Mastech Digital Inc (MHH) 2011 Q4 法說會逐字稿

Greetings and welcome to the Mastech Holdings, Incorporated, fourth-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, Ms. Ford Lacey; you may begin.

Thank you, operator, and welcome to Mastech's fourth-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 Kevin Horner, 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-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 Jack for a review of our fourth quarter and the full-year 2011 results.

Thanks, Jen, and good morning, everyone. Revenues for the fourth quarter of 2011 totaled $23.9 million, or approximately 18% higher than fourth-quarter 2010 revenues and represented a 2% improvement over the third quarter of 2011. Our IT operations continued to see solid activity levels during the quarter, when taking into consideration Q4 seasonality. Market conditions in our healthcare operations remained positive, and we were able to grow revenues by over 6% sequentially.

Gross profit for the fourth quarter of 2011 totaled $4.6 million or 19.3% of revenues, compared to $4 million or 19.7% of revenues during the same period last year. Our gross profit expansion reflects a significant increase in our billable consultants on assignment in the fourth quarter of 2011 compared to the corresponding 2010 period.

Our gross margin decline was largely due to lower direct hire fees in the 2011 quarter compared to 2010, and a change in the mix of our IT business towards our higher-volume sales channels. These channels generally carry lower gross margin opportunities.

SG&A expenses increased to $4.2 million in the fourth quarter of 2011 and included severance expenses of $301,000 related to the elimination of several executive positions during the quarter. Excluding these severance charges, SG&A expenses represented 16.2% of total revenues in Q4, down from 16.7% in the third quarter of 2011.

Net income for the fourth quarter of 2011 was $253,000 or $0.07 per diluted share, compared to $304,000 or $0.08 per diluted share in the corresponding period last year. It should be noted that the severance charge in the 2011 quarter impacted EPS by $0.05 per diluted share.

Addressing our full-year results, 2011 revenues totaled $89.4 million and represented a 24% increase over 2010 revenues of $71.8 million. Gross profits were $17.5 million in 2011 compared to $14.1 million in 2010. Gross margins were 19.6% for the full-year 2011, and that was in line with last year's GM performance.

Consolidated net income in 2011 totaled $1.1 million or $0.30 per diluted share, compared to $663,000 or $0.18 per diluted share a year ago.

Addressing our financial position, at December 31, 2011, cash on hand totaled $5.8 million, we had no outstanding debt, and we had access to approximately $13.7 million of credit under our amended credit facility with PNC Bank. During 2011, our cash balances declined by approximately $600,000 from a year earlier. This decline reflected $1.2 million of investment in operating working capital to support our revenue growth and $566,000 used to execute on our share repurchase program.

Lastly, it is important to note that the quality of our trade receivables remains high. Our accounts receivable DSO measurement improved to 47 days at December 31, 2011, compared to 50 days a quarter ago. Additionally, receivables aged in excess of 90 days at December 31, 2011, represented less than 1% of our total outstanding AR balance.

In summary, our strong financial position and access to capital gives us the financial flexibility to capitalize on strategic opportunities that may prevent themselves in 2012. I will now turn the call over to Kevin for his comments.

Thank you, Jack, and good morning. 2011 was a very successful year for Mastech, not only in terms of our strong financial performance, but also in terms of positioning the Company for future successes. Please allow me to highlight some of Mastech's 2011 key performance measures.

We organically grew top-line revenues by 24%, which is roughly double our industry's growth rate for 2011. We increased our billable consultant base during the year by 99 consultants, a 22% increase from where we started in January of 2011. Additionally, we had positive billable consultant growth for Q4, for the first time since 2005.

As you know, the fourth quarter is historically characterized by high project completions and is also impacted by holiday and year-end seasonality. Even with this, Mastech grew both revenue and consultants on billing in the quarter. We maintained our gross profit margins while shifting our mix of business more towards our higher-volume sales channels.

We grew diluted earnings per share by 67% over 2010 results, despite incurring severance charges during the year that equaled $0.07 per diluted share. We strengthened our balance sheet, and access to capital has never been better for the Company.

As I stated in our last quarter's call, my focus in Q4 would be two-pronged. First, to define and set in motion our three-year strategy for the business; and second, to assess our execution effectiveness throughout the organization, largely focusing on people, processes, and our clients. I also stated that while I didn't envision major directional shifts, I did believe there would be some adjustments to how we did execute.

With that as a backdrop, let me share with you some of the actions that were implemented during the quarter. Number one, we made several changes to our senior management organization which resulted in the elimination of two executive positions. Cost rationalization, consolidation, customer focus, and improved organizational effectiveness were the primary drivers behind these moves.

