Mastech Digital Inc (MHH) 2012 Q4 法說會逐字稿

Greetings, and welcome to the Mastech Holdings Incorporated Q4 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 for Mastech Holdings. Thank you, Ms. Ford Lacey. You may begin.

Thank you, operator, and welcome to Mastech's fourth-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; Jack Cronin, our Chief Financial Officer; and Scott Aicher, our IT business Chief Operating 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 other 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 fourth-quarter and full-year 2012 results.

Thanks, Jen, and good morning, everyone. Revenues for the fourth quarter of 2012 totaled $26.4 million, or approximately 11% higher than fourth-quarter 2011 revenues, and represented a 3% improvement over the third quarter of 2012.

Our IT operations continued to see solid activity levels during the quarter when taking into consideration holiday season disruptions, which occurred during the latter part of December.

Market conditions in our healthcare operations remained positive for the most part, and we were able to grow revenue sequentially for the 10th consecutive quarter.

Gross profits for the fourth quarter of 2012 totaled $5 million or 19% of revenues compared to $4.6 million or 19.3% of revenues during the same period last year. Our gross profit expansion reflects an increase in billable consultants on assignment in the fourth quarter of 2012 compared to the corresponding 2011 period.

Our gross margin decline was largely due to a change in the mix of our IT business towards our higher-volume sales channels, which generally carry lower gross margins, but have attractive operating margin opportunities.

SG&A expenses were $3.8 million in the fourth quarter of 2012, which were in line with last year's level, after adjusting the 2011 quarter for $301,000 of severance charges. SG&A expenses represented 14.5% of total revenues in Q4 of 2012 compared to 17.5% of revenues in the corresponding quarter of 2011.

Net income for the fourth quarter of 2012 was $728,000 or $0.22 per diluted share, compared to $253,000 or $0.07 per diluted share in the fourth quarter of 2011. For comparative purposes, 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, 2012 revenues totaled $101.8 million and represented a 14% increase over 2011 revenues of $89.4 million. Gross profits were $19.2 million in 2012 compared to $17.5 million in 2011.

SG&A expenses represented 15.4% of revenues in 2012 compared to 17.5% of revenues one year earlier. Consolidated net income for 2012 totaled $2.1 million or $0.64 per diluted share compared to $1.1 million or $0.30 per diluted share a year ago.

Addressing our financial position, at December 31, 2012, we had outstanding borrowings net of cash balances on hand of $2 million. This position reflects returning over $9 million of capital to our shareholders during the year in the form of share repurchases and cash dividends. At year-end 2012, we had access to approximately $12.5 million of borrowing capacity under our credit facility with PNC Bank.

In addition to returning capital to our shareholders, we invested $1.7 million in operating working capital in support of our revenue growth during the year. It is important to note that the quality of our largest balance sheet asset, trade receivables, remains very high. Our accounts receivable DSO measurement improved to 47 days from 51 days a quarter ago. And total receivables aged in excess of 90 days at December 31, 2012, represented less than 1% of our total outstanding AR balance.

In summary, our strong balance sheet and access to capital not only provides us with the necessary resources to fund our 2013 organic growth objectives, but it gives us the financial flexibility to capitalize on nonorganic opportunities should they present themselves.

I will now turn the call over to Kevin for his comments.

Thanks, Jack, and good morning, all. Let me say right up front that I am very pleased that 2012 was another very successful year for Mastech, not only in terms of our strong financial performance, but also in terms of positioning the Company for future success.

Let me highlight some of the Company's key performance outcomes for 2012. First, we organically grew top-line revenues by 14% year-over-year, which I believe will prove to be above our industry's growth rate. I also believe that 11% year-over-year growth for the quarter and that 14% year-over-year growth for the year will position Mastech well when compared with our publicly-traded industry peer group.

In addition to top-line growth, we increased our billable consultant base during the year by 77 consultants, and December saw the highest number of consultant starts for any December in the past 10 years at Mastech.

