Mastech Digital Inc (MHH) 2011 Q2 法說會逐字稿

Greetings, and welcome to the Mastech Holdings Incorporated second-quarter 2011 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, Incorporated. Thank you, Miss. You may begin.

Thank you, operator, and welcome to Mastech's second-quarter 2011 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 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 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 2010 annual report on Form-10, 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, Jenna, and good morning. On today's call, I will make my opening comments. Jack will then review our financial results for the second quarter of 2011 and I will rejoin the call for the Q&A.

I am pleased to inform you that second quarter was a very nice quarter for us from both a financial and an operational standpoint. Market conditions remained positive during much of the quarter and we continued a trend of expanding our billable consulting base in both our IT and healthcare operations.

We are continuing to see clients spend on information technology services, which generates operational improvements and provides financial payback despite many economic uncertainties. From a sales perspective, we continue to strive to better service our clients and enhance our reputation as a trusted provider of staffing professionals.

During the quarter, we added staff in our branch operations to better service our clients and made progress in increasing our speed to market with respect to our offshore delivery model.

On a year-over-year basis, we have increased both our revenues and gross profits during the quarter by more than 30%. Our SG&A expenses in the quarter as a percentage of revenue declined from previous quarters as investments in our sales and recruitment organizations start to gain traction.

With the rate of investment in SG&A likely to decline during the remainder of 2011, we are well-positioned to drop more revenue dollars to the bottom line. This is reflected in our second-quarter 2011 financial results, which Jack will detail momentarily.

Operationally, the reporting realignment of our recruitment organization, an initiative that we undertook at the end of last quarter, is showing much promise. Our stated objectives of increasing organizational accountability, improving efficiencies between sales and recruitment and encouraging creativity have surpassed my expectations at this early stage.

While the second half of the year is not without macroeconomic challenges, I am confident that Mastech's improving competitive position in the marketplace will play out well for its shareholders over the second half of 2011 and into the future.

I will now turn the call over to Jack to review our second-quarter 2011 results.

Thanks, Tom, and good morning, everyone. Revenues during the second quarter of 2011 totaled $22.1 million, or approximately 31% higher than second-quarter 2010 revenues. Our IT operations experienced solid activity levels during much of the quarter and we were able to grow our IT global consultant base by over 12%. Our healthcare business continued to grow its top line for the fourth consecutive quarter, as many of our healthcare service offerings are showing signs of improvement.

Gross profits for the second quarter of 2011 totaled $4.4 million, or 20.1% of revenues, compared to $3.4 million, or 19.9% of revenues, during the same period last year. Our gross profit expansion reflects a significant increase in billable consultants on assignment in the second quarter of 2011 compared to 2010. The slight margin increase was largely due to improved margins in our healthcare business and higher direct-hire fees during 2011 versus 2010.

SG&A expenses increased only slightly during the second quarter when compared to the previous quarter and represented 17.3% of total revenues. In the corresponding period of 2010, SG&A expenses were 18.8% of total revenues. And as Tom mentioned, we would expect the rate of investment in SG&A as a percent of total revenue to decline further during the balance of the year.

Net income for the second quarter of 2011 was $382,000, or $0.10 per diluted share, compared to $109,000, or $0.03 per diluted share, in the corresponding period last year. Addressing our financial position, at June 30, 2011 cash on hand totaled $5.3 million, we had no outstanding debt and we had access to approximately $9.3 million of credit under our existing revolving loan facility.

During the quarter, our cash balances increased by $500,000 despite a $600,000 increase in our accounts receivable balances to support revenue growth. Elements of second-quarter 2011 cash flows included net income, non-cash charges and the impact of a two-day improvement in our Accounts Receivable DSO measurement.

Finally, I do want to mention that we are currently in the process of securing an expanded credit facility with PNC Bank. This new facility will replace our existing facility, which is set to expire on October 15, 2011, and we would expect to have this new facility in place by the end of third quarter.

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

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

(Operator Instructions) Mariusz Skonieczny, Classic Value Investors.

Good morning, guys. I just wanted to say congratulations on this fabulous quarter.

Thank you.

It is very encouraging. And I just wanted to say before I ask a question, from my angle here as an investor, it is just so encouraging to see the management perform what they said they would, and it is just fabulous to see that.

