Computer Task Group Inc (CTG) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CTG second-quarter conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Jim Culligan, Director of Investor Relations. Please go ahead.

Thank you, Lisa and good morning, everyone. We certainly appreciate your time and your interest in CTG. On the call today, would have CTG's Chief Executive Officer, Cliff Bleustein and Brendan Harrington, Senior Vice President and Chief Financial Officer. Cliff and Brendan are going to review our financial results for the second quarter of 2015 and then update you on the Company's emerging strategies 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's 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 at our website or the SEC's website at SEC.gov. Please review our forward-looking statements in conjunction with these cautionary factors. Also please note that a reconciliation to GAAP of the non-GAAP financial measures we are providing on this call is included in our earnings release. I will now turn the call over to Brendan to begin the discussion.

Thanks, Jim. Good morning, everyone. Thank you for joining us for this second-quarter earnings conference call. As we indicated in this morning's news release, revenue was $94.7 million, $5.6 million lower than the 2014 second quarter. Revenue was unfavorably impacted by $3.9 million due to the weakness in the value of the euro and we had one less billing day in the 2015 period than in the second quarter of 2014. The 2015 second quarter had 63 billing days as compared with 64 in the 2014 second quarter.

Staffing revenue grew by $3 million, or 5% and revenue from our solutions business declined by $8.6 million or 21% primarily in our healthcare business. Compared with the first quarter of 2015, revenue per billing day in the second quarter of 2015 increased by 1.8%.

2015 second-quarter revenue from IBM was $25 million or 26.4% of revenue as compared with $22.7 million or 22.6% of revenue in last year's second quarter. Our revenue from Lenovo in the 2015 second quarter generated through SDI, [veteran] manager for Lenovo, was $11.4 million, or 12.1% of revenue as compared with $7.4 million or 7.4% of revenue in the 2014 second quarter.

The increase in revenue for Lenovo in 2015 was due in part to the sale of IBM's x86 server division for Lenovo, which was effective October 1, 2014. Direct costs as a percentage of revenue were 83.5% in the 2015 second quarter as compared with 82.2% of revenue in the 2015 first quarter. The increase in costs in Q2 2015 is primarily due to the charges related to the European workforce realignment and the writeoff of the capitalized costs for our medical management software. Excluding these charges, direct costs as a percentage of revenue would have been $77.1 million or 81.3% of revenue.

SG&A expenses were 15.3% of revenue in the 2015 second quarter, down from 15.7% of revenue in the 2014 second quarter primarily due to disciplined cost control. The effective tax rate for the 2015 second quarter was 48.4% as compared with 40.3% in last year's second quarter. The higher rate was primarily due to the lower pretax income and the lack of a current tax deduction in the UK related to certain costs in the second quarter. We anticipate our annual effective tax rate to be approximately 40% to 42%.

Net income in the 2015 second quarter was $554,000, a decrease of $2.7 million as compared with the 2014 second quarter. Excluding the unusual charges, net income would have been $1.8 million, or $1.4 million lower than last year's second quarter. On a per-diluted share basis, net income was $0.03 in the second quarter of 2015 as compared with $0.20 in the second quarter of 2014. Excluding the unusual charges, net income per diluted share would have been $0.11 in the 2015 second quarter. Compared to the first quarter of 2015, excluding those two unusual charges, net income increased $560,000 or approximately $0.035 per diluted share as a result of increased direct profit margin and lower SG&A expense. The 2015 and 2014 second-quarter results respectively include equity-based compensation expense of approximately $0.01 and $0.02 per diluted share net of tax.

Our headcount at the end of the 2015 second quarter was 3,800, 100 people less than at the end of the trailing first quarter 2015 and the same as at the end of the second quarter 2014. The decrease in the headcount from the end of March primarily relates to lower demand from our largest clients in our staffing business. Of the 3,800 employees at the end of the second quarter, approximately 92% were billable resources.

Our days sales outstanding were 61 days at the end of the 2015 second quarter compared with 67 days at the end of the second quarter 2014 and 4 fewer days than at the end of the 2015 first quarter. The timing of cash collections near the end of the second quarter 2015 positively impacted the DSO balance.

