Q2 2021 Mastech Digital Inc Earnings Call
[music].
Greetings and welcome to Mastech Digital Inc. Q2, 2021 conference call at this time, all participants are in a listen only mode.
The question and answer session will follow the formal presentation.
I didn't want to require operators.
During the conference. Please press Star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now my pleasure to introduce your host Ms. Jennifer Ford Lacey manager of legal Affairs for Mastech Digital Inc. Thank you Ms. Ford Lacey you may begin.
Thank you operator.
And welcome to Mastech digital second quarter, 2021 conference call.
If you have not yet received a copy of your earnings announcement. It can be obtained from our website at www Dot Mastech digital dot com.
With me on the call today are Vivek Gupta.
The digital Chief Executive Officer.
Paul Burton Mastech info tell us the chief executive of 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 finance.
Sales 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 within.
Without limiting the foregoing the words believes anticipates plans expects and similar.
Finance and 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 these forward looking statements including.
Putting 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 SEC Doc out.
Additionally, management has elected to provide certain non-GAAP financial measures to supplement our financial results presented on a GAAP.
Express UCITS.
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 the key metrics you.
Used by management in operating the business reconciliations of these non-GAAP financial measures.
Do the 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 1 on 1 meetings or calls.
I will now turn the call over.
To Jack for a review of our second quarter 2021 results.
Thanks, Jen and good morning, everyone checking.
The second quarter, 2021 revenues totaled $53.7 million compared to $47.6 million in the second quarter of 2 types of your 'twenty.
This revenue increase represented 13% growth over the second quarter of 2024, 9% organic growth when adjusting for the Aberdeen acquisition.
Additionally, our revenue performance showed sequential growth of 8 per se over the first quarter.
2021.
Our data and analytics services segment contributed revenue of $9 million.
Third the $6.8 million in the second quarter of 2020.
After adjusting for Amberley organic revenue growth on a year.
Year over year basis was approximately 4%.
Yes.
During the quarter, we continued to see further rab of games at the day in a market is starting to recover.
Bookings were strong for the second consecutive quarter at $15 million.
Pipeline of opportunities.
<unk> continue to show promise and customer conversations of big focus more on I need to start DNA projects rather than reasons for project delays.
Clearly some of uncertainty still remains in the marketplace with the Doe to varian being a wildcard.
However, we feel good about the macroeconomic conditions in the DNA space as we enter the second half of 2021.
And our I T staffing services segment activity levels continue to remain very strong in Q2.2021.
<unk> grew our billable consultant base by 89 consultants an increase of 8 per se from March 31, 2021 day levels.
Furthermore, organic revenue growth was approximately 10% on a year over year basis.
As we can firsthand on a sequential quarterly basis.
Gross profit in the second quarter of 2021 totaled $14.3 million compared to $12.7 billion in the second quarter 2020.
Gross margins as a percent.
Net revenue increased modestly.
<unk> Q2, 2020, and improved by 100 basis points over the previous quarter.
Yeah.
GAAP net income for Q2, 2021 was $3.7 million of 31.
<unk> 10 per diluted share compared to $3 million or 25 cents per diluted share in Q2.2020.
The truth of the Hudson in 'twenty, 1 quarter did benefit by a $2 million pre tax gain related to a reduction in the contingent consideration.
Ability associated with the Amber leaf application.
Non-GAAP net income for Q2 of 2021 was $3.4 million or 29 cents per diluted share compared to $3.9 million or 33 cents per diluted share in the second.
And later of 2020.
Yeah.
SG&A expense items not included in financial measures non-GAAP financial measures net of tax benefits or 1 of the amortization of acquired intangible assets to the stock based compensation and 3 the revaluation.
And of the contingent consideration liability and are detailed in our second quarter earnings release, which is available on our website.
Yes.
Addressing of our financial position at June 32021.
We had cash balances on hand of $5.3 million.
Outstanding Bank debt of approximately $15 million.
No borrowings under our revolving credit facility and cash availability of approximately $26 million at quarter end.
Additionally, our day sales outstanding measurement improved by 2 days.
Days during the quarter from 55 day at March 31, 2021.
I'll now turn the call over to Vic for his comments.
Good morning, everyone. Thank you Jack for the detailed review of our operating results for the second quarter of 2021.
Let me begin by saying that I'm very pleased with our Q2.2021financial performance.
Our data and analytics services segment made some nice progress during the quarter in terms of both revenue growth and the sequential bottom line improvement.
But more importantly by securing strong order bookings and increasing the pipeline of.
Of the opportunities to achieve a meaningful recovery during the second half of the year.
All of the allowed more to say about where he believes we are headed in the D&S segment.
With respect of lot of ICU staffing services segment, we are performing at a very high level.
And I'm very pleased with our progress.
Activity levels remain elevated in Q2, and we achieved an 8% increase in our billable consultant base during the quarter.
This 8% addition is the second best increase in any given quarter. After a record 90% of billable headcount expansion in Q1 of 2021.
In addition, the revenue growth was strong on both of year over year basis at 10% and on a sequential quarterly basis at 8%.
Gross margin increased by 30 basis points from last year's Q2 performance.
Despite adding some low bill rate of engagement.
Additionally, we are effectively managing the cost side of our gross margin equation with the disciplined approach to profit content on new assignments.
At the staffing segment operating income in Q2, 2021 improved by 8% over the corresponding period last year.
Despite the unwinding some of the austerity measures implemented during the first half of 2020.
On a sequential basis, the second quarter, our it staffing operating income increased by 48% when compared to the first quarter of 2021.
I will now turn the call over to Paul for his comments.
On our data and analytics services segment.
Thank you Vivek and good morning, everyone.
Q2 represented in the inflection point as data and analytics returned to growth at the 3 quarters of mostly flat performance to be sure of the effects of the pandemic continue the linger and cast a.
Shadow on the macroeconomic environment, but it appears that our clients are adapting successfully as evidenced by the release of some suppressed demand.
Data and analytics posted strong bookings of $15 million per the second quarter, while also creating increasing revenue sequentially. This comes on the heels of the $15 million bookings performance.
The first quarter of 2021, 2 consecutive quarters of bookings at this level of signal a strong second half revenue performance.
Absent adverse macroeconomic conditions.
Tied to COVID-19, or otherwise, we anticipate sequential revenue growth in Q3 relative to Q2 as well.
<unk> relative to the same quarter last year with improved margins and operating profit.
The recognize however.
That as businesses released demand the demand will go to the service providers, most capable and prepared to receive it.
Of this reason that we continue to invest ahead of the market and sales and delivery capability.
Well as we expected trade some measure of operating profit for growth in the short term as we continue to expand and enhance our capabilities to address our clients' needs, especially as the needs related to analytics application modernization and cloud.
Over the last year, we are very consciously built capabilities that allow us to help our clients.
<unk> derive intelligence from the data and infuse that intelligence and the business processes. The produce extraordinary outcomes. We will continue to build these capabilities organically as well as inorganically, where it makes sense.
That concludes our remarks, and operator back to you for questions.