Number two, we upgraded our offshore recruitment facilities in both Bangalore and New Delhi. Our new aesthetic facilities will provide our offshore organization with state-of-the-art infrastructure, workforce amenities, and adequate space for expansion.

Number three, we increased our offshore recruiting staff by approximately 20% during the quarter. This investment is largely to support our higher-volume sales channels where we have robust demand opportunities.

And number four, we closed two branch operations that have drastically underperformed expectations. Our detailed cost/benefit analysis of both operations highlighted the need to act quickly and decisively for the good of both the business and the people.

In summary, our 2011 performance indicators foreshadow our expectations for the business in 2012. One theme from 2011 repeats over and over again in our three-year strategy and in our 2012 operating plan -- growth. We grew both top line and bottom line in excess of industry averages in 2011.

We would expect to continue to outperform the industry in 2012 as well. There is no question that we will face our share of challenges during the year but I believe we have a talented and dedicated team that is up for the task.

At this time I would like to open it up for your questions.

Daniel Zeff, Zeff Capital.

Hi, guys. Nice performance. Thank you.

Thanks, Dan.

Can you discuss the gross and net margin outlook based on those changes you've made in the quarter? In other words, did we see -- or have we seen the results of those? And do you expect margins to improve based on those changes and future changes?

Well, Dan, our SG&A structure right now, if you exclude our one-time charges, for fourth quarter they were about 16.2% of revenues. That level is pretty much where we would see 2012 coming in at.

We are increasing our recruiting staff. We are looking to increase some sales staff. That may offset some of the savings that we had in executive comp.

But 16.2%, somewhere around that range is about as good as it gets for 2012, I would suggest.

Yes, Dan. Can I add one thing to that? I absolutely agree with Jack. 16.2% is a good thing to have in one's head.

We told you in the last call that we expected further leverage on our SG&A costs. I think what you see from us, from our actions, that we did some consolidation on the executive level of the Company, and we have taken some of those savings and we are immediately reinvesting it in the production end of the organization. And the first piece of that investment goes directly to our recruiting base.

As Jack said, we are likely to make a further investment in from the sales perspective as we move out through 2012. But demand and performance will dictate if and when we do that.

Can you discuss the gross margin?

I think that -- I'm not sure I understand your question other than our expectation around gross margin is we would expect fairly flat. You saw that in 2011; 2011 was fairly flat against 2012. And I expect it to be fairly flat as we move into -- against 2011 against 2010; and I expect 2012 to be flat against 2011.

That's the question. Thank you. Can you discuss -- and I thank you guys for rationalizing your cost structure; I think you are doing a great job.

Can you discuss inorganic growth opportunities? Is it a huge focus? And if so, why? Because it looks like you are growing pretty nicely organically.

Yes, as I said in our last call and I mentioned it again in my remarks today, I did not expect major directional shifts in the Company, and I don't think you are seeing that out of us.

What I think you are seeing is a recognition of kind of a stick-to-your-knitting approach that says Mastech is a centralized recruiting business model. We are good at it; we are going to get better at it; and we're going to focus ourselves there, because we believe we can grow the Company organically through that model.

So, Dan, you have got it spot on that we believe we will grow organically, and that is our principal focus in 2012. I will add to that, given our financial position, we will be opportunistic. We have not stopped looking at the market, and we will be opportunistic.

I will say we will be opportunistic on both fronts of our business. So we will continue to look at opportunities on the healthcare staffing front, particularly in the niches where we have found performance to be pretty solid. And we will be opportunistic on the IT front, but I will say on the IT front our focus will be on things that are like us, as opposed to the branch staffing model that might have historically been the model that the Tech Systems or the Hudson Highlands or the Robert Halfs would have approached the market through.

If you haven't read it, Jim Childs did some really good analysis on the two types of staffing company models. I would suggest it is worth a read because the analysis really spits back out that either the centralized recruiting model or the branch model, the best-run ones of those companies can grow rapidly, far outpace market, and can generate significant operating income in the 5%, 6%, 7% range. So we believe we are a centralized recruiting model, and we are going to make that one work, guys.

Thank you. Finally, when you say outperform your peers, I assume that means ongoing growth as the others are growing too. Is that fair to say?

That is our intent, that we expect to outpace the market. So as an example, staffing industry analysts would project 2012 growth for the IT staffing industry to be in the 10% to 12% range and for the healthcare industry to be in, I believe, about 8%. And we would expect to outpace both of those growth rates.

Great. I assume your stock price will take care of itself if you continue to make this much money. But that said, are you going to be more aggressive with a buyback, or are there other shareholder return opportunities available?

We -- from the management's perspective of the Company and the Board's perspective -- will continue to look at ways to accelerate shareholder value. As you well know, we announced in December of 2010 a share buyback program of 750,000 shares, which we began to buy in February of last year after we announced.