Our cash provided by operations in the 2015 second quarter was approximately $2.2 million as compared with cash generated from operations of $2.7 million in the 2014 second quarter. The 2014 second quarter ended between payroll days while the 2015 second quarter ended on a US payroll day.

In the 2015 second quarter, we incurred $586,000 in capital expenditures and recorded depreciation expense of $517,000. We repurchased 6,000 shares of CTG common stock during the 2015 second quarter and 50,000 shares in the third quarter through yesterday under our 10b5 plan. As of today, our repurchase authorization totals approximately 475,000 shares.

I'd now like to discuss the recent changes and other upcoming changes to our balance sheet. Our cash balance at the end of the second quarter 2015 was $31.4 million compared with $31.7 million at the end of the second quarter of 2014. We've examined the cost of certain financing that we've historically utilized and decided to utilize more cost-effective bank financing for borrowing. As a result, during the second quarter 2015, we used $5.2 million of cash to pay down loans outstanding against the cash surrender value of the Company-owned life insurance policies on several former officers. This also resulted in a corresponding increase to the other asset balance where the loans have historically been netted against the cash surrender value of the policy.

We also intend to utilize another portion of our cash balance to pay down the remaining outstanding loans we have on Company-owned life insurance policies of approximately $17.5 million. We are also removing ourselves from an advanced payment program with a significant customer during the third quarter. Under that program, payments due in 65 days were paid in 15 days for which we paid a fee. As a result of this change, the accounts receivable balance and DSO will increase and our cash balance will decrease by approximately $13 million. The net savings on the annualized basis of using the new financing method is approximately $0.04 per diluted share. We will use the savings generated in the second half of 2015 from these changes for additional business development and recruiting resources.

I'm now going to turn the call over to Cliff for his remarks. Cliff.

Thanks, Brendan. During the last four months, I have been meeting with our clients in the US, UK, Belgium and Luxembourg to learn about their industries, challenges and the role that we play in their organization. I've also hosted internal CTG town hall meetings, met with delivery teams and worked with senior management to learn more about our operations, strategy, capabilities and areas for improvement. As a result of this feedback and an initial review of the businesses, we have already undertaken several strategic initiatives to address opportunities for growth or improvements in financial and operational efficiency. I will continue to make adjustments as our strategy evolves in the coming months.

Our staffing business performed well during the second quarter as we accelerated growth with the addition of US recruiters. We have already increased our recruiting force by over 20% since 2014 and we anticipate adding additional recruiters to grow our recruiting capacity 35% in 2015. We also plan to strengthen our management team through the addition of a vice president who will assist in our business development efforts into new accounts.

We are also in the process of identifying underperforming contracts from a margin perspective and plan to allow them to expire over the normal course of business. CTG's executive management team has also been strengthened with the addition of Al Hamilton, who joined CTG last week. He will be responsible for guiding our health solutions and life sciences practice. Al's breadth of experience in health IT and track record of successfully improving the performance of various healthcare businesses makes him a valuable addition to our management team. I am confident that under Al's leadership this business will return to growth in 2016. We are already seeing that parts of CTG's healthcare business is stabilizing after two years of declining revenue and we are investing in rebuilding sales capacity with the addition of four client partners.

On our last investor call, I mentioned that CTG's success in Europe was one of the things that impressed me about the Company. I have spent some time in Europe getting familiar with our operations and continue to be impressed with our operations over there. However, during my review, it was apparent that despite the significant costs of severance in Europe, it made business sense to absorb the cost of eliminating 13 positions and redirect the funding for these resources to areas where we are likely to grow.

Similarly, I conducted a review of CTG's medical management software, which, although conceptually promising, had not gained traction with healthcare payers. I concluded that we would be better off absorbing the cost associated with discontinuing this tool so we could redirect those resources to our technology consulting practice, which has been expanding quickly. The charges recorded in the second quarter to the European workforce realignment and the medical tool writeoff totaled $0.08 per diluted share, but I consider them to be an investment in growth.

