Q4 2020 Mastech Digital Inc Earnings Call

Greetings and welcome to the Mastech Digital Inc. Fourth quarter 2020 earnings call at this time, all participants on a listen only mode. A question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Ms. Jennifer Ford Lacey manager of legal affairs for Mastech Digital incorporated. Thank you Ms. Ford Lacey you may now begin.

Thank you operator, and welcome to Mastech Digital's fourth quarter 2020 conference call.

If you have not yet received a copy of our earnings announcement can be obtained from our website at www Dot Mastech digital dot com with me on the call today on the vet Gupta Mastech digital Chief Executive Officer, Paul Burton Chief Executive for Mastech, and for Telus, and Jack Cronin, our Chief Financial Officer.

I would like to remind everyone. That's great. That's made during this call that are not historical facts are forward looking statements. Please.

These forward looking statements include our financial growth and liquidity projections as well as statements about our plans strategies intentions and beliefs concerning the business cash flows costs and markets in which we operate.

Without limiting the foregoing the words believes anticipates plans expects and similar expressions are intended to identify 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.

Routing those listed in the company's 2019 annual report on form 10-K filed with the Securities and Exchange Commission and available on its website at Www Dot FCC Dot Gov.

Additionally, management has elected to provide non certain non-GAAP financial measures to supplement our financial results presented on a GAAP basis.

Typically 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 the business.

Reconciliations of these non-GAAP financial measures for their comparable.

GAAP measures are included in our earnings announcement, which could be obtained from our website at www Dot Mastech digital dot com.

As a reminder, we will not be providing guidance. During this call nor will we provide guidance in any subsequent one on one for Carl.

I will now turn the call over to Jack for a full review of our fourth quarter or sorry for a review of our fourth quarter and full year 2020 results Jack.

Thanks, Jen and good morning, everyone.

2020 was a year of extraordinary challenges, we are confronted with the COVID-19 pandemic.

Normally its impact on the global economy, and its devastating disruption to our day to day lives.

With the rollout of global vaccination program. We are now hopefully, we'll get a recovery insight.

We are also extremely proud of how our organization and dedicated employees responded and adapted to these unprecedented times.

This adaptability and focus is the foundation upon which our financial results for 2020 for Bill.

With that backdrop, let me now comment on our Q4 2020 financial performance.

Yeah.

Revenues for the fourth quarter of 2020 totaled $48 $7 million compared to $54 million in the fourth quarter of 2019.

Our data and analytics services segment contributed record revenues during the quarter, albeit with the help of the <unk> acquisition.

And our it staffing services segment achieved a 3% increase in consultants on billing during the quarter.

This was the second consecutive quarter of expanding our head count.

IQ staffing services segment.

While there is still uncertainty in the marketplace. We are seeing positive signs of improvement in activity levels and both the board business share.

Gross profit in Q4 of 2020 totaled $13 $1 million compared to $12 $8 million in the same quarter of 2019.

Gosh, we had a 2% increase in gross margins, despite a 3% decline in revenue.

Our gross margins of 26, 8% reflected an increase of 180 basis points over Q4 of 2019.

GAAP net income for Q4, 2020, which $2 million for 17 cents per diluted share compared to $2 $3 million for 20 cents per <unk>.

Diluted share in the fourth quarter of two balance at.

19.

It should be noted that for 2020 quarter included $650000, a pre tax transaction expenses associated with the Aberdeen for acquisition.

Non-GAAP net income for Q4 2023.

$3 $4 million or 29 cents per diluted share compared to $2 $9 billion for 2006 cents per diluted share in the 2019 quarter.

Fourth quarter SG&A expense items not included in non-GAAP financial measures net.

Cash benefits were one the amortization of acquired intangible assets.

Stock based compensation and three acquisition transaction expenses, which are detailed in our Q4 earnings release and available on our website.

Addressing our full year results for.

2020 revenues totaled $194 $1 billion, a slight improvement compared to a $193 $6 million in 2019.

Gross profit in 2020 were $51 $5 million compared to $48 million in 2019, 7% increase on essentially flat revenues.