At $0.64 a share, we more than doubled our diluted earnings per share from 2011's $0.30 per share performance. Additionally, our pretax operating margin increased by over 50%, from 2.1% in 2011 to 3.5% in 2012. This strong bottom-line performance was driven by two performance fundamentals -- number one, aggressively growing top-line revenues; and number two, capitalizing on our leverageable operating cost structure.

In addition to delivering value to our customers in 2012, we believe Mastech delivered significant value to our shareholders as well. On top of that strong top-line and bottom-line results performance, we executed multiple initiatives throughout the year to accelerate shareholder value.

In Q1, we repurchased 430,000 shares at a very attractive price via a Dutch auction tender offer. In October, our Board authorized an extension to our share repurchase plan out to December 2014 and approved an additional 250,000 shares to be added to the program, ensuring an additional source of liquidity for our shareholders. And then in Q4, we declared and paid a one-time special cash dividend of $2.00 per share.

I think it is important to note that while these collective actions returned over $9 million of cash to our shareholders, we've maintained our strong balance sheet and adequate access to capital to continue to enable future growth.

Operationally, 2012 was a year of change and improvement for Mastech. During the first quarter, we conducted comprehensive reviews of our sales and recruitment organizations. Results of these reviews included changes to our executive management team, the realignment of our sales leadership structure and the implementation of a reengineering and process improvement initiative aimed at making our recruitment organization a top performer in the industry.

I believe that all these actions have contributed in some degree to our success in 2012. While the recruitment improvement initiative is still a work in progress, we have seen tangible results in many of our key performance measures during 2012. I expect our recruitment team to continue to improve performance as we journey through 2013.

Organizationally, in our last earnings call, I stated that we were in the process of conducting an extensive search for a seasoned industry executive to fill our vacant Chief Operating Officer position. Today, I am delighted to introduce you to the newest member of Mastech's executive team, Scott Aicher, who will function as the COO of our Information Technology segment. Scott comes to us with 20 years of staffing industry experience, with many of those years in executive roles.

Since joining Mastech on January 7, Scott has hit the ground running and has already made his presence felt within the team. The good news for me is I'm excited to be back to wearing only one hat for calendar year 2013.

Scott, any comments that you would like to share?

Yes, thank you, Kevin. I could not be more excited about the opportunity to be able to work with such a dynamic leadership team. In my short time with the Company, I've quickly noticed the passion, the drive and dedication that all Mastech employees have for our Company's future. With this and our agile service abilities in support of customers, as well as our consultants, we are well-positioned to do great things in 2013. Thanks, Kevin.

Thanks, Scott. Welcome to the Mastech team. Lastly, while as a Company we don't provide projections or financial guidance to the investment community, I do want to share with you some of my expectations and focus areas for the organization for 2013.

First and foremost, I fully expect to continue our trend of achieving revenue expansion in excess of our industry's growth rate. Secondly, we will continue to make investments to better position our organization to achieve superior growth and achieve long-term shareholder value creation, while at the same time we still intend to capitalize on our leverageable cost structure to drive bottom-line results.

Operationally, we expect to continue to see further improvements in our recruitment metrics as we execute on our recruitment improvement initiatives. And with Scott's addition to the team, I also expect similar improvement in our commercial processes, as well.

Finally, while our focus will be squarely on organic growth and organizational improvement, we will continue to be vigilant in assessing acquisitive opportunities which fit our business model DNA and create value for our customers, our shareholders and our people.

In closing, I'm excited about the prospects and opportunities that lie ahead for Mastech, and I'm confident in our organization's ability to continue to execute at a very high level in 2013. We are building a performance culture here at Mastech, and we intend to perform in 2013 for each of our key stakeholders, our customers, our consultants, our shareholders and our employees.

I would also like to extend my sincere thanks and appreciation to the team of dedicated people at Mastech who have collectively driven our performance in 2012. Well done, all.