We've added a new client partner in our energy business as well who will focus on expanding our sales to that market as well as identifying alternative markets that may require the capabilities of CTG's energy group. For nearly 40 years, CTG has utilized the former Knox Mansion as its corporate headquarters. It is historic in nature and is a magnificent building in the area of Buffalo that has seen significant appreciation and real estate values. We currently have fewer than 35 employees working in the building and they can easily be relocated to our other Buffalo office building resulting in a reduction in operating costs and improved staff performance efficiency. We have put it on the market with a well-known national real estate brokerage for $3.95 million. Although a sale cannot be guaranteed, should the building sell, we don't expect any disruption in operations resulting from the move to our other facility.

Another quality that attracted me to CTG was its strong balance sheet. We've determined that improvements can be made here as well and as Brendan mentioned, we are in the process of making changes that we expect would equate to annual savings of approximately $0.04 per diluted share through a more economical way of financing our business. However, the savings for 2015 and the first half of 2016 will be reinvested in business development activities. I'm going to turn the call over to Brendan for his discussion of our verticals and guidance. Brendan.

Thanks, Cliff. Turning to our vertical market, parts of our healthcare business appear to be stabilizing with our advisory and technical consulting practices contributing at a higher level than they have in the past. Although revenue from our EMR practice continues to show a decline as we move through 2015. Our energy business continues to be adversely affected by the decline in the price of oil, which has caused an industrywide pullback on spending. We plan to explore complimentary opportunities for this vertical and have added a client partner to grow into additional accounts.

Likewise, our financial services business, which is mostly in Europe, is being challenged due to weakness of the euro relative to the US dollar. In local currency, this business was growing at 1.9%. Our manufacturing vertical is benefiting from the transfer of the x86 server business to Lenovo and was up significantly over last year's second quarter.

Looking at our guidance, we anticipate third-quarter 2015 revenue to be between $94 million and $96 million, about 2% below last year with one additional billing day in the current quarter. Full-year 2015 revenue is expected to be between $378 million and $386 million, or 3% lower than 2014 at the midpoint of the range with staffing up 5% and solutions down 16%.

Third-quarter diluted earnings per share is expected to be between $0.10 and $0.12 per share, 35% below last year and full-year earnings per diluted share are expected to be between $0.30 and $0.38, or 47% below 2014 earnings at the midpoint of the range. With that, we'd like to open the call for questions, if there are any. Operator, can you please manage our question-and-answer period?

(Operator Instructions). Juan Bejarano, Noble Financial.

Regarding your staffing service initiatives, I know you are evaluating all of your projects there and I will allow some of those to run off when I renew. But should we expect some revenue declines coming from that in 2016, or do you expect to replace some of those revenues? Any thoughts around this would be welcome. Just want to get your sense on how you are looking at that.

Yes, we've seen pretty significant growth at some of our larger customers and as we said, we are taking a look at some of the other pieces of the business that maybe not as profitable, but we would not expect to see a significant impact to our revenue with regard to the evaluation of those accounts.

Okay. Fair enough. And then I know Al Hamilton recently joined the Company. Can you maybe expand on what he will be looking at? I know you stated that he commenced an in-depth review of the healthcare business and I know it's really early since he basically just joined, but are there any timelines on when he should start implementing changes?

So Al started last week and Al came with a tremendous set of relationships that he has already started to make introductions to our sales team and started to arrange and set up meetings for him to go speak not only with his relationships, but our clients. At the same time, he is working with the team on evaluating each of their business plans for the coming year and helping them to set milestones for progress. I expect that he would be able to come up with his review or his plan along with me in the coming months.

We have four different major lines of business within our healthcare provider group, including technology, application support, delivery and advisory services. We also have a life sciences practice and a payer group and he is going to be evaluating each of those individual aspects for their current situation and how they are going to continue to grow with our investments that we are making in the sales support in the coming months.

Great, thank you. And as far as your director search, what sort of expertise are you looking for? Anything in particular?

