Computer Task Group Inc (CTG) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the first quarter 2017 financial results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, Felena, and good morning, everyone. With me today on the call are Bud Crumlish, CTG's President and CEO; and John Laubacker, Senior Vice President and CFO. 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'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 today, April 25, 2017. 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.

It is now my pleasure to turn the call over to Bud for his opening remarks.

Thanks, Jim, and good morning to all of you. I'll begin with an overview of our first quarter results and discuss how we are executing our downstairs strategic plan, including continuous steps that strengthen CTG's leadership and sales teams. Then I'll provide updates on our 4 focus areas. As announced in this morning's press release, first quarter revenue and earnings per share were both at the midpoint of our guidance with revenue at $77 million and EPS of $0.05. Overall, our business performed well.

The Solutions business grew slightly over the prior quarter offset by the expected modest decline in our Staffing business related to the previous reduction at business in our largest client. Highlighted in the quarter was approximately 7% sequential year-over-year growth achieved in Europe, which has now delivered year-over-year growth for 5 consecutive quarters. Also significant, during the quarter, we were notified that CTG has been selected as a core supplier for a new program at our largest staffing client. This new program reflects the continuing strength of our relationship with this long-time account. As discussed last quarter, we introduced a detailed 3-year strategic plan of financial goals. During the quarter, we took a number of steps to drive incremental shareholder value as part of executing towards these goals.

Let me start with enhancements to our sales organization. Where we are actively upgrading and continuously optimizing the team. We're diligently looking at what's working and who is effective and decisively making changes in cases where it's not working. As a result, we've added multiple new sales individuals during the quarter, as part of consistently upleveling the team to improve our overall sales proficiency and performance. More specifically, as part of executing on this objective, we are placing increased emphasis on sales resources towards capturing incremental share in geographies where CTG has a strong existing market presence and client relationships for example, Raleigh, North Carolina and Austin, Texas. The (inaudible) includes CTG's name recognition, increased opportunities for both internal and external client referral as well as close proximity to our infrastructure and the support resources. Additionally, I've been personally spending time, working directly on-site, individual members of the sales teams and meeting face-to-face with clients. I think this is important for 2 reasons. First, it gives me the opportunity to build personal working relationships and further cultivate our sales team, and second, I believe, the CEO attending meets with clients demonstrates the truly distinctive level of CTG's total commitment to our clients. Another area where we're making progress is the expansion of existing solutions across all lines of business. Since we announced, and launched the ONE CTG program in early January, we consolidated several solutions into a new comprehensive solution we are calling application advantage, is currently being rolled out across the company and as a portfolio services tailored to meet our clients' needs. It's time designed to maximize value, efficiency and cost-effectiveness of application management. This is a first solution designed by our global solutions team and has identified other solution areas for future development in the coming quarters.

In addition to optimizing our sales resources, strengthening our leadership team continues to be a fundamental part of our strategy. Combined with our commitment to disciplined cost management, today we announced the consolidation of the executive roles of CFO and Treasurer, which will now be a single position held by John Laubacker. You may remember that John was also the interim CFO at CTG a few years ago and has been with CTG for 21 years. He served as treasurer for the past 10 years and possesses deep knowledge of our financials and operations. And I look forward to working closely with him to achieve our financial goals in his now dual role as CFO. This appointment replaces Brendan Harrington, who resigned by mutual agreement. Brendan's dedication and significant contributions during his long tenure at CTG are deeply appreciated by the board and the entire executive team, and I want to personally thank and wish him the very best in his future aspirations.

This morning, we also announced the initiation of a surge for the position of Chief Operating Officer. As we execute on our 3-year strategic plan, it's important that we focus our executive leadership lineup to help drive business development and operational efforts. We're already in the process of evaluating multiple impressive candidates. Together with the board, I look forward to filling the position with a highly qualified individual who can drive both new and existing business relationships as well as execute on enhancing the operation of our delivery and recruiting organizations.

