Mastech Digital Inc (MHH) 2014 Q1 法說會逐字稿

Greetings and welcome to the Mastech Holdings, Inc. first-quarter 2014 earnings call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Jennifer Lacey, Manager of Legal Affairs. Thank you. You may now begin.

Thank you, operator, and welcome to Mastech's first-quarter 2014 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 2013 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 first-quarter 2014 results.

Thanks, Jen, and good morning. I would like to start by reminding everyone of the sale of our healthcare segment during the third quarter of 2013. Please note that our financial statements for prior periods have been recast to include our healthcare business as discontinued operations. Accordingly, all financial results discussed today relate to continuing operations unless specifically noted otherwise.

With that clarification out of the way, I am pleased to report revenues for the first quarter of 2014 totaled $28.7 million or approximately 20% higher than first-quarter 2013 revenues.

Our IT operations continued to see solid activity levels during the quarter, despite some softness in early January. Thus, we were able to grow our consultants on billing for a fifth consecutive quarter.

Gross profits for the first quarter of 2014 totaled $5.2 million or 18.2% of revenues compared to $4.4 million or 18.2% of revenues during the same period last year.

Our gross profit expansion reflected an increase in billable consultants on assignment in the first quarter of 2014 compared to the corresponding 2013 period, as well as a slightly higher average bill rate in the 2014 period.

Our gross margin percentage was flat compared to the first quarter of 2013 as higher margins in our retail channel offset lower margins in our wholesale channel where bench costs were higher in the 2014 period.

It should be noted that our gross margins are historically lower in Q1 due to higher payroll taxes and generally higher bench costs.

SG&A expenses were $3.8 million in the first quarter of 2014 compared to $3.5 million in the first quarter a year earlier. SG&A expenses represented 13.4% of revenues in the first quarter of 2014 compared to 14.5% of revenues in the corresponding quarter of 2013.

Net income from continuing operations for the first quarter of 2014 was $869,000 or $0.20 per diluted share compared to $544,000 or $0.13 per diluted share in the first quarter of 2013.

Addressing our financial position, at March 31, 2014, we had outstanding debt net of cash balances on hand of $1.1 million and over $15 million of borrowing capacity under our existing credit facility. During the quarter, we invested $2.6 million in operating working capital.

As we mentioned in our earnings release, this investment in part was due to an increase in our days sales outstanding measurement and reflected billing process changes at a major client. Now while this situation impacted Q1 cash flows, it is not a collection issue, and we would expect that our DSO measurement would revert back to more normal levels next quarter.

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

Thanks, Jack. Good morning, all. I am pleased to report another quarter of strong year-over-year top-line and bottom-line growth at Mastech. As you all know historically, Q1 has been a challenging quarter for the industry in general. Even so, we were able to grow our billing consultant base by 3%.

For some context, for Mastech 3% sequential growth in Q1 is our second best net growth performance for consultants on billing in the first quarter in the last 10 years. Financially our operating results continue to largely speak for themselves. Top-line year-over-year growth of 20% far exceeding our target of 1.5X the industry growth rate; bottom-line year-over-year growth of 54%, further reinforcing the value of our business model; and a strong balance sheet with sufficient access to capital.

Operationally we are focused on building out a new client acquisition engine capable of contributing to our growth objectives for 2014 and beyond. As of today, we have a total of 15 new clients in various stages of contract development and job requisitioning.

Additionally, we have two dormant accounts, which we resuscitated over the last 90 days and are now working day in and day out.

In addition, we continue to invest in our recruiting and delivery organization with a particular focus on continuing to hire and to develop talent in our India-based recruiting centers. Our commitment to our customers and to our organization was to continue to scale and upgrade our recruiting team to continue to provide a reliable source of IT talent for the market.

Lastly, you may have noticed we recently reported we have entered into a new long-term lease for some new space for our Pittsburgh-based headquarters. The new space is five minutes from our existing office and should provide a wonderful new working environment for our employees, customers and investors. Current plans are to relocate in Q3 when the new space has been completed.

In closing, I would like to offer a well done to the team at Mastech and a thank you to our clients and our shareholders for their continuing support. At this time, I would like to open it up for your questions.

(Operator Instructions). Howard Rosencrans, Value Advisory.

Congratulations. Great quarter. In terms of the major clients that you -- is there any issue in terms of their business? Are you switching to other people, or can you give us some more color regarding (multiple speakers)?

Sure. Let me do that, Howard. Thanks for your question. Thanks for your comments.

No, it's a really solid customer. We expect to do more work with them. My sense is the customer that Jack spoke of is a client in our integrator group, and I think they had a change with a large-scale client of theirs, and we found that billing process change to be a slowdown. But it took us about a quarter to get it all worked through with the client, and we believe we are on track now.