Gross margins as a percentage of revenue for a record 26, 6% in 2000 and 2008.

Which reflects an increase of 180 basis points over 2019.

We believe that many companies in today's marketplace would be Mds from such a growth.

Upcharge on gross margin performance.

GAAP net income for 2020 totaled $9 $9 billion for 83 per diluted share compared to $11 $1 million for 99 cents per diluted share in 2019.

Again, it should be noted for 2020 year included $650000 of pretax acquisition transaction expenses and the 2019 per unit.

It benefited by $6 $1 billion of pre tax gains from the revaluation of the contingent consideration liability.

Factoring in these two items GAAP net income in 2020, clearly outperformed 2019.

Non-GAAP net income for 2020 totaled $13 $9 million for $1 16 per diluted share compared to $9 $3 million for 82 cents per diluted share in 2019.

The $1 <unk> earnings per share number was a record performance made particularly noteworthy because of the incredibly challenging macroeconomic environment.

For your interest in 2020.

Again, a detailed reconciliation for non-GAAP financial measures compared to the comparable GAAP measures is included in our Q4 earnings release.

Yeah.

Addressing our financial position.

Spike the challenges of COVID-19, we made material improvements in 2020.

First we protected our cash conversion metrics with respect to our largest asset accounts receivable.

During the year, we maintained a healthy DSO.

Our DSO measurement of 60 days.

2020, with no additions to our bad debt reserve.

Additionally, we lowered lower debt levels and increased our cash balances on hand, even while incurring additional debt to support the <unk> acquisition.

At December 31, 2020.

Borrowing capacity under our revolving credit facility of approximately $22 million.

In summary for financial or financial performance and 2020 was solid it wasn't close to the high expectations that we had when we entered the year.

And I can tell you bet on our entire organization is excited about for prospects and opportunities that lie before us for 2021.

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

Good morning, everyone. Thank you Jack for the detailed financial review of our operating results for 2020.

Let me start by saying, how delighted I am with both on Q4 and full year 2020 financial performance.

Lifetime, there's never been such a disruptive environment as we experienced because of the COVID-19 pandemic for.

Fortunately as an organization we were quick to recognize the challenges at hand and implemented decisive actions on both of our business segments.

We believe these actions proved effective in protecting gross margins improving profitability and mitigating the decline in our revenues.

Our transition to a work from home model from the outset of the pandemic.

Secure the safety of our employees and gave us the resilience to continue to successfully service our clients.

We instituted aggressive but further austerity measures we stood firm on pricing and we have resisted the temptation of lowering our credit standards.

In summary, we acted quickly we've stuck to our principles and we've navigated the challenges from a position of relative strength.

Accordingly, our financial performance was strong and more importantly, we believe we are well positioned today to excel as the global recovery takes hold.

As Jack mentioned, our data and analytics business segment delivered record revenues in both Q4 and for the full year of 2020.

We also closed the acquisition of and belief on the very first day of for fourth quarter.

All will talk about the segment's performance in his comments shortly.

Let me now share a few highlights of our it staffing segment's performance in 2020.

Number one we've mitigated revenue declines.

While our it staffing revenues did decline in 2020, we did an admirable job in mitigating this decline.

We were in front of our clients early to address their challenges.

Launched a new service offering branded as mass for Mod, which provides our clients with highly skilled resources across the U S and Canada and as a result, we achieved on increasing our billable consultant base. During the second half of 2020 and have begun to recover from the headline day clock head count decline experienced in the for.

Half of the year.

Number two we protected our gross margins.

Throughout the pandemic, we continue to focus on digital technologies, which in turn on continued to expand our gross margins on them.

<unk> service offering allowed us to provide our clients with a compelling value proposition for other protecting gross margins from pricing pressures.

And number three we increased net profitability.

Timely and aggressive austerity measures drove strong net income in 2020, despite the many challenges brought on by the global pandemic.

It's also important to note that our austerity measures were strategically implemented with the goal that we will be well positioned from a staffing and cost perspective and capitalize on the recovery in the U S economy.

