Q2 2020 Computer Task Group Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the CTG quarterly Investor call. At this time all participants are in listen only mode. Later there'll be a question answer session and instructions will be given at that time you should require assistance. During today's call. Please press Star then zero has revised stays call is being.
Accorded now I turn the council of your whole is Jim Culligan Director Investor Relations. Please go ahead.
Thank you Shawn and good morning, everyone with me on todays call. Our Felipe Good day, CTG, President and Chief Executive Officer, John Walker, 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's important to note that the company's actual results could differ materially from those projected. These forward looking statements are based on information as of today Tuesday July 20% 22020.
The company assumes no obligation to update these statements based on information from an after the date of this conference call additional information concerning factors that could cause actual results to differ from those made in the forward looking statements is contained in todays earnings press release as well as in the Companys FCC filing.
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 non-GAAP results are provided in both today's press release and the related form 8-K with that I will now turn the call over just the leap for his opening remarks.
Thank you again.
Good morning, Thank you for joining us today.
Not losing a blog on an ongoing impact.
Looking at spot on so many people I hope that you and your time leads are all doing well.
We appreciate you taking the time to participate on today's call.
Over the past few months CTG has continued to build on a solid start to the.
We delivered strong second quarter results.
Revenue and non-GAAP operating profits increasing sequentially.
Despite the unprecedented been challenging global business and writing.
These results are directly attributable to our team's success on disciplined Agnes you.
On the collectively contribute to CTG, achieving our highest those tough operating margin and non-GAAP earnings per share in six years.
We are pleased with these results.
Unbelievably consistent progress we have made announcements from nation in solution centric organization.
Okay on both performance trends over the past year approved.
But our strategy as well.
Our ongoing focus on accelerating our strategic shifts towards solutions has so does extremely well in the past hospitals to problems but.
We are announcing the resilience of our business by meeting a broader range of client needs, while generating higher margins.
Confident.
So also allow us to emerge from the pandemic from a position of strength.
We continue based steps to build on this momentum.
And positioned CTG to capitalize on the significant long term growth opportunities in our so then markets.
The transformation underway would not be possible readout.
When commitment of ARPU.
Since I was appointed CEO 18 months ago, I continue to be incredibly crowds over the team will demonstrate to the cross CTG.
Overall desktop our team has vote, giving him to advance our strategy and support our class.
With the end goal of generating added value for all stakeholders.
Our second quarter results are reflective of the teams determination.
Especially when considering the unprecedented environment, we have all witnessed in recent months.
I will highlight took on last quarters conference call, we took problem and decisive action response Coke if not.
This included rapidly transitioning 90% billable staff to work from home mogul.
Im going to lamenting targeted cost containment efforts.
We made these adjustments without a lost productivity.
The seems effectiveness, while working remotely result.
In both increased efficiencies.
Hi utilization across our global operations.
Good transitions, we have made hugging highly successful.
Im sorry, the demonstrates the resilience of our team and the ability to quickly adapt our capabilities to meet client needs new dynamic market environment.
Also reflected in our second quarter operating results are certain non recurring Ben.
Including a meaningful uptick in business from a large multinational oil and gas client.
Subsequently sold suits, Alaska based operations on June 30.
As well as governments reimbursements for unemployment in Europe associated with a pandemic.
Which largely offset the bench costs related to in active employees.
Taken together, our second quarter will comprise over the following financial highlights.
We continued significant increase in Iowa quality revenue and margins.
It doesn't buy.
A higher mix of solutions business, which generates higher margins on profits.
Sustained growth and performance in Europe.
Despite a more challenging economic environment.
Improved quality of starting about.
As we continue to gradually disengage from lower margin.
Of note the business most impacted by cope with 19 has largely been lower margin style.
Together. This resulted in very strong performance across key metrics on a long gotten basis, including year over year improvement.
Operating income under.
Our ability to deliver these solid results in the current environment reinforces the importance and timeliness of solar solution centric slots.
Well its work from home cleanse accelerates the need for CTG solutions offerings.
Solutions business grew sequentially.
38% of SGOCO revenue in the second before.
As we continue to expand our services offerings around relevant markets opportunities while also driving.
So on the improvement in the margin profile of our business.
Importantly, Howard Dean has done an outstanding job of sustaining new business development efforts, even though the face of new requests for proposals and contract wins have slowed due to the heightened uncertainty associated with that.
During the quarter, we continue to submit the number of proposal responses that we believe will help contribute to future growth when we emerge from the current thing.