Thank you we will now be conducting a question the answer session if you'd like to ask the question. Please press star 1 on your telephone keypad and of course.
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You May press star 2 if he would like to remove your question from the queue.
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Please pull for questions.
Our first question is from Josh Vogel.
With Sidoti and company. Please proceed.
Thank you good morning, everyone. Thanks for taking my questions.
I guess the start.
Paul I was I was.
1 of them nodes can you just.
Reiterating what you were saying about sequential expectations in DNA and for Q3.
Yeah sure. So we had very strong bookings in Q1 better than $15 million and we repeated the performance in Q2 with the $15 million. So we're seeing particularly strong demand.
<unk>.
That is playing out in Q3 right now so.
So I am expecting a strong Q3 I don't have the number for you, but I do expect it to.
The better perhaps significantly better than Q2.
Okay.
Can you remind me of the seasonality in the business and.
Taking the circumstances, where projects were delayed but there's also that pent up demand do you think that kind of.
Reduces the likelihood of seasonal weakness sort of potential seasonal weakness over the back half of the year.
Yeah. So typically what we what we would expect in this business as we would expect a tepid Q1.
Just give us because everyone's coming back from the holidays budgets are being finalized the organizational changes are taking place and our clients and then things to get the heat up in March typically Q2 of Q3, our strong revenue quarters in Q4, usually tails off a little bit in terms of revenue, but is typically strong in terms of bookings.
Is this the end of the year with any of your money.
I think this year potentially will be a little bit different because there is depressed demand that's been bottled up because of the pandemic because of clients just taken a wait and see attitude as to what's going on so.
So we are seeing an unusually strong Q3, so far.
<unk>.
Suspect Q4 will be strong I can't predict whether it will be stronger or not stronger than Q3 at this point.
But I do anticipate strong second half.
That's helpful. Thank you and I know you had some some of it in your commentary, but thinking about the projects.
That were put on the backburner over the past 12.
18 months.
How is the nature of the scope of the projects in the pipeline today.
Change from those prior to the pandemic I'm, obviously I wanted to get a sense of the DNA engagements that were on the table prior to the pandemic.
Some of those services are needs obsolete today are just not part of clients.
Near term digital agenda.
No I think clients are thinking more holistically I think they've had a chance to regroup and reevaluate things as <unk>.
Business is sort of got businesses of projects. If you will sort of got put on hold during the pandemic and so I think clients are thinking more holistically about things in terms.
Politics, and data and cloud and bringing all of those things together into more of the solution.
Posture as they go forward.
And as I say, there is some sense out there.
Net of <unk>.
Year was lost with delays and project delays because of the uncertainty now theres a certain amount of vigor in.
And a place that we're experiencing so its refreshing, but at the same time.
We're not the only competitor out there chasing the spend so it's very important that we approached the market with the right capabilities and are appropriately aggressive.
To meet new demand because clients.
Perhaps have less patients they may of at before.
<unk>.
For things that are not meeting their needs. So again I see I'm more bullish on the second half we see increased demand. We have no reason to be anything other than positive, but theres always a bit of trepidation.
Because you've got to go out and prove it you've got to go out and close the deals and deliver and then.
Then you've got the resource everything and move things along so there's a lot of work to be done, but these are high quality problems.
Yeah for sure. Thank you for the insights on that I wanted to shift gears, a little bit it staffing.
<unk>.
The strong results there year over year sequentially thinking about billable consultants no.
<unk> that this is a historically very tight.
The market for those professionals can you just talk about the supply constraints of Youre seeing.
Are there any notable trends, that's just making it a little bit harder than usual to find the talent and maybe an easier way of discussing it is.
What percentage of orders are going unfilled.
Today because of supply constraints versus historic.
Sure Josh.
The.
The market today is extremely hot we haven't seen this for a couple of decades.
The demand is way more than supply.
To achieve any kind of net growth.
To have that the tone.
The number of starts have to be free.
Greater than the total number of and to be able to achieve decent net growth.
And right now we are seeing an unprecedented level of <unk> because every consultant has so many choices.
As you know better.
Better locations better technology by the quality of projects et cetera, that's not always the and temptation.
So we are seeing an unprecedented level of earnings but then we're also seeing an unprecedented level of demand.
So right now we are trying to address.
As many of those are opportunities as possible I'm sure, they're always unfold food.
Requirements and that happens even in normal course, but we are I guess, becoming more picky about which ones. We want to go after which ones, we can fulfill which ones can give us better gross margins.
So.
It is the hot environment and.
The kind of the.
The number of starts that we've been able to do in the last 2 quarters.
<unk> been sort of record.
And we are hoping the thing will the demand will continue but then we have to keep a very careful.
Our focus on controlling the <unk>.
Really the contrary control by minimizing the ends.
The balance stays in favor of net growth.
If that answer your question.
No that is helpful. Thank you.
And I was just thinking about your comments around engaging in some low.
So bill rate business was that just.
Because of the talent available are you aggressively are targeting lower bill rate business, what does that what does that look like going forward.
No.
We've been kind of going after that opportunistically, but without compromising the gross margins.
Lower figure of an opportunity, which may be slightly lesser bill rate, but we can still.
Get good gross margins and in some ways. They are sort of nicely packaged and we can address that quickly.
And we assure that we will be able to win those deals. So we are going after them opportunistic.
So it would be.
And I don't think Thats really impacted our overall.
The results.
So we will continue to do that I mean, we are not really low.
Limiting ourselves on any area of if we see the opportunity it gives us that the.
The the decent gross margins will go for it.
That's helpful. Thank you and maybe 1 for Jack.
Lowering the contingent.
<unk> by about 70% it gives a little bit of of regions. How amber leaf has performed relative to expectations. I was wondering if you could just talk about that.
What what drove that knowing that we were still.
Mr. The pandemic when you completed the deal just curious what is potentially changed between October and today.
Sure.
Just straight up.
Amberley really came on line at.
The box flow and going in the closing the deal.
In the mid <unk>.
Take care of what's the potential for that and.
That's why you see the deal structure.
Having $4.5 million zone of R&R and crude again.
And so you know clearly they came out of the box their share of business cycle, which such where they.
They were <unk>.
Certain projects and here, where the lag between the.
The end game.
The projects versus the restart of other projects and and again I just wanted to stress that we knew that that was a profit.
Profitability.
At closing and we believe we accounted.
But.
The only 2 years of R&R.
So when.
When the <unk>.
First.
6 months of the earn out or.
On the negative side, where it looks like youre not going to make it.
When you do that fair value revaluation.
Ending the.
Number has come down substantially and Thats, what you see.
Thank you and then just 1 last 1 if I may and I'll hop back in the queue.
SG&A came in a little lower than what I was looking for and I know Paul you had comments around continuing to invest.
The sales and delivery and DNA, but I was just wondering if there was any sort of spending or strategic M&A initiatives that were planned for Q2 that were maybe ex off into the second half of year.
Yeah, I can address that in part, let Jacques take the rest of it.
So we continue to make.
As I said in my remarks, we continue to make very targeted.
