Computer Task Group Inc (CTG) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CTG third-quarter 2015 earnings call. During today's conference, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions).

I would now like to turn the conference over to our host, Director of Investor Relations, Jim Culligan. Please go ahead.

Thank you, Shannon, and good morning, everyone. We have CTG's Chief Executive Officer, Cliff Bleustein, and Brendan Harrington, Senior Vice President and Chief Financial Officer, on the call today.

Cliff will open the call with an overview of our business during the quarter, and Brendan will follow with a detailed review of our financial results for the third quarter of 2015. We will then open the call for questions. If you don't have a copy of the earnings results press release distributed early this morning, you can access it in the Investor section of the Company's website at www.CTG.com.

Before we begin, I want to mention that statements during 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.

These forward-looking statements are based on information as of this date. The Company assumes no obligation to update these statements based on the 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.

I will now turn the call over to Cliff to begin the discussion.

Thank you, Jim, and good morning, everyone. Today I will provide a brief overview of our financial results in the quarter, followed by a discussion of our business initiatives and updates on both our Staffing and Solutions businesses.

Quarterly revenue was $93.1 million, slightly below our original guidance range of $94 million to $96 million, driven by an unexpected reduction in headcount at a large staffing customer. Despite the lower revenue, we were able to generate earnings per share of $0.13 per share, exceeding the high end of our earnings guidance of $0.10 to $0.12 per share.

Perhaps most importantly, the improvement in profitability reflects the meaningful progress we made on a number of our business initiatives during the quarter, including efforts to drive cost efficiencies and capital improvements that are funding our investments in future growth. Although further improvement in profitability will not be linear, due to fluctuations in revenue and the initial costs associated with these investments over the next several quarters, I believe we have identified a realistic path towards repositioning CTG for success in the future.

Now let me address each of our business lines in more detail, beginning with our Staffing business. Staffing revenue was essentially flat sequentially. We anticipated revenue would increase during the third quarter, but a weaker economic environment impacted our clients more than expected, which resulted in the headcount reductions that I mentioned previously. We were largely able to mitigate this pressure by closely aligning services with our direct customers and their customers, combined with multiple smaller wins at other accounts.

More specifically, we were able to increase staffing revenue at a number of large technology and manufacturing clients during the quarter. And we also won a number of new customer accounts as we seek to diversify our staffing business. This is consistent with our objective to not only expand our staffing business across industry verticals, but also within additional divisions at existing customers.

We are pleased to see these positive developments, but it's important to note that new accounts typically start at smaller engagements and then grow over time. We also continued to strengthen the depth and breadth of our sales organization by hiring a new Managing Director and transitioning three Account Directors to account executive roles. We have continued a diligent search for a Vice President position to lead and drive the business.

Year-to-date, we now have increased recruiter headcount by 33%, which is in line with our previously stated goal of 35% for the year. Specific to Europe, the headcount adjustments we made earlier this year to become more cost-efficient and growth-focused have already generated an increase in our European sales pipeline. Further supporting this initial progress, we hired more recruiters in Europe and are adding a technical rider to increase our RFP capabilities.

And finally, we are also interviewing for five additional sales positions to further expand our growth capabilities in Europe. Last quarter, I also referenced several initiatives aimed at making our internal teams more effective at originating sales within our existing customer base, such as cross-selling our platforms to maximize client and geographic coverage.

These efforts primarily consist of increasing the knowledge that each of the team members has about CTG's other business units so that they can identify and source new opportunities within the current client base. One great example of this, we recently secured a contract with a top national hospital site where our Staffing and our Solutions teams worked jointly to close the opportunity. This is a highly effective strategy, and I ultimately want this tactic to become intuitive throughout our organization.

Let me now transition to our Solutions business, starting with healthcare. We continue to experience the anticipated trail-off of EMR business, and expect this trend to continue as the industry shifts its focus from new EMR implementations to conversion and optimization solutions. Responding to these evolving trends, earlier this year, we began realigning our healthcare solutions and resources by investing in technology services, application support, delivery, population health initiatives, offshore provider partnerships, and advisory capabilities.