This includes a multimillion gogo complex secure during the quarter.
Who managed to go lives implementation of a big based electronic health records for prominent healthcare system in the northeast anyway.
This swing represents a meaningful minds.
With our team successfully converting and engage in existing engagement with this clients for application management bench imports to.
Two CTG being selected to manage declines go life implementation.
I was another example of the growing traction within our solutions business, we have seen a rapid increase in our business pipeline for testing solutions.
Following our launch of these offerings in North America earlier this year.
You are also making solid progress on the integration of start.
Home service testing company that we acquired in March.
The addition of Stardust unique cloud testing capabilities, expanding our portfolio of solutions offerings.
Labeling CTG to provide a more complete coverage over the who I'd like to side.
As we continue to build out our call a global solutions offerings, So application advantage.
Mitch and testing solutions.
We are increasingly better positions to address a wider scope of client needs.
The whole thing and then the honest opportunities so multiple solutions to single clause.
Fundamental to both our solutions on the introduction of new expanded offerings is that our solutions, our scalable and they can easily be replicated across multiple clients and mark.
Consistent with these objectives in the third quarter, we will formally launch our newest solutions offering.
Microsoft 365 service.
This collaborative surface specifically target.
Helping clients maximize the value of their Microsoft 365 investment.
From an initial implementation that migration planning.
Deployment optimization unmated.
In support of our ongoing focus on expansion of new solutions business. We are also consistently taking steps to enhance the skills and capabilities of our feet.
In June we announced that Brett.
Seasons, I'd solutions and services that it's it.
Joint CTG as managing director of solutions North America.
In his new role Brett will help drive accelerated growth of the company solutions business through the developer.
While also supporting the rapid adoption of CTG delivery Center model.
We are pleased to have read on board.
To his contributions.
Further complementing our growing solutions business, you recently expand digital delivery platform with the opening willingly centering Bogot Colombia.
This new delivery center, leveraging its our centralized approach.
Enhances our capabilities, we believe that high quality cost effective east services and solutions.
Clients in both the Americas anyway.
We believe the second quarter was an indication of the Swiss and Joe ability of CTG business.
Evidence that our strategy is working.
And then the indication of our entire B.
We remain very enthusiastic about CTG.
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And we expect to benefit from continued traction as we convert our solid pipeline.
Marketing solutions.
Into revenue generating engagements.
As we look through the third quarter and the second half of 2020.
We anticipate sitting in our overall performance.
This is primarily related to the expect.
Increased seasonality on lower you extend into near term <unk>.
Stay at home restrictions are lifted and employee stake.
Particularly in the coming summer months.
We also expect a gradual roll off of the nonrecurring governmental benefits. We are just in the second quarter.
Hi.
Additionally, we believe we will realize its.
New business due to ongoing young clients decision, making process.
Offsets.
We strongly believe in the long term you have our strategy.
And remained fully to our transformation to a higher margin dilution centric organization.
We are confident.
Our prudent invest.
Business development and expand that solutions offerings during the second half of the year.
I will advance our future growth opportunities.
On the accelerates the achievement of our longer term objectives, while generating substantial long term value for CTG shareholders.
I will now during the call over to John.
For a detailed review of our second quarter results are developed strengths that we expect to play out in the second part for 2000.
Thank you for leap and good morning, everyone. Thank you for joining us today.
As reported in our press release earlier this morning.
Consolidated revenue in the second quarter was 89.1 million.
Compared with 86.9 million in the first quarter 2020.
In 100.4 million in the second quarter 2019.
Currency translation had a negative 800000 dollar impact on revenue and the second quarter of 2020.
Compared with a negative 2.4 million impact in the same period of 2019.
Total billable days in the second quarter were 64, compared with 62 days in the first quarter 2020.
64 days in the year ago second quarter.
Hi, T. solutions revenue in the second quarter, 2020 was 33.8 million expanding to 38% of total revenue.
Compared with 29.1 million, representing 33.4% of total revenue in the previous quarter.
And 35.6 million, representing 35.5% of total revenue in the second quarter of 2019.
In addition to solutions revenue continuing to become a growing portion of our overall business. The direct profit from solutions in the second quarter improved 290 basis points over 2019% to 28.5%.
Revenue from Nike staffing in the second quarter of 2020 was 55.3 million or 62% total revenue.
Compared with revenue of 57.9 million were 66.6% total revenue in the previous quarter.
And 64.8 million or 64.5% total revenue in the second quarter 2019.
The decrease in staffing revenue reflects the combined effects of our disengagement from select lower margin staffing business in recent quarters.
