Q4 2020 Computer Task Group Inc Earnings Call
Ladies and gentlemen, we're beginning today's call there'll be and Ah Ah moment of silence does that connect the line.
Ladies and gentlemen, thank you for standing by and welcome to see Chi Chi is the fourth quarter 'twenty and 'twenty results Conference call.
At this time all participants are in a listen only mode. Following management's prepared remarks, we will conduct a question and answer session and instructions will be given at that time.
As a reminder, today's conference call is being recorded for replay purposes, I would now like to turn the conference call over to see T Chief Executive Vice President and Chief Financial Officer, John Lavaka. John. Please go ahead.
Yeah.
Thank you Kara and good morning, everyone. Joining me on today's call Sleepy day, Ctg's, President and Chief Executive Officer.
Before we begin I want to remind listeners that statements made during the course of this conference call and stay at the Companys or managements intentions hopes beliefs expectations and predictions for the future of 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 upon information as of today Tuesday February 23, 2021. The company assumes no obligation to update these statements based upon information from and after the date of today's conference call.
Additional information concerning factors that could cause actual results to differ from those made and the forward looking statements is contained in today's earnings press release as well as on the Companys 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 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 and it's now my pleasure to turn the call over to sleep for his opening remarks.
Thank you John.
Good morning to all of you joining us on the phone and participating part of it.
It's a pleasure to be speaking with you today and the report on our continued success.
Okay.
The team's consistent commitment to disciplined execution will allow us.
Strategic plan resulted in a strong finish to a year of exceptional financial performance.
Fourth quarter revenue was up more than 14% sequentially driven by growth from our solutions business.
Including increased demand for our portfolio of digital solutions.
Revenue from some of them seems grew 22% sequentially.
Expanding the 42%.
And the revenue.
Contributing to our strong sequential growth was the larger than anticipated increase in health solutions business.
During the quarter, we benefited from third to the expansion and the completion of an extensive engagement.
All of the previously announced go line implementation and training services.
With the large existing health care system and the U S.
Another notable area of strength, but as all of our IP infrastructure and the implementation business in Luxembourg the.
Year end spending by existing clients contributed meaningfully higher sales in the fourth quarter true.
Additionally, we maintained robust utilization of our available resources across the organization.
Moving lower levels of unallocated bench resources within our European operations.
The combined with all of a gradual disengagement from lower margin staffing business, we closed out 2000, and 'twenty, we got the highest operating and margin in five years.
For the full year, we significantly improved overall profitability.
On operating and net income.
Well as adjusted EBITDA, increasing or euro for the year two week presents new multiyear highs.
When considering the challenging environment and the lower consolidate its revenue base.
Our strong operating and bottom line the results for the year sort of as important 70 days.
And that all of existing solutions strategy is working and <unk>.
Building the anticipated outcomes.
And you have continued to demonstrate the growing momentum and knowledge solutions business, coupled with the focused expansion of CTG and digital solutions operations.
Our emphasis on solutions and the ability to deliver them remotely.
How's us to capitalize on the Greece demand for digital solutions.
The clients adapted to the prolonged impact of the global pandemic and the remote working environment.
For example, we experienced strong demand for.
All of our Microsoft 365 on the implementation and consulting services.
The chart expanded offerings that we launched in the second half of the year.
Complement all of the Bravo cloud conversion and integration of solutions.
Additionally, you got the award with the first and theories of potential engaged.
Two of rapidly deploy and manage COVID-19 related to tell the solutions for health care providers.
In conjunction with the sustained shift toward remote working and online collaboration and that sort of brought about by the COVID-19 pandemic.
There are also a number of mega trends emerging as meaningful market disruptor.
Most of the applicable for CTG and the clients are new technological breakthroughs, which puts us fast and constantly moving market.
The type of effectively force all businesses to embrace digital transformation and I was one of the top priority.
Yeah.
And at the core of Ctg's solution strategy, we provide the technologies and methodologies to meet the evolving needs of clients. That's the increasingly seek to integrate digital digitalization and to the business decision on a day to day operations.
Today, our existing portfolio of digital transformation solutions address the clients needs and numerous high demand areas and.