As part of this initiative, we brought Al Hamilton onboard in July to conduct a full review of the business and manage the transition process. Al has completed the review and begun to leverage his network of contacts to open doors for CTG, while simultaneously realigning our Solutions unit to focus on new and emerging opportunities.

We are also in the process of interviewing and hiring additional healthcare sales professionals to increase our market reach, and assist in selling a more diversified solution set as part of these efforts. Similarly, I should mention that we have seen good initial progress from the renewed focus on sales within our energy vertical, which is almost exclusively Solutions business.

We recently hired a new sales professional for this market, and the activity and pipeline development over the first six weeks has been encouraging. Even as lower oil prices have reduced spending, we believe a dedicated focus on delivering differentiated best practice solutions will enable CTG to be successful in this market as well as in our other market verticals.

In addition to the significant increase in our focus on sales across our staffing teams and realigning our healthcare solutions business, we've also completed extensive changes in our capital structure. These improvements include paying down loans against cash value of life insurance policies on former CTG officers, using a combination of cash on-hand and lower-cost bank debt, as well as ending an early customer payment program for which we are paying a fee.

Net of the changes, we improved our cost of capital by approximately $0.04 annually. More importantly, the cost savings from these more efficient capital strategies enable further investment in growth initiatives, including the staffing of solution efforts outlined on this call. Also noteworthy, we continue to evaluate our capital allocation priorities, which could include opportunistic strategic investments in organic growth as well as potentially considering smaller tuck-in acquisitions that could accelerate the achievement of our longer-term growth aspirations.

In summary, we expect to face continued headwinds for the next few quarters, including a challenging macro environment for customers, and the transition of healthcare -- of our healthcare business in response to the trail-off of legacy EMR implementations. The investments we are making in leadership, sales and technology services will take time to implement and yield material results, but I strongly believe that successful execution on our initiatives will create a business with a more diverse revenue, improve profitability and broader growth opportunities in the future.

With that, I will turn the call over to Brendan to discuss our financial results in more detail. Brendan?

Thanks, Cliff. Good morning, everyone. As we indicated in this morning's news release, revenue was $93.1 million compared with $94.7 million in the second quarter, and $96.8 million in the third quarter last year. The year-over-year revenue decline reflects lower revenue from EMR solutions and $3.1 million in negative currency fluctuation due to the weaker euro.

We have 64 billing days in the 2015 third-quarter versus 63 days in the year-ago quarter. Staffing revenue grew by $1.5 million or 2.4% year-over-year, and revenue from our Solutions business declined by $5.2 million or 14.7%, primarily in our healthcare business. Revenue from IBM was $26.3 million or 28.3% of revenue compared with $25.1 million or 26% of revenue in last year's third quarter.

Revenue from Lenovo was $10.5 million or 11.3% of revenue compared with $8.2 million or 8.5% of revenue in last year's third quarter. The increase in revenue from both IBM and Lenovo was primarily due to higher demand in the technology services and manufacturing verticals.

Direct cost as a percentage of revenue were 81.2% in the third quarter compared with 83.5% in the 2015 second-quarter and 80.3% of revenue in the 2014 third-quarter. The sequential decrease in Q3 2015 is primarily due to the charges related to the European work force realignment and the write-off of capitalized costs for our medical management software incurred earlier this year.

SG&A expenses were 15% of revenue in the third quarter compared with 15.3% of revenue in the second quarter and 15% of revenue in the year-ago quarter. The effective tax rate for the third quarter was 41.5% compared with 48.4% in the second quarter and 39.9% in last year's third quarter. The abnormally high tax rate in the trailing second quarter was due to lower pretax income and the lack of a tax deduction in the UK related to certain costs in the second quarter. We anticipate our annual effective tax rate to be approximately 41% to 43%.

