Q1 2020 Earnings Call

[music].

Ladies and gentlemen, thank you for standing by welcome to the CTG quarterly Investor Conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time.

Should require assistance during today's call. Please press Star then zero as a reminder, this conference is being recorded but I would now like to kind of conference over to your host Mr. Jim Culligan. Please go ahead.

Thank you Tunica and good morning, everyone with me on todays call or fleet today, CTG is president and Chief Executive Officer, and John lot, better Executive Vice President and Chief Financial Officer.

Before we begin I want to remind listeners that statements made during the course of this conference call. It stayed the company's or management's intentions hopes beliefs expectations and predictions for the future are forward looking statements.

It is important to note that the company's actual results could differ materially from those projected.

These forward looking statements are based on the nation as of today Tuesday April 20 for 2020.

The company assumes no obligation to update these statements based on information from an after the date of this call additional information concerning factors that could cause actual results to differ from those made in the forward looking statements is contained in today's earnings release as well as the Companys SEC filings.

In addition, the company's press release and management's statements. During the call include discussions of certain adjusted non-GAAP measures and financial information.

These financial measures and a reconciliation of GAAP to non-GAAP results are provided in both today's press release and related form 8-K.

That I will turn the call over to totally for his opening remarks.

Thank you Jim.

Good morning to everyone joining us today on the phone then right.

Our consolidated financial results for the first quarter were very good.

And then going to get all prior expectations.

Right to charming just related to the Corbett 19, and that Nick had the most interested in March.

The decline in talking revenue year over year, primarily were expected.

Anticipated it doesn't headwinds one less billable day in for sport.

As well as have aggressive transition away from lower margin I D stat.

During the quarter, we continue to make progress from our strategic shifts towards more solutions.

Organization.

Which was highlighted.

The gross margin from our I'd solutions business expanding to 27.5%.

An increase of 250 basis points year over year.

Combined with our prudent and ongoing cost management.

Chiefs in 80% increase in operating income for the quarter.

Non-GAAP earnings per share increased by 67 cents compared with a year ago cool.

Our first quarter results reflect the successful continuation of our transformational shift to a higher marketing solutions first organization.

It team remains focused on executing on our strategic plan, which continues to deliver solid results as well as expanding margins and improved profitability.

Specific to the current environment.

The majority of our business remains resilient throughout the first two months on core.

Beginning in mid March we began to see increasing feedback from clients about evolving in fact, some business disruptions associated with a global Kogut 19 pending.

Without question the two short months since our fourth quarter conference call has been extraordinary.

And the scope of the impactful so many people's lives companies operations and the global economy.

It's been unprecedented.

My sympathy unwell vicious go out to all those who have suffered loss or hardship associated with upon that.

And I also want to thank all the people that are working so hard to protect then care for the well being all four older communities in which we're live.

Right.

During these challenging times, the health and safety of Cpgs employees clients in business partners continues to be our top priority.

As such we took proactive and decisive action in response to the pending.

The vast majority of our employees have successfully shifted to working remotely while also complying with all national and local guidelines across CTG is operations in North America, Western Europe and India.

Our highly talented team has demonstrated impressive flexibility as well as the benefits of a modern mobile workforce, enabling us to quickly and safely adapts to the changing business landscape.

Fully meeting the needs of our client.

In anticipation of the potential for a prolonged disruption to the global economy and increased uncertainty we took a series of still active steps further strengthen the companys financial position.

Our specific actions include.

Securing additional liquidity.

Drawing down $12 million under our existing revolving credit facility.

And accelerating the collection of receivables from our largest spiky staffing clients during the first sport.

Oh, so totaling about $12 million.

In early April we took measures to aggressively contain costs.

Consisting of a fool far low for a limited number of non billable employees.

And the 20% for low for nearly all other non billable employees, including senior management.

However, we specifically excluded our business development going global solutions organizations.

As we continue to evaluate growth opportunities across our business.

We have also eliminated all discretionary spending and then that's the policy to restrict gold business job.

In Europe, we are actively participating in government backed programs in Belgium, Luxembourg and France.

All of which provide assistance to largely offset the bench costs related to enact its employees.

Even with the unprecedented challenges faced by companies across the globe.

Our theme, we remain focused on maintaining a healthy pipeline of perspective bids.

We have continued to consistently pursue attractive opportunities for new and expanded solution engagements with our current and perspective right.

In addition to submitting a steady volume of new proposals, we have to continue to win meaningful new business.