And lower demand from clients impacted by the cover 19 pandemic during the second quarter.
Additionally, we also improved the drug product for staffing in the second quarter.
As it increased 220 basis points over 2019, 16.5%.
Revenue from Ivy M., the second quarter was 18.9 million were 21.2% of total revenue.
Compared with 19.9 million or 22.9% total revenue in the first quarter of 2020.
In 21.1 million or 21.1% of total revenue in last year's second quarter.
Our Master services agreement IB M. has begun has been extended for one quarter to September Thirtyth 2020.
As we continue to discuss general business terms and conditions of an extended agreement.
No other client represented more than 10% of revenue during the second quarter of 2021 recent comparable periods.
Direct cost as a percentage of revenue were 79% and the second quarter 2020.
Compared with 80.4% of revenue in the first quarter 2020.
And 81.7% of revenue in the year ago second quarter.
The reduction in direct cost a percentage of revenue.
Is due to the increasing percentage of solutions and our overall business mix.
GAAP operating margin in the second quarter 2020 was 2.1%.
Compared with 2.4% in the first quarter, 2020, and 1.8% in the year ago quarter.
Non-GAAP operating margin in the second quarter, 2020, which includes severance and acquisition related expenses totaled totaling $1 million was 3.2%.
Compared with 2.9% in the first quarter 2020.
And 2.4% in the year ago corridor.
As part of our continued evaluation of the impact of the Cobot 19 pandemic on our business, we adjusted our resources, which caused us to incur severance cost during the quarter totaling approximately $600000.
The second quarter GAAP operating margin increased by 30 basis points and the non-GAAP operating margin increased by 83 basis points year over year.
With both measures, reflecting a high utilization of billable resources across the business during the quarter and our continued focus on cost management.
The effective income tax rate in the second quarter 2020 was 43.7%.
Compared with 39% in the first quarter 2020, and 36.6% in the year ago second quarter.
Our effective tax rate in the second quarter 2020 was primarily due to certain nondeductible expenses incurred in the U.S.
GAAP net income in the second quarter, 2020 was 1.8 million or 12 cents per diluted share.
Which included a net $400000 of income or two cents per diluted share count.
Comprised of gains from life insurance proceeds and the sale of real estate offset by severance and acquisition related expenses.
This compared with net income in the first quarter 2020 of 1.1 million or eight cents per diluted share, which included two cents per diluted share and acquisition related expenses.
GAAP net income in the year ago second quarter was $900000 or seven cents per diluted share included two cents per diluted share and acquisition related expenses.
Non-GAAP net income for the second quarter, 2020 was 1.4 million or 10 cents per diluted share.
Compared with 1.4 million or 10 cents per diluted share in the previous quarter, and 1.3 million or nine cents per diluted share in the second quarter 2019.
GAAP net income for the first half of 2020 was $2.9 million or 20 cents per diluted share.
Compared with 1.6 million or 11 cents per diluted share in the first half 2019.
Non-GAAP net income for the first half of 2020.
Excluding severance and acquisition related expenses as well as the gains from life insurance proceeds in the sale of real estate was 2.9 million or 20 cents per diluted share.
Paired with 2.2 million or 16 cents per diluted share in the first half of 2019.
He is total headcount at the end of the second quarter was approximately 3700.
Compared with 4000 at the end of the first quarter 2020.
And 4350 at the end of the year ago second quarter.
The decrease in headcount compared with the prior periods, primarily reflects a reduction and it staffing personnel as we continue to gradually transition away from select lower margin staffing business.
Additionally, the employees, we have furloughed during the pandemic as result of a reduction in client demand primarily delivered staffing services to our clients.
Approximately 90% of our second quarter 2020 headcount is billable.
Turning to our balance sheet cash and cash equivalents at the end of the second quarter were 34.3 million.
Which included net cash proceeds of approximately 2.4 million from the completed sale CTG is corporate headquarters during the second quarter.
The net die in the building had previously been recorded at the end of the first quarter as other current assets as it has been held for sale.
Let me outstanding long term debt was $12 million at quarter end, resulting in net cash of 22.3 million at the end of the second quarter.
Capital expenditures in the second quarter 2020 were approximately $500000 compared with 700000 hours in the first quarter of 2020 and 380000 in the second quarter 2019.
Looking forward given the continued impact for the Govan 19 pandemic on CTG is on market, we're not providing updated guidance for full year 2020.
We anticipate seasonality in the fiscal third quarter will be higher than normal there's employs take vacations that had been previously delayed.
