result of the reversal of certain tax reserves that did not occur in the fourth quarter of 2013. We expect the tax rate in the first quarter 2014 to be between 39% and 41%. The higher estimated rate in the first quarter is a result of certain federal tax credit laws not yet being extended for 2014.

We expect the tax rate for the full-year 2014 to be between 38% and 40% compared to 35.6% for 2013. The higher estimated rate in 2014 is a result of certain federal tax credits related to 2012 which were recorded in 2013 because of the legislation relating to those 2012 tax credits was not passed until January 2013.

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

Our headcount at the end of the fourth quarter was 3700, a decrease of 100 people or 2.6% compared to the end of the third quarter of 2013, and 200 fewer than at the end of the fourth quarter of 2012. Of the 3700 employees at the end of the fourth-quarter 2013, 91% were billable resources.

At the end of the fourth-quarter 2013, we had no debt and $46.2 million of cash on the balance sheet compared to no debt and $40.6 million of cash at the end of the fourth quarter of 2012. Both the fourth quarter of 2013 and 2012 ended between US biweekly payroll dates.

Our days sales outstanding were 62 days at the end of the fourth-quarter 2013, compared with 68 at the end of the third-quarter 2013. The decrease in DSO was due to the timing of the cash proceeds received at the end of the comparative quarters.

Our cash provided from operations in the fourth quarter of 2013 was approximately $18.2 million as compared with $11.4 million in the fourth quarter of 2012, related primarily to changes in working capital. In the quarter, we had $1.1 million of capital expenditures and recorded depreciation expense of $820,000.

We repurchased 116,000 shares of CTG common stock during the fourth quarter of 2013 and 59,000 shares in the first quarter of 2014. Our current repurchase authorization is for approximately 1.1 million shares. As it remains accretive to our earnings, we intend to continue our repurchase program during the remainder of 2014. Jim?

Thanks, Brendan. In aggregate, revenue declined by 5% in the 2013 fourth quarter with our Solutions business decreasing 11% to 39% of our total revenue. The decline in Solutions business came from our healthcare vertical, where our hospital clients faced with a reduction in income and cash flow due to these sequester cuts to Medicare as well as other reductions in government reimbursements, have reduced spending.

On our conference call at the end of October we mentioned we had received two RFPs for our electronic medical record projects to which the hospitals had not decided what IT services firms would be awarded those projects. We received one new RFP for an EMR project since that call. We have won one project which will start up in the first quarter of 2014, and are still awaiting a decision on the other two RFPs as to what IT services firm will be chosen for those projects.

When we started the fourth-quarter 2013, we had 15 active EMR projects. During the fourth quarter, there were no projects that started or ended. Therefore at the end of the fourth quarter of 2013, we had 15 active EMR projects.

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. We have seen hospitals go through cycles like this before where they have had to delay capital spending. It occurred in 1998 when the US government balanced the federal budget by reducing Medicare and Medicaid payments. After a period of time, the government realized it was beginning to bankrupt smaller hospitals and increased reimbursements.

Again in the first half of 2009, hospitals stopped launching new projects as the tax-exempt bond market where most hospitals finance their long-term capital, virtually disappeared. When this credit crunch eased, CTG's business recovered.

While the market is again constrained in the short-term, long-term we still think there is a significant opportunity for growth in our EMR business. There are many hospitals that do not currently have EMR applications and others that have applications that will not meet the more stringent standards that are about to be imposed. There will also be a lot of work required for hospitals that have met the requirements of meaningful use stage one to meet the requirements of meaningful use stages two and three.

The health information exchanges will have to be built to facilitate the exchange of records, and we are positioned in Europe to participate in their adoption of EMR when it occurs. Given the work that needs to be done, we are optimistic in the long term about our EMR business.

Fortunately for CTG, EMRs are not only healthcare offerings and the acquisition of etrinity and our other healthcare offerings continue to have a positive impact on our business, we've recently seen an increase in the number of RFPs that we are receiving for healthcare outsourcing engagements. In the current tight provider spending environment, we see excellent opportunity for us in application outsourcing as it create significant immediate savings for hospitals without them making a large financial investment.

CTG also has an outstanding reputation in this area and these engagements are typically for multiple years, providing an annuity like revenue stream.