But going forward, last quarter, we talked a little bit about how you announced that you might possibly do some buybacks. Did you have a chance at all to acquire some shares? I know you have some restrictions, but were you able to pick up any shares?

Yes, we were. We were able to pick up over 28,000 shares in the time frame in Q -- in that time frame from last quarter. And overall since we started the program, we have been able to pick up over 31,000 shares. So we are aggressively continuing to do that as best we can within our restrictions, but we did much better this quarter than last quarter.

And it is nice that the market impatience through the sales allowed you to pick it up at a much better price than if you were to buy it after the run-up.

That is correct. But at the same time, we just look to continue to buy as best we can within our restriction. But (multiple speakers).

Are you able to disclose what average price you paid for some of these shares during the quarter?

We do. It is disclosed in our quarterly SEC statements on Form 10-Q.

Okay. I didn't (multiple speakers) it yet. I see. Okay. I'm going to let someone else ask a question, and then I will come back to ask another one.

Great. Thank you.

[Jeff Parklow], a private investor.

I would also like to congratulate you on the terrific quarter. Thank you. In the news release this morning and also on the conference call, you stated that you expect your rate of investment to decline from previous quarters. Does that refer -- does that mean that you are not planning to open any additional offices, like you recently did in Chicago, or are you referring to something else?

No, what that refers to is all the investments that we made aggressively throughout 2010, which were quite aggressive in my opinion, we are starting to see those individuals really start to gain traction. We are always going to want to continue to invest in our business to keep the growth going. So in due time, if we need to open more locations, we will to keep our growth and our expansion going.

However, as we continue to grow our top line, more will fall to the bottom line, because the newer individuals that we hired back in 2010 and the office we opened up are starting to gain more traction and add more profitability to the organization.

So the spend will slow simply because the spend that we had done earlier is gaining more traction and more profitable per branch, as well as per individual.

Got it. Got it. Now, your net income for the quarter was $382,000 and that was 1.7% of sales. Are you satisfied with 1.7% profit margins going forward or do you have some other target?

No, 1.7% of revenue is something we are not satisfied. However, as we indicated in our release as well as I spoke to, those investment dollars from the revenue are going to fall more to the bottom line, which hopefully will increase our margin percentages at the bottom line. So as these individuals continue to get even stronger and as we continue to throw more to the bottom line from the revenue, our operating margin will increase.

So we would like to increase that over several quarters into the future. It won't happen all at once, but you will see it increase over several quarters.

Gradually. Okay. Thank you. Also, on your potential expanded credit facility, is the reason you're going for more credit related to a desire to look aggressively at acquisitions or for some other purpose?

It is a little bit of both. One is, of course, to have the adequate dollars for an acquisition, to help expand our organization. But as well as the fact as we continue to grow, if we need to open up more offices organically, if we need to continue to fuel our investment to keep the revenue growth going in the years to come, we want to have those dollars available for us.

Great, great. Okay, thank you very much.

Thank you.

(Operator Instructions) Mariusz Skonieczny, Classic Value Investors.

Tom, when you became the CEO of Mastech, you were able to turn the downward trend in revenues, and now we are seeing this over the past several quarters that you have been able to achieve this. But now do you expect this -- I assume you expect this trend now to continue going forward.

Oh, correct, correct. As I indicated, we are continuing to see our billable consulting base grow, which grows our top-line revenue. And we are in a growth organization; that is one of the reasons why we want to continue to, at a nice pace, feed our branch structure and our whole organization to continue to grow the top line.

Right. Now, considering that you just entered Chicago, which is a great market, and you've got to be here for an organization like yours, but when you reach revenues of, let's say, $25 million per quarter, on an annual basis, that would equate to $100 million.

But when I first looked at your Company, I thought that -- and I don't know if we are talking about guidance here -- but am I totally out of line thinking that within five years, you can be a $200 million company?

Well, as you said, we don't really give guidance. But at the end of the day, like you said, we opened up Chicago for the same reason you stated, to continue to expand in great markets, and hopefully that will take some traction and start to grow and add revenue dollars to our already existing revenue.

And then we hope to do it again. As long as economic conditions warrant it and we continue to get pullthrough in the markets that we have, we hope to continue to grow the business. I can't say it will be a $200 million, $300 or $150 million because I don't know that. But yes, our goal is to continue to grow top line as aggressively as we can.

