Computer Task Group Inc (CTG) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CTG quarterly investor 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 ahead.

Thank you, Greg, and good morning, everyone. With me on today's call are Filip Gydé, CTG's President and Chief Executive Officer; and John Laubacker, Executive Vice President and Chief Financial Officer.

Before we begin, I want to remind listeners that statements made 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, Tuesday, February 25, 2020. And 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 release as well as in the company's SEC filings.

In addition, the company's press release and management's statements during the call include discussions of certain adjusted non-GAAP measures and financial information. These financial measures and a reconciliation of GAAP and non-GAAP results are provided in both today's press release and the related Form 8-K.

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

Thank you, Jack. Good morning to everyone joining us today on the phone and via webcast. The fourth quarter marked a strong finish to a highly successful year for CTG. Consolidated revenue grew 6.6% in the fourth quarter and 9.9% for the full year. Our results were driven by continued momentum in our IT Solutions business, combined with expanding new engagements across Europe. For the full year, IT Solutions business grew 24.9%, contributing an increased mix of higher-margin business and significant improvement in operating profitability, consistent with our strategy. As a result, both full year operating income and margin more than tripled year-over-year. Additionally, earnings per share increased to reach a 4-year high in both the fourth quarter and for the full year. These strong financial results are confirmation that our strategy is working and is evidence of very solid execution by our team.

Underlying our current strategic plan, there continues to be 3 fundamental objectives: first, to immediately expand operating margins and profitability; second, to generate longer-term revenue growth above that of our served markets; and third, to optimally allocate capital in support of continued improvement.

As we have outlined, at a high level our strategy involve transformational shift towards more solution-centric organization. Today, this shift is meaningfully underway. We are focused on taking actionable steps to position our IT Solutions business and the foundation of how we both operate and deliver value to our clients. These efforts include further capitalizing on our existing competitive strengths and capabilities, while simultaneously adapting our approach, offerings and the delivery of solutions to address the current trends within our target market verticals.

I want to emphasize that the reason we have chosen to focus on IT Solutions, extends well beyond it being a higher-margin business. In fact, as part of providing higher-margin solutions to our clients, CTG is often required to assume more responsibility for and management of the delivery and outcome of those services. And one distinct benefit of this additional responsibility is that we are working closely with the client's management team. This frequently allows for deeper client relationships and increased client load, which ultimately creates the opportunity to add value and generate increased profitability for both CTG and our products. In conjunction with our strategic initiatives to increase our focus and grow IT Solutions, we have also taken decisive actions to improve the profitability of our operations, particularly in North America.

One of the most impactful adjustments, which we just completed during the fourth quarter, it was the consolidation of our North American sales teams through a single operating unit, with a focus on employing a solutions first approach.

In addition to the immediate efficiencies, this change generates. Over time, this consolidation of efforts along with shared goals will be critical to further expanding our IT Solutions business. Taking a closer look at our IT Solutions business. Revenue in the fourth quarter grew about 27% year-over-year and expanded to 38% of total revenue compared with 32% in the 2018 fourth quarter. For the full year 2019, revenue from IT Solutions grew almost 25% and marked the second consecutive year of 20%-plus growth. While this impressive top line growth clearly demonstrates the momentum we are generating for CTG's global solutions offerings, the increasing mix of this higher-margin IT Solutions business had a substantially larger positive impact on both our operating and bottom line profitability throughout 2019.

A significant portion of this traction and year-over-year growth is directly attributable to the strong adoption of our core global solutions offerings, Application Advantage and EIM Advantage. Our current pipeline of engagements for these solutions offerings has remained soft, and we have continued to see expanding interest from new and existing clients in both North America and Europe. In recognition of the anticipated opportunities that lie ahead, we are committed to increasing our sales team over the coming year. We are actively working to accelerate the transformation of CTG's business and further expand our existing global solutions with new offerings, including testing. Consistent with this effort, we recently commenced the initial implementation of an automated testing solution for a leading integrated health care organization in Northeastern U.S., which represented CTG's first testing solutions engagement in North America.