Recognizing that new business is critical to fueling Q2 gross.

We remain committed to investing in key areas across our sales and business development purposes.

During the first quarter.

Supplemented our existing highlands highly talented team.

Adding multiple experienced solution sales professionals and sustain our strong momentum.

In conjunction with our expansion of the sales team.

We also implemented aggressive sales compensation plans or twentytwenty to further incenting the rewards new solutions related business.

Despite the recent pandemic related disruptions in early April secure the significant multiyear contracts valued at over $5 million to provide application support for a new health solutions.

In addition.

The same client has already come back after signing the initial contract earlier this month to evaluate the potential multi million dollar I got on or additional training and support.

We continue to accelerate the ongoing successful transformation of CTG to solutions first organization.

You have made strong progress towards our transformational shifts and have positioned to IP solutions as the foundation for how we operate and reliably deliver added value to our club.

Central to these efforts.

Our one CTG initiative aimed at extending the capabilities of CTG score global solutions offer.

Jason advantage and advantage.

I think solution.

And adapting our approach offerings and the delivery of our existing solutions, new regions and vertical markets.

In March we successfully completed the acquisition of starters.

Neither investing on quality assurance for digital services, we'd operations in France income.

Although relatively small with approximately $7 million in annual <unk> annualized revenue.

The acquired business compliment CTG previous testing offerings in Europe.

The complete range of texting cells.

Leading functional multilingual grace no environmental regression and application benchmark.

Stardust also adds proven flexibility of surface approaches with both in lab and onsite testers as well that's commercially proven crowd testing capable.

In addition to strategically expanding CTG testing solutions offerings, and providing significant cross selling opportunities up existing clients. The completed transaction is expected to be immediately greetings to operating results excluding normal acquisition related expenses.

We also Cmos Pena CE launch CTG spheres, offering testing solutions in North America.

Initially focused on the healthcare industry, that's enough with this new suite of solutions is modular by design.

And can be customized provide end to end testing services for both healthcare provider and payer organizations.

Together the launch of our new testing services and the acquisition of Stardust meaningfully expand our portfolio of offerings to address emerging flight.

We actually believe contributes to accelerated growth of CTG solutions business in both North America and deal.

As highlighted in this mornings press release it is my pleasure.

The knowledge and congratulate then I was lucky on his recent promotion to senior Vice President of CTG or.

You know, there's a 25 year veteran of CTG and has demonstrated tremendous leadership in as possible.

While also being a fundamental contributor to the company successful track record of growth and profitable.

He has extensive experience makes him the ideal leader to assumed responsibility for CTG strategy and operations across all of Western Europe.

We announced promotion also serves to complete the hormone transition of my previous ROE prior to becoming CEO.

We are confident in his ability to sustain CTG Europe strength of outstanding performance as well as successfully navigating.

Precedented challenges associated with go get Nineteens throughout Europe.

Specific to the quarter.

Our operations and the overall business environment in Europe, we're very similar to what we experienced in North America.

With a relatively softer start to the year, especially within the European financial sector.

Hello, buying noticeably draw that balls and increased uncertainty beginning in.

In spite of the challenging environment, our team successfully secured the double digit number of new clients.

Including several key wins in Belgium, and Luxembourg.

Contributed revenue into for school.

We are also seeing an initial increase into mom and opportunities for our cloud based solutions.

Which we believe has the potential for significant growth.

The result of more companies, having to adopt remotes work environments for extended theory.

Nike stopping.

This area of the business performed relatively well in the first school.

With increased needs across the small group of larger staffing clients, helping to offset the lower demand.

Mike otherwise, we expect that there was a result of the current involved.

In fact, nearly the entire decline we experienced in the first quarter was from what we consider noncore staffing business.

Which can largely be attribute that to our previously communicated decision to more aggressively transition away from certain lower margin business.

We continue to fully supports the needs of our existing staffing plans, while simultaneously remaining focused on perspective engagements in higher value areas.

Chest professional and Nike staff.

[noise] acknowledging the heightened degree of uncertainty and potential for additional new challenges in the months ahead.

I believe our entire organization has done an excellent job well rapidly adapting to the current business landscape.

While continuing to provide highly effective support to our clients.

We are closely monitoring CTG is business employees and glide.

And we will continue to proactively manage the factors that are within our control.

Most importantly.

We remain focused on the disciplined execution of our strategic plan.

As we manage our way through this challenging environments.