Including artificial intelligence machine learning Internet of things and the cloud computing platforms.
Notably according to market research on the.
Majority of the technology.
The digital technology projects and initiated by companies ultimately fail to deliver the intended value.
We believe this translates to an opportunity for CTG, given our proven track record of reliably delivering repeatable digital transformation solutions through our established network of global delivery centers.
Our centralized and scalable delivery approach and shorts, a unique combination of higher reliability and minimized overall delivery costs for our clients.
Okay.
Over the past year, we have continued to expand our capabilities and expertise.
<unk> seen on sales and business development organizations.
The development of new innovative digital solution sufferings on Bravo Global delivery center capabilities.
Today, you have of what will be find solution strategy and dedicated leadership team in place.
Together and has been the fundamental driver of all of the substantial progress and Stu.
The operating performance over the past year.
With the solid foundation in place we are now looking to take the next step to meaningfully advance our digital solution strategy as the catalyst and accelerator of digital transformation.
Over the past several months, we have been working diligently on the major new initiatives aimed at empowering and growing client base with the digital solutions they need for the business since the succeed.
We are extremely excited about because the initiatives.
Which accelerates the expansion of our digital capabilities and expertise.
While positioning CTG to capitalize on the substantial and growing market opportunity.
And the trends of our planned launch in the coming days I want to take this opportunity to preview four of the key elements and areas in which we are making focused investments and that's part of this initiative.
Industry leading products.
CTG is ask the fleet at sampling of World Class Global solutions organization from <unk>.
Price of talent at the industry leaders and multidisciplinary professionals and are focused on developing expanded digital solutions and service offerings and that can readily be scaled to meet client's needs.
Following a series of key new hires and appointments over the past year.
We have eight solutions and heaters, which includes only a subset of.
Proving the digital strategy and transformation experts, who we promoted the vice president of Ctg's Global solutions and generally.
Yeah.
Great through digital transformation of friends.
We are working aggressively to us.
And Ctg's portfolio of digital transformation solutions with the focus on specific areas the leverage technology.
Which enable the accelerated the achievement of the business all of them.
And the rate the stools and methodologies.
We are also making ongoing investments in tools and training programs and methodologies, which help clients increase their speed to market maximize the innovation and support high performance.
The global delivery network.
We've implemented initiatives to further leverage ctg's existing delivery centers and <unk>.
North America, Western Europe, India, and South America.
Expansion of our delivery center platform will enable us to provide the broader spectrum of scalable IC usage.
Including process automation application development, and maintenance testing infrastructure, and cloud solutions management and maintenance and.
Services.
Each of these four key elements and areas of investment.
And Diavik supports of our larger solution strategy.
And the hadn't seen our ability to accelerate the project momentum and.
And the enable clients successful digital transformation.
More specifically, we are focused on empowering clients and innovate faster make more informed data driven decision creates better experiences for end customers and.
And the ultimately realized tangible business performance improvements.
In addition to our focus on leveraging this new initiative to drive strength, who am I supposed the growth.
We'll continue to pursue synergistic acquisitions.
Of the creative stewards.
Complement our existing offerings and.
Further accelerate the introduction of new digital solutions capabilities and across new geographies and and expand the flying base.
Importantly.
And I also want to emphasize that the primary objectives underlying our solution strategy on the prime remain unchanged.
These include our continued commitment to the.
And immediately improve margins and earnings.
Generally the thing longer term growth of ball.
And that of our served markets.
Targeting higher margin and digital solutions.
And the optimally allocate the capital.
And supports the continued operating performance and.
Egypt acquisitions kind of accelerate the expansion of all of digital solutions portfolio.
Okay.
These objectives, along with our solution strategy and our new digital transformation initiatives on go hand in hand.
Collectively they are the driving force behind CTG being a premier global solutions provider and is widely recognized for enabling clients successful digital transformations.
As we make incremental progress towards this goal through the execution of our strategic plan.
We are confident.
And that's where you'll continue to achieve sustained improvement in on.
Our operating performance and profitability.
I will now turn the call over to jump on.
For a detailed review of our fourth quarter results as well of his commentary related to our outlook for the current quarter and year.
Thank you Felipe and again good morning, everyone. Thank you for joining us today.
