Mastech Digital Inc (MHH) 2016 Q2 法說會逐字稿

Greetings and welcome to Mastech's Q2 2016 earnings call. (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, Inc. Ms. Ford Lacey, you may begin.

Thank you, operator, and welcome to Mastech's second quarter 2016 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 Vivek Gupta, 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 2015 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 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 second quarter 2016 results.

Thanks, Jenny, and good morning all. 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 said, revenues for the second quarter of 2016 totaled $33.6 million compared to $29.3 million in the second quarter of 2015. This revenue performance represents a 15% year-over-year increase and a 6% sequential increase over first quarter 2016 revenue results. Activity levels during the quarter were up from the previous quarter and our new assignment win ratio improved. Thus we were able to expand our global consultant base by 62 consultants to a total of 916 consultants at quarter end. This was our strongest quarterly increase in global consultants since second quarter of 2011.

Gross profit for the second quarter of 2016 totaled $6.9 million compared to $5.5 million during the same period last year. Our gross margins for the second quarter of 2016 were 20.5% of revenues and represented a 170 basis point increase compared to the corresponding period of 2015. This year-over-year gross margin improvement was due to an increase in our retail client base, which generally carry higher gross margins than in our wholesale channel, and higher gross margins on new starts in general over the last several quarters.

SG&A expense were $5.2 million in the second quarter of 2016 compared to $4.9 million in the second quarter of 2015. It should be noted that second quarter 2015 SG&A expenses included $549,000 of transaction expenses associated with the Hudson IT acquisition. Adjusting for these transaction costs, our year-over-year increase in SG&A expenses of approximately $800,000 was reflective of the Hudson IT operations, which were included in second quarter 2016 for the entire period but only in last year's Q2 numbers for 15 days, i.e., concurrent with the acquisition date.

GAAP net income for second quarter of 2016 was $945,000 or $0.21 per diluted share compared to $382,000 or $0.09 per diluted share in the second quarter of 2015. Non-GAAP net income for the second quarter of 2016 was $1.1 million or $0.25 per diluted share compared to $801,000 or $0.18 per diluted share in the corresponding quarter of 2015. Second quarter SG&A expense items not included in non-GAAP financial measures net of income tax benefits were, one, the amortization of acquired intangible assets; two, stock-based compensation; and three, 2015's acquisition transaction expenses, and are detailed in our second quarter earnings release which is available on our website at www.Mastech.com.

Briefly addressing our financial position at June 30, 2016, we had $13 million of outstanding bank debt, net of cash balances on hand. Our borrowing availability at June 30, 2016, was approximately $10.7 million under our existing revolving credit line. And during the quarter we were able to reduce our outstanding bank debt by approximately $1.7 million.

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

Thank you, Jack, and good morning, all. During my first earnings call with Mastech in April, I've shared with you my vision and objectives for the Company, which were twofold. One, to re-energize our existing business and, two, to look at ways to expand our offerings into adjacencies. In our efforts to expand beyond IT staffing, I also wanted to explore areas that will allow Mastech to participate in the digital transformation of our customers' systems and business processes. I'm excited to say that we have made good progress on both these fronts during the second quarter of 2016.

First, let me talk about reenergizing. Clearly our second quarter financial performance reflects our reenergizing efforts. We organically grew our billable consultant base by 62, which is a 7% increase in the quarter. Our gross margins improved nicely, both on a year-over-year basis as well as on a sequential basis when compared to the first quarter of 2016. And our bottom-line results showed a material improvement, both on a GAAP and non-GAAP basis, as we cut operating expenses in the areas in which we were not getting the desired payback while investing in strengthening our leadership and improving our operational effectiveness.

During this quarter, we aligned our US sales organization under new leadership, significantly strengthened our marketing capabilities, and tweaked a number of our core processes aimed at being more responsive to our clients' and consultants' needs. We will continue this journey of enhancing efficiencies by continuing to assess changes in organizational alignment, internal processes, and people during the second half of 2016.

Now, regarding the objective of expanding beyond staffing, we have made progress in several areas. First, we have revamped our go-to-market approach in our salesforce.com practice and have also expanded our capabilities beyond staffing. Today our salesforce.com practice has the ability to deliver both staffing and project services as a solutions provider. Secondly, we have started a new practice around SAP HANA. This is an exciting area of future growth and our first foray into data analytics, a digital transformation technology space that truly excites me. I will expect to talk further about these initiatives as things progress in the second half of 2016 and beyond.