Our SaaS offerings added approximately $0.06 to our earnings per share in 2013 with all of it being generated in the first three quarters. We had forecast $0.03 to $0.05 in earnings per share in the fourth quarter from these offerings. However, our FWA client, a small payer concerned about what the impact of pursuing these claims might have on their relationship with their provider network, has not processed the FWA claim we identified.

The current challenge we are facing in the sale of this product is the problems that have occurred with federal and state insurance exchanges with the implementation of the Accountable Care Act. For example, one FWA engagement we anticipated closing in the fourth quarter did not happen because our clients dealing with one of the states that has issues has shut down all nonessential projects until they are comfortable that the exchange is functioning properly.

Having covered healthcare, I would also like to talk about the other three vertical markets in which we focus. Our technology service provider market which is all lower margin staffing business declined in the fourth quarter 2013 based upon a reduction in a significant customer's need for external IT resources.

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 was flat compared to the fourth quarter of 2012.

Turning to our Staffing business, its revenue declined by 0.5% when you compare the fourth quarter of 2013 to the fourth quarter of 2012. The decline in Staffing business from a significant customer I just mentioned was almost totally offset by an increase in demand from other clients.

Looking forward to the first quarter of 2014, we are forecasting total revenue to be in the range of $98 million to $100 million. It is worthwhile to note that there are only 62 billing days in the first quarter of 2014 versus the 65 billing days in the fourth quarter of 2013 and the 63 billing days in the first quarter of last year. We are forecasting earnings per share in the first quarter 2014 to be in the range of the $0.18 to $0.20 per diluted share.

For the 2014 full-year, we currently expect a revenue range of $410 million to $420 million or a 1% decrease at the midpoint of our guidance when compared to 2013.

Based upon our revenue forecast and the anticipated mix of business, we expect our 2014 net income per diluted share to be in the range of $0.90 to $1.00 per share or a 3% increase from 2013 at the midpoint of our guidance.

We thought it would be helpful if we spent some time explaining how we set our guidance for 2014. For our Staffing business and our traditional IT Solutions business, we set the guidance the same as we have in the past in that we only estimated engagements that we are currently working on as well as engagements that we anticipate will be signed later in the year. As a technology similar, we have grouped three of our newer offerings together and are calling them data analytics.

The three data analytics offerings are our big data offering and our two SaaS offerings which are our clinical decision support system for chronic kidney disease in our fraud, waste and abuse offering.

For these data analytics offerings, we have only included engagements in our guidance for the year in cases where the client has given us a verbal commitment that they want to proceed and we are negotiating the contract with the client or where we have executed a letter of intent on the project. Currently we have included in our forecast for 2014, approximately $6 million of revenue for these contracts that are in process and associated earnings per share for these projects will approximate $0.17.

We do believe that we will sell more than $6 million of data analytic services in 2014 but cannot accurately forecast this business because these offerings are still in the introductory stage of the product lifecycle and we don't have enough history to accurately project which opportunities will be closed.

In addition, because they are high margins, a small amount of revenue from these offerings has a large impact on our EPS. If you think about it, it is only February of the year and in the first two months, we've sold $6 million of these offerings, twice as much as we sold in 2013. As the year progresses, we will adjust our guidance accordingly for additional wins.

As to our quarterly estimates in the first quarter 2013, the government extended the R&D credit retroactively to January of 2012 which increased our EPS in that quarter last year by $0.02 per share. In addition in the first quarter of 2013, we earned $0.02 from our data analytics offerings and we are not forecasting any income in the data analytics area in the first quarter of 2014 as we anticipate that the data analytic projects included in our guidance will begin in the second quarter of 2014.

The data analytic projects included in our guidance which are expected to begin in the second quarter should increase our EPS by approximately $0.06 per share per quarter causing the EPS for the last three quarters of the year to be considerably higher than in the first quarter of the year.

Looking at our revenue guidance for the year, we currently think our healthcare business will decline by approximately 11% in 2014. That assumes the government's reduction in reimbursements will continue throughout 2014 limiting EMR starts. Offsetting some of the decline in EMR revenue are expected increases in our revenue from other offerings such as outsourcing, ICD-10, and consulting services tied to healthcare reform. For our non-healthcare solutions business, we are projecting a revenue increase of approximately 3%. We are forecasting a 3% increase in our staffing business in 2014.

