Q1 2021 Mastech Digital Inc Earnings Call
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Greetings and welcome to Mastech Digital Inc quarter, One 2021 conference call at this time all participants are in 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 call.
Is being recorded.
Now my pleasure to introduce your host Jennifer Ford Lacey manager of legal affairs for Mastech digital.
Thank you Ms Ford Lacey you may begin.
Thank you operator, and welcome to Mastech Digital's first quarter 2021 conference call. If you have not yet received a copy of our earnings announcement. It can be obtained from our website at www Dot Mastech digital dotcom.
With me on the call today off the bat Gupta Mastech digital Chief Executive Officer, Paul Burton Mastic and flow, Charlie Chief Executive and Jack Cronin, Our Chief Financial Officer.
I would like to remind everyone that statements made during this call that are not historical facts are forward looking statements. 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 the markets in which.
We operate.
Without limiting the foregoing the words believes anticipates plans expects and similar expressions are intended.
To identify certain 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 those these forward looking statements, including those listed in the company's 2020 annual report on form 10-K filed with the Securities and Exchange Commission and available on its website at Www Dot S E C Dot Gov.
Additionally, management has elected to provide certain non-GAAP financial measures to supplement our financial results presented on a GAAP basis.
Specifically, 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 to their comparable.
GAAP measures are included in our earnings announcement, which can 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 regular meetings one on one meetings or calls I will now turn the call over to Jack for a review of our first quarter 2021 results.
Thanks, Jane and good morning, everyone.
First quarter had some strong indication that the COVID-19 pandemic is dissipating with respect to its impact on the macroeconomic environment.
Activity levels generally increased during the quarter with the rate of increase very materially from industry to industry and geography to geography.
For instance, our it staffing services segment had a significant uptick in activity from.
Q4 levels, while our data and analytics services segment guidance.
See you approachable market improvement in terms of a latter half of the quarter.
As I review, our Q1 2021 financial results you will see this uneven recovery from the impact of the pandemic in our two business segments.
First quarter, 2021 revenues totaled $49 $8 million compared to $54 million in the first quarter of 2020.
Our data and analytics services segment.
Contributed revenues of eight $8 million essentially flat from the fourth quarter of 2020.
Project delays continue to hurt revenue during the quarter.
However, bookings rallied in the second half of the quarter finished close to $16 million.
It's quite strong and an indication of the solid revenue pipeline.
Additionally, we saw activity improvement in Europe, and parts of Asia, which are important growth markets for us.
Uncertainty still remains in the marketplace relates to win projects and pent up demand will be released in earnest and we believe that we're getting very close next.
Nextgen point.
As we approach second quarter.
Our it staffing services segment.
<unk> levels increased from the fourth quarter of 2020.
We grew our global consultant base by a record 9%.
This performance essentially offset all of the billable head count declines we experienced during the pandemic impacted first half of 2020.
Gross profit in Q1 of 2021 totaled $12 $8 million compared to $12 $7 million in the first quarter of 2020.
Gross margin is of course.
Revenue increased by 50 basis points over Q1 2020.
Good morning per quarter, we made additional investment in SG&A expense of approximately $1 million largely in sales operations and leadership staff and efforts to capture anticipated future revenues as the COVID-19.
Recovery continues to gain traction globally.
Our decision to invest in Brian of an expected revenue growth curve reflects improving demand and early customer acceptance of our.
Broadened DNA service offering, which Paul will touch on later in his prepared remarks.
GAAP net income for Q1 2021.
With $1.2 million were 10 cents per diluted share from.
To one $9 million or <unk> <unk> per diluted share in Q1 2020.
Non-GAAP net income for Q1 of 2021 with $2 $2 million per 19 cents per diluted share compared to $2 $7 million or 23%.
Per diluted share in the first quarter of 2020.
SG&A expense items not included in non-GAAP financial measures net of tax benefits were the amortization of acquired intangible assets and stock based compensation.
And are detailed in our first quarter earnings release, which is available on our website.
Lastly, addressing our financial position at March 31, 2021, we had cash balances on hand of $7 $2 million no outstanding borrowings under our revolving credit facility and cash availability of.
Approximately $25 million.
During the quarter, we reduced our term debt.
$1 $1 million to $16 4 million at quarter end.
Note that this debt balance income.
The $10 million that we borrowed to finance the <unk>.
<unk> acquisition in April.
Over 2020.
I'll now turn the call over to the debt for his comments.
Hum.
Good morning, everyone. Thank you Jack for the detailed financial review of our operating results for the first quarter of 2021.
Clearly project delays impacting revenue was in our data and analytics services segment this quarter and hiring for projects that would ultimately be pushed out at the last minute took its toll on our profit margins.