Net income in the 2015 third-quarter was $2.1 million or $0.13 per diluted share compared with $554,000 or $0.03 per diluted share last quarter, and compared with $2.7 million or $0.17 per diluted share in the year-ago quarter. 2015 second-quarter net income reflects $0.08 per share in charges related to our European workforce realignment and a write-off of the medical management software.

The 2015 third-quarter results include equity compensation expense of approximately $0.01 per diluted share net of tax. Our headcount at the end of the 2015 third-quarter was 3,700 compared with 3,800 at the end of the prior quarter, and 3,900 at the end of the third quarter 2014. The decrease in headcount from the prior quarter is primarily related to macroeconomic pressures affecting a large customer, which we were partially able to mitigate. Approximately 92% of our third-quarter employees were billable resources.

Our cash used in operations in the 2015 third-quarter was $1.7 million compared with second-quarter cash generated of approximately $2.2 million and cash used in operations of $2.4 million in the 2014 third-quarter. We repurchased 78,000 shares of CTG common stock at an average price of $7.24 per share in the third quarter compared with 6,000 shares of common stock during the 2015 third-quarter -- or sorry, second-quarter. Our repurchase authorization totaled approximately 455,000 shares.

I'd like to now highlight the recent changes in our balance sheet. Our cash balance at the end of the third quarter was $20.9 million compared with a second-quarter 2015 balance of $31.4 million. The decline in cash reflects a number of changes in our asset structure, including paying down $17.5 million in outstanding loans against company-owned life insurance policies, in part with cash and in part with $10 million of more favorably priced bank debt.

We also terminated an early pay program with a large customer, resulting in an associated increase in Accounts Receivable to $75 million at the end of the third quarter from $63.5 million at the end of the second quarter. Days sales outstanding also increased as a result of this change to 73 days at the end of the third quarter from 61 days at the end of the second quarter.

After these changes, the cash surrender value on the balance sheet for these life insurance policies is approximately $29 million. The death benefit on these policies is approximately $40 million as of October 2, 2015.

The net savings on an annualized basis from our balance sheet restructuring is approximately $0.04 per diluted share. As Cliff previously mentioned, we are using the savings generated from these changes to fund additional business development and recruiting investment to drive growth in both our Staffing and Solutions businesses.

Turning to our guidance, we anticipate fourth-quarter 2015 revenue to be between $87 million and $89 million with 62 billing days in the quarter. Full-year 2015 revenue is expected to be between $373 million and $375 million or approximately 4.9% below full-year 2014 revenue at the midpoint of the range, with Staffing up 3% and Solutions down 24%. Full-year revenue expectations include approximately $12 million of negative currency adjustment.

Fourth-quarter diluted earnings per share is expected to be between $0.11 and $0.13 per share. Full year net income is expected to be between $0.35 and $0.37 per diluted share, and includes $0.08 in charges associated with our European work force reduction and the write-down of medical management tools undertaken earlier in 2015.

With that, we'd like to open the call for questions. Operator, can you please manage our question-and-answer session?

(Operator Instructions). Bill Sutherland, Emerging Growth Equity.

Cliff, I was curious if you could give us a little color on your -- you were going to let some lower margin contracts run off in the prior quarter. Just kind of if you could discuss maybe the net impact that you saw in your overall growth as a function of that?

Yes, Bill, this is Brendan. I'll just say that the tail-off in any lower-margin contracts had a minimal impact in Q3. We will continue to review any lower-margin contracts that we have, but the expected impact on these -- from these contracts, we don't expect will be significant.

Okay. The -- which vertical market, the large customer that you referenced that had a reduced requirement in the quarter, what vertical was that?

It's in the technology.

Okay. I was just confused, because both of the two biggest customers were up.

Yes, actually, that was in the manufacturing vertical, Bill.

Oh. Oh, wait, the decline?