We continue to remain optimistic about CTG's long-term growth potential. While we are going through a transitional period this time, longer-term we expect our healthcare business to return to growth as the EMR work is completed. In the short term, we expect to see growth in outsourcing ICD-10 and healthcare IT consulting work.

In addition, we positioned CTG to participate in the adoption of US package software by European hospitals. We are pleased that we have already been able to line up $6 million in data analytic sales for the year and will adjust our guidance for further wins as the year progresses.

When we look at how CTG is positioned in healthcare, one of the world's fastest-growing industries, we can see why we continue to be optimistic in our future long-term 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). Brian Kinstlinger, Sidoti & Company.

Good morning, guys. The first question, I guess I was a little bit confused. The data analytics business, how much did that contribute in revenue and earnings in 2013? Did you give those numbers?

No, I didn't but it was $3 million in revenue in 2013 and $0.06 per share.

So why on twice the revenue -- I'm sorry, no, that is okay. So when you say you booked $6 million through February for the year, are those new wins you have won in January and February or are you talking about what you won last year?

No, they actually would have been sold. The customers made the commitments in January and February of this year. We haven't signed the final contracts with them but as I said, they have either given us verbal commitments that they're going to go through with the project and we are actually negotiating the contract with them or we have actually gotten a signed memo of intent with the detail of what they want us to do.

Can you talk about which products they are? I mean have you had another fraud, waste and abuse one? Have you had a new medical IT management win? Could you sort of give us a sense of where that extra revenue is coming from?

Sure. One is actually big data and the other one is fraud, waste and abuse.

Okay. And then the customer that is concerned about going after their claims, have they walked away from the contract or are they expecting -- have they given you a timeline of when they might start to go after those claims?

No. The way the contracts are set up, we are reimbursed when they actually receive the money back. So they have to process the claims that we give them. But they are not required to process the claims and I don't think any payer would buy a contract like that in advance if they have to process the claim whether they agree with it or not.

The clients met this -- beauty that we are right. I mean they have pretty much signed off that we are correct, that the claims would fall under a fraud, waste and abuse and that there is recovery. They are concerned about their provider network and the impact it will have on them. They just have stopped and are trying to decide what they want to do.

And so have they not decided whether they will move forward at all with going after those [terms]? Have they communicated what their plan is?

No, they have not.

So how does this alter your view of the business in total, basically the small, to medium-size hospitals that don't have the clout that the larger hospitals have?

This isn't hospitals, it is payers.

I mean payers, sorry.

Okay. It has altered our view some. We are now concerned that smaller payers won't do it. Medium and large payers, we think will do it because the provider actually needs them. Actually the fraud, waste and abuse, we decided that we would try another market. The fraud, waste and abuse that I mentioned that we are expecting to sign up shortly, it is included in our guidance, is a very large employer with a self-insure planned. And we can't think of why an employer wouldn't want their money back if there was claims that were paid that shouldn't have been. So we're trying that market.

Okay. And then I guess the last question and I'll get back in the queue, as I have others. Can you go over, maybe outline for your EMR projects, how you expect them to expire and complete throughout the year? I mean, I guess the reason I'm asking that is to you have to replace that revenue or there will be more work at those contracts as you move forward?

Well, that is the reason that our healthcare revenues declined. In 2013, we had just over $60 million of EMR revenue and almost all of them are two-year projects so we are assuming that $30 million of EMR projects will end. They are ending because we almost always come in on time and on budget. So they are ending because we did a good job.

Once we finish that project with that client, the client doesn't need our people anymore. We have actually trained their people to know how to maintain the applications as part of the project. And there aren't as many, and so we are assuming for 2014, which I guess is your question, that there will be about $30 million of projects that end. And then either we are expecting to see some new projects start like we just had a project that is starting up in February.

So as the hospitals deal with this reimbursement problem, they are not all going to come out of it at once. They seem to be coming out of it separately and we expect to start some of them, not that many. So we are going to end about $30 million of EMR projects and then either through new EMR or we think we are doing a fair amount of outsourcing in 2014 as well as ICD-10 work, we will get about $15 million in new business so that the (inaudible) is really because there aren't that many EMR projects that are starting up.

