Computer Task Group Inc (CTG) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CTG Quarterly Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Jim Culligan. Please go head.

Thank you, Greg, and good morning, everyone.

With me on today's call are Bud Crumlish, CTG's President and Chief Executive officer; and John Laubacker, Executive Vice President and Chief Financial Officer.

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, Thursday, October 18, 2018. 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 made in the forward-looking statements is contained in today's earnings press release as well as with the company's filings with the SEC.

Also, the company's press release and management's statements during the call will include discussions of certain adjusted non-GAAP measures and financial information. These financial measures and a reconciliation of GAAP to non-GAAP results are provided in both today's press release and the related 10-K -- I mean 8-K, sorry.

With that, I will turn the call over to Bud for his opening remarks.

Thanks, Jim, and good morning to everyone joining us on the call.

I'll begin with a brief overview of our financial results for the quarter. Revenue for the third quarter increased 22% year-over-year to $90.3 million, exceeding our guidance range of $86 million to $90 million.

Revenue was better than anticipated primarily due to the ramp-up of recently secured Health Solutions business across multiple new clients, as well as the continued growth in our European operations. Our acquisition of France-based SOFT COMPANY earlier this year has further complemented the favorable trends in Europe, and we continue to be pleased with the performance of this highly strategic acquisition.

Third quarter earnings per share, excluding the gain from life insurance proceeds, were in line with our expectations that we continued to reinvest in sales and new business development to drive sustainable growth.

Given the notable traction we achieved within health care during the quarter, I would like to start by addressing several positive developments in our broader solutions business followed by commentary specific to the staffing portion of our business.

Revenue from solutions expanded to approximately 32% of consolidated revenue in the third quarter or $28.9 million, reflecting 32% year-over-year growth.

In a year-ago quarter, solutions represented only 30% of total revenue, which clearly demonstrates our early success in increasing the revenue contribution from higher margin solutions business over the last year. In further support of these objectives, we are continuing to gain increased traction as positive new market trends emerge, particularly within health care.

Speaking of health care, I'm proud to highlight that modern health care magazine recently recognized CTG as one of the best places to work in health care for the fifth time in the last 6 years. This recognition is a great testament to the strength and culture of our health care team, which serves as an important foundation for renewed growth and health solutions. In fact, our health solutions business in the U.S. had a very strong quarter, highlighted by multiple contract wins for our Application Advantage offerings as well as a ramp-up of previously secured accounts over the past few quarters.

We also expanded or extended contracts with 10 existing health care clients during the quarter. And most recently, expanded the scope of services we are providing to Catholic Healthcare Initiatives (sic) [Catholic Health Initiatives], a partnership we announced in July to implement Epic Electronic Health Record application.

Adding to this growing business momentum in Health Solutions, subsequent to quarter end, we also significantly advanced a meaningful new engagement for legacy systems support on an EHR implementation with a sizable U.S.-based hospital system. We are actively working to formalize the contract with this new account, which we anticipate completion in the fourth quarter.

Overall, total billable headcount within health solutions increased during the quarter as we experienced growing demand for our expanding portfolio of cost-effective solutions. We continue to position many of our current offerings to capitalize on prevailing transition towards value-based care including Application Advantage, EHR services and Enterprise Information Management.

Across the health care industry, providers have a growing need for effective data and information management to improve efficiency and optimize performance. In fact, our recently launched EIM offering is specifically targeted as addressing need, acute need and we expect to gain additional traction with this solution over the coming quarters.

We're also gaining traction for our EIM solution outside health care, in areas such as diversified industrials. Our solutions team in Alaska recently secured a new 5-year multimillion dollar contract for EIM with the subsidiary of a large existing energy client. This represents only one example of the broad and growing number of engagement that we are actively pursuing for EIM solutions outside of the health care market.

Turning to Europe. The performance of this area of our business continues to be well above the industry average with quarterly revenue from our European operations growing more than 50% year-over-year.

Revenue from Europe expanded to approximately 34% of consolidated revenues compared with 27% of revenue in the same period last year. In addition to SOFT COMPANY contributing to our growing momentum in Europe, our teams in Belgium and Luxembourg, had continued to generate organic growth through a combination of new and expanded contract win, most notably with the European institutions.

Results from our European operations are also reflected of the current market environment for skilled professionals in the region, which remains extremely competitive. Our above average retention of highly skilled technical resources is a testament to the dedication of our team in Europe and our recruiting organization aggressively works to attract quality talent in preparation for the ramp-up of multiple recently secured contracts.