Specific investments in sales and net sales generally of the sales with the specific capabilities around cloud or analytics or customer experience and so we continue to make those and they continue to happen. The timing of those you know when you bring people on the don't always started.
The first day of the quarter, sometimes they come in a little bit later, and so the expense may not hit fully 1 quarter or another.
But we are bullish based on the demand that we're seeing.
We're pretty particular about the types of business development resources were bringing on because they need to have the.
Consultative in the house skills in particular areas to drive the <unk>.
Consistent with our strategy. So that's what's going on and there's been no change in direction. There has been no we're not taking our foot off the gas in any way. This is the question of fielding the right resources getting them on and then the expense will hit the full quarter as as things move on.
Yes.
Alright, well thank you for.
Taking all my questions looking forward to seeing how the business performs over the back half of the year. It looks like you've got a good start there. Thank you.
Yes.
Thanks, Josh.
Thank you. Our next question is from Yaron <unk>.
And the Mark from Onemain capital. Please proceed.
Yeah.
Hey, guys nice job, particularly on the staffing segment.
Given all of the demand challenges that you guys outlined on the cost of so great job.
The first question I have is can you remind us from from the DNA segment, how much of that is still M.
And versus what other capabilities are made up.
<unk> kind of make that revenue.
Yes.
Yes, so we have 4 business lines.
Primarily CF.
The data management data engineering and data science and in Mds.
The majority of the business, but it's it's it's decreasing as a percentage of the overall, we're doing a tremendous amount of data engineering. These days.
As well as some offshore application development related to cloud and the related to the line of business applications. So M. D. M is still strong increasing quarter.
Over quarter, but it's the smaller percentage of the whole.
Got it Okay, and then on the engagements you're taking an M. D M from the legacy <unk> channel is goodness.
How much of the margin degradation and DNA is due to investment in sales.
Staff, and Cape and adding capability.
<unk> and <unk>.
How much of it is just from you know pricing pressure from our winning some of those engagements.
We're not having any pricing pressure on the MGM side.
Clients MTM is actually becoming more probably has been for some time, but it remains mission critical for clients to have master data management capability.
<unk> to have clean data the duplicated data to feed data upstream or downstream of Japan.
Any perspective for other uses so we're not experiencing pricing deterioration across any of all of them at any or all of them elements of our business.
So just to make that point pretty clearly in terms of.
Margin degradation or EBIT of that degradation is primarily related to again investments in SG&A that we make as well as.
Investments.
Certain amount of the hardware and training and other capabilities that we need to bring online.
The service, what we perceive to be the day.
The demand going forward, particularly related to cloud, particularly the related to application modernization and by the way when I say these things cloud of application modernization I'm, not saying those intending them to be discrete to the independent offerings. What we're seeing in the market is all of our offerings of Synergizes and what I mean by that.
That is the data and analytics infused into application modernization delivered in the cloud. So we're seeing a tremendous amount of and this is by design, we're seeing a tremendous amount of synergy between our offerings and which you know bakes the need for more business development more highly skilled sales and client facing capabilities.
Abilities.
Does the engagements of much more sophisticated much.
Much more rich if you will.
Much more interesting actually as well so we're seeing the synergy of all of our offerings by design.
We called that 1 right in the marketplace, and we're making investments to capture that and we're not seeing any price of degradation.
That's great to hear on the M. D. M side are you guys overly leveraged the informatica or IBM or <unk> or any other providers of the MDM solutions or are you guys pretty broad base there at this point.
We're currently today.
The council of them doing.
And.
The creation of slides today with 5 different MDM providers.
You know you called out of IBM and Informatica of those are certainly 2 of the 5 IBM historically has.
It has been a strong installed base for us and the strong relationship for us and we continue to.
To work I B M engagements I B M M D M engagements.
But we're not limited to the IBM at all and I would say the same thing I said earlier that I B M.
It's becoming a smaller percentage of even though it continues to growth, becoming a smaller percentage of our overall portfolio. We've had a very conscious strategy to diversify away from just 1 provider of 1 big client or 1 of anything we're trying to spread the field so to.
And we've been somewhat successful doing that so we're certainly doing business with IBM informatica and others.
Okay. That's great. The here and then on the $15 million of quarterly bookings you guys have had in that segment for the last 2 quarters of greater than 15 million. What's the typical duration of those types of bookings I mean are they typically 12 months 6.
The 24 months.
Yeah. So the the 15 million, we put up in Q1 was a little bit different makeup than what we did in Q2, we actually had.
The 2 large deals in Q1 that were multi year deals 3 year deals what we would call center of excellence deal that can pose probably half of the 15th.
$15 million, the $15 million that we put up in Q2.
There were no multiyear deals in there they were just simply large deals.
The significance of that is the body for your deal of the revenues kind of gets spread over 3 years and in single your deals are less than 1 year deals all of the revenue materialize fairly.
6 months of it so we've injected a little bit of sugar sugar into the bloodstream, which is why we feel reasonably confident that we're going to have a strong second half.
Okay, and and so somewhere 3 years in Q1 and Q2 most of them were less than a year on average and you know in any given quarter are they mostly multiyear deals are mostly 12.
Quick 1 of their lifestyles.
Yeah, what we'll typically do a multiyear deal every quarter.
So if you're if you're looking at volume of deals most of them are 9 to 12 months deals because of our engagements are complex sophisticated and they take a while net and theyre high value.
The 1 million dollar deals.
So hopefully that answers your question.
<unk>, yes. It does okay and then last 1 from me what is the of operational capacity look like to absorb additional M&A beyond Amber leaf at this point and then what are the key capabilities. You guys are looking to acquire and I guess, what does the pipeline look like on that front.
So I can talk about pipeline of key capabilities.
<unk>, so I'll, let Jack field.
On the capacity question.
The key capabilities, we're looking for the you know the.
This this market, where you move data to the cloud and you infuse into cloud native applications analytics and data.
Okay.
The multiple applications and deploy applications that are re architected and re platform, if you will and containers or micro services architectures and there's all sorts of both of which we can throw out there of the idea is as we as clients modernize their application portfolio moving to the cloud is of tremendous is a huge opportunity.
That is out there.
And so we have the capabilities to service that today, but we can't meet the demand without significant hiring.
Based on the demand that we're seeing there is a significant hiring that's required and the skills of scarce in the marketplace. So it's not something that you can just flip the switch and make happen.
It takes a little bit.
Just to go find the resources that the resources, bringing the resources of assimilate them to your culture of your methodology of your business practices et cetera et cetera.
Good news is we see a strong market. Good news is we're approaching that market and having success with it.
Somewhat bad, but not bad news is we've got.
[noise] of efforts up and we've got to add capacity to do it 1 way to do that of course is inorganically.
By finding a company that brings those skills together.
Dovetails with our vision and can you know sort of plug into our operational and go to market model and we're very.
Interested in exploring.
Possibilities as we discover them.
In the marketplace and so as I've mentioned in my remarks, we're certainly open to the idea of inorganic growth and we do spend time looking at that I'm not ready to make any announcements and I don't have any predictions specifically in that regard, but we're very cognizant of what's going on.
