Mastech Digital Inc (MHH) 2008 Q4 法說會逐字稿

Greetings and welcome to the Mastech Holdings Inc. Q4 2008 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Ford Lacey, Manager of Legal Affairs for Mastech Holdings Inc.. Thank you. You may begin.

Thank you. Good morning and welcome to Mastech's 2008 fourth-quarter conference call. If you have not yet received a copy of our earnings announcement, it can be obtained from our website at www.Mastech.com.

With me on the call today are Steve Shangold, Mastech's Chief Executive Officer, and Jack Cronin, Mastech's Chief Financial Officer.

I would like to remind everyone that statements made during this call that are not historical facts are forward-looking statements. These forward-looking statements include our financial, growth, and liquidity projections, as well as statements about our plans, strategies, intentions, and beliefs concerning our business, cash flows, costs, and the market in which we operate.

Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are identified -- are intended to identify certain forward-looking statements. These statements are based on information currently available to us and we assume no obligation to update these statements as circumstances change.

There are risks and uncertainties that could cause actual events to differ materially from these forward-looking statements, including those listed in the Company's information statement filed with the Securities and Exchange Commission and available at their website at www.SEC.gov.

As a reminder, we will not be providing guidance during this call, nor will we provide guidance in any subsequent one-on-one meetings or calls.

I will now turn the call over to Steve.

Thank you and good morning, everyone. On today's call, I will make my opening comments about our fourth-quarter and full-year financial results, and our current market environment. Jack will then review our financial position and I will rejoin the call and we'll open it up for your questions.

During the fourth quarter, economic conditions continued to deteriorate. We are now seeing a broad range of clients reducing their spending for IT services in response to today's global slowdown and market uncertainties.

In the third quarter of 2008, much of this retrenchment was confined to financial services' clients. Now companies in just about all industries are taking a cautious approach to all discretionary spending, including spending on IT services.

With that backdrop, let me review our fourth-quarter financial results. Revenues during the fourth quarter of 2008 declined to $23.1 million, compared to $25.8 million in the same period last year, due to reduced demand for our services.

This reduced demand resulted in a decline of 70 billable consultants during the fourth quarter of 2008, which approximated 11% of the total number of billable consultants employed. Much of the decline occurred towards the end of the quarter, and as a result, the impact of this decline is not fully reflected in our fourth-quarter operating results.

Gross profit margins for the fourth quarter of 2008 declined to 17.8%, compared to 19.2% in the same period last year, as pricing pressures increased over the course of 2008. It should be noted that fourth quarter gross margins are typically 50 to 75 basis points lower than our other quarters as consultant utilization is impacted by the holiday season and higher levels of vacations.

Fourth quarter 2008 SG&A expenses totaled $3.6 million and represented approximately 15.6% of revenues, compared to $3.9 million, or 15.1%, of revenues in the same period of 2007. During the 2008 quarter, SG&A included $114,000 of severance costs related to support staff reductions and $258,000 of bad debt expense.

Net income for the quarter was $289,000, or $0.08 per diluted share, compared to $1.1 million or $0.32 per diluted share in the corresponding period last year.

It should be noted the 2007 quarter included certain income tax benefits which will not be available to the Company as a stand-alone organization. The impact on diluted earnings per share of such benefits is $0.15.

Addressing our full-year financial results, revenue for 2008 totaled $96.6 million, compared to $104.7 million in 2007. Consolidated net income was $3.5 million, or $0.98 per diluted share, compared to $5.4 million, or $1.51 per diluted share, in 2007.

Prior to the September 30, 2008, separation from iGATE Corp., our results included certain income tax benefits related to our participation in our former parents' consolidated U.S. tax return, which are not available to us as a stand-alone organization. The impact of such benefits on net income totaled $1 million, or $0.27 per diluted share in 2008, and $2.1 million, or $0.59 per diluted share, in 2007.

I'll now turn the call over to Jack for an overview of our financial position as of December 31, 2008.

Good morning, everyone. As Steve pointed out, these are certainly challenging times for our industry and for Mastech. While much uncertainty exists as to the depth and duration of this recession, we are taking prudent steps to conserve cash and improve liquidity.