Before speaking more specifically about our focus areas, here are few observations about the market environment in general. Many of which, based on first hand conversations with our clients. First, despite potential changes in the U.S.'s handling the visa permits, a number of companies continue to pursue international strategies, including infrastructure and support across multiple continents. Second, excluding one or two large clients, the number of requirements are increasing across most of our clients. Third, a significant number of employers are struggling to find the right technical people and they're having to look beyond internal resources for a reliable IT services and solution provider like CTG. And fourth, in general, we're seeing clients move at a faster pace than in recent memory. Many companies are looking to fill people with the needed expertise on a project basis, often as part of rolling out new initiatives or even launching new divisions. What's important about these prevailing market trends is that they all represent favorable scenario where CTG's ability can add value and be critically important to both existing and prospective clients.

I'll now shift to providing an update on our 4 focus areas and the steps we're taking to support our long-term growth objectives. These areas are staffing, Europe, healthcare and diversified industrials.

Beginning with our Staffing business. As anticipated, revenue declined modestly on a sequential basis due to the reduction in revenue from our largest client. However, as previously mentioned, we were also awarded incremental new business by this large client for a contract that is expected to begin mid-year. Although, it's too early to forecast the ultimate revenue contribution. I believe, this win speaks for itself in terms of the ongoing relationship we have and how CTG is perceived by this client. More generally, we continue to diligently execute on our key strategic objectives. This includes the expansion of our client base, especially in mid-market companies as well as increased share business at existing clients, while maintaining a more deliberate focus on higher margin opportunities. We successfully added multiple new mid-market staffing clients and also expanded business with large existing clients during the first quarter.

It's encouraging to see these incremental improvements in both areas. Touching on our offshore delivery center in India. During the quarter, recruiting activity was fairly stable and we also implemented a number of operational improvements. Specifically, we refined the team level strategy and leadership structure, including bringing in a new executive to lead the operations at the center in terms of potentially leveraging the center for technical work, we are actively engaged with multiple prospects that would be provided at Letham Park by our team in India. I look forward to updating our progress on these opportunities in the coming quarters.

Turning to Europe. As highlighted earlier, our business grew both sequentially and year-over-year with revenue in first quarter of over $90 million. This represents the highest quarterly revenue contribution from Europe in over 2 years, and a record percentage of total CTG revenue. Growth in our Europe business, which is concentrated in Belgium, Luxembourg and U.K., was led by a combination of recurring revenue from a stable client base and incremental business from new clients in the government, telecom and retail sectors. CTG's leadership positioning key market verticals and the long tenure of our season sales team in Europe has consistently contributed to a number of new business wins in recent quarters. Also in support of continued growth, we expect increasing contribution from previous significant wins, including those with the European Ministries, a leading telecom operator, as well as now 5 signed contracts for EHR implementations with Belgium Hospitals, which we discussed last quarter. In fact, since our fourth quarter call, the team estimated 2 additional proposals for EHR projects in Belgium.

In our Healthcare business. Revenue was roughly flat quarter-over-quarter, reflecting continued stabilization. Purchase decisions by hospitals are increasingly shifting from traditional consulting services to more specific solutions targeted at lowering costs. Recognizing the current market trend, our team's focus continues to be on enhancing CTG's healthcare offerings and support a future growth. We're actively working to refine and demonstrate to prospective clients the cost effectiveness of our solutions in key areas, such as application management services, clinical helpdesk, optimization and performance improvement and implementation. These solutions, along with pursuing increased healthcare Staffing business, represent emerging opportunities for CTG in the healthcare market. Many of which have attractive margins. Investing in the future growth of our Healthcare business remains one of my top priorities. Our Diversified Industrials business consists of a highly skilled group of solution architects and software engineers with unique expertise across various industries. During the quarter, the team secured an annual contract for our new application advantage solution. We also recently signed a staffing agreement with a new client, which is a global engineering and construction firm. Given our Diversified Industrials Group's growing pipeline in both new and existing clients, we are increasingly optimistic about the perspective growth of business throughout the remainder of 2017.