And of the market. We spent a lot of time looking to see what companies are out there how they were mixing matching fit with us.
And there's a there's a there's a focus and intensity there let me put it that way with respect to capacity I'll, let Jack answer that 1.
Could you just repeat the question.
You want me to answer.
Yeah.
Yeah. It was just how much of how much operational and financial capacity to do you think you have on the M&A front.
Well I mean, it's you know if we if second quarters, what we believe second quarter.
Okay.
From a revenue perspective.
Or excuse me the second half.
You know, obviously, we're gonna Houska.
Jumped staffs.
Could you do we have some.
Capacity that exists.
Right now with the Q2 levels.
Absolutely.
There's going to be.
And the way we are going to have to add staff to the equation.
Do you know to meet the increasing demand from an infrastructure standpoint, I mean, we we clearly we just.
Entered into a new.
Office space in our delivery center.
In Chennai, India.
It materially increases the the office space and the quality of the office space So from an infrastructure for.
Perspective, I think we're planning.
For those staff increases.
Jeff can you also talk about the.
The borrowing capacity or the capacity for the acquisition.
Sure I mean in the prepared remarks.
We have a.
A.
$30 million revolver revolving credit line.
We haven't used at all.
It's based on availability.
With respect to your receivables so the.
The unused line is 26 million. In addition to that we have a strong relationship with PNC.
PNC Bank.
You know clearly we believe that if we get a.
All of meaningful acquisition, how we would be able to the.
Materially increase our term loan facility.
Facility.
And.
We believe that we have considerable.
You know purchasing power if you will.
It could do.
And the other acquisition.
If 1 materializes the we think is worth it.
Okay, great. Thanks, guys.
Thank you Adam.
Thank you.
Next question is from Lisa Thompson.
Thompson Zacks investment research. Please proceed.
Good morning.
Good morning.
So Paul back to what you were talking about margins first off have you do you feel that you.
Totally gotten everything you're going to get.
Do I know of Amber Lee as far as synergies and cost improvements at this point.
Oh, no not at all actually.
You know not to put too fine a point on it but that's the ash.
As correctly when you said amber leaf came out of the blocks slow after the acquisition.
But that was.
And this is now and we continue to open up new Amber leaf clients significant new amber leaf clients every month.
We are currently increasing staffing and our <unk> line of business, otherwise known as Amber leaf and we're actually doing.
Business development of hiring in that line of business as well. So we're bullish on that segment of <unk>.
We did get off to a slow start and not to put you know we don't want to ignore that fact.
We're anticipating strong growth in <unk> or in the <unk> line of business going forward. The number 1 with respect to margins. Yes. There were some adjustments that need to be made in the cost structure of amber leaf.
Which are for the most part done.
So I'm anticipating improved operating margins going forward.
Across the entire business, the specifically across our CX line of business.
So I'm bullish on that segment of business, there's no doubt about that and it does dovetail quite nicely.
With the data and analytics capabilities that we have historically.
As well as the work that we're doing as we move and work with clients to move into the cloud, there's a tremendous amount of CX opportunity in the cloud, especially.
With cloud native applications and re platforming their legacy applications from the cloud so amberley fits very nicely into our portfolio. It was the slow start.
And so we're beyond that now and we're accelerating.
Okay, and just to clarify what you said in your comments I didn't quite catch what you set of men. So.
Thing about.
The sacrificing margin and investing now so.
Does that mean that you expect your.
Gross or operating margins to decline going forward or are you kind of where you're going to be.
No I expect our operating margins to increase going forward, but they're not going to increase as much as they could were we to not make because we're making investments in.
Sales and delivery.
Your line.
Okay. So because were so.
The other words, where we're changing the tires on the cars it rolls down the road, we're going to increase margins no doubt about but we're not going to increase them as much as we could because we're making investments some of the SG&A and others in the infrastructure.
The delivery.
Okay I.
Liberty are quite catch what that meant.
That helps so and as far as I T staffing the last couple of quarters, you've hired 90 to 100.
More consultants do you see that number being the same for the next couple of quarters.
Let me say that it's always difficult to say.
How the next 2 quarters of a pan out, but the today as we stand at the end of July of the demand seems to be of the same level.
And as I said, the you know the ends of that also are much higher.
I do expect it to slow down a little bit in terms.
It didn't feel the demand, but in terms of the net growth because we do see them, maybe a little bit more of the ends of the 2 happened some of the engagements that we started in the beginning of the ought to make them for the renewal at the end and that's 1 of the quite of lot of work to replace them or renew of them as well.
So we do.
Of note that the positive trends to continue but I can't quantify it.
Okay. Good that helps.
Thank you.
All of it.
Alright, and then Jack just as far as operating expenses go I know that you said in the first quarter you pulled.
The expenses forward, which kind of explains like like Q1, and Q2 of kind of flat. So does it start picking back up again in Q3 because of that.
As far as when you say starting to pick back up or U S.
S G.
N a SG&A SG&A spend.
Yeah.
Well.
Yeah, it's gonna be it the second half of the year, it's going to pick back up somewhat.
In staffing, it's gonna be it's going to pick back up just because of the demand and some.
Of the variable expenses associated with that demand and the.
And DNA.
The first half of the year, even though it was.
All of US flat revenue quarter, we did make some.
The material investments in G&A SG&A and that's part of his comment.
On you know, giving up some operating margin to position yourself for growth.
So I think in the second half.
We're going to have some increases in SG&A, but maybe not as great as.
You know the first quarter with Tel.
For the first half of the year with the.
Okay, Alright, and my final question, Paul I forgot to ask you.
He said that your Q4 might not be as strong as of Q3, because you don't know yet how is that possible when your contracts are long.
A long enough term that you know they've got to be more than 3 months. So you know what.
Tailing off in what state.
Whereas the reality of it.
Well, there's always some variability.
Every quarter, we have contracts that start in contrast, the N and its.
You know 3 or 4 weeks into the quarter, it's a little bit difficult to predict what's going to end or what's kind of get extended through Q4. You know oftentimes. We are changes that are done day contracts to extend them further into the future of hard to say, what's going to happen with respect to Q4 right now I don't expect Q4 to be a.
I can't say with certainty of specificity, what Q4 is going to be higher or lower I don't expect it to be substantially different than Q3, I just can't predict anything further than that right now based on uncertainty whether what contracts are going to do the extended and what we're gonna be closing here in the next couple of weeks.
Okay great.
Great that helps thank you, but I think the question Oh go ahead, Yeah, I think when you look at our business. The DNA business historically, there's not a lot of volatility until it in it.
We haven't had significant drops in revenue even during the pandemic.
We were mostly flat and now we're starting to climb back up again as as the environment.
<unk> improves I expect that to continue.
Alright, thank you.
That helps.
Oh.
Thank you Lisa.
Thank you.
As a reminder.
If you'd like to ask a question. Please press star 1.
The confirmation tone will indicate your line is in the queue.
There are no further questions at this time I would.
I'd like to turn the call back to Vivek Gupta for closing remarks.
Thank you operator, there are no further questions I'd like to thank you for joining our call today and we look forward to sharing of third quarter 2021 results with you in late October.