Specific to SOFT COMPANY, we made further progress in our integration efforts during the quarter. And the acquired business continues to perform well and in line with our expectations. Although, it's still early, we've already begun to realize the initial sales synergies as our respective teams in Europe increasingly work together and conduct operations as a combined organization.

To close up my remarks on solutions, I want to emphasize that our solutions business has been a key strategic area in which we have invested over the past 2 years. The proceeds of these efforts are not only increasingly evident in our results, they're also positioning CTG for future growth. As we continue to execute on our expanding pipeline of new business engagements and contracts, we expect to generate further positive momentum over the coming quarters.

Now turning to the staffing business. Third quarter revenue from staffing grew 18% year-over-year, or $61.3 million, representing approximately 68% of CTG's consolidated revenue. This area of our business largely performed as expected during the quarter, including a modest degree of seasonal softness, typically associated with the summer months.

More broadly, the macroeconomic environment and seemingly resilient economic growth is giving many companies the confidence to increase IT spend, resulting in additional staffing opportunities.

During the quarter, we secured 11 new staffing clients, and also expanded services in the new divisions of 4 existing clients, marking continued progress on our objectives to expand and diversify CTG's portfolio of staffing clients. Additionally, the record low unemployment rates in the U.S. are cultivating growing demand for permanent placements.

In order to more directly address this prevailing market trend, we've recently assembled a recruiting team dedicated to specific clients. Even though the current revenue contribution is still relatively small, we've already seen a definitive increase in the pace of permanent placements as a direct result of this recently implemented effort.

As I've mentioned on previous calls, we are up leveling our sales organization and increasing the effectiveness of our business development activities. As part of these ongoing efforts, we hired 2 new account executives in the third quarter and made further enhancements to the alignment of our recruiting and delivery teams in key strategic areas.

We also made several net additions to our total recruiter headcount during the quarter. In addition to supporting our larger growth objectives, the strategic initiatives in our staffing business will continue to further streamline the organization and drive increased efficiencies.

Before I turn over to John for a more detailed review of the financials, I'd like to conclude my opening remarks by emphasizing the consistent and notable progress we are making across multiple areas of the organization.

I'm especially pleased by the tangible traction we've demonstrated during the quarter within health solutions, as well as the continued strong performance of CTG's European operations.

As evidenced by our results, our execution is producing meaningful growth and it has also enabled us to establish a growing pipeline of new engagements. We plan to continue reinvesting in the highest performing areas of the business to accelerate the conversion of new and existing opportunities into incremental revenue.

Additionally, we are improving the quality of revenue we generated from our staffing services, which together with increased efficiencies, will contribute to enhancing our overall profitability.

Now, I'll turn the call over to John for a more detailed review of our third quarter financial results and future guidance.

Thank you, Bud. Good morning, everyone. We appreciate you joining us today on the conference call.

As we reported in this morning's press release, consolidated revenue increased 21.9% in the third quarter to $90.3 million, compared with $92.7 million in the second quarter of 2018, and $74 million in the third quarter of 2017. The impact of currency translation on revenue in the third quarter was negligible.

Billable days in the third quarter were 63 compared with 64 days in the second quarter of 2018, and 63 days in the year-ago third quarter.

Solutions revenue was $28.9 million in the third quarter of 2018, which was effectively flat compared with the second quarter on a billable days' basis.

The year-over-year solutions revenue increased 32%, reflecting continued momentum in our European operations as well as the ramp-up of several new health solutions engagements in the U.S. during the quarter.

Staffing revenue in the third quarter was $61.3 million, reflecting a 3% sequential decline largely associated with seasonality during the summer months.

Staffing revenue increased 17.6% year-over-year, driven by our largest staffing clients and the continued conversion of new engagements into revenue-generating accounts.

Revenue from IBM in the third quarter was $19.8 million or 22% of total revenue, compared with $21.9 million, or 23.6% in the second quarter of 2018 and $18.6 million, or 25.1% of total revenue in last year's third quarter.

No other client represented more than 10% of revenue during the third quarter of 2018.

Direct costs as a percentage of revenue were 80.8% in the third quarter of 2018 compared with 80.9% in the second quarter of 2018, and 82.4% of revenue in the year-ago quarter.

GAAP net income in the third quarter of 2018 was $1.2 million or $0.08 per diluted share, which included $0.04 per share in acquisition-related expenses, and $0.06 per share from the nontaxable gain from life insurance. This compares with GAAP net income in the second quarter of $940,000 or $0.07 per diluted share, which included $0.01 per share of acquisition-related expenses.