In early 2009, we implemented a wage and salary freeze across our entire employee population. Additionally, we suspended executive bonuses for all of 2009 and will temporarily halt all other corporate bonuses effective April 1. These actions will incrementally improve our cash flows and financial position in the short term.

Our balance sheet remains healthy, and at December 31, 2008, we had $4.4 million of cash and cash equivalents on hand, and no outstanding long-term debt. Also, we had access to approximately $8 million of credit under our existing revolving loan facility.

At December 31, 2008, our working capital levels increased to $8.9 million, compared to $7 million at year-end 2007.

Our accounts receivable DSO measurement improved to 39 days at December 31, 2008, compared to 42 days at year-end 2007.

As Steve mentioned, we increased our reserve for bad debts during the quarter by $258,000. While we have been successful in improving our DSO measurement, and we continue to keep a close eye on credit risk, we believe that, given existing economic conditions, it was prudent for us to reassess our overall accounts receivable exposures and, accordingly, increase our reserve balance.

We will continue to closely manage our receivables and adjust specific exposures as conditions warrant.

I'll now turn the call back over to Steve.

In summary, we believe that the economic environment will likely remain challenging for some time. We will continue to take proactive steps in the short term to support profitability and our financial health during these difficult times.

However, we will not lose sight of our mission of creating long-term value for shareholders. Our goal is to emerge from this economic crisis in an improved competitive position relative to industry peers, and we are cognizant of that objective in evaluating all actions that we undertake.

I'd like to thank everyone for their time and we will now open it up for your questions.

(Operator Instructions). William VanDevender, Covey Capital.

Good morning. Congratulations on a good quarter in a tough environment. I guess my first question is the cost structure of the business. Can you help me understand a little bit of the fixed versus variable costs there, and how low we can take SG&A this year?

Sure. In general, the nature of SG&A probably is roughly about 50-50 in terms of what we would consider fixed versus variable SG&A. But within that, that would presume in the variable that that includes all of our personnel expense. You know, excludes things like committed leases on rental space that we have, commitments we have within IT expenditures, and things of that nature.

So, that's the mix. Certainly, from the variable side, as you reduce those costs, that's all people. So, at some point, you can only take that down so far before really impacting the business.

We feel as though at this point we've brought a lot of what I would consider our support staff down to an appropriate level, given the size of the business. But if there was further erosion of the business, you can certainly, to some level, consolidate back on areas, to some degree, in finance and accounting, HR, and other of those overhead areas.

The other two key areas that make up a large portion of SG&A for us is our sales expense and our recruiting expense. As demand softens, we might look at carrying down recruiting somewhat further. Although from a sales expense standpoint, quite candidly, I would resist as much as possible making any reductions in terms of investment on the sales side of the business.

Certainly, we will evaluate the performance of all of our individual salespeople and we'll change people as we feel that's appropriate in fit, but I'd be more inclined to look to replace than simply cut that expense.

We think that we need to ultimately make sure we continue to stay active in the market, even to the extent that some of those activities today aren't yielding the results we'd want in terms of additional placements and increased billable consultants. It's helping us further establish our connection and relationships to clients, moving the messaging that we want to move with our clients into higher-value areas, such as some of the ERP skills we've been focusing on.

We want to keep that out there so that when the market does start to improve, we have established ourselves and maintain that continuity.

Thanks. And I guess on the consultant side, you mentioned down 70 in the quarter. Is there kind of a breakeven consultant utilization number that you have, that you need to maintain in order to maintain profitability?

I think that, in the past downturns, you've always kind of remained profitable on an annual basis from -- if I am mistaken there, correct me -- but is there a utilization number that you look for?

Our utilization rate is very, very high. We have a mix of salary consultants as well as W-2 hourly consultants. And the W-2 hourly consultants, they're pretty much project-specific. So when the project ends, they're basically free agents. In a sense, they are utilized at almost 100% on an ongoing basis.

If I understood your question correctly, though, I think Jack is talking about utilization in terms of when consultants are on payroll, how -- their billable nature. If -- do I understand your question more in terms of if we continue to decline in billable headcount, at what -- we declined 70 in Q4, if we continue to decline, at what total number of billable consultants would we start to -- would we reach breakeven, and is that (multiple speakers)

Right, right. That's where I'm going with that.