Let me just take a second because this is actually a good area to talk about because it is key to our guidance this year and talk about what we see happening in the hospitals and why they still seem to be somewhat disarray. I'm going to use -- I won't name them obviously but we have a very good well from hospital system. It's over 1000 beds and after the sequester hit kind of in March and April of last year, they realized that it wasn't going to go away. So they made an announcement in early June that they were going to lay off 1000 people which is a big deal for a hospital system that size. But they were going to lay the people off in June and July. That was going to cause them to lose money in June and July but by the fourth quarter, the revenue will be back and they would have righted the organization and then be back to profitability.

When October came, the government put through a new series of rules in order to shift the cost to hospitals and away from the government. They didn't announce why but I suspect it was in order to be able to fund part of Obamacare that they did this. The one that hurt the hospitals the most is called the two night rule. CMS's position is that there is no reason that a patient ever should be admitted to a hospital for one night. And if the patient is admitted to the hospital, they won't reimburse for it anymore.

So this hospital who had actually planned out to get profitable by the fourth quarter of the year announced in December that because of the changes in the rules they were still not profitable and they were laying off another 250 people to try and get profitable by the first quarter.

So it hasn't been one hit that the hospitals have taken. It has been a series of hits they have been taking. Some of them like the hospital that's starting up in the first quarter actually have kind of righted themselves so they can get their financing. Recently we've been talking to a hospital that literally stopped their EMR implementation mainly because of financing and is now saying hey, we think we've got the financing and we can start back up again.

So what we think will happen this year is individual hospitals may start up EMR project but until the government does something about the reimbursement screen or until they each individually get their profitability back we just don't see the whole market coming back quickly.

Thank you.

Vince Colicchio, Noble Financial.

Good morning, Jim. If the EMR business picks up in a surprising way in the second half of the year and I would say there is an opportunity to add two or three normal sized projects for you guys beyond what you are expecting, do you have the people you need to do that? How would that play out?

Yes, actually we have heard of some of our competitors in 2013 revenues being down 40% to 50% so there are people in the market now that is not a problem anymore. Almost all of our competitors except for us have done pretty substantial downsizing. So getting the people for EMR projects would not be an issue.

Okay. I know you did some thinking on new service lines on the healthcare side. Have you begun to sort of develop something internally towards that? Do you have an acquisition pipeline and remind us what area that may be in?

We do have people out looking for acquisitions for us and people would be investment bankers. We are very specific though. We are either looking for data analytic type companies or the other area that we think would be of interest would be revenue cycle. We don't have currently a huge book of revenue cycle, we do some. We think that once ICD-10 goes in that there will be a couple of years that hospitals have to spend really in education, in getting the doctors used to the new codes so the documentation is right so the coders know to bill the correct amount. So we think once ICD-10 finally hits that that would be a good market.

Okay. And what are your current thoughts on the EMR deadline for this year?

Which EMR deadline is that?

The October deadline for (multiple speakers)

I think that the government may stick with that. If you look at the requirement, it is actually a [chark] and I'm doing this on memory I don't have it in front of me. If you reach meaningful use one and got the reimbursement from the government in 2011 and 2012, then you have to reach meaningful use two on October one of 2014. If you reach meaningful use in 2013, then you have until October 1, 2015 and it kind of goes on like that. So it's the very early adopters that have to get to meaningful use to this year, not all of the hospitals that have reached meaningful use one. So that work will probably be spread out over the next two to three years.

In terms of analytics software, nice pickup obviously early in the year. What do your sales pipeline of opportunities look like versus say six months ago? Is it significantly better?

Yes, the pipeline keeps building. There is no doubt about that and I think the fact that we have already sold $6 million in two months is an indication of that.

The problem really we are having with that is in our traditional business like the EMR business, we have as an example, 10 customers that are telling us they are going to do an EMR project in the next year. We usually figure maybe half of them will actually start in the next year and of those, we will get 77%. We have been very -- pretty accurate actually on our quarterly guidance. The last quarter before the fourth quarter of 2013 that we were below the midpoint of our guidance was October 2012, so it was 12 years ago.

The problem that we are having with the data analytics is twofold really. One, the guidance has been based upon an individual client's performance and that's one client no probabilities that is what is in the forecast. So it's a very narrow focus versus the rest of our business, which is based upon lots of clients.

And the other problem and I guess this is also a good part of it is the profitability. I mean for every million dollars in the quarter that we get from data analytics, it adds about $0.025 to our earnings per share so to be off even $2 million in a quarter makes a huge difference in the Company's earnings per share that are in the 20s or so.