Right. Now let's say you enter a market like Chicago, and next time -- in a year or 18 months from now, you might enter another market. But when you do go into a market like this, do you already have certain national accounts that you can automatically start servicing through a new office or do you basically start from scratch?

It depends, but from a lot of perspectives, our first choice is to get into a market where we already have existing business that we've inherited from an account, or we opened up and we have some stability coming in. That would always be our first choice.

Or number two is we could attract quality talent. As I have always indicated, this is a people business, and if we can attract quality talent to lead the office, to help us grow a marketplace, that have experience in that, we would do that as well. That is opening from scratch, but at least we have individuals that know the market, understand what I call the terrain of the market and our experience to help us expand that.

So one of the other, we will do. But yes, we are not afraid of going in purely as organic growth, but we'd prefer to do it with one of those two angles.

Right, right. I see. Several quarters ago, you acquired the healthcare company. And at the time that you acquired it, I believe you paid like 20% or 30% of sales. But at that time, there was not much bottom line. Are you seeing that business now turning profitable or -- and adding to the bottom line of the entire Company?

As I indicated when we purchased the organization, it was a distressed business. And our organization and Tim Bosse has done a really good job of working with the team out there to change those trends. The healthcare sector in staffing is still struggling a little bit.

But yes, we are starting to see better returns out of our Phoenix operation than we have in many years past. So it is getting in and heading in the right direction, and we expect more profitability in the future from that location.

Okay, I see. Do you have any acquisitions you are working on right now that we might see come through?

We are always working on things, but nothing that I can report -- I wish to report. But at the end of the day, we are working on them aggressively, but at this point I have nothing to report.

Okay, thank you so much, and once again, congratulations for this fabulous performance. And hopefully, we will have good news coming in the future quarters.

Appreciate it. Thank you.

Daniel Zeff, Zeff Capital.

Thanks again for doing a great job. You guys, it seems like this is a surprise from your perspective as well, in terms of your time to improve margins, and everything, frankly. Is that the case?

And behind that, can you talk a little bit more about the economic forces? It seems like from what we read that the economy is still in turmoil. But you are (technical difficulty). So can you discuss (technical difficulty) and what your customers are saying (technical difficulty)?

First off, as I indicated in my comments, we still believe we are in some economic uncertainties. We continue to work hard to better our sales performance, our accountability metrics. I am very proud of every employee that we have here at Mastech. They have worked very, very hard over the course of the several quarters and really the last two years to get to this point.

So I wouldn't really say I was surprised; I mean, I knew that at some point in time we would get there. I am very pleased with their performance and the team has really responded. And yes, the economic cycle has been a little up and down. There has been some good months and some bad months in this year.

But we stick to what I call our knitting. We are focused on continuing to bring in new business, we are continuing to focus on client and candidate relationships. We continue to focus on strengthening those relationships. And we can't control the economy; we can only control what we can control. So we focus on what we can, which is building relationships with both clients and candidates and growing our market share as best we can.

How many consultants do you have on billing now? I assume there are more now than there were at the end of the quarter.

Yes -- you mean the end of the quarter -- yes, we continue to expand our consultants on billing. And that is our big focus, is month after month growing our consultants on billing. But we are pushing up into the 560 range, which is a good number for us on consulting and billing, and we continue to focus on growing that every day; that is what we do.

Thank you. Is there such a thing as a competitive advantage in this business? It seems like others in the industry say, well, we can't do anything; it is just the economy. And the real question is -- are you taking business from other people?

That is really what we do every day. Our job, as I indicated, is to go out and build relationships with as many clients and candidates as we can. And that is what we believe is our competitive edge. If you attract good people, you hold them accountable, you put in good compensation plans that reward them for their successes, in the end that is really how you can get through economic ups and downs, and that is all we can focus on right now.

And so is there a competitive advantage? I am not really -- can say on that. All I can do is say as we can continue to outperform our competitors, we will gain market share.

And finally, are you self-sustaining now from a cash and balance sheet perspective, outside of financing transactions?

Yes.

Dan, we have never borrowed. Even though we had a $10 million revolver with PNC, we have never borrowed penny one.

Right. Okay (multiple speakers).

It is just to have future flexibility, and in particular, if we see an acquisition that enhances our business model, we could capitalize on that.

Thank you very much.

It appears there are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Great, thank you. I would like to thank everybody for joining the call today, and we look forward to sharing our third-quarter 2011 results with each of you in October. Have a good day.

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