Mastech Digital Inc (MHH) 2015 Q4 法說會逐字稿

Greetings and welcome to the Mastech Q4 2015 earnings call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Jennifer Ford Lacey, Manager of Legal Affairs for Mastech Holdings. Thank you, Ms. Lacey; you may begin.

Thank you, operator, and welcome to Mastech's fourth-quarter 2015 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 2014 annual report on Form 10-K filed with the Securities and Exchange Commission and available on their website at www.sec.gov.

Additionally, management has elected to provide non-GAAP financial measures to supplement our financial results presented on a GAAP basis. Specifically, we will provide non-GAAP net income and non-GAAP diluted earnings per share data, which we believe will provide greater transparency with respect to the key metrics used by management in operating our business.

Reconciliations of these non-GAAP financial measures to their comparable GAAP measures are included in our earnings announcement, which can be obtained from our website at www.mastech.com. 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 2015 results.

Thanks, Jen, and good morning. First off, I'd like to remind everyone that our June 2015 acquisition of Hudson IT is reflected in our financial results effective as of the acquisition date. And accordingly has benefited our year-over-year comparables.

With that backdrop, revenue for the fourth quarter of 2015 totaled $32.5 million compared to $28.5 million in the fourth quarter of 2014. This 14% year-over-year increase in revenues was entirely attributable to our Hudson IT acquisition. Activity levels during the quarter were slightly below the previous quarter and included some holiday-related weakness in the latter part of December.

Despite solid overall demand, we had a net decline in our global consultant base of 47 consultants during the quarter. This reflected a combination of a higher level of assignment ends, which historically occur in fourth quarter, and a disappointing start performance, which Kevin will talk more about in his prepared comments.

Gross profit for the fourth quarter of 2015 totaled $6.7 million or 20.6% of revenues compared to $5.2 million or 18.3% of revenues during the same period last year. Our gross profit dollar increase reflected nonorganic revenues in the 2015 quarter. Additionally, fourth quarter 2015 was positively impacted by approximately $100,000 of lower benefit cost due to the favorable claims experience related to our self-insured healthcare program.

Our year-over-year gross margin comparables benefited from Hudson IT's strong retail client base, which generally carries higher gross margins than in our wholesale channel. Additionally, our gross margins on new starts continued to trend up in Q4, and this, coupled with the lower benefit cost, further contributed to our overall gross margin improvement during the quarter.

SG&A expenses were $4.5 million in the fourth quarter of 2015 and represented 13.8% of total revenues compared to $3.9 million in the fourth quarter of 2014. The increase in SG&A expenses in the 2015 quarter compared to the corresponding quarter of 2014 reflected SG&A expenses related to the Hudson IT operations. It should be noted that third-quarter 2015 SG&A expenses, our previous quarter, totaled $5.3 million or 15.5% of total revenues and represented the first full quarter to include all the SG&A expense associated with the Hudson IT operation.

Our lower SG&A expenses of approximately $800,000 in Q4 2015 compared to Q3 2015 was due to the following items. One: lower staff salary expense of approximately $100,000 due to non-regrettable employee attrition and higher vacation time off. Two: lower variable compensation expense of approximately $400,000. This is a combination of lower sales commissions, management incentives, and stock-based compensation.

Three: lower travel and marketing expenses of approximately $200,000. And four: an elimination of $100,000 of transaction -- excuse me, transition service cost associated with the Hudson IT acquisition that we incurred in Q3 2015. These SG&A expense reductions played a significant role in driving our GAAP and non-GAAP net income in the fourth quarter of 2015.

To that point, GAAP net income for the fourth quarter of 2015 was $1.3 million or $0.29 per diluted share compared to $782,000 or $0.18 per diluted share in the fourth quarter of 2014. Non-GAAP net income for the fourth quarter of 2015 was $1.4 million or $0.31 per diluted share compared to $804,000 or $0.18 per diluted share in the corresponding 2014 quarter.

Fourth-quarter SG&A expense items not included in the non-GAAP financial measures net of tax benefits were amortization of acquired intangibles and stock-based compensation expense. And are detailed in our Q4 earnings release, which is available on our website.