Thank you.
This concludes today's conference you may disconnect. Your lines at this time. Thank you very much for your participation and have a great day.
Yeah.
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Yeah.
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[music].
Greetings.
The Mastech Digital Inc. Q2, 2021 conference call at this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
I didn't want you require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now my pleasure to introduce your host Ms. Jennifer Ford Lacey manager of legal Affairs for Mastech Digital Inc. Thank you Ms. Ford Lacey you may begin.
Thank you operator, and welcome to Mastech digital second quarter, 2021 conference call.
If you have not yet received a copy.
Copy of your earnings announcements.
Can be obtained from our website at www Dot Mastech digital dotcom.
With me on the call today are the that Gupta Mastech digital Chief Executive Officer.
Paul Burton Mastech info tell us the chief executive.
Is that currently 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.
<unk> 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, 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 SEC Doc golf.
Additionally, management has elected to provide certain non-GAAP financial measures to supplement our financial results presented on a GAAP basis spin.
Specifically, we will provide non-GAAP net income and non-GAAP diluted earnings per share data.
<unk>, which we believe will provide greater transparency with respect to the.
A key metric.
Used by management in operating the business reconciliations of these non-GAAP financial measures.
2 of their comparable GAAP measures are included in our earnings announcement, which can be obtained from our website at.
VW 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 1 on 1 meetings or calls.
I will now turn the call over to Jack for a review of our second quarter 2021 results.
Thanks, Jen and good morning.
Second quarter, 2021 revenues totaled $53.70 million compared to $47.6 million in the second quarter of 2020.
This revenue increase represented 13% growth over the second quarter of 2020.
<unk>, 9% organic growth.
Adjusting for the acquisition.
Additionally, our revenue performance showed sequential growth of 8% over the first quarter of 2021.
Our data and analytics services segment contributed revenues of.
$1 billion.
Compared to $6.8 million in the second quarter of 2020.
After adjusting for Amberley organic revenue growth on a year over year basis was approximately 4%.
Yes.
During the quarter we continued.
Nice to see further revenue games at the day.
And the market is starting to recover.
Bookings were strong for the second consecutive quarter at $15 million.
Pipeline of opportunities continue to show promise and customer conversations of big focus more on I need to start.
<unk> DNA projects, rather than reasons for project delays.
Clearly some uncertainty still remains in the marketplace with the delta of Varian being a wildcard.
However, we feel good about the macroeconomic conditions in the DNA space as we enter the second half of.
Dark clouds and in 'twenty 1.
And our I T staffing services segment activity levels continue to remain very strong in Q2.2021, as we grew our global consultant base by 89 consultants an increase of 8 per se.
From March 31, 2021 the levels.
Furthermore, organic revenue growth was approximately 10% on a year over year basis.
And 9% on a sequential quarterly basis.
Gross profit in the second quarter.
<unk> of 2021 totaled $14.3 million compared to $12.7 million in the second quarter 2020.
Gross margins as a percentage of revenue increased modestly.
<unk> Q2, 2020, and improved by 100 basis.
At this point over the previous quarter.
GAAP net income for Q2, 2021 was $3.7 million of 31 cents per diluted share compared to $3 million or 25 cents per diluted share in.
Q2, 'twenty 'twenty.
The truth of the Hudson in 'twenty, 1 quarter did benefit by a $2 million pre tax gain related to a reduction in the contingent consideration liability associated with the <unk> application.
Non-GAAP net income for Q.
In Q of 2021 with $3.4 million from 29 cents per diluted share compared to $3.9 million per 33 cents per diluted share in the second quarter of 2020.
Okay.
SG&A expense items not included in financial.
Q2, non-GAAP financial measures net of tax benefits or 1 of the amortization of acquired intangible assets.
2 of the stock based compensation and 3 the revaluation of the contingent consideration liability and are detailed in our second quarter earnings release, which is available.
The main website.
Yeah.
Addressing our financial position at June 32021.
We had cash balances on hand of $5.3 million.
Outstanding Bank debt of approximately $15 million.
No borrowings under our.
Of our revolving credit facility and cash availability of approximately $26 million at quarter end.
Additionally, our day sales outstanding measurement improved by 2 days during the quarter from 55 day at March 31.2021.
I'll now turn the call over to Vivek for his comments.
Good morning, everyone. Thank you Jack for the detailed review of our operating results for the second quarter of 2021.
Let me begin by saying that I'm very pleased with the Q2.2021financial performance.
Our data and analytics services segment made some nice progress during the quarter in terms of both revenue growth and sequential bottom line improvement.
But more importantly by securing strong order bookings and increasing the pipeline of opportunities to achieve a meaningful recovery during the second half of the year.
Okay.
From a lot of more to say about where he believes we are headed in the D&S segment.
With respect of lot of ICU staffing services segment, where we are performing at a very high level.
And I'm very pleased with our progress.
Activity levels remain elevated in Q2, and we achieved an 8% increase.
All of the billable consultant base during the quarter.
This 8% addition is the second best increase in any given quarter. After a record 9% billable head count expansion in Q1 of 2021.
In addition, the revenue growth was strong on both of year over year basis.
At 10% and on a sequential quarterly basis at 8%.
Gross margin increased by 30 basis points from last year's Q2 performance.
Despite adding some low bill rate of engagements.
Additionally, we are effectively managing the cost side of our growth.
Fees the margin equation with the disciplined approach to profit content undoing of assignment.
At the staffing segment operating income in Q2, 2021 improved by 8% over the corresponding period last year. Despite unwinding some of the austerity measures implemented during.
Growth most half of 2020.
On a sequential basis in the second quarter.
Staffing operating income increased by 48% when compared to the first quarter of 2021.
I will now turn the call over to Paul for his comments on our data and analytics services segment.
Thank you Vivek and good morning, everyone.
Q2 represented in the inflection point as of <unk>.
Data and analytics returned to growth at the 3 quarters of mostly flat performance to be sure of the effects of the pandemic continue the linger and cast a shadow on the macroeconomic environment, but it appears that our clients are adapting.
The fleet, especially as evidenced by the release of some suppressed demand.
Data and analytics post the strong bookings of $15 million in the second quarter, while also creating increasing revenue sequentially. This comes on the heels of the $15 million bookings performance in the first quarter of 2021, 2 consecutive quarters of bookings.
This level signal a strong second half revenue performance.
Absent adverse macroeconomic conditions.
The tied to COVID-19, or otherwise, we anticipate sequential revenue growth in Q3 relative to Q2 as well as relative to the same quarter last year with improved margins.
Looking at the brain profits.
Important to recognize however.
That as businesses released demand the demand will go to the service providers, most capable and prepared to receive it.
This reason that we continue to invest ahead of the market and sales and delivery capability. We expect the trade some measure of operating profit for growth.
In the short term as we continued to expand and enhance our capabilities to address our clients' needs, especially as their needs related to analytics application modernization and cloud over the last year. We are very consciously built the capabilities that allow us to help our clients derive intelligence from their data and infuse that intelligence of the.
