Mastech Digital Inc (MHH) 2012 Q2 法說會逐字稿

Greetings and welcome to the Mastech Holdings, Inc. second-quarter 2012 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 from Mastech Holdings, Inc. Thank you, Ms. Ford Lacey. You may now begin.

Thank you, operator and welcome to Mastech's second-quarter 2012 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 in 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 2011 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 second-quarter 2012 results.

Thanks, Jenny and good morning, everyone. Revenues for the second quarter of 2012 totaled $25.3 million, or approximately 14% higher than second-quarter 2011 revenues and represented about a 4% improvement over first quarter 2012 top-line results.

Our IT operations continued to see solid activity levels during the quarter as we grew the number of consultants on assignment by approximately 5%. Market conditions in our Healthcare operations remained positive and we were able to grow revenues on a sequential basis for the eighth consecutive quarter.

We did make a decision during the second quarter not to pursue an existing low-margin service offering, which will have some impact on our third-quarter Healthcare growth rate. It will have no impact on bottom-line results.

Gross profits for the second quarter of 2012 totaled $4.8 million, or 19.1% of revenues, compared to $4.4 million, or 20.1% of revenues during the same period last year. While our second-quarter margins improved nicely over first-quarter 2012 margins of 18.2%, we continue to see supply side pricing pressures in the form of higher consultant compensation during the quarter. The expansion in overall gross profit dollars reflects a significant increase in global consultants on assignment in the second quarter of 2012 compared to the corresponding 2011 period.

SG&A expenses increased to $4.1 million and represented 16% of revenues in the second quarter of 2012 compared to $3.8 million, or 17.3% of revenues in the quarter one year earlier. The increase in SG&A expenses reflects the expansion of our offshore recruitment centers and expenditures made in the most recent quarter to drive process improvements throughout our recruitment organization.

Net income for the second quarter of 2012 was $458,000, or $0.14 per diluted share, compared to $382,000, or $0.10 per diluted share in the corresponding period last year.

Addressing our financial position, at June 30, 2012, cash on hand totaled $1.7 million. We had no outstanding debt and access to approximately $15.3 million of credit under our $19 million facility with PNC Bank. Additionally, the quality of our trade receivables remains high. At June 30, 2012, our accounts receivable days sales outstanding measurement was 50 days and our receivables aged in excess of 90 days represented less than 1% of our total outstanding AR balance.

I should note that our cash balances during the first six months of the year declined by approximately $4.1 million. This decline reflects two primary areas of cash usage, both of which we view as very positive for the Company. First, we spent $2.5 million to repurchase approximately 12% of our outstanding common shares in March of 2012. And secondly, we invested $2.4 million in operating working capital to support our continued revenue growth.

The share repurchase program will prove accretive to earnings per share during 2012 and our investment in operating working capital is directly attributable to the growth trajectory of our business, something that we would like to continue to see from quarters to come. I will now turn the call over to Kevin for his comments.

Thank you, Jack and good morning, everyone. To start, I would like everyone to know I am really pleased with Mastech's performance in the second quarter of 2012. I am excited to discuss 14% year-over-year top-line growth. I am just as impressed that we were able to demonstrate the ability to convert top-line revenue growth to bottom-line earnings.

As you know, year over year, we grew the Company bottom line by 40% in Q2 as compared to Q2 of 2011. Preliminary industry data suggests that Mastech continues to grow our business at a faster rate than the industry at large. This growth performance is an important measure to me as we assess overall performance of the business and more importantly as we decide where we focus our energy, effort, capital and investment for the future growth of the Company. At this point in time, I would like to offer a rousing well done to the team at Mastech for continued better than market growth performance.

With that said, in addition to the day in and day out operations of the business, much of our focus during the quarter has been on strengthening our organization for future performance. Let me share with you some developments with respect to three major initiatives.

Number one, the deployment of our new leadership structure. As I stated during our last earnings call, we were in the process of completing a deep dive of our sales and recruitment operations within our integrator IT channel. This action followed changes made to this channel's leadership structure in March.

I also stated on our last call that I was hopeful to share with you our solution to this assessment during our next earnings call. Accordingly, I am pleased to announce the following changes to our executive management team. First, Ed Meindl has been promoted to the newly created position of Chief Operating Officer for the majority of our IT business segment. Prior to this promotion, Ed was Vice President of the IT alliances and MSP business segment where he compiled an impressive track record of strong growth and improved profitability.

