Q3 2020 Computer Task Group Inc Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the CTG quarterly Investor call. At this time, we have all participants in a listen only mode. And then later, we will conduct a question and answer session.
And the instructions will be given at that time, if you should require any assistance. During the call. You May Press Star then zero on your telephone keypad. As a reminder, the conference is being recorded I'd now like to turn the conference over to our host Chief Financial Officer Mr. John Laubacher. Please go ahead Sir.
Thank you Lori and good morning, everyone. Joining me on todays call. Its fleet P.J.C.G. is president and Chief Executive Officer.
As we begin I want to remind listeners that statements made during the course of this conference call. The state the companys or managements intentions hopes beliefs expectations or predictions for the future are forward looking statements. Its important to note that the companys actual results could differ materially from those projected these forward.
These forward looking statements are based upon information as of today Tuesday October 22020.
The company assumes no obligation to update these statements based on information from and after the date of todays conference call.
Additionally, information concerning factors that could cause actual results to differ from those made in the forward looking statements is contained in today's earnings press release as well as the company's SEC filings.
In addition, the company's press release and management statements. During the call include discussions of certain adjusted non-GAAP measures and financial information. These fine.
These financial measures and reconciliations of GAAP to non-GAAP results are provided in both today's press release and the related form 8-K with that it's now my pleasure to turn the call over to Felipe for his opening remarks.
Thank you John.
Good morning to everyone on the phone and connected player in Mexico.
We appreciate you joining us for today's call.
While much of the world in most businesses, including CTG continues to work through the unique challenges associated with a global pandemic.
I'm pleased to report that our teams focus and commitment to disciplined execution resulted in another quarter of sustained progress and strong operating performance.
Both operating profit and net income increased year over year.
Primarily driven by the growing contribution from higher margin solutions business.
And strong utilization of available resources.
Despite the lower total revenue in the quarter.
That's part of our decisive actions taken earlier this year the majority of our.
The majority of our employees and contractors continue to work remote.
Weve experienced no loss in productivity since initiating the transition and then.
And in fact have realized increased efficiencies and sustained higher utilization.
Starting previously consumed by business travel is used to produce incremental work.
Importantly, we have continued to meaningfully advance the company's rapid transformation toward high margin digital solutions.
Our strategic initiatives and got the expansion of CTG solutions offerings gain notable momentum and its board.
Solutions revenue, increasing 3.7% sequentially and.
And 6.5% year over year.
Represents nearly 40% or so per revenue.
We are continuously working to expand our solutions portfolio with new and complimentary offerings, including incorporating robotic process automation and artificial intelligence capabilities.
With our continued focus on the expansion of our solutions offerings.
And the resulting increase in the revenue contribution from this business.
We remain committed to making the necessary investments.
Did you can be scaled and staff our solutions organization.
Additionally, we are actively taking steps to position the company for success in both our existing and expand it solutions offerings across our target and market sort of.
Consistent with these objectives, we recently hired phases I did it.
And accomplished executive.
Bollywood experience delivering cloud transformation consulting and managed services.
We are pleased to welcome her to CTG and believe she will be an important addition to our growing solutions team in North America.
As evidence of our growing solutions engagements George.
During the quarter, we secured a multi million dollar contract with a large state hospital system to provide epic My chart help desk services or two west coast healthcare facilities in the U.S.
Also during the quarter, we drove increased business development activity and meaningfully advanced our pipeline of engagements for CTG recently launched testing solutions offerings in North America.
As a reminder, or for those new to CTG testing solutions has been an important contributor to the success of our solutions business in Europe.
And we are now seeking to replicate that success in North America.
While also leveraging the unique crowd testing capabilities, we acquired through our.
Through our purchase of struggles.
A leader in testing and quality assurance services.
Earlier this year.
Our team remains actively engaged in the sourcing and submission of new people.