It's difficult to put a specific number, because certainly, as the number of consultants does decrease, we would make adjustments ultimately to SG&A. So it's really a little difficult.

At some point, there does come a point where, theoretically, you don't -- you may choose to not want to decrease SG&A just in order to maintain short-term breakeven levels, if you really feel it's going to hurt you. But I do believe we're, certainly at this point, not imminently near that point.

And then, where do you -- I guess, do you guys have a trough for gross profit? You said it went to 17.8% in the fourth quarter. Is there -- I guess, during past downturns, has it gone down to 15%, or kind of where do you see that bottoming out?

Well, two points. One is that gross profit percentage -- gross margin percentage each quarter does tend to vary a little bit quarter to quarter due to some seasonality, number one. So you'll see some ups and downs from that 17.6% when you move from one quarter to the next.

We have not -- I don't know that we have seen an actual floor on where that would go, although certainly it would -- I would imagine us not seeing ourselves getting certainly below the mid-teens levels, even in -- as this continues to progress in a difficult time, that's probably about, I would guess, where we would see ourselves looking at a potential floor.

Great. And Jack, just to make sure I'm correct on this, you have fulfilled your iGATE obligation, (multiple speakers) And you've still got $4.4 million in cash.

Yes. Our iGATE obligation was about $2.3 million, and we paid that -- those monies to iGATE in October.

Great. I think that's everything. Keep up the good work and I appreciate the color.

Mike McCoy, Cumbre Capital Partners.

Good morning, guys. Could you speak a bit about that $4.4 million cash on hand, and maybe the opportunities you see in the future to use cash, both built-up over the past quarters and also from future operations?

Sure. I think that right now, in the current environment that we're in, as I look around, there's obviously the potential for using that cash for investment into growing the business. It could be M&A-related investments, and you certainly have the potential over time of, if we feel it makes appropriate sense, some share buyback activity.

Right now, given the market conditions, I am not seeing a high-level of those activities occurring anywhere across our industry. That's even with companies in our space at frankly probably all-time low valuations from anywhere in recent times. I think that's just simply because right now, the conservative appropriate thing to do is to make sure that we reserve some of that cash to make sure that we start to at least get to the point where we see early indication of some uptick and improvement in the economy.

At that point, I think certainly we will look at investing some of that money as appropriate. But we have not defined yet a specific strategy.

I should also suggest that, in the interim, we will certainly consider opportunistically anything that may make sense to us as an opportunity to help increase what we feel would be the long-term value of the business. But we have nothing right now that's imminent in that regard.

Okay. And then no plans, at least right now, to issue a dividend?

No.

Okay. Going back to the idea of a buyback, so -- what would you guys like to see in the market in terms of stabilization in your business to where you guys would be comfortable looking at that more closely?

Again, just let me reiterate that once we see that stabilization, certainly that a buyback is one possible use of cash, but not necessarily at this stage do I want to suggest that's what we would be prioritizing as a use of those funds. It's just one of the things you could do.

As far as your question of what would we like to see to have a better feeling of stabilization, to then consider putting more of those dollars to use, I think at this point, certainly, we would want to see demand from our existing client base for our services to pick up at a level where, on a monthly basis, we saw the number of consultants that we had engaging on projects with those clients being a higher number than those that were completing projects.

So, positive net growth within our billable consultant base over at least, probably, a three- to four-month period of time, I believe would be a pretty good indication for us that things were starting to pick up in the right direction.

Okay. Sounds good. Thanks, guys, and good quarter.

(Operator Instructions). Scott Dinsmore, Cumbre Capital Partners.

Good morning, guys. This message is for -- or, this question is for Steve. I was curious about your competitive position. I want to get an idea from you just how you're -- what you're doing right now to stay competitive, and how you see it in general in the landscape, and whether or not the iGATE spinoff has been helpful or hurtful in terms of that.

Let me answer the second question first, if I could. In terms of the spinoff from iGATE, it really has been a neutral effect in terms of any of our competitive positioning in the marketplace.