One of the significant drivers of growth in 2019 was our Health Solutions business. Our consistent ramp of new and expanded contract wins generated 4 consecutive quarters of organic year-over-year growth. For the full year, this resulted in Global Health Solutions revenue increasing more than 12% over 2018. As part of our successful repositioning and ongoing investments to better align CTG Solutions offerings with current trends in the health care industry, we are increasingly addressing the challenges associated with the adoption of value-based care, including clients' growing need for data analytics, testing, deployment and optimization of electronic health records and related changes in workflow.

Another key driver of our growth and progress in 2019 was Europe. Revenue in the fourth quarter grew 25% year-over-year in local currency.

And for the full year, grew over 27% in local currency. Underlying the sustained outperformance of our European operations was continued new business momentum, coupled with revenue contribution associated with our acquisition of Tech-IT in early 2019. Despite a challenging macroeconomic environment, we continue to benefit from our long-standing relationships with prominent European Union institutions and large financial services clients. Several of which we successfully leveraged into new or expanded contracts.

Specific to the fourth quarter, business activity in Belgium was particularly strong with a series of new client wins. Additionally, as a result of realized synergies in our expanded portfolio of end-to-end IT Solutions, the CTG team secured several sizable IT infrastructure and implementation solution contracts in Luxembourg, during the fourth quarter.

I am also pleased to report that we successfully completed the remaining integration activities associated with our early 2019 acquisition of Tech-IT. This is the second acquisition we have successfully integrated into CTG in the last 2 years. We have an outstanding team of talented people, committed to the long-term success of the combined organizations, a culture that promotes success and welcomes our new associates and the commitment of the leadership team to ensure the integration is ultimately a success. It is truly something I am proud as the leader of CTG.

The Tech-IT transaction and our purchase of SOFT COMPANY in 2018 has played a significant role in the growth and success of CTG over the past 2 years. In terms of our consolidated financial results, these acquired businesses overall performed exceptionally well, increased our top line growth and were immediately accretive to CTG's operating profitability.

In 2019, SOFT COMPANY contributed with an operating margin of more than 7%, while Tech-IT performed even better with an operating margin of more than 9.5%. These transactions have also provided strategic synergies and benefits. SOFT COMPANY has expanded CTG's footprint in Europe by establishing a solid presence in France with services, including business intelligence, analytics and mobile application development. Tech-IT added highly complementary services, including infrastructure development and integration, software development and cloud services, giving us the ability to deliver complete end-to-end solutions offerings to existing and prospective clients in Europe. Both of these acquisitions significantly accelerated the growth of our solutions business and our ability to accelerate CTG's broader strategic shift to solution-centric organization. Each company continues to be well-managed and presents a faster means of adding revenue and profits compared with what would have been required to achieve equivalent results utilizing purely organic strategy.

We plan to continue to opportunistically pursue targeted acquisitions that accelerate our strategic plan and the shift to IT Solutions, which yields higher margins and which are immediately accretive to growth and profitability.

Shifting to an update on our IT Staffing business. Our ongoing priority in this area is to improve the overall operating performance. Over the past few quarters, we have refined our approach, and we are now significantly more selective on both new staffing engagements as well as conducting, thoroughly, evaluations of existing contracted services. In addition to concentrating our sales levels and higher value IT and professional staffing services with middle-market companies, we have recently begun taking steps to more proactively transition away from certain lower-margin business. We are also committed to maintaining an efficient, low-cost delivery organization, capable of supporting higher volume clients, while remaining disciplined on pricing and resource prioritization.

Looking ahead, we will continue to actively explore and discuss potential new strategic offerings that could present opportunities with certain existing clients to convert select staffing services to managed services engagements. If successful, we believe such managed services engagements would prove mutually beneficial to CTG and our clients, by enabling potential cost savings, higher profitability and added value.