Nevertheless, we continue to invest for the future despite a bit of revenue lumpiness.
Paul will have more to say about the data and analytics segment performance and where we believe we are headed.
Now, let me share with you the good news with respect to our it staffing services segment.
From the outset of Q1 2021, we saw a strong increase in demand in the segment.
As a result of the demand uptick we were there.
Able to increase our consultants on billing by 19 nine consultants on a record 9% as compared to our head count entering the new year.
Revenues increased sequentially by 3% during the first quarter.
And the head count on demand increases should have a more pronounced impact on Q2 revenue performance. If these trends are sustained.
On a year over year basis, 2021 revenues were still down 5% from the first quarter of 2020.
This performance represents a strong improvement on what would be 8% year over year decline in Q4, 'twenty 'twenty as compared to Q4 of 2019.
Gross margins were in line with last year's performance, despite slightly higher benefit costs.
I should reiterate that Q1 is historically, a low lower gross margin quarter in the staffing business due to a higher payroll tax load.
Q1, 2021 operating expenses for the segment were lower than the first quarter of 2020 by approximately $600000, which allowed us to slightly top last year's operating income for the segment.
Despite the 5% decline in revenues.
During the quarter, we did unwind some of the austerity measures implemented during the first half of 2020.
Additionally, you will see prudently.
See us prudently increased expenses for the segment in the coming quarters to support our anticipated growth.
I will now turn the call over to Paul for his comments on our data and analytics services segment.
Thanks Vivek.
Q1 represented a mixed performance for data and analytics segment, while revenue was basically flat from Q4 2020, we posted nearly $16 million in bookings in Q1, 2021, which suggests to us that some of the pent up demand for data and analytics services is being released significantly we signed.
One new multiyear center of excellence deal and received a verbal award on a second which we expect to close in early Q2.
This bodes well for the future and we see it as a clear indication of the value we were able to deliver to our clients revenue on the other hand, excluding amber leaf compared unfavorably to Q1, 2020, which was a very strong quarter for data and analytics. This sluggish performance wasn't no insignificant part.
The result of our reduced bookings performance during the second half of last year, when our clients were being substantially impacted by the pandemic with strong bookings in Q1 2021. However, we now have reason to believe that revenue will recover and that we will reestablish the strong growth trajectory we were on prior to the on.
Set of the pandemic.
For instance, as Jack has already mentioned, we're seeing deals close in Europe, and Asia, which are accretive to our baseline revenue performance. Moreover, our pipeline in these geographies is very strong and growing these trends along with the expected release of demand in North America are a positive sign for the coming quarters notwithstanding.
All of the challenges we faced last year, we believe that we are extremely well positioned and in many respects stronger than we've ever been.
<unk> broadened our service offerings to encompass the cloud and are in the process of delivering our first cloud engagements with more on the pipeline. We have developed and managed services offerings for our customer experience line of business and have closed our first deal with several more promising prospects from our pipeline. We have also developed and managed services offering per day.
The governance and have closed our first deal further we recently received an RFP award for our second deal in this line of offerings. We expect this deal to close in Q2 as well finally, we have initiated on offshore application development offering and again, we have closed our first deal which is set to yield at least 700 K of revenue. This.
Year. This offering is particularly strategic for us as it is directly relevant to the application modernization imperative endemic to commercial enterprises as they move their application portfolios to the cloud overall, we believe we are seeing success in each offering area. We have chosen to compete in over the last year with.
Limited business travel, we had the opportunity to focus on new offerings and the skills needed to deliver them. Additionally, our data and analytics pedigree continues to serve as well as we leverage these skills and the cloud and with our application modernization offering that I just alluded to.
We believe we are well equipped and very well positioned to meet our clients' needs as they modernize and migrate applications and infrastructure to the cloud data and analytics, especially as especially germane to this outcome because in this age of digital applications as well as digital infrastructure clients must be poised to move.
Smartly with agility and speed, we differentiate ourselves with the capability to deliver smart cloud enabled infrastructure and applications and we're seeing the traction in the market for our offering offerings and capabilities. We're confident about the future. This concludes my prepared remarks, and I'll hand, the call back to Vivek now.
Vivek.
Thanks, Paul.
Operator, you can now open the session for questions.
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One moment, please while we poll for questions.
Our first question is with Josh Vogel with Sidoti and company. Please.
Please.
Hi, everyone. Thanks for taking my questions.
I got a couple here for you the first one.
Wanted.
Hoping you could talk a little bit more about SG&A.
You talked about.
Where the investments were targeted I'm curious how much as planned in Q2 and over the balance of the year on at what point do you feel that you have.