Okay, (multiple speakers).

We like the business. We would love to have more of it.

Just to change gears, there is a lot in the press about the temporary -- the favorable temporary trends, despite the uptick in jobs. Is that something you are -- that you see in any way that changing for better or worse that people will go more to permanent hires? Do you feel like Obamacare or something insures that people will stay in the temporary world and I guess more specific to IT but just looking for some big macro color on that trend?

Yes, I think it's a great question. So now you will get one man's opinion, right? But I have been saying for a while on these calls and when I talk openly anywhere that I believe that the marketplace trends that have emerged coming out of the last downturn will have businesses buying more talent on a temporary basis than they may have historically.

So, I believe that trend, and that's a trend that you will see reported all over the place, I believe that is a trend that is here to stay. Number two, the IT industry in particular has been one that has operated with a temporary set of talent for a long, long time. And in my past world, I operated at a minimum of a 40% ratio of 60% internal employees, 40% external employees, and I did it for a couple of reasons. It allowed me to quickly move. It allowed me to quickly change skills. So, I believe our industry, the IT industry in particular, will continue to operate in that fashion. I don't see change happening there either.

I am not -- I would like to believe your reference to the Affordable Health Care Act would benefit temporary labor businesses like ours. Time will tell on that one, Howard. Let's put it this way. We are not banking any of that into our planning process, okay? But personally I think it almost has to because we adopt a level of risk and a level of liability in that world that others may not want to take on.

Great. Thank you.

Thanks for your questions.

Brian Warner, Performance Capital.

I think it was you, Kevin, who mentioned in the prepared remarks that you were talking to maybe 15 or so new customers. I am wondering if you are doing anything different, like business development, or what is happening that you have got this nice -- this nice thing occurring?

Thanks for the question, Brian. Did you think those remarks were prepared? We did those right off the top of our heads.

Sure.

The 15 new customers that we referenced in there are part of a designed program to grow our end-user customer base. So, our determination back in about Q3 was we now had a recruiting engine, a motor, that was working. So the centralized recruiting model that we operate we determined that it was working with our existing client base, and it was time to bring some new customers into that model.

So, beginning in Q3, particularly in Q4, we went out and we hired some folks on the sales side that were just able to go out and to hunt new clients. We went out to a really specific set of clients that worked well in our business model. So we are after clients who have already adopted the more electronic way of doing business in this temporary labor situation. So we went after VMS or Vendor Management System or MSP, Managed Service Providers, who actually use VMS. We went after that style of client.

And my commentary was we have about 15 new people in various stages of development. We have a couple of new folks that are -- that we are working with directly that we are getting their job reps, that we are recruiting for, and we are filling all the way back to some people who are pretty early in that pipeline.

These aren't -- these are larger scale customers who don't easily add a new vendor into that Vendor Management System. So, the process takes a little bit. It's an investment on our part, but it's a long-term investment.

Got you.

Does that help answer what you are thinking about, Brian?

Absolutely. A couple more quick ones. It seems like -- well, let me start with -- you said a while ago that you were strategically within technology making certain bets, for lack of a better term, on new areas. Search engine optimization I don't believe was one of them. Maybe it was. I can't remember.

I am wondering how that is panning out, and I guess the reason for the question is it seems like in technology, particularly in Silicon Valley, it has just become very, very difficult to find people, and I'm wondering the spaces that you are focused on, the dynamics there?

I think it's a really good question. So, obviously, a piece of our growth strategy is to build out -- to build some depth in a technology-based practice area or two. We have laid that strategy out. We are in the process of hiring somebody into the organization, ideally late second quarter, early third quarter, to run and manage that piece of our growth platform. But we have not begun the investment of building skills yet in one of those new technology platform areas. We have not ramped that up.

We have recruited some existing skills out of the market and are selling those into our existing client bases, but we have not begun to actually invest in skills. Which basically means go out and hire some people on the come, train them up into a new skill platform and then take them into our new client base. That's an investment that we will begin to make in the third quarter.

Okay. And last quick question, I know you guys, I believe, retained somebody to do some banking to maybe show you some acquisitions, and I am just -- under the broad topic of acquisitions -- I am wondering what the market is like for stuff like that and if you guys are seeing anything interesting?

So let me -- what you are talking to is the fourth piece of our growth strategy, which is really all about -- we have been focused for the past two years on growing our business organically, right, on developing out this recruiting engine and developing out the talent side of our business so that we could do much better as a talent partner for our existing customers.

We have determined in Q1 that our approach to acquisitive growth is going to have to be different in 2014 than it has been in 2012 or 2013. Our approach in 2012/2013 was much more of a, I will call it an ad hoc approach, where stuff came across our desks and we took a look at it, something we like to call and add that in.