As I stated on our last earnings call, my ultimate vision for Mastech is to transform it from a pure IT staffing company to a much broader digital technology solutions company. These solutions will include both staffing as well as some turnkey projects and managed services. Towards that end, the revamped salesforce.com practice and the newly established SAP HANA practice are our first steps in our transformation journey. We have also parallelly restructured our offshore recruitment organization to better align with digital technologies.

Specifically, we now have a dedicated team which focuses exclusively on securing experienced consultants in these advanced digital technologies. While Mastech's transformation into a broader digital technology solutions company will not happen overnight, we will continue to review and adjust how we conduct our business to better facilitate this ultimate objective. In summary, I'm pleased with our second quarter accomplishments, not only in terms of financial results but also in terms of strengthening our capabilities and positioning ourselves for the future as a digital technology solutions company.

I will now open the session up for questions.

(Operator Instructions) David Polonitza, AB Value Management.

Good quarter report. Congratulations on that. Just was hoping if you can go a little more in-depth on why we had this level of success for the quarter. And was it due to gaining new clients or servicing existing clients better? Any clarity on that would be useful. Thanks.

Thanks, Dave. Nice to hear your voice after a long time. The quarter, actually there are a number of reasons why this quarter turned out to be the way it is. I think a lot of it, the credit goes to the team. As I came on board toward the end of February, immediately after coming on board we started looking at ways to re-energize the system, the business. And that involved looking at all aspects. So we looked at our sales organization and we felt that that there is -- we need to unify the various units that we had, some of which had been -- which had come to us from the Hudson acquisition, some of which were our legacy Mastech units.

So we integrated them under one leadership. We broke a lot of internal barriers and looked at ways of maximizing benefits from the national accounts. So we focused a lot on account management. We focused -- fill all the positions which were lying open. We also looked at our delivery capability, which as you know, we have a large center in India where we have almost 125 recruiters. And we looked at that and we looked at ways of energizing or strengthening that capability. And we felt that it would be good to change the structure from a dedicated recruiter model to a technology practice-based recruitment model.

So, what that means is that the recruiters who -- the 125 recruiters that I'm talking about, they were allocated to individual sales channels on a dedicated basis. So we moved away from that, and now we have these teams organized on technologies. So the recruiters are dealing with the similar technologies or same technologies day in, day out, and they are getting better and faster at it. So as a result, our speed of response improved and we were able to service the new assignments much better.

We also looked at how the client connect and the consultant connect that we have, and we have been working on it and of course that's something which we will continue to work on. So, it's just tightening a lot of our processes and looking at ways of breaking barriers as I call them, in quotes, and it really was getting the entire engine humming in a better alignment. And that has resulted in this kind of headcount growth. Does that answer your question?

Absolutely. I appreciate that further information. I do have one other question and I'll go back into the queue here. With the digital transformation of the Company, what is -- how are you -- what's your go-to-market strategy in terms of the value proposition that Mastech has versus competitors? And are you able to leverage the history of the Company, our existing client base on the staffing side to help potentially grow that business?

Dave, our plan is to expand our offerings. And what that essentially means is that we should be able to go to the same customers to whom we have been successfully providing IT staffing services and be in a position to talk to the same customers as a solutions provider. Which is, we'll still be serving the staffing requirements of those customers, but we will be able to talk the language as subject matter experts and practice heads, understand what the real problems are, and to be able to service those requirements in whichever way is necessary.

So it could be staffing. It could be actually doing the projects fully where we own the deliverables. It could be managed services. So it's really not opening up a completely different front and having a different sales force coming in. It's really leveraging the current account relationships that we have and have a strong practice and delivery and technology capability, subject matter experts who can support the salespeople in positioning us as more of a solutions provider. And this should help us not only go on the transformation; the digital transformation services side. It is already showing results in improving our positioning on the staffing side. Does that answer your question, Dave?

Yes, Vivek. I appreciate that and keep up the good work. Thank you very much.

(Operator Instructions) Our question-and-answer session has concluded, so I would like to turn it back to management for closing remarks.

Thank you. If there are no further questions, I would like to thank you for joining our call today and we look forward to sharing our third quarter 2016 results with you in late October. Thank you.

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