A number of our core beliefs.

Our client base insist so many large.

Actually strong companies that have the ability to facilitate on manager work from home and.

As we continue to see solid business development opportunities, we will continue to invest in sales and solutions exports to drive continued growth.

We are focused on selling I see solutions.

We will leverage our long history of delivering to our clients including remote.

We believe the current environment will accelerate our transformation to an I'd solutions organization.

As our noncore staffing positions will be reduced and there will be a continued focus on delivering solutions remotely into future.

And.

While we are well capitalized we can and will take additional actions as necessary to maintain liquidity and the overall financial strength of our enterprise.

I will now turn the call over to John or a detailed review of our first quarter results.

Thank you for late [noise] and good morning to those who are joining us on todays conference call.

As reported in our press release earlier. This morning consolidated revenue in the first quarter was 86.9 million.

Paired with 99.3 million in the fourth quarter 2019, 97.2 million in the first quarter of 2019.

Currency translation had a negative 1.1 million dollar impact on revenue and the first quarter of 2020.

The old days in the first quarter was 62 compared with 65 days in the fourth quarter of 2019.

At 63 days in the Ergo first quarter.

I T solutions revenue in the first quarter 2020 was 29.19.

Representing 33.4% of total revenue.

Compared with 33.4 million, representing 34.4% of total revenue in the first quarter of 2019.

Well, our IP solutions revenue decline during the 2021st quarter due to several projects ending.

Consistent with our overall strategy a margin on this revenue improved approximately 250 basis points, 27.5% from last year's first quarter.

Revenue from Nike staffing in the first quarter of 2020 was 57.9 like.

Were 66.6% of total revenue.

Compared with revenue of 63.8 million for 65.6 out of total revenue.

In the first quarter 2019.

The decrease in staffing revenue was due to our planned exit from some low margin noncore staffing business late in 2019 and in the 2021st quarter.

Revenue from Ivy, having the first quarter was 19.9 million or 22.9% total revenue.

Compared with 21.5 million or 21.6% of total revenue in the fourth quarter 2019.

At approximately 20.9 million or 21.6% of total revenue in last year's first quarter.

At this time, our Master services agreement with IBM has been extended to May 1st 2020, and we anticipate it will be extended to June thirtyth 2020 in the coming days.

No other client represented more than 10% of revenue during the first quarter 2020 on recent comparable periods.

Direct costs as a percentage of revenue were 80.4% in the first quarter 2020.

It was 79.6% of revenue in the fourth quarter of 2019.

81.8% of revenue in the year ago first quarter.

In addition to the solutions based business margin improvement.

The margin on our staffing business improved 96 basis points year over year.

GAAP operating income in the first quarter of 2020 was 2.4%.

Paired with 2.4% and the fourth quarter 2019.

And 1.2% in the year ago quarter.

The non-GAAP operating margin in the first quarter, 2020, which excludes acquisition related expenses.

It's 2.9% compared with 3% in the fourth quarter of 2019, and 1.5% in year ago core.

The first quarter GAAP operating margin increased by 122 basis points and non-GAAP operating margin increased by 138 basis points year over year.

Both measures remaining their multiyear highs despite lower revenue base.

The effective income tax rate in the first quarter of 2020 was 39% compared with 34% in the fourth quarter 2019.

And 33.3% in the Ergo first quarter.

The first quarters rate higher than previous quarters.

Rarely do the income in our European operations were effective tax rates are generally higher than that of the United States.

GAAP net income in the first quarter 2020 was 1.1 million or eight cents per diluted share.

Which include a two cents per diluted share an acquisition related expenses.

This compared with net income in the fourth quarter 2019 of 1.79 or 12 cents per diluted share, which also included two cents per diluted share an acquisition related expenses.

GAAP net income in the Ergo first quarter was 600000.

Were five cents per diluted share, which included one cents per diluted share and acquisition related expenses.

Non-GAAP net income for the first quarter of 2020 was 1.4 million or 10 cents per diluted share compared with 2 million or 14 cents per diluted share in the prior quarter.

And 900000 or six cents per diluted share in the first quarter of 2019.

She is total headcount at the end of the first quarter was approximately 4000.

Compared with 3950 at the end of the fourth quarter of 2019 and 4350 at the end of the year ago first quarter.

The quarterly decrease in headcount from year end, primarily reflects the addition of startup.

I think solutions company, we acquired in March.

Approximately 91% of our first quarter 2020 headcount was billable.