Even though the issuance of new requests for proposals and also the potential awards of new contracts wins continued to be delayed due to ongoing uncertainty associated with dependent.
Travel restrictions continue to limit face to face meetings, which are often critical for cultivating trust with prospective new clients.
In response to these temporary obstacles, we have increased business development activities with TGC existing.
As a result of these efforts George.
During the quarter, we meaningfully expand that previously award the go live implementation with a healthcare system clients in the northeastern us.
Additionally, our team successfully maintained a significant amount of EPS risk business and then lastly, Paul.
Following the sale of a client's business units to another.
It has been particularly rewarding to see the significant financial progress we have made oh.
Over the past seven quarters.
Our GAAP operating margin has increased from 1.2% than first quarter of 2019% to 2.1% than this past quarter.
Our non-GAAP operating margin has increased from 1.5% to 2.7% in.
In that same time period.
Additionally, our earnings and EBITDA have also increased in a meaningful way over the past several quarters.
Considering the up all over the continent economies in which we provide services.
Being severely impacted throughout most of 2020 by dependent.
We are pleased that our performance this year.
And remain encouraged about the opportunities ahead.
I'm very proud of what our team has accomplished to date.
Especially given the unique challenges, resulting from the pandemic.
However, there is still more work to be done.
We have only begun to realize what I believe can be CTG its full potential.
In addition to demonstrating progress on our existing strategic objectives, we will continue to take incremental steps to build the problem and accelerate it continued its momentum in our solutions business.
As we look ahead and begin positioning the company for 2021 and beyond.
I believe it will be important to be agile and quickly adapt to both rapidly changing market trends and compliance.
Our team has done an excellent job of adapting to our new norm.
While remaining highly efficient and executing well in a predominantly remote working anyway.
Recognizing both the necessity and opportunity to evolve our strategy and expanded offerings to best meet our clients' needs.
We are confident that.
And our continued focus on delivering value added solutions that enable clients digital transformation.
Also result in increased profitability.
Next weekend long term value for our shareholders.
I will now turn the call over to John for a detailed review of our third quarter results.
Outlook for the remainder of 2012.
Thank you Felipe and again, good morning, and thank you for joining us today.
As reported in our press release earlier this morning.
Tolerated revenue in the third quarter was 88.6 million compared.
Compared with 89.1 million in the second quarter of 2020.
And 97.2 million in the third quarter of 2019.
Small sequential decline in total revenue for the quarter, primarily reflected our continued transition away from select lower margin staffing business.
As well as the typical seasonality associated with the calendar third quarter.
The year over year decline was in part due to the impact from the COVID-19, pandemic and client demand and the previously mentioned and ongoing transition away from lower margin staffing business.
Currency translation had a positive impact of $1.8 million on revenue in the third quarter 2020.
And with a negative impact of 800000 in the second quarter of 2020 and a net.
And a negative $1.6 million in the year ago period.
Total billable days in the quarter were 63, compared with 64 days in the second quarter 2020, and 63 days in the year ago third quarter.
Solutions revenue in the third quarter of 2020 increased $1.3 million or 3.7% sequentially to 35.1 million.
And expanded to nearly 40% of total revenue.
This compared with 33.8 million or 38% of total revenue in the previous quarter.
Solutions revenue also increased $2.1 million or 6.5% year over year, compared with $33 million or 33.9% of total revenue in the third quarter 2019.
In addition, the solutions representing a larger portion of our overall revenue the gross profit margin from solutions improved 280 basis points year over year to 29.8% of revenue.
Revenue from IBM in the third quarter was 18.6 million or 21% of total revenue.
Compared with 18.9 million or 21.2% total revenue in the second quarter of 2020.
In $21.3 million or 21.9% of total revenue in last year's third quarter.
Subsequent to our second quarter conference call, our Master services agreements with IBM was further extended to November 27th 2020, as we can.
As we continue to discuss general business terms and conditions of a longer term arrangement.