In December, we were proud to announce that CTG has earned the designation as a great place to work, certified in the U.S. This was the first year that our U.S. operations have participated in this comprehensive certification program, and this achievement complements CTG's previously certified workplaces throughout Europe. The certification positively affects the way in which prospective employees look at CTG, and provides a clear advantage to the company when recruiting and hiring IT and other talented people in a competitive marketplace. The certification highlights our strong company-wide commitment to cultivating a workplace that attracts, develops and retains the best people. We made tremendous progress over the past year. And it is rewarding to see the positive impact reflected in our financial results for all 4 quarters and the full year. One of the guiding principles for my career has been to under-promise and over-deliver. As CEO, I am absolutely committed to continuing to build on our success and what we have accomplished to date, creating a track record of reliability. We implemented this style when I was appointed CEO, and it is clear that this approach has boosted the organization's confidence, created strong momentum and is accelerating as we transform the company.

We remain highly confident in our strategy, and I believe that our persistent focus on disciplined execution will enable us to continue driving transformational growth in our IT Solutions business, and ultimately succeed in positioning CTG as a premier global solutions project.

I will now turn the call over to John for a detailed review of our fourth quarter results as well as our financial guidance for 2020.

Thank you, Filip, and good morning to those of you joining us on today's conference call. As reported in this morning's press release, consolidated revenue in the fourth quarter was $99.3 million compared with $97.2 million in the third quarter of 2019, and $93.1 million in the fourth quarter of 2018. Currency translation had a negative $1.3 million impact on revenue in the fourth quarter. Billable days in the fourth quarter were 65 compared with 63 days in the third quarter of 2019 and 64 days in the year ago fourth quarter. Solutions revenue in the fourth quarter of 2019 increased 15.2% sequentially and by nearly 27% year-over-year to $37.9 million, representing 38.2% of total revenue. For comparison, Solutions revenue was 32.1% of total revenue in the fourth quarter of 2018.

The increase in IT Solutions revenue reflects continued new business momentum in Europe, driven in part by realized synergies from the acquisition of Tech-IT in early 2019. Staffing revenue in the fourth quarter of 2019 was $61.4 million or 61.8% of total revenue, a decline of 4.5% sequentially and 2.9% year-over-year. Revenue from IBM in the fourth quarter was $21.4 million or 21.6% of total revenue compared with $21.3 million or 21.9% of total revenue in the third quarter of 2019, and $20.1 million or 21.5% of total revenue in last year's fourth quarter. No other client represented more than 10% of revenue during the fourth quarter or for the full year 2019.

We have been working with IBM over the past several months to renew our contract. The contract has been extended on an interim basis to May 1, 2020, as the terms and conditions of a longer-term extension continue to be negotiated. Direct costs as a percentage of revenue were 79.6% in the fourth quarter of 2019 compared with 80.7% in the third quarter of 2019, and 81% of revenue in the year ago quarter. The GAAP operating margin in the fourth quarter of 2019 was 2.5% compared with 1.6% in the third quarter of 2019, and negative 0.8% in the year ago quarter.

The non-GAAP operating margin in the fourth quarter of 2019, which excludes acquisition-related expenses, was 3.1% compared with 2.4% in the third quarter of 2019, and 0.4% in the year ago quarter. The GAAP and non-GAAP operating margins in the fourth quarter of 2019 were at the highest level in 4 years. The effective income tax rate in the fourth quarter of 2019 was 34% compared with 33.5% in the third quarter of 2019. GAAP net income in the fourth quarter of 2019 was $1.7 million or $0.12 per diluted share, which included $0.02 per share in acquisition-related expenses, and again we're at the highest level in 4 years. This compared with net income in the third quarter of 2019 of $0.9 million or $0.06 per diluted share, which included $0.04 per share in acquisition-related expenses.

GAAP net loss in the year ago fourth quarter was $5.3 million or $0.39 per share, which included $0.06 per share in acquisition related and severance expenses as well as $0.36 per diluted share in tax-related items.

CTG's total headcount at the end of the fourth quarter was approximately 3,950 compared with 4,350 at the end of the third quarter of 2019 and 4,158 at the end of the year ago fourth quarter. The year-over-year headcount decrease primarily reflects a reduction in Staffing revenue, I mentioned earlier, as we transition away for some lower-margin staffing business. Approximately 90% of our fourth quarter 2019 headcount was billable.

