Computer Task Group Inc (CTG) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the CTG 2014 fourth-quarter earnings call. At this time, phone lines are in a listen-only mode. Later on, we will have an opportunity for a question-and-answer session. (Operator Instructions). And as a reminder, today's conference is being recorded.

At this time I'll turn the conference over to Director of Investor Relations, Jim Culligan. Please go ahead.

Thank you, Nick, and good morning, everyone. We certainly appreciate your time and your interest in CTG. On the call today we have CTG's Interim CEO, Brendan Harrington; and Interim CFO, John Laubacker. Brendan and John are going to review the results of the fourth quarter of 2014 and then update you on the Company's strategy and outlook. We will follow with an opportunity for Q&A. If you do not have the news release discussing our financial results, you can access it at the Company's website, CTG.com.

Before we begin, I want to mention that statements in the course of this conference call the 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. These forward-looking statements are based on information as of this date. The Company assumes no obligation to update these statements based on information, from and after the date of this conference call.

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 on our website or the SEC's website at SEC.gov. Please review our forward-looking statements in conjunction with these precautionary factors.

Also, a reconciliation to GAAP of the non-GAAP financial measures we are providing on this call is included in our earnings release.

With that, I'd like to turn it over to Brendan to begin the discussion.

Thanks, Jim. Good morning, everyone. Thank you for joining us this morning for our fourth-quarter earnings conference call. As you've seen in our news release, earnings per share for the fourth quarter, before charges, were $0.21, which was at the midpoint of our guidance provided in our third-quarter earnings release.

As we had mentioned in our third-quarter earnings release, we incurred a charge of $0.07 per diluted share associated with the death of Jim Boldt, the Company's former CEO, under his employment agreement.

We also took a non-cash charge of $0.06 per diluted share related to the impairment of the carrying value our fraud, waste, and abuse software solution offering. This charge was a result of the limited revenue generated by this offering in the last year, and due to opportunities that we had been pursuing in 2014 which have not been closing.

Although we continue to believe our FWA tool is a viable offering, the lack of recent sales, along with the limited traction we currently see in the market on which we're focused, led us to conclude that the tool's asset value was impaired for accounting purposes. Despite the write-down of the asset value, we do intend to focus on potential future opportunities for the FWA offering.

In aggregate, our revenue declined 4% in the 2014 fourth quarter. Revenue from our solutions business, which represented 35% of our total revenue, decreased by 15%. The decline in our solutions business came primarily from our healthcare vertical, where we saw the continued impact of several significant EMR projects end earlier in 2014 as we previously had reported.

We started the fourth quarter of 2014 with seven active EMR projects. During the quarter, there was one smaller project that started and one larger project that was completed. Therefore, at the end of the fourth quarter, we had seven active EMR projects. We also signed one new EMR implementation project earlier this month.

As noted, we continue to believe that our EMR business will be constrained in 2015. While we've seen some smaller EMR projects start recently, more hospitals are attempting to staff the projects with their own resources. Often these organizations realize that they do need outside consultants in many of the key positions, thereby resulting in us getting more requirements to provide experienced resources to support and manage the EMR projects on a staffing basis rather than through an RFP. We have seen downward pressure on our billing rates resulting in a reduction in EMR margins, as our hospital clients respond to the pressures of healthcare reform.

While the demand for large-scale EMR support has declined, there is increasing demand in healthcare market for external assistance in other areas where CTG is offering to support these changing client needs. More hospitals are looking to realize the full value of their significant EMR investments by looking for external consulting help in the areas of EMR post-implementation and optimization support.

We have also recently seen an increase in the number of RFPs we are receiving for outsourcing the management of healthcare applications. In the current tight provider spending market, application management outsourcing is a good opportunity for us, as it creates savings for hospitals without requiring them to make a large financial investment. We have a solid reputation in this area, and the engagements are typically for multiple years, providing an annuity-like revenue stream. It should also be noted that the margins on these application management projects are being squeezed as well.