The cost structure and personnel in place Thats a line for these future growth opportunities.
Josh.
This is moving.
Let me, let me try and break this.
Your question on the answer into two parts, let me talk about the.
It staffing piece and then I'm going to ask Paul to talk about with your day Olympic Skus.
Because these two are slightly different.
On the SG&A front.
Titan our cost structure last year, as we were going through the pandemic.
And as I've mentioned in my previous earnings calls we didn't cut.
Things, so far that it would hurt.
Business starts picking up and Thats served us very well because this quarter Q1, we were able to capitalize on this demand which game.
A big.
Big way.
But to do that because we had not got ASO is bound to the boardroom.
As we go forward, we will have to keep increasing on SG&A cost in terms of having the right amount of capacity for the producers.
Salespeople in the recruiters.
To keep pace with the demand, which is there, which we're hoping will sustain.
So that.
That being said I think we are already in a fairly good position and we are not talking about.
A very large increase but there will be some incremental increase as the quarters progress and we will obviously keep pace with the demand if the demand keeps increasing we will immuno Rev up the.
Engine, a little bit more if it slows down we will slow down as we have been doing prudently and I think we've done pretty successfully last year.
As regards the data analytics part I'm going to ask Paul take that question.
Paul.
Thanks Vivek.
As Jack mentioned, we invested about $1 billion in SG&A and as I mentioned in my prepared remarks, we saw the closure of one significant centre of excellence deal.
With another award forthcoming hopefully imminently.
We expect to close that soon what we're seeing in our installed base is a significant number.
Of multiyear.
Deals that are requiring.
SG&A in salespeople and operations capability in order to meet the demand. So we felt comfortable investing forward seeing the demand in the pipeline and we anticipate more of these deals coming along so specifically with respect to SG&A. We added seven people in the data and analytics business.
To meet this demand and hopefully capture it going forward I hope that answers your question.
Yes, I appreciate the insights there so.
Just looking a little bit higher level.
When we think about <unk>.
SG&A on a full year basis, you know when you go back to 2018 and 19 year, we're at about 16% to 17% of revenue last year, just under 20%.
Understanding that you do need to invest certainly on the DNA side win.
Ahead of certain projects.
What should we how should we think about an annual run rate.
For the cost side of the equation going forward or on the term debt.
Would it still be sub 20% should be like closer to 2020, or maybe closer to like an 18% range on any sort of insights there would be helpful. Thank you.
Josh I think.
It should be on the below the 20% Mark, but I'm going to ask Jack if he has a feel for what the rest of the SG&A of adequate addressed.
Jack.
Yeah, Josh I would say, it's clearly it's going to be higher than.
Our historical trend because as Paul said, we continue to develop new service offerings et cetera, and when were you on.
Always seem to be staffing up ahead of the curve.
Which which is a good thing.
Obviously, if you if you projected day the revenue growth curve properly. So I would say for 2021, we'd likely to be.
A little bit plus or minus 20% range.
Great. That's helpful. Thank you for your question.
Oh, yes, yes. It did thank you sorry, my mute button wasn't on meeting.
A question I guess for Paul.
With the easing headwinds around COVID-19 I guess, it's still a little surprising that project delays, we are still impacting DNA.
You did talk about.
On a strong pipeline in the latter half and some.
Just.
The pressure letting up there, but I was curious is there are you seeing any of the projects that were delayed last year are they are they all are any off the table are not going to materialize. It just thoughts on your confidence level around that.
Yeah, Yeah. So I can look at the business across two dimensions with respect to our core business.
The clients that we have some different relationships with them that we've been building over time, we are seeing the projects come back and they are coming back as we would.
<unk> without a terrible amount of delay.
So that piece of the business is performing as expected. There is however, a transactional aspect to the business of deals that come to us shall we say transactional H or AD hoc perhaps.
And those those deals are just now starting to come back.
No.
Project delays.
I think for the most part are coming to an end and we're starting to see demand return.
A pattern that we saw before COVID-19 and before the pandemic.
<unk> is a little bit of uncertainty out there in certain geographies. For example, as we know India is suffering from the pandemic terribly right now and that is a bit of a wildcard going forward, but in terms of the overall demand our core business. Our core accounts are coming back exactly as expected and I think strongly and the transactional demand.
That is a little bit more volatile quarter over quarter is starting to return to a normal pattern as well so I am seeing things come back the way we would expect.
That's great to hear it.
Good commentary around.
New new offerings like cloud engagement data governance application development.
I'm curious when you are those those types of newer service offerings that that youre getting into.
Can you just talk about the sales cycle.
