Mastech Digital Inc (MHH) 2009 Q4 法說會逐字稿

Greetings and welcome to the Mastech Holdings fourth-quarter earnings call. At this time, all participants are in a listen-only mode. A brief 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. Ms. Ford Lacey, you may begin.

Thank you, operator, and welcome to Mastech's 2009 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 Tom Moran, Mastech's Chief Executive Officer, and Jack Cronin, our Chief Financial Officer.

I would like to remind everyone that statements made during this call are not historical facts but 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 markets in which we operate.

Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions 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 2008 annual report on Form 10-K filed with the Securities and Exchange Commission and available on 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 Tom.

Thank you, Jennie, and good morning. On today's call, I will make my opening comments about current market conditions and how we are positioning ourselves for 2010. Jack will then review our financial results for the fourth quarter and full year of 2009. I will then rejoin the call for the Q&A.

As reflected in our operating results, it has been a tough run for our industry over the last two years. Declining demand and pricing pressures have significantly impacted our revenues and gross margins forcing us to take some difficult actions with respect to adjusting our cost structure.

In the third quarter of 2009, many of our markets showed some signs of stabilization. During the fourth quarter, we saw some improvement in demand within certain channels and technologies. As such, our focus is shifting from retrenchment to making the necessary investments that will better position us to capitalize on a recovery in industry demand.

During the fourth quarter, we invested in both our sales and recruitment organizations. We improved accountability across our entire organization by better defining responsibilities and more importantly, performance expectations. We also took steps to divest of underperforming and non-core assets such as our brokerage operations unit. All of these actions are aimed at strengthening our ability to grow our core business in 2010, focus, accountability and execution. I am confident that these building blocks of success will have a positive impact on our operating results during 2010.

I will now turn the call over to Jack to review our fourth-quarter and full-year results.

Thank you, Tom, and good morning, everyone. Revenues during the fourth quarter of 2009 declined to $15.6 million compared to $23.1 million in the same period last year largely due to reduced demand for our services. While we did see some improvement in activity levels during the quarter, a high level of project ends more than offset this modest uptick in demand.

Additionally, revenues from our brokerage operations business declined to less than $300,000 in the 2009 quarter from over $3.3 million in the corresponding quarter a year ago.

Our gross profit margins in the fourth quarter of 2009 increased nicely to 19.2% compared to 17.8% achieved during the same period last year. Pricing continues to remain competitive despite some early signs of an improving economy. We did experience a favorable channel mix of business during the quarter, with less revenues coming from our lower margin brokerage operations business.

Additionally, we put in place minimum margin requirements when bidding on new assignments, which has also helped contribute to our overall GM improvement for the quarter.

Fourth-quarter 2009 SG&A expenses totaled $2.7 million and represented 17.3% of total revenues compared to $3.6 million or 15.6% of revenues in the same period of 2008. In the previous quarter, our SG&A expenses totaled $2.5 million, and as Tom mentioned, we invested in our sales and recruitment organizations during the quarter and expect additional investment during the first half of 2010 as we see more signs of economic recovery.

Net income for the quarter was $219,000 or $0.06 per diluted share compared to $289,000 or $0.08 per diluted share in the corresponding period last year.

Addressing our full-year financial results, revenues for 2009 totaled $71.1 million compared to $96.6 million in 2008. Our gross profit margins were in line with last year's performance despite significant pricing pressures experienced throughout most of the year. Consolidated net income was $1.4 million or $0.38 per diluted share compared to $3.5 million or $0.98 per diluted share in 2008. It should be noted that 2008 included certain income tax benefits derived from the Company's participation in its former parent's consolidated US income tax return. These benefits would not have been available to us as a stand-alone organization. The impact of such benefits on 2008 net income approximated $1 million or $0.27 per diluted share.

Addressing our financial position, despite the challenging economy, our balance sheet showed continued improvements over the course of the year. At December 31, 2009, our cash balances increased to $7.1 million and our tangible net worth increased to $11.3 million. We ended the quarter with no outstanding long-term debt and access to approximately $6 million of credit under our existing revolving loan facility.

In 2009, the Company generated $2.7 million of free cash flow compared to $2.8 million in 2008. Cash used in investing activities, principally capital expenditures, approximated $200,000 in both 2008 and 2009 and we would expect 2010 CapEx to be in line with those levels.

The quality of our trade receivables has remained in pretty good shape throughout the year. Our accounts receivable DSO measurement at December 31, 2009 was 46 days compared to 45 days a quarter ago.

In summary, we believe that our strong balance sheet will provide us with the financial flexibility that will allow us to capitalize on market opportunities as the economic recovery advances.

With that said, I'd like to turn the call back over to Tom for Q&A.

Thanks, Jack. Operator, at this time, I would like to open it up for questions.

(Operator Instructions) Bill Sutherland, Boenning & Scattergood.

Thanks. Good morning, Tom. Can you provide a little more color on your plans in the sales and recruitment areas in terms of the expansion you mentioned?