No other client represented more than 10% of revenue during the third quarter of 2020 or in recent comparable periods.
Cost of services as a percentage of revenue were 77.9% in the third quarter 2020.
Paired with 79% revenue in the second quarter of 2020, and 80.7% of revenue in the year ago third quarter.
GAAP operating margin in third quarter, 2020 was 2.1% compared with 2.1% in the second quarter of 2020.
And 1.6% in the year ago quarter.
Non-GAAP operating margin in the third quarter of 2020, which excludes approximately $600000 of acquisition related expenses was 2.7% compared.
Compared with 3.2% in the second quarter of 2020, and 2.4% in the year ago quarter.
The third quarter GAAP operating margin was flat sequentially, but increased 50 basis points year over year, while the non-GAAP operating margin was 50 basis points lower sequentially, yet increased 30 basis points year over year.
Both measures reflect the increase in the mix of solutions revenue within our total revenue and our continued efforts to improve the execution delivery of our services.
The effective income tax rate in the third quarter of 2020 was a negative 31.2%.
Paired with 43.7% in the second quarter of 2020, and 33.5% in the year ago third quarter.
The negative effective tax rate in the third quarter 2020.
Primarily the result of implementing newly enacted legislation that allows the exclusion of certain high taxed income associated with the global intangible low taxed income or Gil.
Or guilty regulations.
This change in legislation resulted in a onetime tax benefit of $1.1 million or eight cents per diluted share during the third quarter.
GAAP net income in the third quarter of 2020 was 2.8 million or 20 cents per diluted share.
Which included a net $200000 of non operating income or two cents per diluted share comprised of a gain from non taxable life insurance, partially offset by acquisition related expenses.
Non-GAAP net income for the third quarter of 2020 was $2.6 million or 18 cents per diluted share.
Additionally, note that both the GAAP and non-GAAP net income for the third quarter of 2020 included the previously discussed tax benefit of eight cents per diluted share associated with the change in legislation occurring during the quarter.
For comparison.
GAAP net income for the second quarter, 2020 was $1.8 million or 12 cents per diluted share, which included a net benefit of two cents per diluted share comprised of gains from non taxable life insurance and the sale of a building offset by severance and acquisition related expenses.
Excluding these items non-GAAP net income for the second quarter of 2020 was $1.4 million or 10 cents per diluted share.
GAAP net income for the third quarter of 2019 was $879000 or six cents per diluted share included approximately $500000 in acquisition related expenses.
Non-GAAP net income was 10 cents per diluted share in the year ago third quarter.
For the trailing four quarters ended September 2020, net income on both a GAAP and non-GAAP basis was $7.4 million or 52 cents per diluted share, which includes the previously mentioned tax benefit of eight cents per diluted share related to the change in legislation.
Adjusted EBITDA for the trailing four quarters was $14.9 million.
CGS total head count at the end of the third quarter was approximately 3750 compared with 3700 at the end of the second quarter of 2020 in.
And 4350 at the end of the year ago third quarter the change.
The change in headcount compared with the prior year, primarily reflects reduction in personnel out outside of our solutions business as.
As we continue to transition away from select lower margin staffing services products.
Approximately 91% of our third quarter 2020 headcount scalable.
Turning to our balance sheet cash and cash equivalents at the end of the third quarter were 33.4 million.
The company's outstanding long term debt was 6 million at quarter end, reflecting the pay down of 50% of the previously outstanding balance on the company's revolving credit facility during the quarter.
And resulted in net cash of 27.4 million at the end of the at the end of the quarter.
Capital expenditures in the third quarter of 2020 were $685000 compared with 493000 in the second quarter of 2020 583000 in the third quarter of 2019.
Looking forward given the dynamic business environment challenges associated with quantifying the potential impact of the COVID-19 pandemic on CTG is clients, we've chosen to not provide quantitative guidance for the fourth quarter and full year 2020.
That said, we are very encouraged by our sustained progress and the success of our solutions initiatives.