We really had operated, for probably at least the last two or three years, fairly autonomously and separate from iGATE under the Mastech brand. There was periodic joint marketing activity between the two firms, but very, very minimal.

So the separation has not had a real effect on us.

In terms of the things we're doing right now to remain competitive, we are doing two things. One, certainly we're looking to make sure with our core customers that we are placing a significant amount of attention on those clients, to make sure that we sort of protect our position, and hopefully, even though total spend has been decreasing with many of those clients, we're working hard at increasing our market share within that spend, which we believe will then position us well when things turn up and their overall spend increases.

So there is a lot of focus on those clients.

We have also been focusing efforts on expanding relationships that we have in our partnerships with both Oracle and SAP on the ERP side. We just, at the start of this year, completed an enrollment in SAP's Partner Edge program. We've got relationships that we're building with some senior leadership there within a few particular niche areas, to target solutions within that SAP market space more aggressively.

And the same as it exists on the Oracle side, in working with many of the folks in Oracle. Oracle happens to be a customer of ours. We have partnered with them and subcontracted with them on some projects, but we also partner on doing a lot of work with our clients directly in the application space.

We feel that this, at least within this area, provides us an opportunity to be involved with work that will at least carry with it some higher bill rates, somewhat better margins, and so, we're putting more focus that way.

We're also looking to leverage right now in industry segments where we have client representation, where we feel that there will be at least better opportunity potentially than the economy in general.

For example, within the healthcare segments, a number of some of our more significant customers are involved within the healthcare industry, primarily on the payor side, but also some on the provider side. So we have been, again, trying to focus more of our efforts, not only on those clients, but in terms of new business development, targeting that industry sector, because we believe that, again, overall, there will be some additional funding there.

As it relates to the stimulus package, certainly putting some money in in terms of electronic medical records, work, and then beyond that, there are some mandates that will be coming down the road within the healthcare industry that are going to affect IT on both the payor and provider side. And we're trying to zero in on doing more of that activity as well.

(multiple speakers) And in terms of historically being competitive, what has been your few things that have made you guys do as well as you have, and hopefully will continue in the future?

The core strength of Mastech has always been our recruiting engine and our ability to access IT talent in ways that are a little different than the general industry at large.

This industry tends to operate in very much of a localized business model, where companies are based in a particular city, and they sell and recruit talent locally within those individual cities.

Whereas our historical bent -- value proposition has been to identify talent, frankly globally -- in some cases outside the country and bringing it into the U.S., in other cases individuals that are here in the U.S. -- that are either mobile in terms of being able to relocate for projects from one city to another, or for certain skill areas such as ERP where the talent is very typically working on a bill rate plus expenses mode.

So, because of that, we've operated without the overhead expense, the SG&A expense, of having physical offices in all cities of the country. Currently, we have really physical offices in three locations in the U.S., yet we do work all over the country. And it's in part because the talent we're recruiting, it's throughout the U.S. and can be moved around very easily.

We also have tended to provide, as a result of being able to do a broader search for talent, we believe we find superior quality talent and have been able to offer that to clients at a very solid value from a pricing standpoint, because of the fact that we use a very lean SG&A structure.

In part, that's -- as an example -- been driven by our having a number of years ago shifted the majority of our recruiting organization from being physically based here in the U.S. to global recruiting centers that we have in locations in India and in Bulgaria, for instance.

In these areas, we're able to maximize our spend on recruiters by having individuals who are, on average, going to be lower expense than recruiters here in the U.S., so we can get more of them for that same investment dollar.

So we continue to leverage that. In our industry, those recruiters are really accessing and identifying talent by utilizing tools on the Web, social networking, job boards. They're reaching out and connecting with the workforce we hire by phone and frankly, very often, through e-mail and instant messaging.

So that low-cost recruiting engine, or lower-cost recruiting engine, allows us to get a broader reach on a national basis.

Great. Thank you for the clarification.

There are no further questions at this time. I'll turn the conference back over management for closing comments.

We appreciate everyone's time today. If we have no other questions today, then, we would just like to thank everyone for joining us on our call. We'll look forward to sharing our first-quarter 2009 results with you in early May, and wish everyone a good day. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.