We were able to repurchase about 140,000 to 150,000 shares. So we have roughly 600,000 shares that are left in that announced repurchase plan. So our intent is to continue to work that buyback program.

Yes. In Q4, Dan, we were able to purchase approximately 66,000 shares in Q4 at an average price of $3.76.

Great.

There are no further questions at this time. I would like to turn the floor back over to management.

I thank you for turning us back. I have -- there were two questions that were asked in our last call that I wanted to make sure that I didn't leave unaddressed.

So, number one, there was a bit of a discussion around guidance, and our perspective and our Board's perspective is still one of which we do not intend to provide guidance. Now, we gave you some discussion today about the forward look of our business, but generally speaking we are going to draw the line at -- are we willing to provide guidance or not. And the answer to that, from our Board is -- we will continue to not provide guidance.

So that is number one. I wanted to make sure that I covered that, because I committed to going back to the Board on that one.

The second question that came up last time that I said -- guys, give me a quarter and at least let me get a little bit deeper into the business, was about innovation and how we had brought innovation to bear inside of the business. Let me for one minute talk about where I believe our improvement opportunities lie, particularly in 2012.

So in 2012 our focus will really be on our recruiting engine, and there is really a two-step process to our recruiting engine. You heard a piece of it, with what we have already done in the fourth quarter, which was really about capacitizing. Right? In many respects.

I am a 30 year old -- a 30-year manufacturing guy. So we had to go fix our recruiting plant, and we did a bunch of that from a capacity standpoint in the Q4 of 2011, and we will do a bit more in Q1 of 2012.

And then for the majority of 2012, our focus on our recruiting side will be about productivity. It will be about productivity of our recruiters and productivity of our entire system.

And as soon as we begin to start to focus on productivity, the innovation question comes squarely into the forefront. We believe that one piece of our productivity is all about people and process; and we believe the other piece of productivity that we'll drive in 2012 is really about automation and leveraging technology to make our folks more productive.

Then lastly, the third place that I believe that innovation will play much more heavily as we move forward over 2012 and beyond is in the way we connect with and stay connected with our consultants and our potential constituents out there in the marketplace. I believe our industry will move much more quickly over the next two years to do a better job of using available social media tools to better connect with our constituent base.

So, guys, I didn't want to -- I appreciate you listening, because I didn't want to leave either of those questions unanswered from our third-quarter call. So, operator, I'm done now. Thank you.

We have another call from -- another question from Daniel Zeff.

Thanks, Dan. Go ahead.

I am going to just go one more too here. Thanks for giving the innovation answer. Appreciate that too.

Can you discuss iGATE and your relationship? Is that growing and fueling your growth? And can you discuss the economy from your perspective, presently?

Well, I can very clearly talk about iGATE and the fact that we -- the two companies Mastech and iGATE aren't related. There is obviously a common bond between them in that the cofounders and cochairmen of Mastech are the cofounders and cochairmen of iGATE. But from a business standpoint and a go-to-market strategy, we are not related.

And our business models are very, very different. Right? So, yes; I guess the easiest way to say that is we are not related.

Then the marketplace? Dan, I am not a prognosticator, so we take a lot of our thinking around the market straight from the folks who actually do the survey work. I believe in our industry the Staffing Industry Analysts folks, the SIA folks do a really, really nice job. They stay in touch with the industry, and I actually believe their growth projections.

The only other thing I will say about the industry -- and this is specific to the IT industry -- is the IT jobs in the US today approach an all-time high and are tens of thousands of jobs away, it is either 10,000 or 20,000 jobs away from the all-time historic high, which personally I believe will be eclipsed sometime between Q1 and Q2 of 2012.

So at the end of the day, IT jobs have never been more plentiful than in 2012 in the United States. I know that may come as a surprise when you think about what happened to the economy through the downturn of late '08, early '09, what might have happened when the tech bubble burst back in 2001, 2002.

But the fact of the matter is today is one of the healthiest times for IT employment in the United States in history. And my prediction would be 2012 will play out to be the most -- will play out to be the year where the most IT jobs existed in history in the US.

Does that include the Catch-22 of job availability versus job qualifications? In other words, there is a lot of -- I hear in the industry a lot of difficulty finding the right people.

Oh, I don't know. I've got to tell you, I think we've -- I'll tell you what, if you hear that, my phone number is 412-787-9503. Send them my way, and we will find them the right people.

Okay. Thanks a lot.

There are no further questions at this time.

Well, listen, I would like to thank everyone for joining the call today, and I look forward to sharing our first-quarter 2012 results with you again in late April. So thanks again, folks.

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