I am confident that this objective was achieved as we sit here today.

I will now turn the call over to Paul for his comments on our data and analytics services segment.

Thanks, Vivek and good morning, everyone. There is no doubt that the global pandemic disrupted our performance in 2020. Nevertheless, despite the pandemic, we were able to post solid solid growth in Q4 and net of the Amber leaf acquisition, we achieved 6% topline growth for the full year.

As well as the highest bookings we've ever had net of the Amber leaf acquisition. We also posted record gross margins for the full year and profit, which measured as a percentage of revenue came in ahead of 2019 and 2020, we lost no key clients and some significant deals that were delayed.

Already closed in 2021.

We are optimistic that the effect of the pandemic on the macro economy will reduce in 2021, and the new offerings and capabilities that we developed for 2020 will take hold on propel us to even greater growth and profitability. This year.

As you know on October one 2020, we announced the completed.

Acquisition of Amber leaf a client experience consulting firm, we completed the integration of amber leaf into the data and analytics business in Q4, and now we anticipate that the combined capabilities of the two businesses will take hold and produce larger opportunities in new and existing clients. Indeed, we are already seeing significant true.

<unk> and deal closures due in part to these capabilities and have reason to be hopeful that this will continue.

However, as important as amber leaf wasn't helping us fill out the proposition of value that we take to our clients. We see additional focused opportunities in the market that can help us move even more quickly to meet the urgent needs that our clients have related.

Cloud computing application modernization and enterprise intelligence, we remain alert to such opportunities and cognizant of the need to move quickly and efficiently meet the developing needs of our clients and to respond to emerging market trends.

We are not we are simply not seeing the slower the lethargic being rewarded in this market.

Finally, as we enter 2021 were seized with a hot with a pipeline of high value opportunities as I mentioned a moment ago.

We are already seeing engagements that slipped from last year closed, particularly in Europe, and Asia and our key partnerships not only remained solid but they're showing significant signs of improvement based on public announcements for example, IBM recently announced it would invest substantially and his partner cloud ecosystem.

With vaccinations for Covid, accelerating and our strong capabilities offerings and pipelines, we see substantial reason for optimism in 2021. This.

This concludes our prepared remarks and now operator, you can open the session for questions.

Thank you ladies and gentlemen, the floor is now open for questions. If he would like to ask a question. Please press star one on your telephone keypad at this time.

A confirmation tone will indicate your line is in the question queue.

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Once again that is star one to register questions at this time.

Our first question is coming from Josh Vogel of Sidoti.

Go ahead.

Thank you and good morning, Vivek, Jack and Paul Thanks for taking my questions.

First one.

I know you've been investing in the business, notably in the data and analytics sales team.

And maybe this is a dual question for for Jack and Paul, but when we think about areas of internal investment in 2021, where will you be looking to spend and when and how much relative to prior years.

So I'll go Youre talking about internal investment correct, yes.

Yes, yes, yes, so we're seeing a tremendous amount of demand.

For managed services and the data and analytics space as well as in cloud computing application modernization as I mentioned in my remarks, and so investments it would certainly seem appropriate to tailor internal investments towards building out and hardening managed services capabilities. So that we can support clients 24 by seven as current.

Seeing demanded in the marketplace. So certainly investments around managed services, which would have a multiplier effect for annuity revenue would be I think appropriate.

Alright, great.

When we think about the aggressive austerity measures.

One on kind of get a sense of how much can be permanent how much may come back this year.

Also I know you don't give guidance, but any sort of directional commentary around sense of how the gross margin could look this year.

As as the year progresses, certainly as DNA and digital become bigger pieces of the revenue mix.

Yeah.

I can take a crack at that Josh I mean.

Yeah, we don't give guidance.

But with respect to gross margins just because of the blend of.

The revenues between DNA and staffing.

Clearly, we expect our margins in 2021 to expand.

Uh huh.

If I may add over here.

Saturday measures that we took in the beginning of 2000 empty.

Well timely, but we also are what really are pragmatic.