Non of processes that produce extraordinary outcomes, we will continue to build these capabilities organically as well as inorganically, where it makes sense.
That concludes our remarks, and operator back to you for questions.
Thank you we will now be conducting a question and answer session.
If you'd like to ask the question, we're supposed to star 1 or yourself from cheaper.
Confirmation from long state your line is in the queue.
You May press star 2 if he would like to remove your question from the queue.
So of participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, 1 moment, please pull for questions.
Our first question is from Josh Vogel.
With Sidoti and company. Please proceed.
Thank you good morning, everyone. Thanks for taking my questions.
I guess the start.
Paul I was I was taking notes can you just.
Reiterating what you were saying about sequential expectations in DNA.
And for Q3.
Yeah sure. So we had very strong bookings in Q1 better than $15 million and we repeated the performance in Q2 with the $15 million. So we're seeing particularly strong demand.
That is playing out in Q3 right now so.
So I am expecting a straw.
The Q3 I don't have the.
<unk> for you, but I do expect it.
To be better perhaps significantly better than Q2.
Okay.
Can you remind me of the seasonality in the business and just given the circumstances where projects were delayed but there's also that pent up demand do you think that kind of.
Of reduces the likelihood of seasonal weakness sort of potential seasonal weakness over the back half of the year.
Yes, so typically what we what we had expected in this business as we would expect a tepid Q1, because everyone's coming back from the holidays budgets are being finalized the organizational changes are taking place.
Our clients and then things to get the heat up in March typically Q2 of Q3, our strong revenue quarters in Q4, usually tails off a little bit in terms of revenue, but is typically strong in terms of bookings because of the end of year with any of your money.
I think this year potentially will be.
<unk> for the different because there is depressed demand that's been bottled up because of the pandemic because of clients just taken a wait and see attitude as to what's going on.
So we are seeing an unusually strong Q3, so far.
I suspect Q4 will be strong I can't predict whether it will be stronger or not stronger than Q3.
At this point.
But I do anticipate strong second half.
That's helpful. Thank you and I know you had some some of it in your commentary, but thinking about the projects.
That were put on the backburner over the past 12 to 18 months.
How is the nature of the scope of the projects in the pipeline today.
Today changed from those prior to the pandemic I'm, obviously I wanted to get a sense of the DNA engagements that were on the table prior to the pandemic.
Are some of those services are needs obsolete today are just not part of clients.
New term digital agenda is.
No I think clients are thinking more holistically.
I think they've had a chance to regroup and reevaluate things.
As <unk>.
Business is sort of got businesses of projects. If you will sort of put on hold during the pandemic and so I think clients are thinking more holistically about things in terms of analytics and data and cloud and bringing all of those things together into more of the solution.
<unk> our posture as they go forward.
And as I say, there is some sense out there.
Net of <unk>.
Year was lost with delays and project delays because of the uncertainty now theres a certain amount of vigor in the marketplace that we're experiencing so its refreshing but at the same time, we're not the only competitor.
After chasing the spend so it was very important that we approached the market with the right capabilities and are appropriately aggressive.
To meet new demand because clients.
Perhaps have less patients they may of at before.
For things that are not meeting their needs. So again I see I'm more bullish.
<unk> second half, we see increased demand we have no reason to be anything other than positive, but theres always a bit of trepidation.
Because you've got to go out and prove it you've got to go out and close the deals and deliver and then you've got the resource everything and the things along so there's a lot of work to be done, but these are high quality.
Yeah for sure. Thank you for the insights on that I wanted to shift gears, a little bit it staffing.
The strong results there year over year sequentially thinking about billable consultants knowing that this is a historically is very tight.
Market for those professionals can you just talk about.
The supply constraints that you're seeing.
Or are there any notable trends that is just making it a little bit harder the unusual to find the talent and maybe an easier way of discussing it is what percentage of orders are going unfilled.
Day, because of supply constraints versus historic.
So Josh.
The.
The market today is extremely hot we haven't seen this for a couple of decades low.
The demand is way more than supply.
And to achieve any kind of net growth you know we have to have that the total number of starts have to be far greater than that.
The total number of engines to be able to achieve a decent net growth.
And right now we are seeing an unprecedented level of earnings because every consultant has so many choices in Alberta.
Pay better locations better technology, better quality of projects et cetera, So I kind of always there and temptation.
Patient, but we are seeing an unprecedented level of earnings but then we're also seeing an unprecedented level of demand.
So right now we are trying to address as many of those are opportunities as possible.
Sure they're always unfold.
Requirements.
In terms of in the normal course, but we are I guess, becoming more picky about which ones. We want to go after which ones, we can fulfill which ones can give us better gross margins.
So it.
It is the hot environment and.
Of the kind of the.
The number of starts that we've been able to do it.
And that had 2 quarters.
<unk> been sort of a record and the real hoping the thing will the demand will continue but then we have to keep a very careful.
Focus on controlling the.
Really you can't really control about minimizing the ends.
The balance stays in favor.
Sort of a net growth.
If that answers your question.
No that is helpful. Thank you.
And I was just thinking about your comments around engaging in some.
Lower bill rate business was that just.
Because of the talent available all of you you aggressively our.
Getting lower bill rate business, what does that what does that look like going forward.
No. So so we've been kind of going after that opportunistically, but without compromising the gross margins. So if we see an opportunity which may be slightly lesser of bill rate, but we can still get good gross margins and in some way.
Our sort of nicely packaged and we can address that quickly and we are sure that we will be able to win those deals. So we are going after them opportunistic.
And I don't think Thats really impacted our overall.
The results so.
We will continue to do that I mean, we are not really.
Limiting ourselves on any area of if we see the opportunity it gives us that the the the decent gross margins will go for it.
That's helpful. Thank you and maybe 1 for Jack.
Lowering the contingent liability.
About 70% it gives a little bit of of a read into how amber leaf has performed relative to expectations. I was wondering if you could just talk about that.
What what drove that knowing that we were still in the midst of the pandemic. When you completed the deal just curious what is potentially changed between October and today.
Sure.
Straight up.
<unk> really came on line.
The box.
And going in closing the deal.
New day care was the potential for that and.
That's why you see the deal structure.
Now, having $4.5 million.
Colors of R&R included.
And so clearly they came out of the box there their business cycle with such where they.
They were ending certain projects and here, where the lag between the.
The ending of.
The projects versus the restart of other.
Other projects and and again I just wanted to stress that we knew that that was the profitability.
At closing and we believe we accounted for it but.
There's only 2 years of arnotts.
So when.
When the <unk>.
First.
6 months.
That's the part out or.
On the negative side, where it looks like youre not going to make it.
When you do that fair value revaluation.
You know the numbers come down substantially and Thats, what you say.
Thank you and then just 1 last.
Last 1 if I may and I'll hop back in the queue.
SG&A came in a little lower than what I was looking for and I know Paul you had comments around continuing to invest in sales and delivery and DNA, but I was just wondering if there was any sort of spending or strategic M&A initiatives that were planned for Q2 that.
Maybe it's the off into the second half year.
Yeah.