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

(Operator Instructions) David Polonitza, AB Value Management.

Good morning, gentlemen, and welcome, Scott, to the Company.

Thank you.

The Company, especially with some of their -- the special dividend in the fourth quarter and there might be some new shareholders that are involved with the firm. So Kevin, if you wouldn't mind just kind of going over what makes Mastech unique compared to some of your competitors, and why are those unique elements helping the Company to achieve above-average growth rates right now?

Sure. Dave, I appreciate the question. Let me give you a little bit of some context around it. I think most people know that Mastech has been a stand-alone public company since Q4 of 2008. We had been part of the iGate Holding Group, and were spun out in October of 2008 as a stand-alone entity.

The Company is fundamentally a staffing business, 90% IT, about 10% boutique healthcare staffing. And that staffing industry fundamentally has two styles of business. The first style, and the one that we've probably seen most often in the marketplace, is a branch-style business where historically, companies would parachute a handful of salespeople and recruiters into a new geography and the salespeople would knock on doors and take people to lunch and ballgames, and the recruiters would begin to build a Rolodex of names in the local market, and they would begin to try to place those folks.

That model has been extremely successful in the staffing industry, particularly in the IT space, where lots and lots of third-party labor is used and accepted as a part of the business model. That style model, generally speaking, has a bit higher gross margin, has a much higher SGA structure, and the best of the best in that space are making somewhere between 6% and 7.5% operating margins.

The second style business is a more centralized recruiting model, where the SG&A cost is significantly lower because all of the recruiting is centralized in a geography, and salespeople are located where customers decide it is best for salespeople to be located. Those style businesses have much lower gross margins, but also have significantly lower SG&A costs. And the best of the best in that world have operating margin that approach 6% to 7.5%, just like the best of the branch-style businesses.

Mastech is the latter. We are a centralized recruiting model. And basic structure of business process would suggest that as soon as you can make a process location list, so that it doesn't have to be in one particular location, you can then localize that process wherever you can find high-quality talent at least cost. And I believe that is part of Mastech's secret, is that we've done that.

And so you've heard us comment time and time again about our leverageable cost structure. And we are -- all of our jobs are in the US. All of our consultants are in the US. All of our consultants are either US citizens or US right-to-work folks. And 90% of our recruiters are sitting offshore in a low-cost country, working US hours, speaking to those US consultants daily. So we get leverage there that many of our competition do not get. And that model is very scalable.

So I think the leverage and scale are two things that if you walk away from this call with nothing else, you should walk away with leverage and scale for Mastech.

Secondly, our client base is kind of the Who's Who of IT consumers in the US. So we have really large-scale customers. And we can devote a large number of recruiters, given our cost structure, to those large-scale clients, and we can work a significant amount of job requisitions from those large-scale clients. And given those large-scale clients for a big chunk of our business, we are positioned very well from a risk standpoint. A much lower risk of being paid when your client is IBM or your client is Kaiser or your client is TEKsystems. And those are a handful of our big customers.

So if I were to overly summarize, Dave, the Company has been a stand-alone Company for four full years and one quarter of 2008. We are a centralized recruiting model. We have a leverageable cost structure. We have really experienced, talented sales people who live out where their customers enable them to live. And we deal really, really well with the new MSP/VMS procurement model that has been inserted inside of this business over the last 10 years.

So where some of our branch competitors are having a difficult time dealing with the VMS world because the margins are a bit tighter, we love it.

Kind of some follow-up questions. This seems to be the strongest fourth quarter for you guys since you've been an independent public company. Is that more industry-specific trends, or is that Mastech just executing a little better than your peers right now?

Dave, to be honest, I can't comment yet on my -- at least my publicly-traded peer group, because I just haven't seen any data yet. I haven't seen any reporting yet.