Turning to our balance sheet cash and cash equivalents at the end of the first quarter were 31.5 million the highest balance in nearly five years.

Selected the drawing down of $12 million on the company's existing revolving credit facility.

As well as accelerating collection.

Schedule, we put into place at our largest staffing client.

We ended the first quarter were 12 million of outstanding long term debt.

Resulting in net cash of 19.5 mill.

Capital expenditures in the first quarter of 2020 were 700000.

Compared with 1.2 million in the fourth quarter of 2019 and 283000 in the first quarter of 2019.

With that I want to provide a few comments regarding our business outlook.

Although the coping 19 pandemic had relatively limited financial impact on our business in the first quarter.

We expect a more pronounced effect on both our clients operation and CTG business beginning in the second quarter.

Therefore, given the heightened degree of uncertainty.

Related to the magnitude and longevity of the anticipated future impact to the pandemic.

We have chosen to spend or previous fill your guidance for <unk> for 2020.

Together CTG board of directors and senior management will continue to closely monitor developments as visibility improves we'll revisit for your guidance.

Finally, before we moved to the Q1 day session.

Several last quarter I would like to remind everyone that we're here today to discuss the financial operational results for the quarter and will not address the previous unsolicited offers to acquire the company.

As in the past our board in consultation with its advisors will continue to review and evaluate any proposal to determine the course of action that we believe the best interest of the company had stakeholders.

We ask that all questions remain focused on a reported results and current operations were business.

Nico could you. Please manager question answer session.

Certainly ladies and gentlemen, if he wants to accept question. Please pass one then zero on your telephone keypad you may withdraw your question at any time by repeating one zero command. If you are using a speakerphone. Please pick up the handset before passing the numbers. Once again if you have your question. Please press star.

<unk> London zero at this time.

My first question.

And our first question comes from the line Kevin.

Okay, Lou and company your line is open.

Hi, good morning.

First question here, it's really going it looks like there was much of an impact from Covidien 18 on your business in the first quarter can you just quantify if there was actually anything you saw with respect to any of your existing engage and and then maybe you know through the first three weeks of April here, what kind of what's changed in terms of how could that 19 has impacted the business.

Sure Kevin Good morning, and.

Looking at.

Endemic and then what's happened thing or let's say the last four or five weeks, we really have seen mixed effects.

In both North America, and the European operations.

Most of our employees now we're in a work from home position. So continuing never assignments and that's we also had some clients on projects or it's not possible to work remotely do a due to the nature of the work we're doing with them so their revenue.

Being adversely impacted.

We also see some clients are pushing project start dates <unk>.

The lace revenue on one side that however in some instances. There's also resulted in increased business as our legacy application management contracts where extend.

You have some help desk operations in our health solutions vertical.

I have expanded.

And in response to an increase in patients demands for access to their online medical records.

And in this a flexible.

Moving to everybody, making everybody of it.

Each work from home and we have helped some clients with their remote work capabilities.

You can think of procuring laptop setting up phone systems.

Which helped us in securing strengthening those clients relationships, but also in billable hours.

And we see potential for growth and our cloud business in Europe.

As clients are looking to facilitate future remote smoke capability.

So all in all mixed effects.

Ultimately.

So does the short term impact on the company I see more positives and negatives on the long term as we are continuing to strengthening those clients relationships and more importantly, proving our abilities to be and I'd solutions provider in the work from home in Parliament.

Now she or.

Yeah go ahead.

Oh, sorry, if you had more data go ahead.

Add on and ask you know as you start to see operations return to a little bit more normalcy as countries and state start to reopen here do you have any sense from your clients at this point in terms of whether their level of engagement with you is going to return to fairly normal pre pandemic or is it just too early to tell.

Very early to tell 'em, I'm definitely not going to speculate though.

How long I'm also a deep disciplined democratic <unk> is going to be a what we do see Kevin moves that we continue to talk about business developing about new opportunities. So on the long term I'm confident we're going to get back.

Q3 Cove it level.

Although we're still working together with our clients on new opportunities.

Now the timing of that because obviously the the million dollar question.

And all the economic reports that if I'm reading.

I don't see anybody saying that this is going to really come back very fast.

And then the next quarter or the courts are obstacle no body.

It's a is rising goes kind the predictions.

At this moment I couldn't get so to say that nobody really knows.