I can address that in part, let Jacques take the rest of it.
So we continue to make as I said in my remarks, we continue to make very targeted.
Very specific investments in sales and net sales generally the sales with spirit.
Specific capabilities around cloud or analytics or customer experience and so we continue to make those and they continue to happen. The timing of those you know when you bring people on the known when we started the first day of the quarter, sometimes they come in a little bit later and so the expense may not hit fully 1 quarter or another.
But we are bullish based on the demand that we're seeing.
We're pretty particular about the types of business development resources were bringing on because they need to have.
The consultative and have skills in particular areas to drive the business consistent with our strategy. So that's what's going on there's been no change in direction. There has been no we're not taking our foot off the gas in any way.
It's just the question of fielding the right resources getting them on and then the expense will hit the full quarter as as things move on.
Yeah.
Alright, well, thank you for taking all my questions.
Looking forward to seeing how the business performs over the back half of the year. It looks like you've got a good start there. Thank you.
Yeah.
Thanks, Josh.
Thank you. Our next question is from Yaron <unk>.
Hey, Mark from Onemain capital. Please proceed.
Hey, guys nice job, particularly on the staffing segment.
Given all of the demand challenges that you guys outlined.
On the cost of so great job.
The first question I have is can you remind us kind of from the DNA segment, how much of that is still M. D M versus what other capabilities are made up.
How kind of make that revenue.
Yeah.
Yeah. So we have 4 business lines.
Primarily CF.
Data management data engineering, and data science and in an M. D. M is still the majority of the business, but it's it's it's decreasing as a percentage of the overall, we're doing a tremendous amount of data engineering. These days.
As well as some offshore application development related to cloud and the related to the line of business applications. So M. D. M is still strong increasing quarter over quarter, but it's the smaller percentage of the whole.
Got it Okay, and then on the engagements you're taking an M D M from the.
The legacy and the trailer business.
How much of the margin degradation and DNA is due to investment in sales.
The staff and Cape and adding capabilities.
And how much of it is just from pricing pressure from our winning some of those engagements.
We're not having any pricing pressure on the MGM side.
Clients MTM is actually becoming or probably has been for some time, but it remains mission critical for clients to have master data management capability.
To have clean data the duplicated data to feed data upstream or downstream on the depending of the perspective for other uses so were not experience.
<unk> seen pricing deterioration across any of all of them at any of an element of our business.
So just to make that point pretty clearly in terms of.
Margin degradation or EBIT of the degradation is primarily related to again investments in SG&A that we make as well as.
Investments and a certain amount of the hardware and training and other capabilities that we need to bring online.
The service, what we perceive to be the demand going forward, particularly related to cloud, particularly the related to application modernization and by the way when I say these things cloud or application modernization.
<unk> seen those intending them to be discreet in the independent offerings, what we're seeing in the market as all of our offerings of Synergizes and what I mean by that is the data and analytics infused into application modernization delivered in the cloud. So we're seeing a tremendous amount of and this is by design we're seeing.
A tremendous amount of synergy between our offerings.
And which.
Begs the need for more business development more highly skilled sales and client facing capabilities.
Because of the engagements of much more sophisticated.
Much more rich if you will.
The much more interesting actually as well so we're seeing the synergy.
Synergy of all of our offerings by design I think we called that 1 right in the marketplace and we're making investments to capture that and we're not seeing any price degradation.
Okay. That's great. The here on the MDM side are you guys overly leveraged the informatica or IBM or <unk> or any other providers of M.
The EM solutions or are you guys pretty broad base there at this point.
We're currently today.
The count them doing.
N D M engaged in the slides today with 5 different MDM providers.
You know you called out IBM and Informatica of those are certainly 2 of the 5 IBM historic.
Shortly has been a strong installed base for us and the strong relationship for us and we continue to.
To work on the IBM engagements IBM MDM engagements, but we're not limited to the IBM at all and I would say the same thing I said earlier that I B M.
It's becoming a smaller percentage of even though it continues to grow as the kind.
The smaller percentage of our overall portfolio, we've had a very conscious strategy to diversify away from just 1 provider of 1 big client or 1 of anything we're trying to spread the field so to speak and we've been somewhat successful of doing that so we're certainly doing business with IBM and informatica and others.
Okay, that's great the here and then on the.
The $15 million of quarterly bookings you guys have had in that segments of the last 2 quarters of greater than 50 million of whats. The typical duration of of those types of bookings I mean are they typically 12 months 6 months 24 months.
Yeah. So the.
The the 15 million, we put up in Q1 was a little bit different makeup than what we did in Q.
We actually had.
2 large deals in Q1 that were multi year deals 3 year deals what we would call center of excellence deal that can pose probably half of the $15 million the $15 million that we put up in Q2.
There were no multiyear deals in there they were just simply large deals.
The significance of that is the body for your deal of the revenue is going to get spread over 3 years and in single year deals are less than 1 year deals. All the revenue is going to materialize fairly quickly. So we've injected a little bit of sugar sugar into the bloodstream, which is why we feel reasonably confident that we're going to have a strong second half.
Okay.
And so somewhere 3 years in Q1.
Q2, most of them were less than a year on average and you know in any given quarter are they mostly multiyear deals are mostly 12 month or less deals.
Yeah, well, what typically do a multiyear deal every quarter.
So if you're if you're looking at volume of deals most of.
Them are 9 to 12 months deals because of our engagements are complex sophisticated and they take a while net and theyre high value.
A million dollar deals.
So hopefully that answers your question.
Yes. It does okay and then last 1 from me what is the operational capacity look like to absorb additional.
M&A beyond Amber leaf at this point and then what are the key capabilities. You guys are looking to acquire and I guess, what does the pipeline look like on that front.
So I can talk about pipeline of key capabilities I'll, let Jack field.
On the capacity question.
The key capabilities, we're looking for the.
This this market, where you move data to the cloud and you infuse into cloud native applications analytics and data.
For multiple applications and deploy applications that are re architected and re platform, if you will and containers or micro services architecture.
Textures, and there's all sorts of both of which we could throw out there of the ideas as we as clients modernize their application portfolio moving to the cloud is of tremendous it has a huge opportunity.
That is out there and so we have the capabilities to service that today, but we can't meet the demand without significant hiring.
Based on the demand that we're seeing there is significant hiring that's required and the skills are scarce in the marketplace. So it's not something that you can just flip the switch you make happen it takes a little bit of effort to go find the resources that the resources, bringing the resources of.
Assimilate them to your culture of your methodology of your business practices et cetera et cetera.
So good news is we see a strong market. Good news is we're approaching that market and having success with it.
Somewhat bad, but not bad news is we've got to ramp up and we've got to add capacity to do it 1 way to do that of course is inorganically.
By finding the company that brings.
Sales together.
Dovetails with our vision and can sort of plug into our operational and go to market model and were very.
Interested in exploring possibilities as we discover them.
In the marketplace and so as I mentioned in my remarks, we're certainly open to the idea of.