As reported in our press release earlier this morning consolidated revenue and the fourth quarter was $101 3 million.
Compared with $88 6 million and the third quarter and $99 3 million and the fourth quarter of 2019 the.
The sequential increase and total revenue was driven by multiple factors led primarily by the continued expansion of our solutions business and that included the sizable contribution from the completion of a multi quarter project with the health solutions clients and the fourth quarter.
Additionally, currency translation and had a positive impact of $3 1 million on revenue and the fourth quarter.
Compared with the positive impact of $1 8 million and the third quarter.
And the negative impact of $1 3 million and the 2019 and fourth quarter.
Total billable days and the fourth quarter were <unk> 67.
Compared with 63 days and the third quarter, and 65 days and the year ago fourth quarter.
Solutions revenue and the fourth quarter increased $7 $7 million or approximately 22% sequentially.
The $42 8 million and represented 42, 2% of total revenues.
This compared with $35 1 million or 39, 6% of total revenue and the previous quarter.
Solutions revenue also increased $4 9 million or 12, 8% and year over year.
Compared with $37 9 million or 38, 2% of total revenue and the fourth quarter of 2019.
Revenue from IBM and the fourth quarter was $20 1 million or 19, 9% of total revenue.
Paired with $18 6 million or <unk> 21 per cent of total revenue and the third quarter.
And $21 4 million or 21, 6% of total revenue and last year's fourth quarter.
And as previously disclosed during the fourth quarter of CTG renewed its long term Master services agreement with IBM for a three year period expiring in October of 2023.
The other client represented more than 10 per cent of revenue during the fourth quarter of 2020 on recent comparable periods.
Cost of services as a percentage of revenue were 78, 7% from the fourth quarter compared with 77, 9% of revenue and the third quarter.
And 79, 6% of revenue in the year ago fourth quarter.
GAAP operating margin and the fourth quarter was three 3%.
Compared with two 1% from the third quarter and.
Two 4% and the year ago quarter.
Non-GAAP operating margin and the fourth quarter, which excludes approximately 300000 of acquisition related expenses.
With three 5%.
Compared with two 7% from the third quarter, and 3% and the year ago quarter.
The fourth quarter GAAP operating margin increased 120 basis points sequentially, and 90 basis points year over year, while the non-GAAP operating margin was 80 basis points higher sequentially and improved 50 basis points year over year.
Both measures reflect an increased mix of solutions revenue to our total revenue and the fourth quarter.
And our successful efforts to sustained higher utilization of billable resources, especially when our European operations.
The effective income tax rate and the fourth quarter was 45, 6% compared with the negative 31, and 2% and the third quarter and 34% and the fourth quarter of 2019.
The tax rate was higher and the fourth quarter due to non deductible expenses for tax purposes.
The negative effective tax rate and the third quarter was primarily the result of implementing newly enacted legislation.
Lot of the exclusion of certain high taxed income associated with the global intangible low taxed income or guilty regulations.
And this change of legislation results and a onetime tax benefit of $1 $1 million or <unk> <unk> per diluted share during the third quarter.
GAAP net income and the fourth quarter was $1 9 million of 13 cents per diluted share.
And included approximately 200000 or <unk> <unk> per diluted share of acquisition related expenses.
Non-GAAP net income for the fourth quarter was $2 1 million or <unk> 14 per diluted share.
For comparison GAAP net income for the third quarter was $2 8 million or <unk> 20 per diluted share and included a net $200000 of non operating income or <unk> <unk> per diluted share.
And this of gains from non taxable life insurance and partially offset by acquisition related expenses.
Excluding these items non-GAAP net income for the third quarter was $2 6 million or <unk> 18 per diluted share.
Both GAAP and non-GAAP net income and the 2023rd quarter included the <unk> gain from a change and tax legislation.
GAAP net income and the fourth quarter of 2019 was $1 7 million of 12 per diluted share.
Which included $300000 of <unk> <unk> per diluted share of acquisition related expenses.
Non-GAAP net income was $2 million or <unk> 14 per diluted share and the year ago fourth quarter.