Turning to our balance sheet. Cash and cash equivalents at the end of the fourth quarter were $10.8 million, and we had $5.3 million of outstanding long-term debt, resulting in net cash of $5.5 million.

Capital expenditures in the fourth quarter of 2019 were $1.2 million compared with $583,000 in the third quarter of 2019, and $371,000 in the fourth quarter of 2018. As outlined in this morning's press release, we published guidance for the full year 2020, which highlights our expectation to realize increased operating profits and continued year-over-year earnings growth -- earnings per share growth. Specifically, for the full year, we anticipate revenue to be in the range between $380 million and $400 million, and GAAP net income to be in the range between $0.32 and $0.38 per diluted share. Excluding acquisition-related expenses, we expect non-GAAP net income for the full year to be in the range between $0.42 and $0.48 per diluted share. In support of these objectives, we have recently taken advantage of select opportunities to aggressively transition away from less profitable staffing business as we accelerate our shift toward an increased mix of higher-margin solutions business.

Specific to the 2020 first quarter, we expect a 3 fewer billable days than the fourth quarter of 2019. And near-term headwinds associated with the transition away from the lower margin staffing business, will result in revenue of approximately $87 million. However, because of an improved mix of business and operating performance, we expect earnings per share for the first quarter of 2020 to increase approximately 50% over the first quarter of 2019. As indicated by our captain on today's call, we are very pleased with the team's focused execution on our strategy over the last year, which contributed to our exceptional results for both the fourth quarter and the full year 2019. As we progress throughout 2020, we believe our ongoing actions to transform the company and focus on being a solution-centric enterprise will lead to further improvement in our operating results and result in another strong year for CTG.

Before we move to the Q&A session, I'd like to address the offer received from one of our shareholders, Assurance Global Services on January 14. As we announced in the press release on that day, our Board, in consultation with its advisers, is carefully reviewing and evaluating the new proposal in the context of CTG's strategic plan. The Board and the management team are focused on creating value for our shareholders. Beyond that, we are not going to comment any further on this matter on today's call. We ask that you keep your questions focused on our results.

Greg, could you please manage our question-and-answer session.

(Operator Instructions) Your first question comes from the line of [Kevin Lowe].

Nice results from the quarter. First question I had, it doesn't look like it from the fourth quarter performance. But have you seen any sort of impact on your business from either the macro uncertainty or the coronavirus news? Just curious how your customer base and, in particular, some of the health care providers that you serve are responding to things in terms of better sales cycles, given all these factors?

[Kevin], no, we haven't seen any specific effect of what's happening around the coronavirus. But obviously, we are monitoring what happens and where we have close conversations with all of our main clients. At this moment, there's nothing to report.

Great. And just turning to some of the changes you've made within your North American sales organization. Wondering if you could provide a little bit more detail just in terms of how your sales capacity might look coming into this year versus where you were a quarter ago. Any sort of changes in terms of incentive in terms of the incentive plan? And what, if any, disruption you might anticipate from some of the efforts you've made?

Well, if you look to our sales team, a year ago, we had different sales teams divided over the lines of business. What we have done now is we brought everybody together in one sales team under the same leadership using the same sales process, same KPIs. And as you mentioned, also same incentive program. We don't see disruption. We just see continued evolution, as our incentive programs are fully in line with our transition to solution-centric organization. So we are focusing our incentive program to reward solutions business and make sure that all members of the sales team are focusing to sell our Global Solutions and in all parts of our business. And as we said, we are committed to grow our sales team. Now we have a strong structure. We have one process, one set of KPIs, it's all under one CTG approach. Now we're ready to grow that team further with the business to grow our solutions business fast.

Understood. And just in terms of the strong solutions growth within the fourth quarter. It seemed like a lot of that came out of the Tech-IT organization or maybe the acquisitions you've made over the past 2 years. Could you just add a little bit more in terms of any sort of synergies that you're seeing from that? For instance, are you seeing success in selling those services in terms the old CTG base or vice versa? Just any more color would be helpful.