We are each tapping into our network to look at the current Board and see what gaps we have along different lines. We have evaluated people from different backgrounds, including experiences with international growth strategies, evaluated individuals with significant IT backgrounds, as well as financial backgrounds to start.

Okay, great. That's it for me. Thank you.

(Operator Instructions). Bill Sutherland.

Emerging Growth Equities. Brendan, I know that in terms of your segments, the growth mix, I think staffing growth for the year is now looking more like 5% at the midpoint of your guidance.

Correct.

What's healthcare solutions and other solutions if you are still looking at the Company that way?

We are. The other solutions is projected to be down about 5% and healthcare is projected -- healthcare solutions is projected to be down about 21%.

Okay. And then I noticed in the release the commentary on the healthcare IT consulting group growing very nicely in the first half. So maybe you could just provide a little color on that? I'm not sure how big that group is now?

So we are not giving the breakdown on the size of the individual business units, but what I will say is that, as the EMR implementations throughout the United States have tailored off in terms of greater than 97% of the households having an EMR, our group has continued to focus on diversifying their portfolio of services that they are having across the different areas. One of those that we are seeing a significant amount of business uptake is technology consulting, which goes anywhere from business intelligence to data warehousing, to the interoperability of the information, security and so forth. These are all areas that continue to drive significant needs in the marketplace and are continuing to expand really on a macro level as well.

So Cliff, this would be a different professional than the folks you had actually providing an EMR solution. This sounds more like a Deloitte or a Huron kind of person, am I right on that?

So the skill sets of an individual who is implementing an electronic health record is often quite different from an individual who is doing a technology consulting engagement. We had a significant number of individuals who were in the medical products group that had very technical backgrounds that go within healthcare, as well as other industries that dealt with data management, warehousing, business intelligence and analytics, integration and normalization of data sets. So we already had significant capabilities housed in our medical products division. We have merged those individuals with our group of technical consultants that have complementary skill sets to those that I just stated to create a relatively large group of individuals that have deep technical expertise. So I think that it is a higher valued skill set in the marketplace and we are seeing both engagements where individuals are being asked for in more of a stock-augmentation capability as well as in a solution capability. So we are seeing that growth in both areas of the business.

Okay. Thanks for that. One last one from me. As I look at the verticals, I noticed that healthcare is now at least for the quarter the third largest vertical for you guys and -- after tech and manufacturing. So just wonder if you could comment a little strategically, Cliff, about what you think about your vertical focus going forward. I know you are focused on growth, that's for sure, across the board.

Yes, I think our business has both services and solutions. And one of the services that we have is staffing and we are seeing significant growth in that across all of our industries. At the same time, we still believe that energy and healthcare are exciting solutions that have significant opportunity ahead of them. Over the last couple of years within both of those industries, the salesforce had been cut and we are in the process of rebuilding those sales individuals to help us continue to push through the solutions that we have that we know are going to do well in the marketplace.

We continue to do well in ratings via external agencies and customers value many of those external agencies as well. So we believe that not only do we have the capabilities internally, but our clients see the value that we provide as well. I think both healthcare, energy are exciting areas that we are going to be able to grow hopefully in both the mid-term as well as into 2016.

Okay. Thanks, Cliff; thanks, Brendan.

Brian Kinstlinger, Maxim Group.

Cliff, you mentioned -- you had some comments on the medical IT management business. I'm wondering if you can outline your evaluation of the fraud, waste and abuse application. I might have missed it. Is there a value in the asset? Is the salesforce actively looking at pipeline or should we know longer expect there to be a focus to sell that asset?

As you know, we wrote that off at the end of 2014 and really the evaluation at that point in time was that it was a fairly crowded space. We were having a lot of difficulty in being able to differentiate our space and to basically try to push out the vendors that a lot of the payers already had in place. They already had a lot of these applications that were -- even though we thought ours was more capable in certain areas, it was still a situation where it was very difficult to convince the payers that they would benefit from implementing this solution into their system. So it was decided -- we decided at that point in time to really no longer focus on the fraud, waste and abuse application and really are not pursuing opportunity in that space at this point.