As well as the corresponding increase in the company's gross profit margins in the third quarter of 2020.
We also continue to be committed to our strategy of making appropriate focused investments in solutions for the remainder of 2020.
As part of positioning the business for the year ahead, while also seeking to further enhance the long term value of CTG.
Before we open up the call for questions I want to briefly address the filing that to our investors made yesterday.
Our board and management team have seen the letter and are reviewing it the focus of today's call to discuss our quarterly results and we will not comment further on the filing at this time.
Lori could you please initiate our and manage our question and answer session.
And ladies and gentlemen, if you wish to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command.
You are using a speakerphone please pick up the handset before pressing the numbers. Once again, if you have a question you May press. One then zero at this time and one moment. Please for your first question.
Our first question from the line of Josh Vogel with Sidoti and company. Please go ahead.
Thank you good morning, So weve been John Hope you both doing well.
Good morning, John.
So my first question is no.
Healthcare is proven to be a strong market for you're seeing some nice success there in signing new business expanding existing business. So just wondering if you can talk.
Talk about the general pipeline today, and maybe what's changed in how you engage with and help these clients and prospects relative to pre cobot.
Good question, Josh So definitely.
Looking at our pipeline in healthcare is so strong is growing.
Growing and then number overall.
Yeah when Cove. It set then we.
We saw that we had our business in some areas and not only in health care, but also there.
Increased in some areas for instance, the help desk operations, we had additional work and still have additional work in response to an increase in demand that think about patient access to online medical record think about all of the employees working from home.
Having different kinds of problems between the kind of.
And questions could help desk.
We've also help in setting up remotes vote capabilities and that goes from laptops phone systems, but also to more collaboration.
Software processes.
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The installations that were more at are now becoming more robust because it's taking a longer time.
So we see a lot of.
Demand in that area, we also see it.
Growing pipeline and are testing.
Business as I said during my remarks.
This is a business that was very strong still is very strong for us in Europe and we're.
And we're now replicating its in that in the states on with the increased software implementations with the increased new releases and updates of software and the speed in which beginning of go get everything has to be changed.
There is a lot about robust testing needed to make sure that the systems are a win.
Without without doug's without.
And so all in all and the number of different areas, we see good.
Good and solid so potential still in our health care business.
I appreciate the insight there.
When thinking about the IP solutions business, you have application solutions operation support testing information management.
It was pretty impressive jump in the gross margin and.
I guess you know can we assume that you are seeing most of the traction today in the application solutions and testing work and maybe just give a sense of where you are seeing.
Most demand overall and what you anticipate over the next several quarters when we think about all of the.
All of the offerings underwriting solutions.
Andrew.
I think we see.
Traction in all of the areas.
We see mainly a lot of things happening in the area cloud cloud computing platform.
Platform.
That is really position all over the spectrum of the solutions that we are we are offering.
We see in all of the solution. So if it is application development implementation.
This testing is upper.
Operations and support and infrastructure.
We see.
A lot of progress in applying.
Robotic process automation artificial intelligence.
Testing for Ensign.
We like as we've launched 30 recently this year we can.
We can see the growing demands and also the growing demand not only for testing such test automation.
Test automation.
And you see that most of the test automation software vendors are applying artificial intelligence in their tool sets and that's also how we are focusing on the market.
The amount of testing work that there is no and there is going to be in the next several years.
Huge.
Cannot be done manually and it's doesn't economically it doesnt, even make sense to do that so thats stuff formation is definitely an area.
We see strong demand.
And in the application side same thing and then the service side.
We also see those new digital technologies take more.
More of the.
The parts of the opportunities in our pipeline.
All right. Thank you and maybe a question around you.
Utilization of the billable resources in the quarter burn.
Versus your initial expectations in late July.
Was there, perhaps less vacation time taken than expected could that potentially dampened utilization in Q4, if people finally do take some more time off you just give some color on that.