We truly believe that we are going to land some other data analytic clients this year but depending on which one we pick, it has a huge impact on our EPS forecast for the year. So we think we are better off to go in with what we believe we are going to close based upon our current negotiations with customers and then change our guidance as the year goes on.

And we know that means we are going to have to change what we have been doing in terms of guidance. In the past, we have tended to wait till the end of a quarter to announce when we signed a deal. Because we haven't included items if there is anything significant that we have closed, we will actually issue a press release when we close it and most likely redo our guidance for the year.

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

Rick D'Auteuil, Columbia Management.

Good morning. So to get some clarity on what you are calling data analytics now. So to drill down on the fraud, waste and abuse piece of it, you had a client at the beginning of last year, you signed a new client midway through the year that was supposed to start in the fourth quarter. Well, originally it was supposed to start I think in the third quarter but didn't and then it was the fourth quarter. That's the one you are referring to that isn't processing the claims?

Correct.

Okay. And then there was a large opportunity that was in the pipeline that you expected to sign formally in the fourth quarter and you may have made a reference to it but what happened to that?

That was a large payer and that particular payer is involved with one of the states that is still having problems with their exchanges and basically they shut down all of their nonessential projects until they get it worked out. So we were basically put on hold.

And that is not in your guidance at all for this year?

No.

Is it your expectation that still happens at some point?

The client is still telling us that they want to do it but it goes back to if we -- we would be back to setting the guidance based upon what we think one individual client is going to do.

Okay.

It is not in our guidance for this year, no.

Is there progress being made with that one state?

Our understanding is yes but it is still behind where they need to be. Some of the states are actually, the press has been more focused on the Federal Exchange obviously. Some of the states have actually had more problems than the Federal.

Okay. Why would you believe that that large payer won't do what the second customer did?

Well, the larger payers are not as dependent on the provider. It kind of flips at some point. This would be considered, we group them in four groups so a small payer, medium-size payer, large payer and then the mega payers. When you get to the large payer, the provider needs the payer more than the payer needs the provider is our understanding from talking to people in the industry.

One small, 10% physicians practice can't look at a large payer and say we're just not going to do business with you anymore because they are going to lose a lot of customers if they do that. And it doesn't hurt the large payer as much as it would a small payer.

Have you been following these Medicare changes that I know you guys aren't involved with that but as it relates to CMS and what the government is doing?

I follow them somewhat and we actually have people obviously that follow them fairly closely.

It sure feels like the providers are pushing back hard with lobbying and having some success.

Yes.

Okay. And then actually this two-day rule really hammered those guys too so you don't feel the same is true in the non-government reimbursed space?

Well, the biggest changes that have ever happened probably to healthcare are occurring now. And the payers, Obama originally wanted a one-payer system, right. He didn't want private insurance. And the payers are having to justify kind of their existence. I mean in the past, the administrative costs and profits are probably for the larger guys, at least maybe 10% of the healthcare costs that they process. So now the pressure is coming under them with these exchanges, etc., to become more efficient.

In the past they have always looked to reduce their administrative costs, which again is only 10%. The bigger opportunity actually is for them to reduce their payment costs, because if they can do that and get more efficient, the reason the processing claims goes up immensely.

So we still think that there is an opportunity in it. As I mentioned before, the FWA that we won, we decided we would try a different market with the self-insured plan and being a -- having a self-insured plan and actually using our application on our own plan I can't see why a company wouldn't want the money that they paid if they didn't have to back.

No, I get that. To drill down more, what happened to client number one, are they still doing business with you?

Well, they are out there but this business works very different than the rest of our business. Most of these clients -- remember they are doing an audit so we might do a year or two years for a client and then once we are done with that they collect those claims, they are done making those payments, they might not have us run the application for another year or two.

Really, okay. It is that lumpy. I mean they are obviously doing more claims or getting more claims all the time but you are saying you view it in 12-month increments?

Yes, probably 12 months would be the least. We have been redesigning. Actually it is pretty much on our end done, the application so we can do it more real time as people are processing claims because the small payers are telling us that if they could catch where we are catching real time, to do an adjudication of a claimant and deny it as you are processing the claim it is a much easier sell for them than waiting a year and going back to their the provider.

And there is a clear way that you get paid under that scenario too?

Yes, we are telling him it is the same whether we do it by the year or more real time.