We are also starting to see increased demand for healthcare IT and business consulting support from both payers and providers as they seek to respond to mandates under healthcare reform, such as accountable care, population health, and medical data analytics. Our healthcare services group has significant experience in both the payer and provider markets, which gives us a competitive advantage, especially as these markets continue to converge.

These projects are generally smaller than EMR and outsourcing projects, since the work will mainly be consulting and assessment-type engagements. But these initial projects often lead to more significant remediation or implementation projects.

We completed a large data analytics project in the fourth quarter. That project started in April 2014, and, as expected for the fourth quarter, it added $1.9 million to our revenue and approximately $0.06 to our fourth-quarter earnings per share.

We also completed our integration project in the area of genomics in the fourth quarter. We will continue to pursue additional systems integration work with other hospitals and labs, as providers increase efforts to share genomic data with each other to provide better population health management to their patients.

Having covered healthcare, I'd also like to talk about the other three vertical markets on which we focus. Our revenue from the technology service provider market, which is all lower-margin staffing business, decreased in the fourth quarter of 2014 by 6%. We saw increased demand in the quarter from our largest customer's current need for external IT resources.

However, this increase demand was offset by the transition of IBM's x86 server division to Lenovo, which was effective October 1, 2014. We retained a significant share of this business, which, subsequent to the transition, is included in the general markets vertical.

Our financial services vertical, which is concentrated in European markets, had another good quarter, although the revenue increase in local currencies of 8% was offset by the stronger US dollar.

Our energy business revenue decreased approximately 5% when compared to the fourth quarter of 2013, mainly due to the effect lower oil prices are having on our energy customers.

Turning to our staffing business, revenue increased by 2% compared with the fourth quarter of 2013, as we saw a pickup in demand in the US.

Our European business experienced modest growth in local currencies during 2014, and is now approximately 20% of our consolidated revenue. Our focus in Europe will continue to be expanding our work with government agencies, financial services organizations, and in healthcare. Given our healthcare experience as a Company, we continue to be optimistic regarding our ability to grow revenue from implementations of US EMR systems in Europe over the next several years.

I am going to talk more about our expectations for the first quarter and the full year, but I am first going to ask John to review our financial results.

John?

Thanks, Brendan. Good morning, everyone. Beginning this quarter, we will provide an abbreviated financial summary during the call compared with what we have previously presented, as we have added much of the information to a summary sheet of other financial information at the end of the earnings release to provide a quick overview of key financial information in one place.

For the 2014 fourth quarter, CTG's revenue was $98.3 million, a decrease of $4.5 million or 4.4% compared with the 2013 fourth quarter. The decrease was primarily due to lower revenue in our healthcare solutions business. The 2014 fourth quarter had 66 billing days as compared with 65 days in the 2013 fourth quarter.

2014 fourth-quarter revenue from IBM, our largest customer, was $21.1 million compared with $23.4 million in the 2013 fourth quarter. The decrease in revenue year-over-year was due to the sale of IBM's x86 server division to Lenovo, which was effective at the beginning of the fourth quarter. As a percent of total revenue, revenue from IBM decreased to 21.5% in 2014 fourth quarter compared with 22.7% of total revenue in the 2013 fourth quarter.

Direct costs as a percentage of revenue were 81.5% of revenue in the 2014 fourth quarter as compared with 78.3% in the 2013 fourth quarter. The increase in costs in 2014 is in part due to the $1.5 million impairment charge we took for our fraud, waste, and abuse software solution; a shift in our business mix to a higher level of staffing, which is a higher direct cost as compared with our IT solutions business; as well as medical expenses for our self-insured medical plan, as costs for the 2014 fourth quarter for the plan were $600,000 higher than in the 2013 fourth quarter.

SG&A expenses were 16.8% of revenue in the 2014 fourth quarter as compared with 15.8% in the 2013 fourth quarter, but included $2 million in costs associated with the death of our former CEO, Jim Boldt, under his employment agreement. This additional expense in 2014 was partially offset by lower incentive compensation in the 2014 fourth quarter as compared with 2013.