In Q1 we have actually made -- we have actually hired an investment banking company to help represent us on the buy side, and I think the marketplace out there is actually very interesting right now. The potential universe of the kinds of -- the styles of companies that we would look to acquire in the US is a three-digit number. So, yes.

So, I think there is -- we have now moved from an ad hoc process to a multi-year, multi-transaction systematic way of thinking about how to acquire.

Got you. Sounds good. Thanks.

Brian, time will tell. Time will tell. But that's what we have done.

Terrific. Thanks a lot.

Michael Conti, Sidoti.

With the [15] new clients, how many of those do you have consultants on those projects and if you guys are actually seeing a revenue stream from those clients?

We have one.

Just one?

One, yes, and the revenue stream isn't -- it's not worth discussing yet.

So, we should see some type of, I guess, bump in revenues going through the second half of the year once you get more consultants on those particular projects?

We would certainly hope so. In fact, we have had much more success with the two customers that were dormant that hadn't been works in several years and resuscitating those back to life. We have had a much better -- much higher success rate with those than we have with our brand-new clients.

Sure. Can you just throw some color on the sequential growth rate going from fourth-quarter 2013 to first-quarter 2014? It seems a bit low compared to last year number as well and take into consideration the decrease in consulting from billing growth from the third quarter to the fourth quarter. Any color on that would be great.

I am assuming you are talking Q4 2013 --

Into this year, yes.

-- revenue?

Yes, topline, yes.

Fourth-quarter 2013 year-over-year growth was 21%. First-quarter 2014 was 20%, so down a little bit year over year but not down much.

What I am getting at is sequential growth because you guys added about 10 consultants in the fourth quarter, which it was the second time you guys had positive growth (multiple speakers) in the history at Mastech. But on a sequential basis, going from the fourth quarter of 2013 to the first quarter of 2014, grew about 70 basis points. Wondering, I kind of had modeled a bit higher growth rate given the increase in COB growth. Was there any --?

Sequentially --.

Sequentially we were up 1%.

We were up 1%, and the growth and consultants on billing as Kevin, I think you mentioned, is 3%?

3%, right.

Were there any one-time factors impacting top-line growth? Were you guys impacted by weather at all with the hourly consultants or --?

I don't think our utilization rates were anything --.

They were normal for the quarter.

Yes.

Okay. Great. And just curious as to you guys plan on placing your consultants on these newer projects with the new clients rather going forward, is there any -- do you find it to be difficult to maybe add or retain consultants to fill in those spots? Is there any, I guess, headwinds going forward, or are you guys confident that you will be able retain enough consultants to actually fill in the open positions?

Yes, so let me answer that two ways. Let me start from a macro sense, Mike. The IT industry in the United States on a year-over-year basis from Q1 2013 to Q1 2014, the IT industry has grown 2.4%. So there are 2.4% more jobs starting in April in 2014 than there were in 2013. So, that's a good news story. Right? That's a good news story.

In 2013 in total I believe we added between 180,000 and 200,000 jobs to the US IT economy, right? US colleges and universities are graduating -- they graduated the last numbers I saw, and they were through TechServe. I forget the survey that they follow, but it's a very specific industry IT industry survey. It looks like the US graduated about 30,000 people in a similar timeframe and have in total 50,000 to 60,000 people enrolled in colleges and universities -- that is graduate and undergraduate programs.

So, if the industry is adding somewhere between 150,000 and 200,000 jobs and the education system is ginning out 30,000 or 50,000 or 60,000 people a year, is it going to get tougher to fill those jobs? Yes. Yes, it is. It is. And, frankly, it's why companies like ours -- well, it's part of the reason why we exist. That's why our clients want a good talent acquisition partner to work with because we find talent in places that others can't or that they can't for themselves or they don't for themselves.

Our business model works pretty well in that we attract both US citizens and US right to work candidates, as well as H1B candidates. We attract both of those. So, I think we're advantaged in this situation where talent gets tighter and tighter and tougher and tougher to get.

So, do I believe it is going to get tougher, yes, I do, Mike. I do. I believe we are finding that it is getting tougher. I believe the economics of the jobs world today is still because the recovery in the US has been so slow and so drawn out and fundamentally a jobless recovery in most industries other than IT. I mean the IT industry is growing 3 times the rate that the rest of the US economy is from a job standpoint.

It is still tough to get bill rate increases out there, and you can see it in the way people are reporting earnings. You see a lot of people making bottom-line numbers and not a lot of people making top line. We feel extremely fortunate to grow our top line 20% year over year when the market is forecasted to grow this year 7%, 8%, and the first folks out of the box yesterday reported a 10% down.