They are in terms of like engagement, signing starting to ramp and ultimately be fully ramped up and how that compared to.
On a pre pandemic projects.
Yes, there isn't there there continues to be a significant move to the cloud.
Clients are realizing all businesses are realizing that if they want to move.
With any type of agility or speed, they can't stand up infrastructure by servers standup networks and do the typical things that they would've done years ago. So moving to the cloud offers a significant speed advantage in terms of bringing technology capabilities online.
And that's why we're seeing the move to the cloud in terms of the sales cycle.
It's different.
We're seeing three to six month sales cycles for cloud offerings and significantly with respect to the cloud as clients move to the cloud they actually have to move something to the cloud and so we're seeing a significant number of application modernization offerings.
Coming along which bodes well for the future and when I say application modernization offerings has application portfolios are picked up off of premise shall we say and moved to the cloud. There's a certain amount of work that has to go into it to make it cloud ready.
And that work for the most part is really beginning to spike as we come out of the pandemic and clients returned to <unk>.
Something resembling a normal posture, so I would say a three to six month sales cycle.
For cloud engagements and application modernization engagements, which can be quite large can take longer.
And but they are broken into pieces and we're starting to see those come as well.
That's really helpful. Thank you and just one more on I'll hop in the queue, maybe maybe for Jack.
I wanted to make sure I was doing the math right talk thinking about billable consultants.
Or are we now sitting somewhere closer to the second half 19 levels, which is like just north of 1100 50, and then also can you just a quick comments around how bill rates are tracking or are they still in the in the mid sixties or the 66 70, Assam, sorry, mid seventy's around 76% to $77.
Yes, you're thinking about.
The billable consultants correctly, we are in that range.
750, a little bit above.
And the average bill rate is still in the mid Seventy's It came down a little bit.
In Q1, but we're still in the.
The mid 70 range.
Sounds great I'll hop back in the queue. Thanks for taking my questions everyone sure.
Our next question is with Lisa Thompson from Zacks Investor Research. Please proceed with your question.
Good morning.
Good morning.
So I'm using my highly scientific algorithm if you increase.
Staffing consultants, 9% does that mean sequentially revenue should be up nine.
9%.
So Lisa.
The revenue yes.
9% I don't think I wanted to make a you know.
Statements like that because there is still quite a lot of things.
Things that need to happen.
In terms of.
How this quarter pans out.
But.
I would just like to leave it on the this quarter the revenue should definitely be up in comparison with Q1.
Okay and since it's already April 'twenty as it is this quarter tracking the same amount of ads.
Actually we haven't quite reached the end of the month, yet so that's when we really need to be the pluses and minuses and a lot of contracts actually and on the last day of the month.
Because that's how the customer is often.
Find the contract thought so we have to wait for the end of April to happen before we can say on what happened in <unk>.
But it is looking positive I don't know what the final opinion.
When you look like.
Okay.
And is there could.
Could you, possibly tell us what amber leaf contributed in the quarter.
Well you cannot talk on anymore.
Okay.
I'm actually going to pass this question over to Paul.
Yeah, Hi, so so amber leaf was fully integrated into the business.
Effective January one we're not running separate P&L on them anymore. What I can tell you is is that the.
Amber leaf as a channel certainly opened up eight new logos.
First quarter, and we continue to see opportunities as a result of that acquisition, but we're not tracking the P&L separately.
Okay.
And going back to your bookings of 16, almost $16 million is that a record number.
No that's not a record number.
Maybe a second best number, but its not a record number and a record number was Q4 of 2019.
Okay.
Alright.
Interest you quickly went through all the new things that you were working on I was wondering if you could talk a little bit more about what you meant.
When you said.
About the first cloud engagement.
Also on the managed services data governance.
Talk a little bit what that means.
Yeah. So what we're seeing is as clients move to the cloud.
Not necessarily have the skills on staff in order to manage on a sustained their cloud environment to migrate out.
Data into the cloud et cetera, and so there is a managed services opportunity to stand up a team offshore and to essentially.
From this business for the run the project if you will for them over an extended period of time. So when we talk about managed services we're talking about.
Standing up a team and sustaining and maintaining their cloud infrastructure environment and doing certain tasks around it right.
And data migration into the cloud over time.
So that's what we're talking about when we see managed services on the cloud with respect to data governance again is as clients are moving to filed on their applications are moving to the cloud what.
What we're finding is that all of their data of course has to follow it but there are certain standards that their data has to meet in terms of shall we say hygiene and.
Cleanliness.
No.
There's a tremendous amount of work that's available to straighten out and help clients straighten out their data as it gets moved to the cloud. So it's appropriate for applications and so there is an offering that we've taken on around that and we have closed one deal and expect to close the second deal around that soon.