The tax rate for the 2014 fourth quarter was 23.8% compared with 38.4% in the 2013 fourth quarter. Our 2014 fourth-quarter guidance provided with the third-quarter financial earnings release included approximately $0.02 per share for credits for research and development and the Work Opportunity Tax Credit that were not passed by the US federal government until the 2014 fourth quarter. Accordingly, we recorded the credits for all of 2014 in the fourth quarter; and the 38.9% tax rate for the 2014 full-year was consistent with the guidance provided in our third-quarter earnings release. The tax rate for the 2013 full year was 35.6%.

Net income in the 2014 fourth quarter was $1.2 million, a decrease of $2.5 million compared with the 2013 fourth quarter. On a per diluted share basis, net income was $0.08 for the quarter as compared with $0.22 in the 2013 fourth quarter. The 2014 fourth-quarter diluted earnings per share included $0.07 associated with the death of our former CEO, Jim Boldt; and $0.06 associated with the impairment charge for our fraud, waste, and abuse software solution. Without these charges, 2014 fourth-quarter diluted earnings per share would have been $0.21, or 5% lower than 2013.

The 2014 and 2013 fourth-quarter results include equity-based compensation expense of approximately $0.05 and $0.03 per diluted share, respectively, net of tax. The $0.02 increase in the 2014 fourth quarter is due to a portion of the costs associated with Mr. Boldt's passing being included in equity-based compensation expense.

Our headcount at the end of the 2014 fourth quarter was 3,800, 100 people less than at the end of the trailing 2014 third quarter, and 100 more than at the end of the 2013 fourth quarter. The decrease in headcount from the end of September this year primarily relates to adjustments in headcount from several clients in our staffing business near year-end. Of the 3,800 employees at the end of the 2014 fourth quarter, approximately 92% were billable resources and 8% were non-billable.

Our days sales outstanding were 66 days at the end of the 2014 fourth quarter compared with 62 days at the end of the 2013 fourth quarter. The increase in DSO was due to the timing of cash received at the end of the comparative quarters.

Our cash provided by operations in the fourth quarter was approximately $15.7 million as compared with cash provided from operations of approximately $18.2 million in the 2013 fourth quarter.

In the 2014 fourth quarter, we incurred $679,000 in capital expenditures, and recorded depreciation expense of $676,000.

Finally, we repurchased 113,000 shares of CTG common stock during the 2014 fourth quarter at an average price of $8.74 per share. On a year-to-date basis, we repurchased 499,000 shares of stock at a cost of approximately $7.4 million. We've also repurchased 64,000 shares of stock through today since the beginning of 2015. As of today, our current repurchase authorization totals approximately 573,000 shares, and we intend to continue purchasing shares in 2015 under our repurchase authorization.

Brendan?

Thanks, John. As to our expectations for the first quarter of 2015, we are forecasting total revenue to be in the range of $97 million to $99 million. We are forecasting earnings per share in the first quarter of 2015 to be in the range of $0.07 to $0.09 per diluted share, a 58% decrease from the 2014 first quarter at the midpoint of our guidance.

For the 2015 full year, we currently expect a range $375 million to $395 million, or 2% lower at the midpoint of the guidance when compared to 2014. Based upon our revenue forecast and the anticipated mix of business, we expect our 2015 net income per diluted share to be in the range of $0.35 to $0.45, or a 38% decrease from 2014 at the midpoint of our guidance.

The significant decreases in the expected earnings per share compared to 2014 are primarily a result of lower revenues and profits from EMR implementations, which have been our highest-margin solutions offering; a significant reduction in revenue and profit contributions from data analytics offerings, as there are no data analytics projects currently ongoing; as well as a contract renegotiation with a significant staffing customer that resulted in lower pricing which began in August 2014.

Consistent with what we've historically done, we set the guidance by estimating engagements that we are currently working on, as well as engagements we anticipate will be signed later in the year. For our data analytics offering, we have not included any revenue in our guidance for the year, based on the absence of current engagements.