When I think about not cutting the cost down so much that it would hurt us when the recovery came.

So we actually maintained a pretty healthy producer level and this year they.

They will of course be some increase in the in the call.

Costs.

We are.

The governor on scale.

But I don't anticipate that we will go back to the pre COVID-19 levels in terms of those.

For those costs.

Investments if this answers the question that Youre asking Josh.

Yes, that's helpful. Thank you and Vivek.

Obviously very impressive how well the business held up.

Last year and the margin expansion and you mentioned, how you stood by your pricing discipline and I'm just curious if you.

New Boston any significant opportunities or business, because because you were so disciplined with pricing.

Josh I think surprisingly no.

I think there was that.

Got it of cooperation between the customers and ourselves and the ones who work for.

Putting pricing pressure that they actually have genuine reason for doing that because they were grappling with their own demons.

The binding pandemic was affecting every industry.

But I think we were able to work out with customers.

And I'm, having a you know.

And offering like Master Mort helped us as well and.

And managing on on managing the pricing. So we really didn't lose any customers on account of pricing. We may have had some engagement is coming to a name for the customers had issues with their budgets on.

On the other pressures that day.

Yes.

Yes, sorry.

If we lost a client it wouldn't be clients that we were overly conservative loosen.

I mean, it would be the low margin stuff and you know what.

Non interest checking that.

Yes understood.

And just lastly, Paul you made a comment around us from deals.

That were delayed for already closed in 2021 can you just give us a sense of the size or amount I know back I guess it was December 2019, you kind of put you quantified how much.

New business was signed just wanted to get a sense of what what closed already in 'twenty one. Thank you.

Yes, So we had three three particular deals in Europe and Asia.

We are anticipating closing Q3 than Q4, but because of reasons associated with the pandemic.

Kept getting delayed and ultimately pushed to this year, we have since closed on January <unk>.

Two deals in Asia, and one deal in Europe.

Of significant size so.

I don't want to disclose the number in particular, but well over $1 million.

Thank you for you guys again for taking my questions.

Yes.

Once again I'm sure.

Thats Star one to register a question at this time.

Our next question is coming from Lisa Thompson of Zacks Research.

Research. Please go ahead.

Hi, good morning.

Good morning.

So, let's talk a little bit about the fourth quarter on how you see business going into the first quarter and into 2021.

I feel like staffing didn't come back as quickly as we had hoped by the end of this year.

And I was wondering what you felt about sequential like staffing has gone down in revenues for the last three quarters do you expect that to stop happening and to start growing again sequentially.

So suddenly say, yes.

After after a drop in I know at.

At the end of Q1.

The staffing revenue will have pretty much held up around the 40 million revenue kind of mark.

We did have a growth in head count in Q4, but.

Business the actual benefit of that comes on the following quarter and seasonally Q4 also day.

A quarter in which we have a lot of holidays and furloughs towards the end of the etcetera, so that always impact.

The revenue.

But we can get for the number of consultants consultant base that we have.

We are definitely things are looking up in Q1, it should be better than and we should start seeing the improvement come in I can't comment on the exact amount, but yes.

Yes, definitely there, but we should get the benefit of the additions that we've had head count in the last two quarters.

Okay, that's good to hear.

And I look at data and analytics.

Q4 eight.

$8 9 million.

And you, obviously and it added a quarter of amber, which should be about I don't know $2 million to $5 million. It seems like it was.

Fairly weak for the rest of the business or is there something going on there that I don't know.

Yes.

No. It was six eight to one.

Totaling $8 9 million and as I said that we saw significant deal delays in fourth quarter, primarily related to the pandemics and particularly harsh shutdowns in Europe, and Asia and as a result, we had deals slip out which I've already noted it closed in Q1. So Q4 was a good quarter it was not a record.

<unk> for the core business.

We saw substantial increases in pipeline.

We improved margin improved EBITDA. So overall it was a very solid quarter.

Customers continue to have different behaviors as they relate to the pandemic, but we are seeing.

The effects of the pandemic reduced, especially with the light at the end of the total represented by vaccines in their distribution. So we're very optimistic going forward.