And then there were several other -- I think six of five other that were beta testing the fraud, waste and abuse and we are still in the pipeline. What is the status of those?

Of the original six we won one, which is one of the ones that you mentioned. so that brings it down to five. Two of them told us that they just weren't going to pursue it at this time. So they basically said we can come back later on and the other three, we are still pursuing and they are still talking to us.

Okay, and there is nothing that would indicate that they are likely going to contribute to 2014, those other three?

Two of them are telling us that they want to do something but they are not to the point that they are saying yes, go ahead, give us a contract or we are going to do an RFP or whatever. So they would be significant changes to our EPS if we put them into our guidance and we don't want to do that until we get them to the point that they are saying yes, we're going to do this with you and give us a contract and start negotiating.

Okay. And then just ICD-10, still has an October 2014 deadline, is that correct?

That is correct.

So your original belief was hospitals were a mess on this and it was going to be a much bigger task than they were contemplating and we are eight months away from that deadline. So what is going on out there as it relates to that?

Well, we have three ICD-10 projects that we are involved in and running. We have other projects where the hospital said no, we think we can do this ourselves, but we need project managers and high-end consultants to help. So we are providing people to some of those hospitals as well.

I really don't think that the healthcare system is going to be ready by October 1 to do this. I just don't because I doubt any of the small hospitals have done anything and even some of the larger ones are hoping to get a postponement.

When you still because of these additional changes to CMS, I mean I'm just picking a hospital that I -- they are going for financing so I happen to know what their numbers are. There is a 1000 hospital bed hospital system that used to be profitable probably at a 2%, 3% operating margin before the government started reducing spending. They lost $6 million in the second quarter, they lost $15 million in the third quarter. They haven't released their fourth-quarter numbers but everybody thinks they are going to lose money.

Some of the hospitals that we do business with have violated their debt covenant so we know that they are working with some of the funding agencies to get out of their problems. So when you go and you talk to the CEO of a hospital and say you're going to get killed if you don't have ICD-10 done, some of them look at you and say, I have to figure out how to make payroll. I got a get the bond guys out of here, work out some deal with them.

Okay.

It is a weird situation because we have never been in a situation before where both the payers are not in jeopardy but have a lot of stress under them because of this Obamacare and the exchanges and everything. And the providers, the government has significantly reduced their reimbursement. We are starting to see smaller hospitals file for bankruptcy. There is one in Western New York for instance that is going to close its doors in March because they just can't handle all of these changes.

My recollection was that ICD-10, if that deadline stays intact, that is very onerous on people that haven't upgraded to -- on the hospitals that haven't upgraded to that?

That is correct. We can actually map from ICD-9 and ICD-10 because almost all of the 10 codes are an explosion of the 9 codes. So expense for instance is one code in ICD-9, there's 80 codes in ICD-10. The problem is when you do the mapping, you don't have the documentation to prove that you did the most expensive code reimbursement so you have to map to the lowest. So where currently they are getting paid kind of on the average of those 80, they switch to only getting reimbursed for the lowest reimbursement. In models people have run the hospitals will lose at least 3% of their money, their revenues if they are mapping to keep themselves going.

The alternative is you've got to shut the hospital down because you can't bill anybody. It would be terrible. CMS is digging their heels in. So far they have said they are going to stick with the date. It wouldn't surprise us quite frankly if we get close to the date and they postpone it.

Well it sounds like -- I mean, they have already done that what, three times?

Yes, three times, yes.

All right, thank you.

(Operator Instructions). Bill O'Loughlin, O'Loughlin Financial Group.

Three or four comments if you could be kind enough to clarify it. Most people on the call probably are not aware that yesterday Gov. Cuomo announced that IBM is going to locate 500 people in Buffalo and basically duplicate the Silicon Valley complex that he has successfully done in Albany, New York.

In that article, Jim, this morning, for the benefit of the people on the call, the top IBM executive on location who will oversee this big initiative said this, he said that genomic mapping and medical records are two areas where IBM is doing work. Given the fact that CTG is doing genomic mapping and medical records, can you envision IBM -- and I don't see why not -- buying CTG? It is only a $1 billion purchase and IBM could swallow you like a cup of coffee and you could have now the capital, the people, the global name to do what is not happening now? That is my second questioning.