Looking at the mix of revenue guidance for the year, we currently estimate that our healthcare solutions revenue will decline by approximately 14% in 2015. For our non-healthcare solutions business, we are projecting revenue will decrease by 6% in 2015.

We are forecasting a 4% increase in our staffing business for the year, driven by several customers. We recently announced that we were engaged to provide IT resources to The Boeing Company under its contract labor program. Though we believe this could be a large customer over time, we are not in a position to provide specific projections at this time, as the relationship is just getting underway.

We are disappointed in our outlook for 2015, which reflects this year being a transitional one for our healthcare business. However, we continue to believe that as a result of the aging population and the fundamental changes taking place in the healthcare market to gather, utilize, and share medical data, the healthcare industry will have a strong need to continue to invest in information technology for many years.

Given our experience in the healthcare space, and the investments we are making to change client needs, we believe that once we are past this transition period for our healthcare business, CTG is well positioned to assist various organizations in meeting their changing IT objectives.

With that, I'd like to open the call for questions.

Nick, can you please manage our question-and-answer period?

(Operator Instructions). Kevin Liu, B. Riley.

First question I wanted to ask, just -- I know you talked about the puts and takes within the earnings guidance for fiscal 2015. But in terms of how you're approaching the costs to both your EMR implementation business, as well as some of the data analytics pieces, given the lower revenue contribution for the year, are there already costs being taken out that are associated with those two groups? Or are you carrying some cost in hopes of an upturn in either of those areas later in the year?

We are carrying some costs in each of those areas, mainly as it relates to investing in providing future offerings. As far as the EMR work goes, we have some bench that we do carry on a regular basis. And as I said, what we have seen are reductions in margins. We have seen pricing pressure on our EMR projects, especially on the newer projects. And the billing rates are coming down, at this point, faster than the salary rates are coming down, which is typically the progression.

And just specific to the healthcare business, and maybe even just the EMR implementation work that you are seeing, I guess how are you certain that that's truly related to some of the macro pressures that your hospital customers might be facing, as opposed to anything competitive, whether it's just other folks moving up in rankings or competing more effectively against your own team?

I think, given our place in the market and our understanding of the competitive marketplace, I think we have actually probably fared better than a number of firms that we are familiar with. And the feedback from our clients and potential clients with regard to what those pressures are that they are feeling, because of health care reform -- it is coming back to us in terms how we are pricing new business.

Understood. And then lastly just on the data analytics piece, wondering if you can update us on what you see in the pipeline today -- why you still feel that could start to contribute more meaningfully at some point in the future, and is worth investing in.

On the medical management model, we have a small number of prospects in that pipeline. We are working on trying to close our first commercial engagement in that area. This is definitely taking longer than we would have anticipated to close a commercial opportunity in the medical management area. The sales cycle has been long, and we need to convince the customers that this is a good idea.

Ultimately, we do believe that because of the healthcare reform and the changes that payers and providers are going to have to go through in terms of taking cost out of their system -- that ultimately we believe there's opportunity for data analytics to help them, especially in the area of the medical management model.

Got it. Thank you for taking the questions.

(Operator Instructions). Thank you, speakers. There are no further questions in queue.

Okay, thank you. I'd like to close with a couple of comments here. CTG is firmly established in healthcare, which now represents almost 20% of the US GDP, and is undergoing a major transformation that will fundamentally change the way healthcare is delivered, while also creating new payment reimbursement models.

The magnitude of these changes, along with the demographics of an aging population, will ultimately require significant investments in technology. Based on our offerings and experience in healthcare, the value provided by the other areas of our business, and our financial strength, we are confident that CTG is favorably positioned for the long-term.

Thank you for your continued support and for joining us this morning.

Thank you, ladies and gentlemen. With that, that does conclude our conference for today. We thank you for your participation, for using AT&T executive teleconference. You may now disconnect.