Resulting in lower utilization of our billable resources.
We also expect reduction in government subsidies in Europe for done the quantum climate.
The sale the customers business unit and Alaska to another company.
And our continued investments in business development solution experts to impact earnings in the second half the year.
Despite these near term near term challenges, we're very encouraged by the progress of our T. solution centric strategy.
This has resulted in the highest non-GAAP operating margin and diluted earnings per share we've reported for the first half period in the past six years.
We remain committed to our strategic transformation.
We'll continue to take the necessary steps to enhance long term value of CTG.
As a reminder, before we moved to the QNX session. The purpose of today's call it to discuss the financial and operational results for the quarter.
We will not address the previous unsolicited offers to quite a company.
As in the past our board consultation with its advisors will continue to review and evaluate any such proposal to determine the course of action that we believe isn't the best interest of the company and all stakeholders.
Sean can you. Please initiate manage our question and answer session.
Yes. Thank you ladies and gentlemen, if you do have a question. Please press Wanda than zero on your Touchtone phone you will hear an acknowledgment that you've been placed in Q you maybe move yourself from Q at any time by pressing one zero again.
Once again, ladies and gentlemen, if you do have a question at this time. Please press one than zero on your Touchtone phone.
First question will come from the line of Kevin Lu from Cailloux and company. Please go ahead.
Hi, Good morning, Hope you all doing well.
First question here Smart and Kevin Kevin.
Okay.
Can you talk a little bit about kind of.
RFP activity throughout the quarter, mainly focused on how trends have been through the quarter and then subsequent to quarter end.
Has there been any sort of shift in the types of projects that clients are focused on but.
From pre Covanta.
Current day.
Sure Kevin.
All right well.
RFP activity or business development activity in broader sense.
Yes continues.
That does also why in the beginning of endemic.
We did not implement the 20% flow for non billable employees on business development and on our global solutions teams.
Calls we were on are still reviewing and evaluating opportunities for growth.
Across our business.
Well costs changed in that second quarter is the speed of consulting.
Okay juneteenth into real business into contracts.
And.
At the same time I have to say that some areas of our business.
Hi seen more workloads on more trucks.
Kind of imagine some help desk operations all have had the additional work in response to the miles from our clients.
Hi.
Since access to their online medical records for like supporting our clients stops to saw its moved to work from home.
We have helped some clients with their remotes broke capabilities.
And we also saw.
Because of our business there consultants were turning commuting time into billable hours as there are staying at home.
So from all angles.
You can decks.
Areas, where we see our traction going.
Going forward.
Everything.
Is has to do with remote solutions offerings with some homes support from were Oklahoma or helping declines to install.
Infrastructure so their employees can.
From home and then easier Ray and then I'm thinking around cloud services.
Fortunately it should look to CTG solutions portfolio all of our global solutions.
Perfect me, a flexible enough work from home environment.
I think as moves to solutions.
Our strategy to more solution centric organization.
It is helping us still keeping a very healthy pace in our business development.
Got it and then longer term or some of the efficiencies and increases in productivity that you're seeing a cleanse allow you guys had to work off site are you expecting that to persist even beyond the pandemic.
Does that provide kind of a longer term benefit to your gross margin.
And we do believe parts some thoughts we will continue obviously and meeting face to face where it all.
People with clients, especially well in the sales environment also and then and new stages metric for cloud environment.
Makes a lot more sense.
And when.
Possible to do that in the states environment.
While protecting our clients and our own employees I think that will come back.
That's frankly, I think everybody has seen in their own lives that they're set.
Some areas.
I would say that weve seen meetings the project follow ups, maybe the third or before.
Conversation when Youre in the on the proposal review all those things can easily being down Oh wait to new collaboration as well Milton you went through collaboration platforms, we already have for a while back yard and that's really using them.
Our next also cranky. The reason why are you going to launch our services around August the 65.
And collaboration platform now security, how to where tenants now but only about.
Earnings in video call it's about.
Implementing more productivity in the collaboration I think that definitely in area I would see.
So more to lose coming.
Got it and that's related to that fleet, you mentioned the partnership or the effort to work on more of a 365 services.
It's primarily inorganic initiative, where would you expect to acquire.
<unk> partners in order to build up to scale.
As you move forward on that path.
At this moment was called on some organic.
Initiatives and.
It's not something new for CTG.
Mario better we already have quite a lot of experience in Europe, and moving to states or a Microsoft's gold partner everywhere.