To conclude my remarks, since being appointed CEO in the middle of last year, one of the most frequent questions I've been asked is, what's going to change, what are you going to do different? My answer to that question is simple and always has been, execution. In a relatively short period of time, we have successfully strengthened our leadership team from the board on down, reduced costs and right size the organization, formulize a definitive 3-year strategic planning goals and adopted a strictly performance-based equity plan for senior executives. We've also aggressively acted on a significantly expanded share repurchase program that was authorized by the board in November. In fact, in just over 5 months, the company has used approximately $3.6 million of the $10 million authorized to repurchase 754,000 shares. These accomplishments help strengthen our foundation to support profitable growth and deliver greater value to our shareholders. I am confident our continued success on execution will drive incremental improvement that will ultimately enable us to achieve revenue and earnings growth that is consistent with our long-term goals.

With that, I will now turn the call over to John for a discussion of our financial results.

Thank you, Bud. Good morning, everyone. And we want to thank you again for joining our call today. As we indicated in this morning's news release, revenue in the first quarter was $77 million compared with $77.5 million in the 2016 fourth quarter and $85.9 million in the year-ago quarter. Negative currency translation reduced revenue in the current quarter by approximately $800,000. We have 64 billing days in the 2017 first quarter versus 65 days in the year-ago quarter. Staffing revenue decreased by approximately $830,000 from the fourth quarter, or 1.5%, and declined by $6 million or 10% year-over-year. The year-over-year decrease was primarily due to the reduction requirements from our largest client which began in the 2016 fourth quarter and were completed in the 2017 first quarter.

Revenue from our Solutions business increased sequentially from the fourth quarter by approximately $350,000 or 1.5% and declined by $2.8 million or 11% year-over-year. Revenue from IBM in the 2017 first quarter was $20.3 million or 26.4% total revenue, compared with $23 million or 29.7% of revenue in the 2016 fourth quarter and $25.9 million or 30.2% of revenue in the year-ago quarter. Revenue from Lenovo was $9.4 million or 12.2% of total revenue compared with $8.3 million or 9.6% of total revenue in the year-ago quarter. Direct costs as a percentage of revenue were 81.5% in the first quarter compared with 80.8% in the fourth quarter of 2016 and 83.1% of revenue in the year-ago quarter. The year-over-year reduction in direct cost primarily reflects improved utilization and lower benefit costs. SG&A expenses were 16.8% of revenue in the first quarter compared with 17% of revenue in the 2016 fourth quarter and 15.7% of revenue in the year-ago quarter. Despite SG&A expenses being higher year-over-year as a percentage of total revenue, first quarter 2017 SG&A expense was $540,000 lower than in the year-ago quarter. The effective tax rate for the first quarter was 41.2% compared with 28.8% in the 2016 fourth quarter and 1.6% in the year-ago quarter.

Excluding the goodwill impairment charge, the non-GAAP income tax rate in 2016 first quarter was 32.4%. The higher effective tax rate in the 2017 first quarter reflects the required adoption of a new accounting standard, where the company recorded approximately $100,000 of additional tax expense, related to employee stock-based compensation transactions that previously would have been recorded to shareholders equity on the company's balance sheet. Net income in the first quarter was $751,000 or $0.05 per diluted share compared with net income of $1.1 million or $0.07 per diluted share in the fourth quarter of 2016, and a net loss of $20.9 million or $1.34 per share in the year-ago quarter. The net loss in the year-ago quarter included a charge of $21.5 million or $1.38 per share related to the goodwill impairment. 2017 first quarter results included equity-based compensation expense of approximately $0.01 per diluted share net of tax. Our headcount at the end of the first quarter was approximately 3300 compared with 3400 at the end of the fourth quarter of 2016 and 3500 at the end of the first quarter of 2016. Approximately 90% of our first quarter 2017 employs were billable resources consistent with the 2016 in fourth quarter.

Turning to our balance sheet. Cash and cash equivalents at the end of the first quarter were $10.1 million with no outstanding debt. Day sales outstanding were 79 days in 2017 first quarter compared with 81 days in the year-ago first quarter. The cash surrender value of life insurance policies was $31.1 million at the end of the 2017 first quarter. We continue to list our 2 owned buildings for sale, the first building has a net book value of $1.2 million that remains on the market at an asking price of $3.3 million. The second office property has a book value of $1.7 million and is currently listed at a price of $3.2 million. Although today, we have no formal offers in hand for either property, our ultimate goal continues to be the consolidation of our Buffalo-based workforce into a single building here in Buffalo.