That's a really long answer to your question, Mike, but do I believe it's going to get tougher? Yes, I do. I do. Yes, the game is not for the faint of heart.

Sure. Okay. And, lastly, do you have any clients that represented more than 10% of revenues?

Yes.

Yes.

We do.

Yes, we have two. One represented 11%, and one was 10.5%. So we had two clients in Q1.

Okay. Can you guys share the names of those clients?

Sure. Sure. The number one was KPMG, and the second one was Accenture.

Okay. Great. That's all I have. Thanks, guys.

Dave Polonitza, AB Value Management.

Good quarter there. Just a few questions. Wanted to know if you could break out the wholesale revenue number, and also did you repurchase any stock during the quarter?

With respect to the stock repurchases, we repurchased 19,341 shares, and the wholesale/retail we had total revenues of $28.7 [million]. The wholesale channel we had revenues in the wholesale channel of $22.9 [million], in the retail channel $5.8 [million].

Okay. Great. Was that stock repurchase done in the open market, or was that a private purchase?

Actually, it was purchased through the vesting of restricted shares, and the sell portion was to satisfy tax obligations.

Okay. Great. And, Kevin, if you could just comment -- I think you mentioned that January started off a little bit weak or implying that the demand started to pick up as the quarter went on. How is the Company positioning itself for basically the spring and summer of 2014 in terms of its recruiting capacity and the type of existing customer demand you see out there?

I'll give you a couple of thoughts on there. Number one, on the recruiting capacity side, we have just gone through our second half of Q1, early Q2 hiring process for our larger scale recruiting centers in Noida and in Bangalore. And, so, we have recently added a significant number of folks to the organization through that process. So I am -- I feel pretty comfortable with how that process has worked.

In terms of demand for Q2 and Q3, I don't see anything out of norm on the demand front right now, Dave. I don't see anything like -- we are not seeing anything huge or -- we're not going to ring any bells, okay? In the same breath, I'm not overly concerned at the moment either. I think if you looked at the data, our requisition levels in total for the business, our job requisition levels were down a bit in Q1 as compared to Q1 of last year. Our fill rates were better, so we did a bit better from a quality standpoint.

And our positions and job reqs are a bit up so far in Q2, but I wouldn't read anything into it. Yes, I wouldn't read anything into it.

And just going back to one other thing, if I heard you right, Jack, you said wholesale was $22.9 million, and retail would be $5.8 million. Is that correct?

That's correct.

What changes -- because I think that's the first uptick in retail in a while -- what changes drove that increase in retail revenues?

From a client perspective, it was just doing some more business with some of our MSPs.

Yes, the two dormant accounts that I talked about a minute ago, Dave, are both retail business, retail clients that we have done some business with late in Q4 and then again in Q1. It could be as simple as that.

Okay. Great. Appreciate it, you guys.

Howard Rosencrans, Value Advisory.

Just a quickie. You referred to the new initiative where you put on or you are targeting 15 new customers, and you added or I guess that's the beginning of your targeting of new customers from the adding of personnel. We're always looking for bigger and better.

Your SG&A ratio was a little bit up Q to Q. Have we seen pretty much the full impact? Is there more of a lag from those hires, or should we start to see or hopefully get some leverage from those hires as we put -- get new sales on from those 15 and others?

Well, the cost structure is very clearly indicative of the fact that we did bring new people on. So we have salespeople in the organization in Q1 this year that we did not have in Q1 of last year. In fact, we didn't have it in Q4 of last year either.

So, that really does explain some of the cost stuff, Howard. That is the design, right? In this business, the cost happens before the revenue does, right? I am not sure it's different from any other business, but certainly the way this one works is the SG&A cost hits first and then, hopefully, the revenue hits. So, that's the bet we are making.

It works for us. So that's -- (multiple speakers). It works for us, and it apparently works for you. I am just trying to understand if we have seen pretty much the full -- is there a bigger hire on the -- additional hires on the horizon this year, or have we seen pretty much the full impact?

We will continue to hire. Yes, we will continue to hire, and we will continue -- probably the single biggest hire that in my view we will do is outside of just the standard sales and recruiting is we are going to hire somebody who will run that third leg of our growth strategy that is really all about building out some technology talent in a focused, technical platform or technical track (inaudible). So, we will be bringing somebody to do that.

Okay. Great. Keep up the great work. Thank you.

(Operator Instructions). Mr. Horner, it appears there are no further questions at this time. I would like to turn the floor back over to you for any additional concluding comments.

Thank you very much. Considering there are no further questions, I would like to thank you all for joining our call today. We look forward to sharing our second-quarter 2014 results with you in late July, and thanks for the engaging call. It was actually a lot of fun today. So, thanks much, and everybody, have a great day. Take care.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation, and you may disconnect your lines at this time.