GAAP net income in the year-ago third quarter was $40,000 or $0.00 per diluted share, which included unusually high medical costs associated with the company's self-insured plan.

Non-GAAP net income in the third quarter of 2018, excluding acquisition-related costs and the nontaxable gain from life insurance was $900,000 or $0.06 per diluted share, compared with second quarter non-GAAP net income of $1.1 million, or $0.08 per diluted share, excluding the acquisition-related expenses. And $740,000, or $0.05 per diluted share in the third quarter of 2017, which excluded the unusual medical costs.

As a reminder, we revised how we define and calculate headcount following the acquisition of SOFT COMPANY, where we utilized a large number of subcontractors in order to better reflect total billable consultants. Accordingly, CTG's total headcount at the end of the third quarter was approximately 4,150 compared with 4,150 at the end of the second quarter of 2018, and 3,450 at the end of the year-ago third quarter.

Approximately 91% of our third quarter 2018 headcount was billable, which is consistent with previous levels.

Turning to our balance sheet, cash and cash equivalents at the end of the third quarter were $10.5 million. And we had $3.1 million of outstanding long-term debt.

Capital expenditures in the third quarter of 2018 were $610,000, compared with $488,000 in the second quarter.

During the third quarter, the company used $1 million to repurchase 178,000 shares of CTG common stock at an average price of $5.90.

At quarter-end, we had approximately $7.8 million remaining under the existing repurchase authorization.

Turning to our guidance, total revenue for the fourth quarter of 2018 is expected to be in the range from $89 million to $94 million. Additionally, we expect fourth quarter GAAP net income to range from $0.03 to $0.07 per diluted share.

Non-GAAP net income excluding acquisition-related expenses and amortization of intangible assets is expected to range from $0.06 to $0.10 per diluted share.

There are 64 billable days in the fourth quarter of 2018. And we anticipate an effective tax rate of approximately 30%.

For the full year 2018, revenue is expected to range from $355 million to $360 million.

GAAP net income for the full year 2018 is anticipated to range from $0.21 to $0.25 per diluted share. And non-GAAP net income is expected to range from $0.26 to $0.30 per diluted share.

At the midpoint of our fourth quarter guidance, we are on track to achieve our revenue goals for 2018, with strong top line growth of 19% for the full year.

As Bud indicated earlier, we continue to make focused investments in the highest performing areas of our business, which is having a short-term impact on our bottom line results.

We have more work to do in order to improve the mix of higher margin business within staffing. We are also increasing the productivity and the pace by which certain investments are materializing in the bottom line results.

Looking forward, our priority is to maximize the return on our strategic investments, and deliver improved profitability in the coming quarters as we remain intent on achieving our 3-year financial plan and 2019 targets.

With that, we'll now open the call for questions. Greg, can you please manage our Q&A session?

(Operator Instructions) Your first question comes from the line of Vincent Colicchio from Barrington Research.

Yes. Bud, could you help us understand the staffing margin challenges in terms of impacting guidance for the balance of the year? Any color would be helpful.

Well, Vince, the -- one of the things that we got, I mean, as you can -- as you know, we've grown our larger volume staffing business. And with that, it's pushing the lower margins. And when you look at the entire mix, we're diligent about growing the higher margin, more midmarket activities and we're working on that. But that's really probably the most dramatic thing that's causing that impact, fourth quarter is the volume that we have with the larger accounts.

Do you think that, is it a vertical focus issue? Is it -- need more salesforce in place? And anything else?

On the salesforce, I mean we're adding sales people. It may take time to ramp up. And especially when you're going out to the midmarket and the larger accounts, there are a lot of relationship base, we have direct communication with the buyers and services and that just takes time. And it's a smaller portion of our staffing business. And it's going in the right direction. But it's just certainly taking probably longer than we want, of course. But it's still going in the right direction.

And then IBM, I think I was expecting a bit higher over the number, or maybe I was being too optimistic. How did IBM come in versus your expectations? And what does it look like going forward?

They came in -- we're growing. We're growing IBM and we've got certainly other opportunities with them. So I feel very positive about, not only the relationship, but the level of business we're getting. And as you know, we've been dealing with them for a long time. And we know how to work with them and really make money. Some of the other things that may impact it a little bit is they had a group, a division that was sold off and some of that revenue that we had considered as IBM before is in a different account. It had to do with the chip business.

Okay. SOFT COMPANY, I know you'd mentioned in the past if I remember correctly that you have some existing accounts that you think that will be able to help you gain share at? Is that -- is there any sense for that -- the chance of that happening in the near future?

