Mastech Digital Inc (MHH) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Mastech Digital, Inc. Fourth Quarter 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 Digital, Inc. Thank you. You may begin.

Thank you, operator, and welcome to Mastech Digital's fourth quarter 2017 conference call. If you have not yet received a copy of our earnings announcement, it can be obtained on our website at www.mastechdigital.com.

With me on the call today are Vivek Gupta, Mastech Digital'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 2016 annual report on Form 10-K filed with the Securities and Exchange Commission and available on its website at www.sec.gov.

Additionally, management has elected to provide certain 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.mastechdigital.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 2017 results.

Thanks, Jen, and good morning, everyone. Revenues for the fourth quarter of 2017 totaled $40.5 million and represented a 25% increase compared to revenues of $32.4 million in the fourth quarter of 2016. Our data and analytics services segment, which was acquired on July 13, 2017, contributed $5.1 million of revenue during Q4 or approximately $1 million higher than revenues reported from this segment in the previous quarter. This sequential revenue increase was due to higher project wins in Q4 versus Q3, and is reflective of a full year of operations -- or excuse me, a full quarter of operations by this segment in the fourth quarter of '17.

Organic year-over-year revenue growth from our IT staffing services segment was 9% in Q4, as our billable consultant base increased by 12% during the year. Demand for our IT staffing services remained robust during the fourth quarter and improved efficiencies at our offshore recruitment center resulted in a higher assignment win ratio in 2017.

Gross profit for fourth quarter of '17 totaled $9.5 million compared to $6.4 million in the same period last year. Our gross margins for Q4 of '17 were 23.5% of revenues compared to 19.7% of revenues in the fourth quarter of 2016 and 22.5% of revenues in Q3 of 2017.

Our data and analytic services segment had gross margins of 45.3% in Q4 of 2017 compared to 44.2% in Q3 of 2017. Our IT staffing services segment in Q4, our gross margins were 20.4% compared to 19.7% in the 2016 fourth quarter and 20% in the third quarter of 2017. Lower bench costs in the data and analytics segment and higher direct hire revenues in our IT staffing segment favorably impacted our gross margins in the 2017 quarter.

SG&A expenses were $7 million in the fourth quarter of 2017 and represented 17.4% of total revenues compared to $5.3 million or 16.3% of revenues in the fourth quarter of 2016. Exclusive of amortization of acquired intangible assets, our operating expenses as a percent of revenues were 15.7% in both Q4 of 2017 and Q4 of 2016.

GAAP net income for the fourth quarter of '17 was $865,000 or $0.16 per diluted share compared to $640,000 or $0.14 per diluted share in Q4 of 2016. It should be noted that Q4 net income in 2017 included a $372,000 charge related to U.S. tax reform, which impacted diluted earnings per share by approximately $0.07 per share.

Non-GAAP net income for the fourth quarter of 2017 was $1.7 million or $0.32 per diluted share compared to $841,000 or $0.19 per diluted share in the corresponding quarter of 2016.

Fourth quarter SG&A expense items not included in non-GAAP financial measures, net of tax benefits, were: one, the amortization of acquired intangible assets; two, stock-based compensation; and in the 2017 quarter, three, an estimated onetime charge related to the impact of U.S. tax reform, and are detailed in our Q4 earnings release, which is available on our website.

Addressing our full year results, 2017 revenues totaled $147.9 million and represented a 12% increase over 2016 revenues of $132 million. This increase is reflective of our July 2017 acquisition of the services division of Canadian-based InfoTrellis and organic revenue growth achieved in our IT staffing services segment.

Gross profits in 2017 were $31.6 million compared to $26.3 million in 2016. Gross margins as a percent of revenues were 21.4% in '17 versus 19.9% in '16. This improvement was largely due to the InfoTrellis acquisition.

GAAP net income for 2017 totaled $1.6 million or $0.33 per diluted share compared to $2.5 million or $0.56 per diluted share in 2016. Non-GAAP net income for '17 totaled $4.6 million or $0.92 per diluted share compared to $3.8 million or $0.84 per diluted share in 2016.

Full year SG&A expense items not included in non-GAAP financial measures, net of tax benefits, were, again: the amortization of intangible -- acquired intangible assets; stock-based compensation; and in the 2017 year, acquisition transaction costs; and an estimated onetime charge related to U.S. tax reform; and in the 2016 year, severance expenses. Again, a detailed reconciliation of our non-GAAP financial measures compared to their comparable GAAP measures is included in our earnings release.

Briefly addressing our financial position. At December 31, 2017, we had $35.7 million of outstanding bank debt, net of cash balances on hand, and our borrowing availability approximated $12.9 million under our existing revolving credit line. The increase in bank debt during the year reflected our July 2017 acquisition, which was largely funded with debt.

Lastly, our accounts receivable balance at year-end 2017 remains of top quality, and we ended the year with a healthy days sales outstanding measurement of 58 days.