Ed's a 16-year veteran of Mastech and has touched each of our sales channels and nearly all of our customers throughout his career. So the position of COO is a perfect opportunity for the Company to better utilize Ed's knowledge and proven abilities. In this role, Ed will have accountability for all of sales and all of recruiting for both our integrator and MSP sales channels.

Secondly, Sameer Srivastava has been promoted to Vice President of our alliance channel. The alliance channel focuses largely on the needs of other staffing companies and on the remarketing of existing field consultants.

Prior to this promotion, Sameer served as the Sales Director of these operations where he developed a strong sales and marketing team and he cultivated operational processes that have been responsible for this channel's success.

In addition to sales and marketing, Sameer now has accountability for recruiting for the channel as well. Sameer and the majority of his team operate the business from our Noida location in India.

Lastly, on the Healthcare side of the business, I am pleased to announce the promotion of Risher Dumpit to Vice President of our Healthcare business segment. Risher was brought into Mastech Healthcare in 2010 to establish a presence in Chicago and to help develop and grow our therapy service offerings.

This promotion acknowledges Risher's leadership, his in-depth knowledge of the industry and the value that he has brought to our Healthcare organization and our Healthcare customer base over the last two years.

These promotions round out the Mastech executive team. You may note that the team is a bit smaller than the team was when I assumed the CEO position. You would be very, very right in that assertion. I contend we now have the right people in the right roles for Mastech to continue to grow profitably. Profit and loss for the Company is now localized in these three experienced industry leaders. My belief is the Company is now well positioned and well focused to drive the organic component of our growth strategy over the next 30 months.

Number two, our recruitment improvement initiative. Another area of considerable attention has been to improve the capability and effectiveness of our global recruiting team. As I mentioned on our last call, we have been materially ramping up our recruitment organization over the last 180 days to better address our customers' needs and demands.

I also told you in that call that progress on the recruiting front is not happening as fast as I expected it to happen. I personally made several trips to our India-based recruitment centers in Q2 and I'm pleased to say my belief in the business model has been totally reaffirmed by the talented people I met there.

Additionally, the business made it perfectly clear to me that opportunities exist to drive significant productivity gains from our operations there. To that end, during the quarter, we deployed a well qualified team, which was empowered to identify and drive improvement in all aspects of our recruiting operations from the technology and processes that we deploy to the way we supervise and train our resources.

The results of the initiative to date have been enlightening. As we enter the implementation phase of the project, I am confident we will end the year with a more effective and scalable recruitment organization than the one we operated at the start of the year.

Number three, our gross margin expansion initiative. In last quarter's call, I told you that even though I was pleased with Mastech's financial performance overall, gross margin performance wasn't meeting my expectations. In the second quarter, we did a deeper dive into our IT business's gross margins. Step one of actioning our learnings from that deeper dive has been to establish minimum margin parameters and approval processes related to each of our sales channels. These new processes apply not only to new assignments, but also to extensions of existing assignments as well.

Needless to say, this is a delicate subject in our business and frankly in any business. I do expect some margin compression as a result of our increased focus on the high-volume sales channels of our IT business. We are committed to working gross margins in the second half of 2012 and we are committed to doing that contract by contract and customer by customer. We are also committed to a disciplined approach for accepting and retaining business, which meets our profit content objectives.

Lastly, with macroeconomic uncertainty likely to remain with us for the balance of 2012, we will focus on creating additional value for our clients and shareholders by continuing to make improvements to our organization regardless of the prevailing economic conditions in which we operate.

Great companies outperform their industry peers in good times and in bad times. Outperforming the market is a critical component of Mastech's longer-term strategy. Thank you. At this point in time, I would like to open it up for your questions.

(Operator Instructions). David Polonitza, AB Value Management.

Hi, gentlemen. I have a couple of questions here. If you could comment at all on how are your customers accepting the supply side issue that you are facing. You commented a lot on the first quarter. I just wanted to see how the progress was going on that.

Let me try that and Jack, feel free to add. I think it has been tough to be fair, David. I think with the world as it is economically, our customers are not real happy to hear that the cost of talent is going up. So we have worked really hard in the quarter on our gross margins with a number of customers. We have worked very hard on existing assignments and we've put through bill rate increases on existing assignments. Those were tough discussions. They weren't pleasant, but, in many cases, our customers recognize the fact that the marketplace is changing a bit for talent. And listen, at the end of the day, IT employment in the United States is at its highest point in the history of IT employment in the United States today. Today is the high point and I suspect tomorrow will be better than today.