Sure, sure, good question, Bill. What we have done is we've taken our existing offices that we have which one is in Dallas and in Pittsburgh and we went out and hired more of a sales-focused individuals. We had put together a hiring profile that would be more of what I call a sales generation individuals. They are more time to accountability, more tied to a bonus-driven plan, and we put an extensive interview process in place and we went ahead and hired three people in our Dallas market. And also implemented a domestic recruitment programs which was also filed in Dallas, and the reason being is we want to complement our Indian operations of recruitment. That being said with local sales and local accountability within each market.

We also did the same in Pittsburgh. We also did the same in our Fremont, California office, and we are looking to do in the first quarter to close that out in DC. Really what the goal is there is to generate more localized sales focus in geographic markets, and we will continue to expand that as those become more and more profitable for us.

You are talking about the addition of not only having the sales, local salespeople, but some fulfillment capability right there domestically?

Correct. So that will complement with our Indian offshore recruitment program. So we feel we then position ourselves to be really very strong in the market compared to our competitors because we can recruit internationally and through -- from our Indian operations very cost-effective and they are very strong. We have been doing that for 20 years but complement that with more localized candidates which also lead to localized sales.

When I look at year-over-year in fourth quarter with the revenue, how much of the decline in the fourth quarter just reported was the result of downsizing or divestitures that you mentioned?

The brokerage ops in fourth quarter, the revenue decline, $3 million of it was from the brokerage operation business.

It was a sizable percentage of our decline.

$3 million of the total decline?

Yes.

And what has the revenue trend been like quarter to date, Tom?

For Q1?

Yes.

Well, the good news is we've experienced, as I said in my opening comments, demand has increased in December and January actually has been increased nicely for us. We feel confident that our sales efforts we put forth in the fourth quarter are really starting to come home to roost for us, although it's early. But trends are on the positive side for us for the first time in a long time and January is tough month.

But like anything, Bill, it's very early to tell but we are pleased with how January is coming out so far. Demand has increased and we're doing a hell of a better job on managing our ends.

But the one thing that I just want to point out is we did have some -- we had -- and it's fairly normal in our industry to experience a higher level of project ends at year-end. So we had a lot of projects that ended at year-end and the loss of that revenue stream isn't totally factored into fourth quarter. And it will be totally factored in to first quarter.

So despite some of the improvements that we are seeing in January and early February, we still have that revenue decline from fourth quarter that's going to work its way into first quarter.

So John, you are saying just look for the normal seasonality in Q1 in terms of the project ends and delays in project starts?

Yes.

At last, Tom, I will jump off, well, actually two things. I guess they are related. One is I know you are not doing real guidance, but if you could talk about possibly strategy and how that would impact or lead to the growth targets that we could look for? And then I wanted to ask about your priorities for use of cash. Thanks.

Sure. The first question is, as indicated before, we are continuing to work aggressively with our new sales folks and our new recruiters as well as the existing teams to really manage the accountability expectations we put forth and we feel as the year progresses on as the economy gets stronger and our demand continues to get stronger, we feel our goals will increase from quarter to quarter as well as we believe demand will increase from quarter to quarter. So we believe more towards the second half of the year we are going to be increasing our projections. Our goals will get met more in the second half. We will have our team established. And more importantly, we will have a stronger recruitment process in place that we can continue to take hold on that.

We also put in accountability expectations in for our recruiters as well. So as the year progresses, we believe our goals will increase and we will continue to increase our revenue stream as well as our margins as well as our profitability.

Jack, I don't know if you want to add anything on that before we go to the next piece.

No, that's fine.

One thing I would like to add -- one follow-on to that is will you in the process of building out, Tom, will we see some margin pressure for the next quarter or two?

We believe that the margin pressure will continue. We are getting smarter on the type of business we choose. We are being a little bit more demanding on having the right conversations with our clients, and that was one of the things we worked on in training is to make sure that we are being more confident in our delivery, we're being more positive of the skill sets are delivering to our clients, as well as being a little more confident on the margins when we place our individuals.

So although the pressure is still going to be there, we want to do our best to (inaudible) a little bit. And as I indicated before, Bill, I think as the year progresses, the margins will get better.

And the operating margins, I mean the investment in sales and recruiting no doubt is going to have some impact on our operating margins.

Similar to Q4 or -- I guess Q1 is going to be the toughest because of the seasonal lull.

Correct, that's what we would expect.

Okay, then on use of cash, Tom?

We are looking for to continue to invest organically as we come across high-quality sales associates and recruiting associates, we definitely want to invest in that. We do want to continue to expand geographically in other markets. At the same time as I indicated in the last call, we also are keeping our eye out to make sure that we continue to divest or diversify our offerings both on the IT side and making sure we're building more on a client base locally. So we'll do that organically as well as we are looking at to see if there is opportunity for us through an acquisition. As well as we want make sure that we look in the future to get into more of the higher end gross margin businesses that we feel the industry have specialty. So we will continue to look to diversify our offering as well.

And that is something that we will look to utilize our cash properly to help our business be more stable into the future and how we figure to do that would be to have more geographic locations, grow organically, and at the same time, diversify our offering by possibly through organic or through acquisitions as well as build and buy model, where we would buy small and then build it organically.

Great. Thanks for all that.

(Operator Instructions) Mr. Moran, there are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Thank you. I would like to thank everyone for joining our call today and we look forward to sharing our first-quarter 2010 results with you in April. Thank you again.

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