Addressing our full-year results, 2015 revenues totaled $123.5 million and represented a 9% increase over 2014 revenues of $113.5 million. This increase reflected our June 2015 acquisition of Hudson IT. Organically, revenues decreased by approximately 5% in 2015 due to a decline in our billable consultant base.

Gross profits in 2015 were $23.8 million compared to $20.8 million in 2014. Gross margins as a percent of revenues were 19.3% in 2015 compared to 18.3% in 2014. Both the higher gross profit dollars and gross margin percentage are largely attributable to the Hudson IT acquisition.

GAAP net income for the full year 2015 totaled $2.8 million or $0.62 per diluted share compared to $3.4 million or $0.77 per diluted share in 2014. Non-GAAP net income for 2015 totaled $3.8 million or $0.85 per diluted share compared to $3.6 million or $0.81 per diluted share for the full year 2014.

Full-year SG&A expense items not included in non-GAAP financial measures net of tax benefits were the amortization of acquired tangible assets, stock-based compensation expense, acquisition transaction cost, and severance cost. Again, a detailed reconciliation of our non-GAAP measures compared to their comparable GAAP measures are included in our earnings release and available on our website.

At December 31, 2015, we had $11.7 million of outstanding bank debt, net of cash balances on hand. Our borrowing availability at year end 2015 was approximately $11 million under our existing revolving credit line. During Q4 2015, net bank debt declined by $3.8 million.

Lastly, our accounts receivable balance at December 31, 2015, remains of top quality. With client contract assignment matters related to our asset purchase of Hudson IT largely behind us, our days sales outstanding measurement is starting to return to pre-acquisition levels.

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

Thanks, Jack, and good morning, all. First I would like to comment on our fourth-quarter performance and then I will give you my perspective on the full year of 2015 and where I see Mastech headed in 2016.

With respect to the fourth quarter, I would summarize Jack's detailed comments in the following way. Number one: our Hudson IT acquisition is providing the kinds of results that we had hoped for when we acquired the business in June of 2015. Thus far, I'm very happy with this transaction.

Number two: gross margins continue to expand beyond the impact related to the acquisition, which pleases me. Albeit, we had some help during the quarter from our self-insured healthcare program. Three: we've done a good job managing our SG&A expenses in Q4, from eliminating marginal producers, to encouraging the use of vacations during the slow holiday season, to tightening up on travel marketing and support-related expenditures.

Our fourth-quarter SG&A expense performance also shows the positive impact of having a leveraged compensation structure in place, with lower commissions, management incentives, and stock-based compensation expense responding to a lower-than-expected growth rate for the business.

However, despite solid earnings performance in fourth quarter of 2015, our consultants on billing continue to decline, which was disappointing for me. While historically the fourth quarter is a high project ends quarter and we generally come to expect some COB deterioration, my disappointment was squarely on the start side of our business. We need to do better turning demand into new starts in 2016. I'll talk a little bit about our plans around that in a minute.

Addressing our performance for the full year, most of my fourth-quarter views apply to the entire year. We closed an exciting acquisition with plenty of potential. The market is still cooperating and we have adequate demand for our services. We have a low-cost operating model which has proven to be effective. But, again, like the fourth quarter, we struggled to cover demand opportunities into new business at rates which were consistent with our performance from 2011 to 2014.

Let's talk a little bit about our focus for improvement in 2016. That focus is a back-to-basic strategy. Within our offshore recruiting organization, we have implemented smaller client-centered teams, each with an experienced leader accountable for the performance of his or her team. The smaller teams have daily quality candidate submittal targets and we simply do not go home until we hit our daily targets.

If January is a measure, we are probably up about 25% or 30% submittal rates as compared to Q4. So I'm very pleased with the initial action there.

Number two: we've added resource managers to our onshore delivery organizations and those RMs are working with our clients to clarify job requisitions technically, to confirm those technical needs with the recruiting organization, and to evaluate the candidates who are being submitted for both technical fit and client cultural fit.

Number three: within our sales organization, we have added additional experienced account executives, plus we are reestablishing relationships in several clients who changed MSP -- that would be managed service providers -- in the second half of 2015. As you know, in the MSP world, relationships with both the customer hiring manager and the MSPs' sourcing coordinators or sourcing contacts are crucial.

Number four: we have several interesting growth opportunities in 2016 and I'd like to highlight just a couple of them today. We added a new client in 2015 who is a large user of contract IT resources. In the two quarters we have been servicing them, we've moved into their top tier of vendors and we stand to grow with them in 2016 as well.