Of inorganic growth and we do spend time looking at that I'm, not ready to make any announcements and I don't have any predictions specifically in that regard, but we're very cognizant of what's going on in the market. We spent a lot of time looking to see what companies are out there how they were mixing matching fit with us.
And it.
There's a there's a there is a focus and intensity there let me put it that way with respect of capacity I'll, let Jack answer that 1.
Okay.
Could you just repeat the question.
Did you want me to answer.
Yes.
Yes, it was just.
How much how much operational and financial capacity to do you think you have on the M&A front.
Well I mean, it's you know if we.
Second quarters, what we believe the second quarters can be.
From a revenue perspective.
Excuse me the second half.
Obviously, we're gonna Houska.
We leverage up staff.
Could you do we have some.
The capacity that exist.
Now with the Q2 levels.
Hello.
We are going to have to add staff to the equation you know to meet the increasing demand.
From an infrastructure standpoint, I mean, we we clearly we just.
<unk> entered into a new.
Office space in our delivery center in Chennai, India It materially increases.
The the office space and the quality of the office space.
So from an infrastructure.
Perspective, I think we're planning.
For those staff increases.
Jeff can you also talk about the borrowing capacity of the capacity for the acquisition.
Sure I mean in the prepared remarks.
We have a.
A.
$30 million revolver.
The revolver revolving credit line.
We we haven't used at all.
It's based on availability.
With respect to your receivables so the young.
Huge line here is 26.
We're in.
In addition to that we have a strong relationship with <unk>.
PNC Bank.
You know clearly we believe that if we get a.
Meaningful acquisition, how we would be able to.
Materially increase our term loan facility.
The facility.
6 new and.
We believe that we have considerable.
Purchasing power if you will.
Could do another acquisition.
If 1 materializes that we think is worth it.
Okay, great. Thanks, guys.
Thank you Adam.
Thank you.
The next question is from Lisa Thompson with Zacks investment Research. Please proceed.
Good morning.
This morning.
Yeah.
So pop back to what you were talking about margins first off have you do you feel that you.
Totally gotten everything you're going to get out of Amber Lee as far as synergies and cost improvements at this point.
Oh, no not at all actually.
You know not to put too fine a point on it but that's the Ark characterize correctly when he said and believe came out of the blocks slow after the acquisition.
But you know that was then and this is now and we continue to open up new Amberley of clients significant newly I believe clients every month, we are currently increasing staffing.
And our CX line of business, otherwise known as Amber leaf.
And we're actually doing.
Business development of hiring in that line of business as well. So we're bullish on that segment of business. We did get off to a slow start and not to put you know we don't want to ignore that fact.
But.
We're anticipating strong growth in amber leaf or in.
The line of business going forward the number 1 with respect to margins. Yes, there were some adjustments that needed to be made in the cost structure of amber leaf.
The chart for the most part done and so I'm anticipating improved operating margins going forward.
Across the entire business, the specifically across our CX line.
The line of business.
So I'm bullish on that segment of business, there's no doubt about that and it does dovetail quite nicely.
With the data and analytics capabilities that we have historically as well as the work that we're doing as we move and work with clients to move into the cloud, there's a tremendous amount of CX opportunity in the cloud.
The C actually with cloud native applications and re platforming their legacy applications from the cloud so amberley fits very nicely into our portfolio. It was the slow start we're beyond that now and we're accelerating.
Okay, and just to clarify what you said in your comments I didn't quite.
The catch what you said or meant said something about.
I know of sacrificing margin and investing now so.
Does that mean that you expect your gross or operating margins to decline going forward or are you kind of where you're going to be.
No I expect.
Especially commodity margins to increase going forward, but they're not going to increase as much as they could were we to not make.
We're making investments in.
Sales and delivery right.
Okay. So because were so.
In other words, where we're changing the tires on the car as it rolls down the road, we're going to increase margins.
Our offer of about but we're not going to increase them as much as we could because we're making investments some of the SG&A and others in the infrastructure and the delivery.
Okay I didn't quite.
Catch what that net.
That helps so and as far as I T staffing the last couple of quarters you.
The higher 90 to 100.
More consultants do you see that number of being the same for the next couple of quarters.
Let me say that's all of it is difficult to say how the next 2 quarters of the pan out, but the today as we stand at the end of July of the demand seems to be at the same level.
There's no doubt and as I said the you know the ends of that also are much higher.
I do expect it to slow down a little bit the in terms of not the demand, but in terms of the net growth because we do see them, maybe a little bit more of the ends the 2 happened some of the engagements that we.
But from the beginning of year to make them for the renewal at the end and that's sort of quite a lot of work to kind of replace them or any of them as well. So we do expect the positive trends to continue but I can't quantify it.
Okay. Good that helps.
Okay.
Ask about.
Alright, and then Jack just as far as operating expenses go I know that you said in the first quarter you pulled the expenses forward, which kind of explains like like Q1, and Q2 of kind of flat. So does it start ticking back up again in Q3.
We thought because of that.
Yes, it's true.
Far as when you say, it's starting to pick back up.
U.
SG&A SG&A SG&A spend.
Yeah.
Well.
Yeah.
It's gonna be it the second half.
Half of the year, it's kind of picked back up somewhat.
In staffing, it's gonna be it's going to pick back up just because of the demand.
And some of the variable expenses associated with that demand and then the DNA.
You know what the first half of the year, even though it was.
The flat revenue quarter, we did make some.
The material investments in in DNA, SG&A and that's post comment on you know.
Giving up some operating margin to position yourself for growth.
So I think in the second half.
We're going to have some increases in SG&A, but maybe not as great as.
You know the first quarter with tell us for the first half of the year with them.
Okay Alright.
My final question, Paul I forgot to ask you.
He said that Q4 might not be as strong as of Q3, because you don't know yet how is that possible when your contracts are.
A long enough term that you know they've got to be more than 3 months. So you know what.
Tailing off in what state.
Where's the growth.
The reality of it.
Well, there's always some variability I mean were you know every.
Every quarter, we have contracts that start in contracts at the end and it's.
3 or 4 weeks into the quarter, it's a little bit difficult to predict what's going to end or what's gonna get extended through Q4, but you know oftentimes we have changed.
That are done day contracts to extend them further into the future of hard to say, what's going to happen with respect to Q4 right now I don't expect Q4 to be.
The I can't say with certainty of specificity, what Q4 is going to be higher or lower I don't expect it to be substantially different than Q3.
Sorry, I just can't predict anything further than that right now based on uncertainty whether what contracts are going to do the extended and what we're gonna be closing here in the next couple of weeks.
Okay, great that helps thank you.
Oh go ahead, yeah, I think when you look at our business the DNA business historically, there's not a lot of volatility until it in it.
We haven't had significant drops in revenue even during the pandemic.
We were mostly flat and now we're starting the climbed back up again as the environment improves I expect that to continue.
Alright, thank you.
Helps.
Thank you Lisa.
Thank you.
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Fair enough.
Further questions at this time.
I'd like to turn the call back to Vivek Gupta for closing remarks.
Thank you operator same day or no further questions I'd like to thank you for joining our call today and we look forward to sharing of third quarter 2021 results with you in late October.
Thank you.
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