Mastech Digital Inc (MHH) 2014 Q2 法說會逐字稿

Greetings and welcome to the Mastech Holdings second-quarter 2014 earnings conference call. At this time all participants are in a listen-only mode. A 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. You may begin.

Thank you, operator, and welcome to Mastech's second-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 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 injections, 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 driving guidance during this call; nor will we provide guidance in any subsequent one-on-one meetings or calls. I will now turn to call over to Jack for a review of our second-quarter 2014 results.

Thanks, Jen, and good morning, everyone. Revenues for the second quarter of 2014 totaled $27.7 million or approximately 6% higher than second-quarter 2013 revenues. While activity levels were in line with last quarter, our new assignment hit rate was below first-quarter 2014's performance. Additionally, we had an unscheduled project termination on a significant integrator assignment that impacted our revenues and billable consultant base during the quarter.

For the first six months of 2014, our revenue growth on a year-over-year basis approximated 12%, which is in line with our previously stated objective of growing revenues at 1.5 times our industry growth rate. However, as most of you know, the consultant-based decline in Q2 will certainly have some impact on next quarter's revenue performance.

Gross profits for the second quarter of 2014 totaled $5.1 million or 18.5% of revenues compared to $5 million or 19% of revenues during the same period last year. Our gross profit expansion reflected an increase in global consultants on assignment in the second quarter of 2014 compared to the corresponding 2013 period, partially offset by a slightly lower average bill rate in the 2014 quarter.

Our gross margin percentage was 50 basis points lower than last year's performance, as our business mix continues to shift towards our lower-margin wholesale channel. Additionally we had an increase in consultant compensation on existing projects during the quarter that outpaced bill rate increases.

SG&A expenses were $3.7 million in the second quarter of 2014 compared to $3.8 million in the second quarter a year earlier. SG&A expenses represented 13.3% of total revenues in the second quarter of 2014 compared to 14.4% of revenues in the corresponding quarter of 2013.

Net income from continuing operations for the second quarter of 2014 was $893,000 or $0.20 per diluted share compared to $765,000 or $0.18 per diluted share in the second quarter of 2013. Addressing our financial position at June 30, 2014, we had no outstanding debt; cash balances on hand of $1.2 million; and approximately $16 million of borrowing capacity under our existing credit facility.

During the quarter our days sales outstanding measurement improved by six days from last quarter and now stands at 50 days, which is back in line with our historical averages. And lastly, in early July we expanded and extended for another three years our credit facility with PNC Bank. This new facility will continue to provide us with the financial flexibility to capitalize on future market opportunities.

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

Thank you, Jack, and good morning. Our second quarter performance did not meet my expectations, both operationally and financially, and was disappointing when compared to our historical performance trend lines. There were four primary areas of concern for me during the quarter.

Number one, our hit rate of assignment wins to activity levels. This metric fell for the first time in well over a year. Part of our issue here was that we dedicated considerable recruitment resources to several large project opportunities that we didn't end up winning.

The decision to execute this strategy took recruiting horsepower away from the balance of our organization, and frankly, our new assignment performance suffered as a result. This resource allocation dilemma illustrates a pressing need to accelerate the scale of our recruitment organization, which we are aggressively addressing right now.

Number two, early project terminations: we had a substantial integrator project that terminated about eight months earlier than previously expected. This resulted in the loss of 30 consultants on billing during the quarter, accounting for our entire consultant net growth decline. While this was a frustrating event for us, unfortunately it's an inherent risk in our industry, and there isn't really a silver bullet to ensure that surprises like these do not happen from time to time.

Number three, a longer ramp-up time related to our new business development efforts. I have been underwhelmed by our performance to date with respect to new business development. Last quarter I mentioned the tangible results from this initiative were taking longer than I had hoped. In late second quarter we had to make some personnel changes to address the situation. My expectations are we will see improvement in the second half of the year with respect to new business development.

Number four, gross margins: as we have stated several times in the past, our expectations for gross margin are flat to a minor decline on a year-over-year basis as we continue to shift our business mix towards the wholesale sales channel. In the second quarter, and in addition to this expected business mix shift, we experienced consultant compensation increases that outpaced bill rate increases on existing projects.

This is an unacceptable outcome which we will address going forward. While it's always challenging to get bill rate increases on existing assignments, organizationally we will link our pay-side decisions to the client-side decisions on bill rate increases. This whole area is something that we will focus on during the balance of 2014.

I would like to highlight several positive items from the quarter, as well, though. Number one, IT job growth in the United States continues to outpace the growth of all jobs in the economy by a roughly 3-to-1 rate. Talent continues to tighten, as well, but the marketplace for IT people and IT jobs in the States continues to hit new highs every month.

Number two, July seems to have recovered nicely in terms of assignment wins to activity levels. But as you know, consistency is the key to success in this industry. I look forward to providing you with a progress report in October on this space.

Number three, in Q2 the net growth of our recruiting organization was a total of 14 people. As we have communicated before, it generally takes 60 to 90 days of training and ramp-up time before we begin to see results from new hires in our recruiting model.

We are looking to begin reaping the benefits of the Q2 hiring and training that we have done in the third quarter. Additionally, we will continue to hire and scale our recruiting team.

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

(Operator Instructions) Michael Conti, Sidoti.

I just had a quick question on the gross -- with the loss of the project. Can you elaborate what went wrong on the project termination and how much revenue was lost?