For the full year ended the summer 2020 net income on a GAAP basis increased approximately 85% year over year to $7 6 million or <unk> 53 per diluted share.
Which included a net $100000 benefit of <unk> per diluted share comprised of severance and the acquisition related expenses offset by non taxable gains from life insurance and the sale of the building.
Non-GAAP net income for the full year 2020 increased approximately 34% year over year to $7 5 million or 52 per diluted share.
Adjusted EBITDA for the full year 2020 increased approximately 25% year over year to $15 $6 million.
Ctg's total headcount at the end of the fourth quarter was approximately 3900 compared with 3007 hundred 50 at the end of the third quarter.
And 3950 at the end of the year ago fourth quarter.
Approximately 91% of our fourth quarter 2020 headcount was billable.
Turning to our balance sheet cash and cash equivalents at the end of the fourth quarter were $32 9 million.
During the quarter repay the remaining outstanding balance on the company's revolving credit facility, resulting in no long term debt outstanding at the end of the year.
Capital expenditures and the fourth quarter were $169000 compared with 685000, and the third quarter and.
And $1 2 million and the fourth quarter of 2019.
Looking forward given the current business landscape remains highly dynamic and large part due to the sustained global impact of the COVID-19 pandemic.
Including reduced visibility on Ctg's and markets and clients, we are not providing quantitative guidance for the first quarter and full year 2021.
However, we are very pleased with the recent performance across the business and the success of our strategic focus on digital solutions, which has yielded consistent and significant improvements and the companys margins and profitability.
We remain committed to the execution of our strategy and investing our global solutions organization, which will yield expanded digital capabilities and support of our highest priority to deliver long term value to all of Ctg's stakeholders.
Keira can you please initiate and manage our question and answer session. Please.
And then move to Q&A. Please press the pound too on your telephone keypad to enter the question queue.
Here and notification when your line is on mute it at that time, Please and then state your name and your question once again pressing pound to indicate that you wish to ask the question.
And do have a question on the Q, let's go to the first call us.
Your line is on muted. Please go ahead.
Hey, Good morning, This is Kevin and live with Kelly on the company how are you guys doing.
I guess, Kevin how long.
Right Yep.
First question and I wanted to touch on the fleet you mentioned a couple of awards that could be the first in the series of health care providers. It sounded like that was related to some COVID-19 items and you just talk a little bit more about what those awards were how meaningful they are and how you see them kind of expanding over time.
And I'm sure Kevin.
And we're talking about small like at Brooks, and COVID-19 related and how best solution that needs to be deployed some of it quickly.
And you can clean Cow instance of.
From a vaccination support and for.
And for our health systems.
And not all of that.
The speed with which the coming and the size.
And will depend on is depending on the the availability and the logistics of of the vaccines.
So it's a it's the best on for.
Paul and get back and movement there we have it for the contract that's been awarded.
And we can do.
And but.
It's it's the level at the same time, it certainly and it's already and.
I'm going to understand how and how fast and how big this is going to become.
And I hope in the states logistics with the vaccines are not that's oh, it's difficult because they are in Europe and.
And that's for sure.
Understood. That's helpful. And then maybe more generally on the past few quarters of the.
Because of the pandemic was going on as I talked about sales cycle slowing with the.
Some of them with their health care provider customers, given that theyre still dealing with some issues here, but at the same type of maybe there's light at the end of the tunnel I'm curious if those discussions around the other.
Of your health care business.
Moving forward on and what <unk>.
And you expect.
So being able to kind of grow bookings on them over the course of the 'twenty one.
Okay.
And that's the that's very difficult times, that's the question Kevin.
So you're almost asking me to make the statement on the house.
All of it is going to evolve and in the next couple of months.
And we all expect sort of going to get out of this and.
Vaccination is going to prove part of the on a.
The big bulk of the solution and we.
We see that and country small for instance, the states most of them.
The UK starting.
Coming out.
And we also see the the lot of work has to be the flex the team well.
And it's actually extremely urgent and the beginning of Thrones the collaboration software and the support of work from home now with the.
Those are COVID-19 related.
The solutions we.
We believe that's where all of whenever I see the yoga and of the promo or when but the.
Image and it's very clear now.
The business is going to take up.