Okay.

On Amber leaf you had talked about how you could.

Potentially improve their margins either.

Synergies are or just repricing can you just talk about where you are on that process.

Yes, so the integration of Amber leaf was completed in Q4, which essentially means that they're running on our processes and policies and we have an integrated go to market.

On operating model with them. So we do anticipate and are seeing.

Margins improved for the overall business.

And I would anticipate that some of the opportunities and work on but.

The annuity nature for Amberley can be serviced nearshore and offshore.

So overall, we do expect the margins to improve going forward.

Okay. So you still have some.

Even after this quarter.

Some someone after this quarter.

Improvement in margin like cross cutting Oh, yeah.

Yeah, Yeah, yeah yeah.

On integration.

Integration was effectively completed in fourth quarter. So now first quarter on where we're going to start seeing the upward trend of increasing margins.

Okay. Good so Jack taking that and just.

Applying it to SG&A can we just take like the fourth quarter SG&A subtract the 651 time and expect it to be at that level or lower.

One.

Well I don't I would say debt.

Our activity levels are fairly.

Increasing in.

Staffing for sure.

We had a 3% CRB growth.

And DNA.

Our pipeline or bookings or backlog have increased it.

In Q4, so there's clearly going to be some ramp up.

SG&A to support what we think theres going to be an increase in activity levels and revenues.

In Q1 so.

I think that debt.

If you did the math that you talked about.

Come up with the baseline shoot for number we're gonna be a little bit higher than that in Q1.

Okay.

Yes.

Alright. So is there any thing you can just kind of broad they talk about how you expect 'twenty 'twenty one to look versus 2022.

As far as revenue growth or expenses just to.

It seems like you could really.

Come Roaring back or it could just trickle in slowly what are you feeling on how it's going to play out.

Lisa we are.

I guess still independent make for you got knocked out of it so the uncertainties still debt. So it's hard to actually give a very precise.

Projection as to what the year will look like but definitely this year is going to be the year of a recovering for the staffing business and.

Going beyond that in terms of beginning the scaling and on the data analytics side, it's definitely going to be scaling from where we've.

Reached this is at the top line level and SG&A will increase which is what Jack just mentioned.

And how the whole thing plays out.

It's still not that clear so day that is the intent and that is the direction the organization and the two segments I think.

I don't know if that answer.

Yeah, a little bit.

I, just just to compare with last quarter, you talked a little bit about how international was shut down in certain countries you couldn't even traveling.

Has anything improved or is everything still on this day situation.

Well with losses.

So Europe had a very hard shutdown on Asia shut down early probably going back to March April and they remained shut down so Europe and Asia, our two major markets outside of the U S very hard shutdowns and as a result, we saw a lot of pipeline and a lot of deals, which we would've expected to close much earlier get delayed.

Push and as I've mentioned some of those have already closed.

The shutdown is still in effect and these places, but what I think you've seen us businesses need to continue to be businesses and they've adapted and figure it out how they're going to proceed given the shutdown in terms of running their business continuing to build out capabilities and infrastructures. So I think there was certainly a period of time.

Where businesses, we're trying to assess what was going on how long this is going to last.

Should I deal with investments in terms of continue on your postponing et cetera.

Different sectors relating to it different ways, but I think.

It's sort of a well known quantity at this point everyone understands how to work in this environment after about nine months of doing it and unless theres a material degradation.

In the environment. The vaccines don't work for pandemic gets worse as the mutation something weird happens I think we're on the upswing and we should see things improve.

Okay, great that makes a lot of sense. Thank you that's on my question.

Thanks Lisa.

Gentlemen, if you do have a question. Please press star one on your telephone keypad.

Please while we poll for additional questions.

Yeah.

Were showing no additional questions at this time I'd like to turn the floor back over to Mr. Cooper for closing comments.

Thank you operator.

If there are no further questions I would like to thank you for joining our call today stay safe and we look forward to sharing our first quarter 2021 results with you in late April Thank you.

Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines or log off the webcast at this time and have a wonderful day.

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