I wouldn't say anything went wrong. You know, one of our integrator clients and their end client had to agree to terminate project much earlier than was originally planned in terms of the duration of those 30-plus consultants that were on-project.

Okay. And then with the 30 consultants, did that have an impact on gross margin with the increase in bench costs?

Go ahead, Jack.

Not a whole lot; just a bit. But it did have an impact on revenue, obviously. And for the full year, if the project would have terminated as we originally expected, the delta on revenue was in the course of the year at $3.5 million or thereabouts. So it hurt.

Sure. Sure. Absolutely. And, I guess, can you -- I mean, who were your top 10% of revenue generators for the quarter?

Top 10%, Jack?

As far as clients, you mean?

Clients.

In Q2 we had two clients that represented over 10%: Accenture, they were at 11%; and CGI was just over 10% -- 10.1%.

Okay. Because it sounds -- CGI -- I mean, that would be considered a new client of over 10%. Can you --.

Yes. They actually busted through the 10% barrier. They have been a client with us for quite some time, but first time over 10%.

Okay. Can you elaborate whether or not that's -- did you see a significant ramp over the course of the past nine months? Or is that more or less, like, a sustainable -- I guess, is that a more sustainable stream of revenue going forward? Because last quarter you had KPMG, and that seemed to have fallen off?

We've been building that CGI relationship and that business, frankly speaking, since Q2 of 2012.

Yes. They've been -- probably the last four quarters, they've been in the 7% to 9% range.

And been one of our highest -- one of our best growth clients over the last three to four quarters.

Yes.

Okay. And then, lastly, can you just give us an update on your internal initiative to train fresh grads within the Workday and Salesforce space? I think we spoke briefly about that before.

Yes. We actually put that initiative on hold until the third quarter, given the second-quarter revenue issues we had, and focused all of the organization on recovering the lost project revenue and at the same time holding off SG&A expense.

Okay. Great. That's all I have.

(Operator Instructions) Dave Polonitza, AB Value Management.

Can you elaborate a little more on the demand side of your business? You had the one project termination, but you said, you know, July is recovering nicely. Just trying to figure out how the balance is between the supply and demand, where -- you're obviously trying to work on your recruiting on the supply side, but how does the demand look?

Yes, thanks, Dave. That's a really good question. Hopefully -- we try to address it subtlely, but let me do it really directly. The demand side of our business still looks really solid; and in fact, so far through Q3, we're probably hitting the demand side activity levels, which are frankly at high points for the year. So demand is still very, very solid.

Demand through the second quarter was solid. As Jack said and I tried to explain a little further, we actually went after a couple of large-scale projects with a couple of our integrator clients that -- where we just -- we didn't win those. We spent a bunch of recruiting efforts that we didn't direct at our kind of standard, day-in and day-out demand.

And so part of our rationale right now, and part of that focus on ramping up the recruiting organization, and the fact that we grew the recruiting organization on a net basis by 14 people in the quarter in Q2, is to be able to position ourselves to do both: to continue to work our existing demand that's really solid and to be able to actually take on larger-scale project work and not impact the standard day-in and day-out business.

Just one or two follow-ups. So you added a net 14 people recruiting wise. What's the ballpark number that that -- how many people do you have right now?

It's a very low three-digit number.

Okay.

Okay? But we are now over 100 recruiters.

And also, any updates on your acquisition initiatives, or is that just continuing forward as it was before?

I'll let Jack weigh in as well. We actually had a fairly active quarter with our buy-side advisory group in examining several businesses. We haven't brought anything to our Board yet from a proposal perspective, but there are several things that we've -- several pieces of business that we've spoken with in the quarter that we really like. Jack, would you add anything to that?

No. We're window-shopping right now, but we like some of the things that we see.

Yes.

And just one other final thing for Jack. Do you have the wholesale revenue number for the quarter?

The wholesale revenue number? Yes, sure. I do have that. Give me a sec. $21.6 million. Retail was $6 million, and we had close to $100,000 [in term].

All right. Thanks, guys.

Tom Wynn, Centurion.

Hi. The large project that you didn't win -- why did you lose?

Tom, we're actually working with our clients on both of those efforts to better understand why we didn't win. I think at this point the early indication would be a combination of price and skills.

Okay. All right. Thanks.

(Operator Instructions). Michael Conti, Sidoti.

Just a quick follow-up. Can you talk about any pricing pressure you may have faced in the quarter and your outlook on the competitive landscape for the second half of the year?

Yes. The market is a bit funny right now, Michael. A couple of our very large clients are pushing hard on price -- and that's both direct clients and integrator clients.

And in the same breath, we're finding pressure in the market on the wage side, given the tightness of talent. I think it's a function of the entire economy -- that the economy is growing, still in fits and starts; the IT portion of the economy is growing at a much more rapid rate than the rest of the business. And a couple of our clients were actually under some pressure in the quarter and pushed fairly hard on us. And at the same time, as we talked, we had some wage pressure from some longer-standing consultants who actually needed -- and it was fair that they needed -- wage increases.

So we think we did as good a job as we could in balancing those things. But in some respects I think the client base is beginning to recognize that the talent is getting tighter. We may be forced to actually market the talent to other places if we can't get the talent priced appropriately in the existing customers.

Okay. That's great color. Thanks.

Mr. Horner, it appears we have no further questions at this time. I would now like to turn the floor back over to you for additional or closing comments.

No further comments on my end. I'd like to thank everybody for attending the call today. We do look forward to sharing our third-quarter 2014 results with you in late October. Thanks very much, all.

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