But I don't know when that's going to be because of.
It's also very dependent on the global situation then.
And the different the speed and progress and vaccination.
Between the confidence.
The is big zone.
Timing is still the question Martin and Doug.
Also why we didn't give any guidance.
And for the remainder of 2021 at this moment.
Yep understood.
And that being said maybe this question is for John but just in terms of the like that into an outlet. The statements I know, it's more qualitative at this point, but yeah, you talked about expecting on the solid revenue growth. This year and just curious how much the visibility you guys, having that whats driving on that level of confidence and the.
And beyond that.
Some of the dimension of disengagement from lore.
Like the staffing business just wanted to check and see if there were other sizable.
The sizable engagements that you have of.
Potentially I expect them to walk away from them over the course of.
Of this year.
Sure Kevin.
So a couple of points there relative to the revenue growth of the solid revenue growth comment that we put in the release.
Ah we're excited and I'm sure you can tell from the from the release and from the call today about the execution that we've had over the past year really over the past couple of years on driving the solution strategy and now further where the digital solution strategy we.
We do see opportunities in front of us.
He just said, it's somewhat hard to predict the times because the throughput from opportunity to closing the deal has us.
Become longer, but we see enough opportunities in front of us.
Especially in the solutions area, and especially that area, where we're primarily focused and we do believe that we can continue to generate or we can this year could generate brothers from revenue growth.
So solid is not a it's not a double digit number but it is a growth number relative to the staffing business and stepping away from the lowest margin staffing business I think we're going to continue to do that.
All of our effort time and resources and energy are going into driving the solutions business and a variety of different ways.
And again, whether it be skills, whether it be methodologies, whether it be processes.
And we understand that that's where we're focused I think our disciplined execution. This year has been great and part of that story is continuing to disengage as appropriate from the staffing business. So I don't envision us doing that and a very very significant way, but we are going to continue to critically evaluate the staffing opportunities.
Come up for renewal.
Okay. That's helpful. Congrats on the strong year here, especially given the circumstances and a good luck and 21.
Thanks, Kevin Thanks, Kevin.
Moving to the next caller in the queue.
Your line is on muted. Please go ahead.
Hey, good morning, Felipe and John Josh Vogel, Sidoti and hope you guys and do well.
Hey, Jeff Martin and zone.
Good morning.
And the absence of being guidance and just kind of want to get a little bit of a sense of directional commentary around Q1.
With the completion of the multi multi quarter project and just general seasonality can you just kind of talk to what kind of stepped down and revenue we could expect for Q1.
Okay.
From the would you like sorry, that's one.
Sure.
And.
I think we'll definitely see a step down on revenue in Q1, and Josh, but it won't be significant or unusual we had strong as we indicated on the on the call we had strong.
Business from the multi quarter go lives that we had done we had very good sales and Luxembourg.
The infrastructure I T and.
There however, and there are also a few less billable days and the first quarter. So having said that I don't think it'll be materially different than sort of our run rate on billable days.
So from that perspective.
I think and get comfortable that we had some really good events and really good projects that drove the fourth quarter, which is fantastic.
But it's not a significant from sort of a static run rate on.
Revenue per day to be materially different and Q1.
Understood can you remind me the total number of billable days that you have for Q1, just want to make sure of my matches up.
Yeah I'm all of.
I don't have the right in front of me, but I'll get back to you on that.
Okay sounds good.
Shifting gears a little bit.
Understanding that as solutions grows so should the margin profile of the overall business I know that utilization benefited from low vacation and sick time should we expect.
Utilizations, maybe swing back a little and the other direction.
Post pandemic or as things normalize how should we think about that.
Yes.
Tom.
Sure.
Our solutions margins.
The have pretty consistently been significantly higher than our.
The staffing margins and how we've looked at of Josh internally is it depends upon the service being provided on both sides of that fans of the staffing service and the the <unk>.
Solutions, but generally the margins are at the end of the day, our two to three times higher. So it's it's not unreasonable to think that our staffing and engagement with your margins and our two and a half times as high so from that perspective.
We would.
As we continue to drive the solution side of the business and again disengaged from the lowest margin staffing business.
We really think that there's a progression of steady progression of.