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

Good morning, everyone. Thank you, Jack, for the detailed financial review of our operating results for 2017. Let me start by saying that 2017 was a watershed year for Mastech Digital. Since joining Mastech in March 2016, it's been my stated objective to transition the company from a pure-play IT staffing company into a leading player in digital transformation IT services.

With the acquisition of the services division of InfoTrellis and operating investments in other parts of our business intended to enhance our capabilities and focus on digital technologies, I'm pleased to say we are well on course in this journey.

Having said that, 2017 was also a period of great change for our organization, and our dedicated employees rose to the challenges. Our corporate team did an excellent job in completing the acquisition of InfoTrellis from the due diligence phase to its integration as well as in dealing with the disruption of upgrading our IT system.

Our sales and delivery organizations dealt admirably with change management during the year, as we redefined our services portfolio and go-to-market strategies and how these organizations execute upon them. Let me take a moment to acknowledge all the hard work and tenacious efforts of our associates during an extremely demanding year.

It is thanks to their efforts that, today, we have a project-based data and analytics services segment, with capabilities to deliver a wide portfolio of digital transformation services from multiple geographies, and our IT staffing services segment has several promising practice areas and a clear focus on staffing digital technologies in addition to mainstream technology skills. It's been quite a ride, and I'm confident that the best is yet to come.

Now let me share with you my expectations for 2018 for our 2 operating segments. First of all, data and analytics services segment. I believe that this segment is full of opportunities. In 2018, we will endeavor to broaden our capabilities in several high-growth areas, including big data, analytics, master data management and data governance. We also plan to make investments in 2018 to expand the size and quality of our sales organization. This initiative will allow us to fully capitalize on our crew and delivery capabilities and should help mitigate the historical lumpiness in this segment's quarterly revenue streams.

Cross-selling efforts and back-office optimization will continue in 2018. We've had some success in both of these areas in 2017 and expect to see continued successes this year.

Next, let me talk about the IT staffing services segment. I fully expect our IT staffing segment to grow better than the industry average for 2018. Continued efficiency gains at our offshore recruitment center and successes with digital technologies will be key drivers in this year. I also expect our gross margins to stabilize around 20% in 2018. Clearly, a tight supply of qualified IT resources will continue to pressure margins. However, our focus on advanced digital technologies should mitigate these headwinds. And we will continue with efforts started in 2017 to upgrade our backbone systems and security environments. This initiative will ensure that we have the required infrastructure to support our growth objectives in 2018 and beyond.

As we enter 2018, I can tell you that the morale of our employee base is extremely high, and the confidence levels have continued to strengthen during the year. Collectively, our organization is looking forward to a prosperous and successful 2018.

I will now open the session for your questions.

(Operator Instructions) We do have a question coming from the line of [Boofis Moser] with [Marfricks].

I was wondering, the stock price being what it is, around under $10 somewhere, and I know you have a real small capitalization, do you have any interest in trying to get some analyst coverage? Because of the apparent momentum that you're achieving now, it would seem to me that you might be able to get a little bit higher price for your stock if you had some coverage. And I don't know if you go to various meetings with executives or trade shows, et cetera. But I think it's undervalued, and I think that it would help. So that's my question.

This is Jack Cronin. We've been just starting to attend some investor conferences. And so we're going to continue to do that. As far as a complete IR blitz, I mean, we -- I really need to talk to our board about when that's appropriate.

Okay. You do, however, would assume -- feel that the momentum of what you created and you recently announced quarter-to-date will continue on course?

Yes. We are hoping that we'll be able to maintain the momentum that we've gained.

Okay. Is there anything coming up in the new product that would add to the appeal of the company?

Are you asking, are we introducing any new service line in the company?

Yes, yes.

Well, at the moment, as I mentioned in my piece, we plan to strengthen the service offerings in our defined areas in the digital transformation services. So we will look at if there are any missing bits, or anything, investment areas in the space of big data analytics, master data management and data governance. On the IT staffing side, I think we've come a long way in the last 2 years by introducing practices specifically focused towards servicing the digital technologies. And as a result of that, in the last 7 quarters or so or 8 quarters, we've been able to almost double the percentage of our revenues that are coming from the digital space. So I'm giving you a long answer to your question. I mean, there's nothing very -- I wouldn't say something very radically different, which is going to come out, but we will just strengthen what we have and see that our portfolio becomes more complete.

Okay. Yes, I guess, that would -- something else on my mind, but I can't quite come up with it now. So I appreciate your answers, and good luck.

(Operator Instructions) It appears there are no further questions at this time. So I'd like to pass the floor back over to Vivek Gupta for any additional concluding comments.

Thank you. So if there are no further questions, I would like to thank you for joining our call today, and we look forward to sharing our first quarter 2018 results with you in late April.

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