CTG's tangible book value at the end of the first quarter was $5.02 per share. During the first quarter, the company repurchased 384,000 shares at an average price of $4.87 per share for a total cost of approximately $1.9 million. We repurchased 83,000 additional shares subsequent to quarter end, and today have approximately $6.4 million remaining under the existing repurchase authorization.

Turning to our guidance, we anticipate total revenue for the 2017 second quarter to be in the range from $77 million to $79 million. Our operating income is expected to be between 1.7% and 1.9%. We expect second quarter net income to be between $0.04 and $0.06 per diluted share. There are 64 billing days in the 2017 second quarter, the same as in the 2016 second quarter. The effective tax rate for the 2017 second quarter is expected to be approximately 40%. For the full year 2017, we continue to anticipate revenue to be in the range of $312 million to $332 million.

Operating margin for the full year is expected to be approximately 1.9%. Full year net income is expected to be between $0.19 and $0.29 per diluted share. Finally, we expect the effective tax rate for the full year 2017 to be approximately 38%.

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

(Operator Instructions) And our first question comes from the line of Kevin Liu of B. Riley & Co.

You mentioned earlier that you won't know how much total revenue there is from this new win -- IBM, but I was wondering if you could provide some additional details namely, whether you're still kind of working within their systems and technology group or if you've extended beyond that. And then also, what sort of initial headcount requirements there might be as you guys set about launching this new program?

Sure, it's nothing in addition to the STG organization, so this is something new for us. But in terms of headcount, we really don't have that information at this point in time. It's a staffing arrangement, and based on their natives, it's going to go up and down depending on what kind of engagements we have. But it’s definitely something outside, so it's a new area for us.

And just as a follow-on to that, would you expect the margin profile of the new work to be similar to what you've experienced historically? Or is it at a different margin than...?

I would say it's a historical margins, absolutely.

Got it. And then more generally, you guys seem to be on track with getting to your fiscal '17 targets, but obviously there is going to a big step up required in revenues to get there in the back half of the year. So how much visibility do you have into that at this point? And how much more work is there to do in terms of kind of new program wins in order to get you to that $80 million plus level in revenues?

We are actively getting more -- we're increasing our sales capacity and we are diligent about going after more and more RFPs and meeting with clients. It's certainly -- it is a step up in the back half of the year. But we just put on some new people, and we got new management in place to actually drive that business. And we're seeing that, as I mentioned in my remarks, that we're seeing our requirements increase except for a couple of large clients, we're seeing this general economy pick up with a number of requirements. And so we're very focused on that to be responsive and one of the key things we have to do is when we get the requirements, ensure that we have the optimal [ increase ] organization to move forward and actually solidify those requirements and make those happen in the placements.

And then just last question, regarding Europe, you talked about some of the good growth you're seeing there as you move forward over the rest of this year and into next year, any sense you can give us for what sort of growth rate you could expect come out of the region, do you expect it to be kind of above the company average for the foreseeable future? Or are there any sort of puts and takes that you expect?

Yes, we're seeing -- we've been doing well in Europe and I see us actually Europe outperforming some of the other parts of the company. They have been strong. They've had a really good couple of years, especially this year. We've had some significant wins with the sales team. So I mean, they are probably tracking in the 6% to 8% range.

And the next question comes from the line of Vincent Colicchio with Barrington Research.

So I'm curious, are there any solutions that you have added or looked at in healthcare that you are excited about. I was hoping that you could share that with us.