John could you give some color on boat show.
Sure.
The it was actually different among different countries in which we operate so in some of I'll start with Europe. Some of the European countries utilization continued to be very very high and vacation time taken a was a bit less than we had thought it would be in Q3. So we do think that there'll be an impact there in Q4.
But I want to say in most of the countries in which we operate.
Vacation holiday time taken was a little bit higher than it had previously been as expected as we expected people to take a breath and take us some time off and as countries at least at that point in time in the third quarter opened up a little bit.
To.
To some travel people did take some holiday time and take some time off so we did see that in the United States I think or utilization across the board was very very strong we did expect a tick.
Tick up in time off and we did see that but it wasn't a really any higher than we had expected. So.
I would say as expected in North America.
All right, great and just one last one probably for you as well John.
Just doing back in the envelope math kind of calculating a gross profit in staffing at about 17% up from 15% in changing year ago I'm just curious if.
How much more business or you plan to trend transition away from or when will that be complete and then how should we think about the margin profile of the staffing business going forward from here.
That's great. It's a great question. Your your math is good and from our perspective, when we look at the staffing business overall and stepping away are disengaging from some lower margin staffing business, we've been pretty detailed and thoughtful about that process you go through.
Sort of a long list of questions around who is.
Who is the client and what is the opportunity or how hard is it to recruit how hard is it to deliver what are the future opportunities to maybe convert that to something else and what does the overall client relationship look like just to name a few the things that we think about.
It would be our plan to absolutely continue to step away from the lowest margin staffing business.
As we do that.
There are opportunities and you look at number of our larger clients.
Clients not all of the businesses governed by say one contractor one relationship in one in one location, we've got multiple contracts and multiple relationships and so as each one of these come up we critically evaluate.
The work that we do and then each one of those areas and decide if that's something we need to continue or want to continue or something that we might want to step away from so I think you'll continue to see a progression away from the staffing the lowest margin staffing business. We're just isn't a vital are instrumental to what we're trying to accomplish overall as an organization.
So that is definitely going to continue.
As far as margin profile, so I would think that Oh.
It's not going to go up rapidly from here, but I continue to believe that we'll continue to push that up incrementally as we step away from the lowest margin piece of that business.
Alright, great well. Thank you both for taking my questions.
Thanks, Josh Thank you Josh.
And ladies and gentlemen, as a reminder, if you wish to ask a question you May press. One then zero on your telephone keypad. We'll go next to Kevin Lewis of key Lou and company. Please go ahead.
Hi, Good morning, guys I guess, just one of them.
You guys talked a little bit about the pipeline deals still moving a little bit slower given the current environment. I was wondering if you are seeing signs that that is picking up and for a number of these deals to that.
That's come into the pipeline related to testing in North America do you expect those to be able to close in the near term or do you think these opportunities more for more so for the coming year.
I think we we have all kinds.
Kind of a spread in the in the pipeline we still see.
The Big news opportunities, obviously don't go through the pipeline as they did treat covance.
That's we do see that our clients are.
Let's say past step first phase, where everybody says, okay everything's going on all over.
We're only doing quick fixes.
Thanks for discussing now are really the things for long term.
We see that now they are in a situation where all the quick fix this problem.
Probably needs to be replaced by more structural more robust solutions and the low pay just comps wait until well who knows when things are really better. So we see some pickup in activity and though its still okay.
Note that the states that we had before.
Understood and just a couple of questions around the solutions gross margin. Obviously you guys have made a lot of progress there does the mix of work you see in the pipeline.
The projects nearing completion does that points any sort of changes in what you would expect for gross margin going forward.
John maybe you could help us just in terms of the benefit you guys received from government reimbursement programs in Europe, whether you expect those to continue or if those start to taper off from here.
[noise], Okay, well, let me start with.
Solutions gross margins, we are obviously very happy with the continued progress of our gross margin and solutions and I think hopefully see Kevin is a is a combination of two things. It's a combination of focusing on the number of solutions.