Two: we have one of our integrator partners, again a top-five customer of ours, who is challenging us to double our starts per month with them in the first half of 2016. We've added recruiting capability and we've added sales and RM capability to service that account.

Three: we have one of our direct customers, again a top-five customer, who has offered us the opportunity to significantly grow our exclusive business with them beginning in January of 2016. Historically, this customer is an MSP customer with little hiring manager contact. So we expect to leverage those new relationships that we are building there as well.

To summarize, for Mastech, 2016 will be all about organically increasing consultants on billing with our clients. Our how-to is a back-to-basic strategy focused on two things which are simple to say, but much tougher to do. One: a much higher level of quality candidate submittal activity from our recruiting organization. And two: a much higher level of sales activity, penetrating our existing clients, developing new or reestablishing existing relationships with contacts within both customers and, where applicable, the customer's MSP.

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

(Operator Instructions)

[Louis Moser], [Mayfax] Investors.

I'd just like to verify that the new acquisition is not a seasonal business. I know you included it for just part of the year. And I wondered if this business will continue to grow, as it has apparently done during the time you have the company?

Actually, we expect it to continue to grow. And the customers of that business are somewhat seasonal in that many of our contracts in that business run through the end of the year. So 12/31/2015 was a big ends time for that part of our business as well. So if there is any seasonality in the business, it's high growth in the first two to three quarters with some trailing in the fourth quarter.

Is that a fair way to describe the business, Jack? At least as much as we've seen so far and what the team can tell us about how the business has historically performed.

Yes. And that's been their historical trend.

Thank you.

David Polonitza, AB Value Management.

Thank you very much for the call this morning. I just have two quick questions. One: if you could just comment about the sustainability going forward? The operating margin, obviously it is a good number compared to historical margins of the Company.

And the second one is just a breakdown of the wholesale versus retail revenue and if there was any permanent placements during the quarter?

I'll let Jack think through the perm question and let me try the first one. Dave, we believe that the operating margin or the relationship of our SGA costs to our revenue at 13.8% is absolutely sustainable. Now, there will be times when in a quarter where we will add salespeople or add some recruiters and generally the performance is trailing those adds, right? But generally speaking. I don't see any reason why we won't be -- why those ratios won't continue.

Jack, do you agree with that on the operating margin side? I don't see any reason they won't.

From a gross margin perspective, I think they are sustainable. We had a $100,000 favorable cost element because of good claim experience on our self-insured programs. Is that going to happen each quarter? I would doubt that. But margins -- but again, our perm placement activity was down in Q4. So maybe those do offset a bit, but certainly gross margins in the low 20%s are I believe it's sustainable.

The operating margins -- if you look at the cost savings that we had in Q4 versus Q3 and both of those quarters have all of the SG&A expense associated with the Hudson acquisition -- the Hudson operations -- we had $800,000 of cost or expense improvements, some of which are in a way one-time. Like the sales commissions, the management incentives, and the stock-based compensation. Hopefully --

But one-time related to revenue.

One-time related to cost.

No. But as revenue increases, that ratio of SG&A to revenue will continue to stay where it is.

I think maybe over the long haul, those operating margins would hold. But in the shorter term, I would suspect they were going to decline a bit.

Oh. You mean like Q4 to Q1?

Yes.

That's a fair statement, Jack. That's absolutely fair. I stand corrected; that is fair. Dave, did we catch you? Did we get what you were looking for?

Yes. And just if you have the numbers in front of you in terms of the wholesale versus retail breakdown on the revenue base?

Yes, I do. Give me a sec. For fourth quarter, we had approximately $19 million of wholesale and $13 million of retail. So we are looking at retail of around 40% and wholesale around 60%. And prior to the Hudson acquisition, that number was dramatically different. The retail channel was more like 25%. So one of the advantages that Hudson did was it moved up our revenue split in retail.

Thanks. Appreciate it.

(Operator instructions) There are no further questions at this time. I would like to turn the floor back over to you, Mr. Horner, for closing comments.

Given there are no further questions, I'd like to thank you for joining our call today. And we look forward to sharing our first-quarter 2016 results with you in late April. Thanks, all.

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