Actually, we're getting -- we started when EHR implementations were at peak, we were picking up as you know a lot of legacy work -- legacy applications so that the hospitals could take their existing IT staff and put those on a new implementations. And that has a sunset date because when they cut over, it goes away. But hospitals have been coming back to us, and they really want us to take a look at managing their version upgrades and enhancements in patches and things like that. So it's more traditional application management they are coming back to us for that. And the other thing is the clinical helpdesk. That's a solution that we have. These EHR applications are very complex and a lot of the large hospitals, I'm talking hospitals that are thousand beds or more, have implemented their own clinical support to us for the internal operating units of the hospital, meaning like the physicians calling in the nurses and that. And so they've -- but it's also a utilization problem too. So what we've been able to do, we -- that's one of our offerings and we have gone to the hospitals and we can by -- these got to be -- these are level 2 and level 3 people, so they got a lot of expertise. And with that, by using the utilization and bringing in people that can handle more than 1 hospital at a time, say in the middle of the night, you got to have staff on, but if they can cover more than 1 or 2 hospitals then we are going to get a benefit there. And then the hospitals can focus on providing care, we provide the clinical support to support them so they can provide that care. That's another thing that has been taken off. And as well as going in and looking at their current systems to perform improvements on the system as well and optimize the system, a lot of times that they have been implemented, but they still have a ways to go. They might be functional at 70%, 80% and we're going in with our group to do the analysis and actually upgrade the system so they get more functionality out of it. The only reason why they do that, is it's going to be more efficient, it's going to lower their overall cost.

And then, looking for a COO, what areas of the operations do you think you may be -- you are falling short in terms of optimal efficiencies? Any details there would be appreciated.

Really. We're looking for someone that's primarily with business development and from a sales organization and implementation background as well as ensuring that we have the appropriate delivery and optimum recruiting mechanisms. The onshore, offshore for recruiting deliveries so that we can deliver up to the right value and we have a lot of what we do is higher materiable, but we do have some fixed priced engagements when I make -- we want to make sure that we have the prudent business controls in place to do that. But primarily business development, sales, driving growth, that's the primary and the secondary, delivery and recruiting.

And then, what are your current thoughts on may be tuck-in acquisitions to accelerate your improvement in some of the areas of the business?

We're definitely looking, we're out there in the marketplace. And we're interested, it’s got to be something that's strategic, it's got to be the right price, got to be the right deal. But we are always in the market, and looking -- we have been looking and have had some initial inquiries in some things.

(Operator Instructions) And our last question comes from the line of Mark Jordan of Noble Capital Markets.

Couple of related questions about SG&A. You clearly have some cross trends there with consolidation efficiency moves at headquarters and also the desire to expand and invest in incremental marketing capabilities. Could you talk a little bit about how you see absolute level of SG&A moving forward given those sort of puts and takes? What are your goals and objectives relative to either further efficiencies and/or how do the investments impact the absolute level of investments? That would be question 1. Question 2, have you been able to quantify what your goals might be from a cost savings standpoint when you're able to affect the consolidation of your facilities?

Sure, Mark. Let me tackle both of those. From an SG&A standpoint overall, there is really probably two parts to that answer. One is short-term and long-term goal. The long-term goal is to return ourselves back into that 15% range becomes challenging as you make investments in the business. And so what we are trying to do is be very diligent about making the appropriate changes in our cost that do not stunt any growth that we have, and so any cost that we do manage to rearrange or move around, we're trying to put back in the sales people requiring partnership business development in any way to try and generate revenue. So the long-term goal there is 15%, but we're going to work our way toward that over time as we grow the business and by making reinvestments and reinvesting some of those costs. As far as consolidating the 2 businesses with the 2 offices rather that we have in Buffalo, each one is about $0.5 million in operating cost. So our goal is to get into one of the buildings by selling one of them and that should save us about $500,000 annually in operating cost.

At this time, there are no further questions.

Thank you, operator. To close out the call, I'm encouraged by the traction that we've achieved today across the organization as evident by the expansion of new accounts, further penetration in existing accounts as well as the increased activity on prospective new engagements. The entire company remains highly focused on execution against our strategic plan and financial objectives. I want to thank you, everyone, our shareholders, for your continued support and belief in CTG. We appreciate you joining today's call and look forward on reporting continued progress next quarter. Operator you may now disconnect the call.

Ladies and gentlemen, this conference will be available for replay after 10:30 a.m. today through April 28, 2017. You may access the AT&T teleconference replay system at any time by dialing 1 (800) 475-6701 and entering the access code 403936. International participants please dial (320) 365-3844.

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