Hi, There said and then Philipp you also mentioned earlier that you guys did continue to add on the business development front and the first quarter here how have you seen yourselves cycle impacted if at all and then make and then as you head into the next few quarters are you satisfied with the level of hiring thus far or do you plan to continue to add to.

The cells unlocking organization.

Well, we haven't really seen a longer sales cycle. So in fact, it so far and in the last quarter. So in March.

And we see more what I'd like I said before start dates being pushed out.

But we're working with clients on proposals on on on reference checking so activities that are very car into sales cycle. So that this can thing you. It and that's also why we decided to continue to invest in sales and solutions or professionals.

Going forwards are over always maintaining a strong pipeline.

Sales and solutions professionals, because I think that's just the or Weiss action her a company like ours.

Too because we can always use silent in those areas.

Well have to see in the next coming quarters.

How fast we're going to act on that line or how much time, we're going to need to grow heard.

But on the long term basis, or we see that our strategy is actually helping us now and that we will definitely confidence will come out stronger.

Because of this crisis and be ready.

When things pick up most kroger.

Got it and then just in terms of some of the actions you guys took at the start of a this month and Furloughing non billable folks and unlike you talk about what sort of expected cost savings, you'll see from those actually either on a quarterly or annual basis.

John would you like to answer that one.

Sure it's really a.

Good morning, Kevin good good to hear from you.

Oh, the actions that we've taken a just to reiterate we we didnt furlough and a full time basis, a number of a small number of non billable resources.

And then we are effectively for most nearly all of the remaining nondeal resources, including the senior management team, so including sleep myself and the rest of the executive leadership team to the 20% furlough effective April six our goal is to.

Evaluate that as we go through a each month in each quarter.

To understand the impact on us a long term. So this is not something that we've put in place for a set period of time and something that we're really constantly evaluating almost on a daily basis as we understand.

What we've just talked about from a business development standpoint.

The information and the instructions we received from our clients about yeah, the amount of activity that they need support for at this point in time.

So at the end of the day those actions themselves really create between a half a million to a million dollars a quarter of cost reductions.

But that's four that's for an entire quartered again something are critically evaluating as we go through this process.

Yes, I said appreciate the color there and then just lastly, some questions around your testing business.

How much revenue did the acquired started desktop actions contribute within the quarter and then kind of given the timing of the launch of testing services in the U.S. being more so towards the latter part of the quarter curious as to how you expect that business. It's around both in terms of pipeline and then ultimate business over the course of this year.

Sure.

Well I was really got or acquisition Star Best is not intended to stand alone, we will not breakout or raising your financial results on winner on ongoing basis.

However, as we said the crime of acquisition.

Revenue was approximately 7 million.

Hi annually.

And Ah well, we completed that are early March.

As to our testing solutions in North America.

Basically even before we officially announce.

Our testing solutions in the states, we've already obviously active with clients and that connects and when they're ceiling or what kind of potential there wasn't in the market and the the biplane we have built even before the official launch a was quite.

Impressive is quite impressive and there's still a continuing to grow so were very positive.

About testing I think we having very good focus.

In that helped solutions vertical.

Because there those are real strong needs with the increasing speak of new releases, Oh for instance, and that yeah more like epic.

That testing quarterly testing is now moved two months.

And your old testing at Mt moves too.

Quarterly testing because there's more releases and that's just.

Painful situation for most of our clients. So we see I love of potential we see growing pipelines.

Obviously, a decision moments hasn't been have been pushed a little more into the future and we'll see in the coming quarters, how fast we can.

I wouldn't hurt this pipeline into business.

Yeah No further questions you may continue.

And if you haven't additional question. Please press wondering zero.

No one are there any other questions stenico.

I would have no other questions at this time.

Okay. Thank you then they kept.

I'm proud of our organization the resilient dedication of our team and our numerous accomplishments over the past quarter.

Regardless of the prevailing landscape, we go proactively manage dose have to get our within our control.

While remaining committed actively supporting our clients by delivering value at solutions and services CTG hasn't been known for since 1966.

I remain extremely confident enough strategy and the ability to drive transformational growth in our I'd solutions business through continued focus on disciplined execution.

In doing so we will further enhance profitability as well as maximize value for all CTG shareholders.

I'm very confident we're going to come out of this crisis trial.

Thank you for participating on today's conference call and for your continued support for CTG.

And they kind of you may now disconnect the call.

Thank you. Thank you for your participation for use in 18 <unk> service you may now disconnect.

Okay.

[noise].

We're sorry your conference is ending now please hang up.