SIA, Staffing Industry Analysts, has published three quarters' worth of growth data. And I think you will see -- for the public companies in the IT staffing space. And I think you will see very clearly that Mastech has been the top growth performer through the first three quarters of 2012, and I suspect the fourth quarter will be similar. I think our business executed extremely well in the fourth quarter.

Was that revenue growth being driven by new customers, or existing customers adding on to business they already had with you?

It is principally further development of our relationships with existing customers; handful of new things. But principally, it is us getting deeper and deeper with our existing customer base.

You mentioned when you started talking about my first question where a good Company in this space -- some of the best companies end up with operating margins between 6% and 7%. In terms of how you guys can get there, are there ways that you are working on the gross margins to help ultimately reach those numbers to the bottom line?

Yes, I think when we laid out our three-year plan for the Company in Q4 of 2011, and then updated that in Q4 of 2012, we see an organic growth path to operating margins that are in that range that I talked about the best of the best achieving. So there is no doubt that we can see our way through to those level of operating margins.

And we see our way through there with slight increases in gross margin -- slight. Not -- we don't have to dramatically change our gross margin content in order to get home on the operating margin side. And I'd like to reemphasize that leverageable cost structure as being a key portion of that.

Now, don't get me wrong, and please, don't hear me say we are not caring about gross margin and we are not focused on gross margin, because everybody in our industry has to be and we are not different in that respect. We are not.

But we look at two pieces of gross margin. We look at both gross margin percentage and gross margin dollars, and then we also look at duration of the deal. And we are willing to take some deals that have good gross margin dollars that have a nice duration where the percentage might not be 24%. I might be really willing to take a 19% deal for an excess of 12-month duration at good gross margin dollars.

So yes, we have several things that we will do in calendar year 2013 that focus on gross margin with our sales team, but the fact of the matter is the majority of our OM improvement is going to come by growing top line and leveraging our cost structure.

I'll just -- one more set of questions here, in case anyone else has any questions on the call. But if you can provide any more color on your recruitment improvement initiative and what your capacity is right now in terms of recruitment, and also comment if you conducted any share buybacks in the fourth quarter.

Sure. Let's do the easy one there first. Jack, we didn't do any share buyback in the fourth quarter, did we?

Under 10,000 shares.

Under 10,000 shares on the buyback side, much of that driven because we were blacked out a good deal of the fourth quarter. Because of the announcement of the special dividend and, and, and, we got very conservative in that timeframe. So we did under 10,000 in the fourth quarter.

In terms of color on our recruiting process improvement initiative, I believe I talked a little bit about this in 2012. But the bottom line, if I were to again overly summarize, we took arguably one of our best recruiting resources out of a manager's role. He was a division manager. We took him out of that job. And he has been traveling nonstop for the last six months back and forth between the US and our two recruiting sites in Noida and in Bangalore in India.

And the focus has been on a handful of improvement activities that are all about deepening our team's understanding of the recruitment process itself, of the expectations for each of our individuals and how to get to those expectations.

So in some respects, our business on the recruiting site is fairly simple. It is really a function of activity, and activity starts with phone time with potential consultants and building a relationship and building rapport with potential consultants. And it moves from there to either remarketing those potential consultants or our existing consultants into new opportunities that we seem, or else filling immediate [reqs] from those large scale consumers of IT services that we have.

And it is a highly transactional business, and we have been all about teaching really standardized process over the last six months. So again, if there is a takeaway from this on the improvement initiative, it is about building standardized process, teaching standardized process and ingraining standardized process in the way we work. Right? So it is all about building a process around the way we are going to choose to work.

Thanks for all your hard work in 2012. Good luck, Scott, and look forward to 2013.

Thank you.

Thanks, Dave.

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

Well, thank you. I appreciate the opportunity to talk more about our business. It is exciting, and as Scott mentioned, there is real passion in the organization about the business today.

I'd like to thank you all for joining the call, and we look forward to having you back in April for our first quarter of 2013 results. So, thanks again. Have a great day, all.

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

Thank you, operator.