Okay, great and so I also assume in your business is that margin gross margins will continue to improve.
As you know you get and beliefs figure it out.
Yes, yes, I I I expect gross margins to to hold and improve throughout the balance of the year.
Okay, great. Thank you that's all my questions.
Thank you Lisa.
Our next question is with Brian Kitson Linker with Alliance Global Partners. Please proceed with your question.
Hi, Good morning, guys. Thanks for taking my questions.
And when you talk about delays is it delays in getting new contracts signed meaning longer sales cycles or is it delays in getting.
Signed contracts to begin or is it both.
It's the former.
Brian.
Delays in getting the contract signed typically once the contracts are signed we start execution as soon as possible after that.
Can I go havoc on <unk>.
Tract in hand in the last minute the custom on being saying you know can you delay the start date on this by a certain period, but that's less frequent.
So with that said.
There was discussion about winning a large center of excellence contract I think in late <unk>. It may be assuming those would the timing has that program started or if not when do you expect that will start.
Actually I haven't got on how ask all go on to that question.
That contract that contract signed and it's effective April one so billing will start on that it really did start on that on April one.
Great and then finally, maybe you can talk about the competitive landscape in data and analytics business I mean, it's obviously a buzzword it's a popular.
Target market right now so.
Talk about the competitive landscape and is pricing higher or lower or even with last year.
Our pricing is improving.
Thanks Vivek.
Pricing is improving there continues to be a shortage of skills in the market.
For data and analytics, especially data and analytics as it relates to the cloud and to applications. What we're seeing is applications reported on or migrated or modernized into the cloud is that they're being infused with analytics and with intelligence or business intelligence.
As they migrated into the cloud so there's a big opportunity for this to happen the skills. In this area are relatively scarce compared to other areas and so I would expect.
Pricing to hold and improve depending on the skill of the project were talking about I don't see any dilution or erosion in pricing or gross margin. This year in this business I expect things actually to get better.
Great. Thank you.
Yeah.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Okay.
Our next question is Josh Vogel from Sidoti <unk> Company. Please proceed with your question.
Thank you.
A quick one around mass remote where we're about a year and now I was just when we think about your staffing business longer term and the delivery model.
How much.
Business do you think are targeting to be run through Mazarin mode. Can you remind me if the margin profile of bill rates or any different there and.
Any any sort of commentary thank you.
Sure Josh the Master note offering what was was really well timed we launched it in June on actually we've since then almost two thirds of our placements.
I've been doing I've been in remote locations.
Even last quarter, 65% of our placements work in a remote.
But.
When the customers are finding up there is an expectation from half of them roughly even when I say two thirds, one third out of the hole.
Expected to come back in some shape or form to the office locations. Once the customer is comfortable about that.
Pandemic is under control and they can do that and it may not be a full on all five days kind of a pain, but the interesting thing is the remaining one third will always remain remote because they are so far removed the day.
The consultants actually living in a very different.
Location completely different <unk> altogether, often different states. So that we will continue to be.
And we see this kind of trend going forward from this.
Even today the requirement the demand that I am talking about which is coming to us.
The majority of them are okay for remote locations.
To answer your other question about <unk>.
Gross margins et cetera on gross margin still tend to be in the same range is just that the price point changes depending on where the candidates on if there are in lower cost locations and are you able to attract them and the clients get the benefit of that lower cost as well and they are willing to.
Make the compromise of not having the candidates come on at any point in time to their locations.
They are able to get better quality candidates and better pricing as well.
I don't know if this answers your question.
No that definitely does.
And just one last one for Jack.
Can you remind me the contingent consideration amount that could be paid this year on Q2 years, if enbrel it hits its targets.
Yes.
Total well.
The fair value that we have on our balance sheet is about $2 9 million and that's a you know a city.
Historical value based on a probability model so that's.
That's on the balance sheet, but.
And that's what we believe the fair value is.
It is likely to be but b the contract.
Earn out is $4 5 million and that splits in two years.
First year is fiscal year 2021, and the second of course is fiscal year 2022.
No.
If they make earn out.
Their payments would probably happen in April.
2022 and April of 2023 on.
I mean, if you're trying to assess the <unk>.
Cash flow on vacation.
Yes, perfect. Thanks again guys.
Sure Josh.
Okay.
Ladies and gentlemen, we have reached the end of our question and answer session and I would like to turn the call back.
Good day for closing remarks.
Thank you operator.
So if there are no further questions I would like to thank you all for joining our call today and we look forward to sharing our second quarter 2021 results with you in late July. Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.