The curves crossed in January of this year for employment, for IT folks in the US and we are now well above where we were in July of 2008 and July of 2008 was well above where IT employment was before the bubble burst in 2001. So our customers are smart and they understand the marketplace. They have a set of business requirements that they have to manage to as well. So those negotiations are always tough, but again our customers are smart and no one wants to cut off their nose to spite their face.

Sure. One other question. You mentioned or Jack mentioned 5% sequential growth on IT -- or you mentioned 5% growth on IT consultants. Was that year over year or sequential?

That is sequential. That is our billable headcount at the beginning of the quarter compared to our billable headcount at the end of the quarter.

Okay. Where are you guys seeing your growth? Is it from bigger clients or is it from some of the smaller projects?

I would suggest that our growth is coming from bigger customers and it is coming from some focused work that we have done in 2012 with some of the smaller integrator customers.

Would you care to comment -- you commented on the macroeconomic environment, but what are you guys seeing on the ground in your industry? Is Mastech able to maneuver that environment better than some of its competitors? Or because of the IT segment itself, it has somewhat so far isolated the industry from some of the other employment issues going on in the economy?

Yes, so let me -- again, as I said a minute ago, IT employment is at a high point in its history in the United States right now. So the industry itself is absolutely at a high point. I think -- here is a perspective. You can either agree with this or disagree with this, but -- and I am pretty sure I am going to be -- in fact, I know I am going to be very, very close to exactly accurate. I believe that, as of Monday of this week, a bit more than 20% of the S&P 500 had reported its earnings and over 70% of the reports had those companies that had reported beating bottom-line estimates and about 40% beating top-line estimates.

Historically, 60% to 62% beat bottom-line estimates. So the fact of the matter is, even in this kind of strange economic time, the S&P 500 was operating at historical highs in terms of companies beating earning estimates, but not generally speaking beating revenue estimates.

So what it tells me is companies have done a really good job of managing the cost side of their business in 2012 as compared to historical performance and companies have cash. But given the economic situation, people are not hiring full-time as much as they might in times gone by. So I believe that bodes well for our industry and I think it bodes well for Mastech because we are actually fairly nimble. We could move reasonably quickly. We have an A list of clients and that A list of clients is actually beating estimates so they have money and have projects that have to get done.

So when you bring all of those things together, I think at the end of the day, we sit in a pretty advantageous position. And again, we are a bit smaller than some of the other public companies in this space. So for us to grow 14% might be a little bit easier than for manpower to grow 14%.

Sure. And I will leave you with a last thing here. If you could just comment -- there was some performance shares granted recently. The vesting schedule on that and are you guys still open to open market purchases of stock going forward?

So I am not sure I understand are we still open to open market purchases of stock, David. Can you help me with that?

Before you conducted the tender offer, there was some -- you guys were purchasing shares.

Oh, we were repurchasing shares, yes.

Yes. So are you still open to doing that?

Absolutely. Jack, what do we still have outstanding from -- when we initially said to the market that we were going to repurchase shares, we announced the 750,000 share repurchase program. I believe that we probably have about round numbers 100 --

-- 77,000

Okay, that is probably better than round. 177,000 still outstanding.

So we have the flexibility to repurchase up to another 177,000 through the end of the year.

And yes, we are absolutely open to that. We believe we are a good investment.

And the shares that were granted in July, there was some performance shares. What is the vesting schedule on that?

The vesting schedule is related directly to our three-year plan that our Board approved in December for 2012 through 2014. And the vesting schedule is directly related to EBITDA targets for year-end 2013 and year-end 2014. So I think in total, we have 160,000 performance share units that were awarded in July across the directors and the management team of the Company. 80,000 of those 160,000 vest on the attainment of a pretty aggressive EBITDA plan at the end of 2013. And then the second tranche vests again on the attainment of again another pretty aggressive EBITDA plan scheduled for 2014. I would be happy to take you through the details of that if you are really interested, David.

No, that provides what we were looking for here. I appreciate your information. Good quarter and I look forward to the future.

Great, thanks for the questions.

(Operator Instructions). There are no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Well, listen, thank you very much for attending the call and we look forward to sharing our third-quarter 2012 results with you in October and have a great day, all. Thanks for tuning in.

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