The higher on a pretty consistent basis on both.
Two of three things one is the overall margin of for the organization too as we stress and sell and deliver digital solutions, we think that that's gotta, even higher opportunity and higher margin within the solutions portfolio. So we think our solutions margin again should gradually increase now and we've had as we said the in past and.
We said too and in general that it isn't always going to be a linear increase from some quarters won't be out for some quarters will be down, but we think long term.
Steady climb and the solutions from mid to high Twenty's to a higher number and overall are beginning to look.
More towards the mid Twenty's overall, and I don't I'm not sure of that that we're going to get there in 2021, but significant improvement on both ends.
I appreciate the insights there.
The E.
So we did and you had the.
And the agreement with head of client and northeast of <unk>.
<unk> and the increase there with some jump and financial services sequentially and I'm. Just curious does that was that related to the ICU.
Infrastructure and implementation business and Luxembourg or was there a new win or an expansion there or a bit of both.
I didn't hear the first part of the question, Joe and I'm not sure. If you yeah No I'm just free Josh broke up with you broke up a little bit of at the beginning of the question. So I wasn't I wasn't exactly sure I apologize the gist of shortening up the and I just saw a big.
Sequential increase and financial services revenue and I was just curious if that where that came from was there a new win and expansion of bit of both of us.
And we saw on Luxemburg and just curious of.
What drove that.
I think it's a it's the level that the mix of of everything.
Josh.
<unk>.
It's definitely the infrastructure side, and and Luxemburg and that's helped us.
But also in Belgium, and then from there was higher activity and two.
Towards the end of the year and the financial services market, but no one specific big contract it was more like and.
Like and well overall increased activity.
Okay, Great and just lastly, given the new.
Digital transformation initiative and the investments there.
Again outside of giving guidance Im just curious how we should think about SG&A.
This year.
Relative to 2019, and 2020, and just kind of a base full of how should we think about that.
Okay.
It sounds like a question for you too Joe Okay.
Yes.
Overall, we expect us.
The margins to go up as we just talked about as you just asked we just talked about with solutions margins themselves.
And then within the concept of.
Disengaging from a staffing I think overall margin will increase we know we've kind of make the continued investments and our solutions and our business development on that side of the business and we're going to continue we plan to continue to do that.
So from that perspective, we said, we still think the the operating margin goes up.
And so we think that within the direct or gross margin and we think that increases we know that we've got to spend some more money. So we think the SG&A increases, but we think at the at the operating income level, but that increases.
And as well, probably again that sustainably, but we definitely believe that we can continue on and improve on where we are from operations standpoint, I think we view this and the path on calls and sleep and I talk about all the time, it's a bit of of Germany right. There's we know we're not at the destination of today.
But we're definitely headed down a path, where there were going to see gradual improvement as time passes and on.
On the the billable days for.
Q1 has 65 for the first quarter.
Alright, great well I appreciate all the details inside and.
The impressive to see how the results ended.
I ended up being in 2020, given everything going on so good luck and.
2021, and thanks again for taking my questions.
Thanks, Josh Thanks, Josh.
We have no further questions on the queue. At this time, we will turn the call back to management for any closing remarks.
Thank you Kara.
And clothing, we are very pleased with our strong results and the fourth quarter.
Reflecting on the past year I'm very proud of all of a highly dedicated team and work together to overcome challenges and what we as an organization and ultimately accomplish despite the unprecedented and volume.
We know the only rapidly adapting to the changing business landscape without any loss and productivity and.
And we made significant strides and successfully expanding our solutions offerings and how we deliver services to meet the evolving needs of all of our clients.
We exited the year with growing momentum for our expanding portfolio of digital transformation solutions.
And we are just getting started in terms of all of realized the page.
Today, we have the solid foundation in place and.
And I'm excited about what we are positioned to achieve and 2021 us.
And we accelerate ctg's strategy and empower clients with the digital solutions required to succeed.
With continued focus and disciplined execution of our strategic plan on.
The confidence we will drive the near and long term success of three.
Adult and meaningful value creation of all CTG stakeholders.
Thank you for participating on today's conference call and for your ongoing support of CTG.
You may now disconnect the call.
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