Correct. Yes. The softness from that one particular customer.

Oh, so this is not one of your two biggest?

Yes, actually it is. It's -- yes, the second customer, and I'll just give you the revenue numbers for Lenovo. We had -- it was $10.5 million in the third quarter of revenue. That was up from $8.2 million last year, but it was down sequentially from $11.4 million.

Okay. That makes sense. The -- I was curious if we could get a little more color, Cliff, on some of the realignment that you are making in healthcare as far as where you're kind of placing your bets with new sales and business development?

So, we already have solutions that we have been bringing to market across applications support, across partial IT outsourcing, technology support, advisory capabilities. And many of those -- as well as delivery. Many of the advisory capabilities that we continue to grow and enhance are those that are going to be catering towards population health and population management, and security services, as we are seeing an increase in demand for these types of services. These are also being funded on a state level through grants designed to try and improve the overall cost structures by managing populations of individuals more tightly.

Okay. And in Europe, if you could comment -- you've done quite a bit there. Maybe just a little more color on the vertical focus or anything else that perhaps we don't know about that effort over there.

You know, in Europe, the capabilities within IT Solutions and Services is a much broader capability that goes across industries. So when you look at Europe as a whole, their skill sets span multiple industries, and the services that are provided are very similar, whether they are call centers or testing capabilities or other aspects of solution development.

So they play within not only the European Union and contracts related to that, but also finance, government, life sciences, healthcare and other industries, so that the support of those is a broader base than you typically see in the United States. And, as such, the sales capabilities that were building and growing there, and the RFP capabilities that we continue to enhance, are designed across industries to support the solution focuses that we have.

Okay. Thanks for that. And then, Brendan, I just didn't -- I didn't quite catch the expected growth by Staffing and Solutions in quarter-four.

Well, full-year is 3% growth we are anticipating for Staffing and 24% decline in Solutions. For the fourth quarters, we are expecting Staffing to be down about 4%. And total -- or sorry -- yes, total solutions down about 20%.

Okay. Okay, thanks very much.

Sarkis Sherbetchyan, B. Riley & Co.

So first on the healthcare side of the business, can you talk about the business opportunities you are seeing around ICD-10?

You know, ICD-10 is being implemented relatively slowly at organizations that haven't already done it already. With the passing of October of the -- maintaining ICD 10, we are just seeing really a maintenance in terms of the amount of ICD-10 work that we are seeing. It doesn't seem to be growing. It doesn't really seem to be declining yet.

I think most organizations really have until October of next year to be fully implemented into ICD-10. So, I think you're going to continue to see maintenance work in that area, but I don't think that that will be a growth area by any stretch of the imagination.

Okay, that's helpful. And then with respect to the sales capacity additions, where are you with sales reps today on the healthcare side of the business? And where do you get to in the next few quarters?

So, as I said for dedicated healthcare solution sales people, we are currently looking for a total of four before the end of the year. We already have one accepted offer of a salesperson who's going to be starting in November. And we have several individuals in the pipeline right now, and we are optimistic that we will be able to bring them on before the end of the year.

Thanks for that. And then with respect to the increase in recruiters on the staffing side, what kind of growth do you expect to generate on that side of the business next year?

We are not giving guidance yet at this time for next year.

Okay. That's all the questions I have today. Thank you.

(Operator Instructions). Gregory Macosco, Montrose Advisors.

Just a question regarding the cutbacks and the like. With regard to those reductions, have you lost any specific customers as a result, or is it -- are the cutbacks just across the board and the customers will remain in place?

So the customer has remained in place, and we continue to grow business in other areas at that client. So we haven't lost a client; it's a solid client that has year-over-year growth. But quarter-over-quarter, there was a decrease in one of the business units that isn't performing as well as that client had expected.

I see, okay. And with regard to the 73 days of Accounts Receivable, is that a normal level? What is the normal level kind of that you expect on an ongoing basis -- with the adjustments that you've made regarding the balance sheet and restructuring?