Yes. We're actually seeing it in both directions. We've seen the former CTG Luxembourg clients, where we were selling now the Tech-IT services, so hardware, software, cloud services. And we've also opened up our -- the Tech-IT clients for the CTG services. We're sharing consultants. We are answering RFPs together. And frankly, we are answering RFPs that none of us could have answered on our own before, and we're winning several contracts because of the combination. And that's the purely financial part of it. Obviously, if you look at being able to provide end-to-end IT Solutions, now not only in Luxembourg, that all those solutions we can provide and to our clients in Europe, in Belgium, in France, too, that creates a very different competitive positioning going forward.

All right. Great. And then just a couple of questions on the staffing side of the business. You guys mentioned that you had identified some more lower margin staffing work that you're not going to undertake this year. Can you quantify how much of a headwind to growth that is in your fiscal '20 guidance? And whether your guidance currently contemplates everything you anticipate for going for this year or if you're still evaluating other opportunities that might not fit CTG going forward?

[Kevin], this is John. We have not quantified the specific amount that we have disengaged from so far to date, but it is a fairly significant portion. You may recall from my comments during the call that we were down sequentially in Staffing revenue and down year-over-year, and that's a direct result from taking a look at opportunities to understand the work in front of us, how does -- what is that work? What is the client? What are the long-term prospects? How does it fit into our solution-centric plan and disengage from it? So although we haven't disclosed a specific amount, that is what's strictly driving the decrease sequentially in year-over-year and Staffing. I will tell you that we do anticipate that we will continue to look very critically at engagements as they come due. We have anticipated that we would disengage from a variety of work in 2020, like we did at the end of the second half and the end of 2019. And all of that is already worked into the guidance that we provided.

Got it. And then just on the IBM relationship, you mentioned you have an extension through May here as you negotiate a longer term agreement. I think for the past renewal -- I mean, the past 2, it's been more sort of kind of a 1 year extension. Can you just talk about any sort of changes you anticipate in this contract in terms of either the duration or the scope of services that you're providing?

Yes. I don't think that we're looking at a significant change of scope of services that we're providing. Typically, in previous renewals, and you had mentioned this, that the IBM starts that negotiation process within the last 3 months of the last quarter or so before an expiration. And we did start talking to them about the things that they were thinking and the opportunities that they wanted to see in a new engagement. And at this point in time, as you know, as I'm sure you're aware, there's been some changes in the IBM side of the fence as well with leadership. And so the process has gone relatively slowly. We have a great relationship. We're in great conversations with them, have no concerns about the extension of the contract. But for now, it's been extended for 4 months to May 1. And as we continue to negotiate the terms and conditions going forward, we expect it to be in place. And I can't say it will be the same as it's been in the past, but we feel good about all the discussions we've had today.

All right. Congrats on the strong finish 2019 and good luck you in 2020.

Thanks, [Kevin]. Appreciate it.

(Operator Instructions) And at this time, there are no further questions.

Thank you, Greg. We were pleased to close out a very successful year with strong fourth quarter results, which included...

Mr. Culligan (sic) [Mr. Filip] , please go ahead.

Okay. We were pleased to close out a very successful year with strong fourth quarter results, which included earnings at multiyear high. I extend my appreciation to the entire CTG team for their dedication and efforts, without which our accomplishments of the past year would not have been possible. Entering 2020, growth of our IT Solutions business will continue to serve as a fundamental driver of profitability improvement. We are actively working to accelerate the transformation of our business and further expand CTG's global solutions offerings, which will enable us to deliver value to our clients, while also capitalizing on the increasing mix of higher-margin business. Focused execution on our strategic plan will remain paramount to achieving our objectives of increased profitability and sustainable long-term growth. Both of which we believe are fundamental to our priority of successfully unlocking significant value for CTG shareholders. As always, I want to thank you for participating on today's conference call and for your continued support of CTG. Greg, you may now disconnect.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconferencing. You may now disconnect.