Yes. That's -- now, we actually got some synergy with a couple of different clients. In fact, SOFT COMPANY really helped out a proposal that we are working on. And because of their contacts, we are part of this larger group, we've got more capabilities. And that actually helped us actually close the deal that otherwise we wouldn't have. Now, compete against and then so that's a start. We have some work from SOFT COMPANY, actually we brought them into the Belgium area to do some work there for us. So the sales teams are connecting together and really pushing the market in both ways because we do have different services in different countries. And so we're rolling that out to all the clients. So it's going very well.

Your next question comes from the line of Zach Cummins from B. Riley FBR.

Can you talk a little bit more about some of the factors that are driving the strength in your health care business? And kind of some of the potential pipeline opportunities that you see going forward, specifically in North America?

Sure, Zach. In health care, what there's -- the merger and acquisitions, the consolidation in health care industry, they want to standardize with their electronic health application. So as more and more hospitals come in under a fold of a larger organization, they want to have consistency and standardization. And that's what we're doing in Catholic Health Initiatives. So that's working out.

And these are -- they have multiple hospitals that are going on like that. So that's certainly been a driver. There's also a bit of a trend that you put in on the application, they typically last 10 years. A lot of these were -- some of these were put in -- at least some were put in, in 2005, 2007 time frame. And it's almost like it's so complicated. Now they have to do a complete refresh. They're actually going out for RFP and is putting a whole new system. So that's driving some activity as well.

And then I think that also with our clinical service desk is part of the Application Advantage, the hospitals, these are complex systems. And that's also an affordability thing, 24/7, to answer physicians calls for a very critical information at times. And it just seems like we're really good at it, they're really good at doing at the health and clinical piece. And they're looking to us and really kind of take over that. So that's been a really nice growing portion of our business and we continue seeing that to grow where we actually handle the calls. And for example, there's a surgery going on, the radiologist is trying to get some information, trying to get at a certain MRI or something can't get it, and so they would call one of our people. So these are highly skilled people, it's not just to help a very highly skilled people that actually did implementations and they walked them through the system and get them the information they need so they can move on with the procedure.

Those are a couple of the areas and then there's also the whole convergent value-based care and all of our solutions complement value-based care either directly or indirectly. So that's something was population health and a lot of things are going out to a lot more outpatient type of services to drive cost down, gain efficiencies and we're working with our clients on that as well.

Great. That's really helpful. And then in terms of the Q4 EPS guidance. It sounds like there is really some headwinds related to margins in your higher volume staffing business but can you talk about more of the investments or changes that you need to make to improve the mix of your staffing business going forward?

It's really targeted towards that we're hiring the account executives to go after markets that we already have a presence. And let's say, it's a smaller -- it's a much smaller portion of our staffing business that it's taking time to really build up the amount of volume to have a significant impact but we're really going after those smaller ones and that we can get the higher margins, and as I mentioned before, it's a direct relationship. And it's just a matter of -- it takes time. It's, you want everything to happen very quickly, it takes time to get these solidified. So that -- and as we add more and more people, there is a certain amount of call and absorption rate that we can have so many account executives so that we can maintain our profitability, while we continue to push forward in the marketplace. And we're doing that now. So I guess that is taking probably longer than we want. But it's moving in the right direction and we're trying to increase that as much as possible with a lot of diligence.

And at this time, there are no further questions. I'd like to now turn the call back to the management for closing remarks.

Thanks, Greg. Before closing on today's call, I want to express my well-founded confidence in CTG's ability to achieve both continued growth as well as enhanced profitability. As a result of deliberate execution, we're consistently demonstrating measured progress and significant top line growth across all areas of our business. In solutions, our European operations continue to outperform and also experience growing momentum further enhanced by our strategic acquisition of SOFT COMPANY earlier this year.

As I highlighted in my earlier remarks, we are gaining meaningful new traction for our expanding health solutions offering. And in staffing, we continue to win new business and are determined to improve the quality of incremental revenue in order to enhance overall profitability.

Looking forward, we remain focused on driving continued top line growth and increased efficiencies, as well as maximizing the return on investments in support of achieving our financial goals and objectives for 2019.

With that, thank you again for joining today's call, and for your support of CTG. We look forward in reporting our continued progress next quarter.

Ladies and gentlemen, this conference will be available for replay after 1:00 p.m. Eastern Time today through October 21. You may access the AT&T teleconference replay system at any time by dialing 1 (800) 475-6701 and entering the access code 445606. International participants dial (320) 365-3844. Those numbers once again are 1 (800) 475-6701 or (320) 365-3844 with the access code 445606.

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