Okay. And then if I look at that application in medical IT management, is there an opportunity to sell those, or did it not seem there was value to even sell to any competitors those businesses?

Yes, I don't think that there is really an opportunity to sell those products to other vendors. I think that the competition has created tools on their own and we would see a challenge in integrating our tool onto theirs. So I think that would be a very difficult sales cycle or sale overall.

Okay. And then can you quantify the amount of underperforming revenue in the staffing side and maybe what the impact of those contracts have been to the bottom line so we can kind of model as those go away how that can improve the margin profile?

Yes. We are not currently reporting what the margins are of any of our contracts. But as contracts continue to come in and as we continue to add new logos and new accounts, we believe that, over the long term, margins are going to slowly creep up. Remember, it doesn't take much improvement in margins in the staffing business to have an impact on the bottom line, so we are looking to improve efficiency in small little pieces wherever we can.

Okay. And then on the EMR side, did you mention how many projects or what the revenue is from that and maybe how much of that will come to its natural conclusion by year-end?

We had eight projects ongoing, Brian. That's unchanged from the previous quarter and in the second quarter, the EMR revenue was $7 million. Overall, for the year, we are expecting about $26 million of EMR revenue, so that's down about 38% or so from 2014.

And does that suggest at the end of the year some of those projects of those eight are coming to a natural conclusion, or they are going to continue into 2016?

It varies somewhat, but we would expect that -- there is a bit of a falloff in the second half of the year, so we would expect some of those projects to come to a natural end.

Great. Thanks so much.

Sarkis Sherbetchyan, B. Riley & Co.

Will the strategic initiatives that you guys have outlined be realized pretty much organically, or are there plans to execute some bolt-on acquisitions?

So I think the answer is initially we are looking at organic growth and the initiatives that we are doing to supplement our salesforce and our business development activities, as well as adding new individuals to the senior management team such as Al, obviously, those are all organic growth. We always look at acquisitions in terms of opportunities that are out there for growth that way as well. However, we are cautious in terms of those evaluations and those require a significant amount of due diligence before we would pull the trigger on any form of acquisition.

That's certainly helpful. And then as far as the corporate headquarters deal that you guys had mentioned that you put on for the market, I guess from a timetable perspective, obviously, we won't know how long it (inaudible), but assuming that you get the $3.95 million that was discussed, what would the plans for the capital be? If you can maybe give us some color around that.

Well, as we outlined, we've basically been taking a look at our use of capital and we are going to make some changes to our financing that we've had through life insurance policies and also with regard to the discount that we have with a significant -- a payment discount with a significant customer. And the other --.

So I think when we look at our capital allocation, we have historically used it for acquisitions, stock buybacks and dividend payments. And I think we are going to continue to evaluate all of those options as we move forward. And this is just another piece of the capital that we are trying to free up that we would be able to use more effectively as a company. We're already starting to invest some of the things -- some of the capital that we are freeing up from interest payments to fund the investments that we are making in sales and business development.

That's certainly helpful. Then I guess just my last one here. Can you help clarify if the technology consulting practice has ties to your current proprietary software product offering?

I'm sorry. Could you clarify your question again? I'm not sure what you are asking.

Yes. So if your technology consulting practice that is embedded in the business, if it, I guess, uses or is currently tied with the software offerings that you have today.

So some of the knowledge that has been gained over the life of the development of the medical products application are clearly applicable on a go-forward basis. We still do have some engagements that utilize component pieces of that medical application software. However, those engagements are typically sold as services as opposed to a licensing fee for an application itself. So the knowledge gained from that is baked into the engagements as part of the services that are being offered.

All right. That's certainly helpful. Thank you so much.

Thank you. We have no further questions. Speakers, please continue.

So it's been an interesting challenging four months from my perspective. I firmly believe in taking steps that will pay off in the immediate efficiency and ultimately in growth. However, there is much work to be done to make CTG a stronger and more viable organization. I look forward to sharing our progress with you when we report third-quarter results in October and thank you for your support and for joining us this morning.

Thank you. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.