There is 7 billion people in the world, 320 million in the US. I don't see how with what you are doing with in stage renal disease under your SaaS system and will also be able to do if you had the people to do it, coronary heart disease, mental health, diabetes and drug addiction, why you couldn't instantly have a global presence and bring in massive amounts of new business and have your salesforce learn to drop what we used to call in the investor business the sitters and spitters who are waiting to do something but don't do it and learn to just put those people on the back burner and go after all the new business all over the planet that you could have in my opinion, if you had the human capital and the financial capital to do it.

Can you give me any thoughts and views on how 7 billion people in my opinion would love to hear what you're doing and probably have no idea in how you might tap into that market in China and India in Europe and South America that I don't think your salesforce has any ability to even call on now?

Well, first, I have absolutely no idea if IBM will ever buy us or not and even if I did, I couldn't comment on it but that would just be absolute pure speculation. IBM obviously has been working on genomic sequencing and tying in EMR apparently -- records. We have actually done that for a client account -- this is all public as you know -- Roswell Park.

So we obviously have capabilities. I am sure IBM would say their capabilities are larger than ours. I honestly don't know because that marketplace is so small at the moment, we have never actually seen them in a customer.

We think that the genomic offering is going to be significant over time, particularly the ability to tie in the EMR records and we are probably third in the world in IT services for electronic medical records and we've already successfully helped a client do genomic sequencing. So we have the right skill sets to be able to do that and actually are doing it for that client.

So I think the opportunity is huge. Our own belief is you talked about China, etc., most of the money being spent, virtually all the money -- I shouldn't say all -- but the vast majority of the money being spent on genomics is in the United States currently and it's because the state and the federal government are financing research in that area. Also the big pharma companies are also doing research and we think that the announcement that IBM and UB made long-term first place it is great for Buffalo. I mean it is fantastic for Buffalo.

But long-term we think that actually will be good for CTG because if we have used the UB research particularly in the past to develop things like our in stage renal disease offering, if they can tie in genomics to medical records, then that creates even a more viable database for people to use to develop systems like that to help doctors treat patients with certain diseases. So long-term probably good for CTG. I don't see why it would not be.

Any news or opinion, Jim, on your initiative with Roswell Park, the local cancer hospital and the genomic sequencing project you are working on? It would hopefully expect a partnership to be announced between Roswell Park and CTG. Is there any hope that that will be announced relatively soon?

I really can't comment on that. The lead in that project is Roswell, it is not CTG. We agreed with Roswell quite some time ago that any announcements or news would be given by someone at Roswell, not by someone at CTG.

I used to be an IBM representative and the one thing they stressed to us is patience is not a virtue. You have done a terrific job in taking CTG from staffing into truly a healthcare potential behemoth of a company but I have to wonder if your salesforce works with too few prospects too long and doesn't learn to drop them and move on to people that would probably be able to sign up in a month if they knew what you were doing.

And I have to -- I suspect that may be the case. They hope that something will happen and Obamacare stultifies it. Forget Obamacare; it's a global market. Isn't there something that you could do with a big bang in Europe or other countries with all that you are working on that truly could help solve the biggest problems in the world which is healthcare, healthcare costs. Truly in many cases, save millions of lives with what you are doing. But people don't know about it.

And I think your salesforce in my opinion needs a good cattle prodder to really get out there and say look, guys, if you're not going to close these accounts, put them on the back burner and forget them and move on to new fertile ground of businesses that have money around the world that could take advantage of your services.

I don't think that is the issue. Genomic sequencing for instance, the offering, we are still waiting for state approval to be able to use certain aspects of that so there isn't actually something that we could go out sell tomorrow. The other offerings are all brand new technologies. What the in stage renal disease for instance is exactly what you said. I mean it's the ability for us to be able to put a system in that not only significantly reduces costs for the payer -- I mean it will at least avoid an emergency room visit which is probably $30,000 to $40,000. But also for the patient, the specialist has the ability to stimulate the neurons and keep the kidneys from failing.

We have developed things that will do that but this is brand new technology. No one's ever done that before. When we patented that application, our attorneys told us it was the first time anybody patented an application to use human blood for any kind of a [decision] support system. So this is new technology; it takes longer to sell.