Over time frame up more than a year now getting better and better before we're doing the same solutions for beating the same solutions and getting more efficient and executed. So that obviously gives you a higher profitability.
Well to be also see is that's where we're focusing more on.
Subsets of solutions that yield higher profit margins.
And there you you definitely come in the area of do more digital solutions and that's are more in the month and that's a yield the bigger higher profitability. So it's a combination of those two factors as we move forward in executing our digital solutions.
Absolutely and we increased the mix of business towards a higher margin solutions.
We see we are confident that our margins are going to continue to increase though obviously, it's not going to be a linear straight line going up.
The trend will definitely be.
On the increasing sauce.
John you want to comment on the benefits.
Sure.
Thanks Phillip.
Kevin It really is a different answer in each one of the countries in which we operate.
For instance for the most part a lot of the subsidies diminish greatly or ended at the end of August.
In some instances they would continue for the rest of the year and we will take advantage of those where we can.
But for instance in Belgium.
For the most part those came to an end at the end of August. They continue on if you are a company that's in a troubled state and we're not we're actually doing as you know exceptionally well. So the benefits that we previously received won't be available to us after August or weren't available to us after August impacted September unlike in Q3.
In the other countries are those.
Benefits do continue but at a diminished level as time passes and so it will be reduced the amount of benefit we get from the government and in the other countries as time passes so the impact in Q4 will be substantially less than the impact was in Q3 and certainly in Q2.
Got it that's helpful. And then just on the staffing side I know, it's still kind of early days since I B M announces that with the spinoff that they're undertaking I was wondering if you could comment a bit on how much business you had with the portion that's being spun off versus the part that's remaining with idea and how you expect this to kind of effect.
No negotiations for a longer term agreements or perhaps even shifting some of these engagement more towards managed services agreements.
Sure.
We have normalized EPS have a detailed discussion with IBM subsequent to their announcements.
Obviously, we believe a certain portion of our business would move to the new company that this moment nothing has been decided yet.
And as you know our relationship with IDN is long term and is outstanding.
So we expect to continue to EPS relationship even if some of that.
And this will transition to new company.
John indicated in his remarks current complex hasn't being extended to November 27.
And the discussions with IB M. on the terms and conditions of a new long term deal are still continuing.
So I'm not sure there would be a significant impact from that spin off on those discussions that like I said, we haven't added a detailed discussion with them.
All right great well, thanks for taking the questions and congrats on the continued progress.
Thanks, Kevin.
Our next question from the line of Gary Hatton with Granahan investment. Please go ahead.
Hi, good morning, John.
Good morning, Gary Gary.
I understand you're not here to talk about the filing.
I'm actually.
And of out of pocket and having a chance to see with the filing even second are you willing factually just to say what what what they what they filed and said.
John.
Our our approach.
Our approach is that we're just we're going to talk about financial results today, Gary on Oh from the quarter and the press release and so now we're we're not going to address.
The filing that was made.
Okay. Thank you.
Thank you and I'll now turn it back to management for closing remarks.
Thank you Laurie.
In closing I want to first thank the entire CCG organization for their dedicated Burke and collect its contributions to the company's strong operating performance in the third quarter and year to date.
I'm very pleased with our continued progress, including the growing momentum for our solutions business end offerings, especially during this challenging environment.
As our strategic focus involves further.
To work to expand that higher margin solutions business.
Enable clients digital transformation.
I am confident we will be well positioned to capitalize on new long term growth opportunities across multiple end markets verticals and geographies.
We anticipate this expansion of CTG solutions business will yields both increased profitability and significant shareholder value.
Thank you for your continued interest and participation on today's conference call.
You already you may now disconnect the call.
Thank you ladies and gentlemen, this will conclude our conference call for today. Thank you for your participation and for using ATM T. conferencing service and you may now disconnect.
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