We have the global expertise the references on boats continents.
It's not something you at same thing that.
And with environment.
Is getting more traction than more value.
Right and you talked about acquisitions, we always are looking for.
Or evaluating.
Potential investments in the stronger parts of our business.
Thanks, Good luck resistance will always has to meet our disciplined investment criteria.
Tax to be complementary to synergies business.
But we do believe at this moment than the current environment this would be difficult to completing acquisitions.
So it's not all the immediate.
Understood and then a couple of my questions here regarding the new service delivery center in Colombia.
Actually drove kind of the need to open that center it, especially at this particular time and then what's sort of implications are there for how you will scale to head count in coming quarters as long as any sort of impact on the overall utilization rate.
Good question.
We have been working with that we had a partner in Bogota, Colombia or where the over a year now.
So we have been building experience in how to work with people in Colombia to set that no guineas Asian over there and we already have planes working where this through that Colombia add team and narrow recap stake in the next step two is.
Publish.
Delivery center, which can leverage our centralized approach.
Rich.
Add something to our delivery Center network.
Bogo class Colombia.
Favorable economic environment, It's us time zone, India.
Delivery Center, a wasn't our European these new centers Adam.
Well, we also are meeting in demand from clients for Spanish speaking I'll turn it.
Well the literary sensor activities.
And we find then build up a strong technical infrastructure. So we can have reliable connections.
And competitive labor costs and access to a lot of high quality Spanish speaking I see fall so.
Reverse presence already.
Just need now we make the next step and we pounce on about a delivery center.
As expand our business.
No.
So that's a that's the story.
Hi, There and then lastly from me it sounds like there are a couple of impacts in Q3 I'm. Just wondering if you could quantify the impact of the reduced government subsidies.
In Europe, and then also what's the revenue impact from the Alaska business unit that was sold.
Okay.
No John that those are more high ninetys move outs or can I ask you to take this.
Sure.
Kevin.
The government subsidies, what we have done in the past is up.
When we look out into the out quarters in out years. We've only included the information that we know at this point in time, so primarily in the countries that we do business in Belgium, Lux and France.
In Belgium and in France.
Officially those programs have only been approved through August at this point in time as far as.
The technical unemployment reimbursement that have come to companies like CTG. So we anticipate we don't know until the extended beyond August at this point in time, but we have not assume that they will be and so where we had a full quarter in a Q2, we expect not for those countries than I have a full.
Quarter in Q3, Luxembourg has been approved primarily I believe through the end of the year, but at a reducing rate until there's a diminishing return on the wattenberg reimbursement at this point in time and so when we make that statement. We just are focused on what we know at this point in time as far as what's been approved full quarter in Q2.
And diminishing amount of benefits in Q3 in Q4.
And that's why we made that comment.
We haven't disclosed the revenue relative to the business unit in.
[noise], Alaska that we had dealt with we had.
Very publicly talking about that a sale of Ah Ah BP Alaska to another company that as an organization that over the years, we've done an awful lot of business with.
Have a great relationship with we're working hard to to forge.
And continue that relationship with the buyer that organization, but again, we're not making any assumptions that it'll be sort of a one for one extension from old client to new client. There, we're taking a very conservative approach on the relationship understanding how they work working with them, helping the transition from old to new.
And it made I think a reasonable estimates there that.
Would be more conservative maybe then just assuming that it's just going to continue.
Hi, there so I appreciate that color how the thanks for taking the questions, though no. Good luck trying to set up there.
Thanks, Kevin Thanks.
Thank you and at this time, we have no further questions in queue.
Thank you song.
In closing.
We have done an excellent job navigating the challenges associates its kogut 90.
While continuing to make progress on all sides Romania.
And then leg or another very solid core.
We believe the second quotes were clearly demonstrates the strength and your ability of Cpgs business, our strategy and the teams disciplined execution of our plan.
As with any plans, there's likely to be seen variation, you know growth and report which results from quarter to quarter.
Especially in light of the uncertain market conditions driven by dependent.
However, we remain excited about CTG prospects for future growth and success.
We expect to benefit from continued traction with our solutions offerings and high margin business. Okay.
I am confident.
We will emerge from the current environment stronger going in that.
And that's the audit securitizing executive team on the strategy that will succeed in maximizing value for shareholders.
Thank you for your continued interest and participation on today's conference call.
Sure I'll you may now disconnect the call.
Thank you, ladies and gentlemen that does conclude our conference for today, Dan for your participation infusing ATM <unk> executive teleconference. You may now disconnect.
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