But just in conclusion, CTG is on the cusp of greatness. I don't believe someone like Obama or Obamacare or the US economy or whatever, some budget from some hospital group or hospital should slow you down. I think your salesforce needs to be re-motivated, retooled, rebuilt and probably restrengthened to say look, we've got to go out and sell this. We've got the answers to some of the greatest medical problems in the world. We are not going to have the patience to wait for those who want to sit and think, let's go out and find people that want to act and do it.

And that's my point, is to go out and nobody knows how many losses you have. They only can count the wins. And the wins are evident in sales and earnings. The losses are irrelevant. You just have to go for the wins and I think my own instinct is there is not enough salespeople working on enough wins. They are just regurgitating and revisiting those people who think and think and wait. And that's what I'm concerned about as an investor.

Well in the first two months the applications you are talking about are the data analytics. In the first two months we have sold $6 million, twice as much as last year. We just haven't included any future wins in our forecast going forward and we will when we get those wins, we will definitely adjust our guidance.

You have done a terrific job with CTG. You are not a salesman, you weren't meant to be, you are a CEO. But I would really hope that you could revisit the fire in the belly of your salesforce and get them to work with more prospects, not fewer and drop and put on the back burner those people that want to wait for God knows whatever, that may never materialize.

It is a big world and we are global and you could be a behemoth of a company. You could be the salvation of many people's lives. You could be globally known. You could be on the front page of Forbes with what you are doing and I'm concerned not enough people know about it but I do appreciate you listening.

Okay. Thanks, Bill.

Brian Kinstlinger, Sidoti.

Jim, you mentioned two of your beta customers weren't going to pursue. What was the reasoning for that?

I am sorry?

Of your six original beta customers, two said they didn't want to pursue. What was the reasoning behind that?

They didn't actually give us reasons. Basically we talked to them for a couple of years. They admitted that -- we ran samples for them to show them how much we could save and they just said we don't want to pursue that at this time. So they didn't actually give us a reason.

And where do they fit, small, medium, large or mega?

Large or mega.

Not mega, just large?

Large or bigger.

Got it. Can you maybe quantify a pipeline in terms of number of people you are talking to in both fraud, waste and abuse and medical IT management? Are we talking about 10 or 20 or are we talking more like 50 or 60?

I don't actually have a number in front of me. The problem with giving that number out is that if someone -- the way our system works if somebody goes in and talks to somebody for the first time would actually pop up as one. I suspect it would probably be in that range, closer to 20 than 60 but I really don't know the number.

And then have you been able to convince any stage two issue in an RFP. I think a while back you had mentioned that states need to have competitive procurement. Have any been convinced?

Not for what we are selling, no.

Okay. And then finally, you have mentioned outsourcing contracts is an area that you can grow. I think that you were bidding on a couple of large contracts that you expected to be adjudicated in January. Did you mention what happened to those?

Yes, we bid and these will be contracts that we would have gotten either in the fourth quarter of 2013 or the first two months of 2014. So we bid on seven contracts. We won three. Two of the customers told us they are on hold. We are doing the outsourcing because they're doing some other project. We think they can't get their financing and they put those projects on hold so they are going to come back to us on those two and then two we are still waiting for them to make a decision. So the three that made decisions to go forward, we won all three of them.

Thanks very much.

Vince Colicchio, Noble Financial.

Europe grew 5% organically in constant currency. The driver there, was it staffing or was it your EMR client? And then also on the EMR side, are you starting to see a pipeline build or still too early?

More of the hospitals in Europe are getting interested but they are not to the point that they are ready to sign contracts and part of their problem is they have to get financing or they have to get either financing or capital to basically state supported organizations. So they're going to have -- most of them will probably have to go to the state and somehow get capital to do that.

There is very little revenue at the moment from EMR in 2013. The initial contract that we got was a consulting contract, just to help them kind of get the project organized and do some quality checks at the beginning. So there isn't much revenue.

Most of the increase in Europe actually was in financial services which has been growing and the other area that's growing for them is the government, the European Union. It's basically rebuilding Washington DC 200 years later. And most of the growth actually in Europe was in Solutions, it wasn't in Staffing.

Okay, thanks for the color.

There are no further questions in queue. Please continue.

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

We have offerings to meet the IT needs of providers and payers including electronic medical records, fraud, waste and abuse, ICD-10 conversions, accountable care organizations, genomic sequencing, IT driven medical management models for chronic diseases and big data, all of which are expected to be in strong demand for several years. As such, we remain very excited about CTG's long-term future growth prospects.

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

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