Yes, the increase in the third quarter related to us going away from the payment discount with a -- our large client was about 12 days. And so 73 days, roughly, the low to mid-70s will be about what I would expect for DSO on a go-forward basis. That's in the range of what would be normalized for us.

I see. And then on the last quarter call, you mentioned selling a building or putting it up for sale. How has that gone? And could you give us some color on that?

Sure. We've had interest in the building as well as several offers. At the present time, we don't have an accepted offer. I think that there may be challenges. You know, it's a unique historic building that's going to require a very specific buyer. And there's an additional challenge that there's a school next door and a Temple across the street.

So, it may make it a challenge for a potential buyer in terms of changes to zoning requirements. So we're going to continue to pursue that and see what happens, but there continues to be interest and we will see what happens in the coming months.

Okay. And then my last question, if you will. You mentioned that you did well with cross-selling. And could you -- is there anything driving that? Is there particular incentives that you put in place? And can we expect to see that kind of cross-selling increase as we look forward?

Yes, the goal certainly is to do additional cross-selling. In the past, each of the business units had operated really in their own little silos to some extent without as much cross-pollination as we had hoped. On a go-forward basis, we are encouraging greater collaboration across the different industries and across the different types of businesses of Staffing and Solutions to improve people's understanding of what one CTG can offer to our clients, and improve the penetration into clients, as Staffing typically operates at different levels then our Solution businesses, so that it allows us to enter into clients at multiple different touchpoints.

Was Al Hamilton behind that?

We had started that prior to Al's coming onboard. But Al certainly is a large supporter of continuing to drive a one CTG solution to all of our customers.

Thank you.

(Operator Instructions). I'm sorry, there are no further questions in queue. Please continue.

Okay, thank you. This is Cliff Bleustein. Thank you, everyone, for joining us today. We remain focused on our efforts to improve the fundamentals of our business both in terms of cost efficiencies end market position.

We do not expect progress to be linear, as we are navigating both external pressures on our customers while simultaneously making investments in sales, marketing and technology services to drive future revenue growth. However, ultimately, we believe these efforts will create a more diverse, sustainable and profitable business for both shareholders and employees. We look forward to updating you on our continued progress on our next quarterly conference call.

Shannon?

Yes, sir. I'm here.

There is somebody in the queue. Could you take Juan?

Yes, one moment, please.

Thank you.

You're welcome. And the next question -- we have a question from the line of Juan Bejarano from Noble Financial. Please proceed with your question.

Good morning and thank you for taking my questions. I just wanted to kind of follow-up on the hiring of the new sales guy. Can you maybe just talk a little bit about -- like, once you hire someone, how long do you expect that salesperson to ramp up? Maybe the average time it takes them to build a pipeline? And then are there revenue targets that you have for each salesperson?

We do have revenue targets. We don't publish what those are at the current time. If you look at the industry for a services salesperson within healthcare, depending upon their non-competes and depending upon the geographic market that they are in, ramp-up time can take anywhere between three to six months for them to start developing a pipeline, with an expectation that they start closing smaller deals within the nine-month period, and then larger deals by the end of the year, which is the normal ramp-up of a salesperson.

Got it, okay. That's helpful. And Brendan, can you just repeat the IBM revenue -- I missed that -- year-over-year and sequentially?

Yes. I'd be happy -- it was $26.3 million of revenue in Q3. It was $25.1 million in last year's third quarter. And it was $25 million flat in Q2.

Okay. All right, perfect. Thank you, that's it for me.

There are no further questions. Please continue.

All right. Thank you, everyone, for joining us today.

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Once again, this conference will be available for playback beginning today at 10:30 a.m. Eastern running through Friday, October 30 at midnight Eastern Time. You may access the AT&T playback service by dialing 800-475-6701. International participants, please dial 320-365-3844, and entering the access code of 341054.

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