Q3 2021 Mastech Digital Inc Earnings Call
Third quarter of 2020.
After adjusting for Amberley or organic revenue growth on a year over year basis was approximately 19%.
Sequentially revenues were 18% higher than our previous quarter.
During Q3, we continued to see further evidence that the DNA market is in recovery mode.
Order bookings were strong for the third consecutive quarter at $10 million. Despite several major orders pushing to Q4.
And our pipeline of opportunities.
Changes to show much chronic.
Still some uncertainty still some uncertainty remains in the marketplace with the assistance of the Delta there yet, but we feel very good about the macroeconomic condition and the DNA space and are very very optimistic about 2022.
And our I T staffing services segment, we reported record revenue of $49 million, an increase of 22% on a year over year basis, and 10% sequentially higher than Q2 2021.
Activity levels continue to remain strong in the third quarter of 2021, and we grew our global consultant base by approximately 5%.
Through the first nine months of 2021, we've increased our global consultant base by 24% that's.
That's an annual record and we feel about three months ago.
Gross profit in the third quarter of 2021 totaled a record $16 $6 million.
<unk> to $13 $1 million in the third quarter of 2000 and Kuwait.
An increase of 27%.
Gross.
Margins as a percent of revenue into 2021 third quarter was 27, 9% compared to 27, 6% in the 2023rd quarter.
GAAP net income for Q3 of 2021, it was $3 $4 million or 28 cents per diluted share compared to $3 million or 25 per diluted share in Q3 2020.
Our non-GAAP net income for the third quarter of 2021 was $4 $6 million or <unk> 38 cents per diluted share compared to $3 $8 million or 32 cents per diluted share in the third quarter of 2020.
SG&A expense items not included in Q3, non-GAAP financial measures net of tax benefit for the amortization of acquired intangible assets and stock based compensation.
There are detailed in our Q3 earnings release, which is available on our website.
Addressing our financial condition.
September 30 of 2021, we had cash balances on hand.
$5 $4 million.
Standing bank debt of approximately $14 million.
No borrowings under our revolving credit facility.
And cash availability of $30 million.
Our day sales outstanding measurement increased by three days during the quarter from 63 days at June 30th 2021.
This increase was largely due to two major clients paying us in early October versus on contract terms of September 30th.
So while this hurt or day sales outstanding measurement the impact on our business was really annoyed events.
I'll now turn the call over to <expletive> for his clinic.
Yes.
Good morning, everyone. Thank you Jack for the detailed financial review of our operating results for the third quarter of 2021.
It is great to host these calls when you are sitting on record financial results.
It's even better when you believe you are well positioned to surpass. These if you continue to execute our plan and that's exactly how I feel today.
Both of our business segments had an outstanding quarter.
The data and analytics services segment is experiencing much better market conditions than during the first half of the year and I'm optimistic that more improvement is in the cards for 2022.
Order bookings during the first nine months of 2021, but approximately $40 million and our pipeline of opportunities continues to improve.
Paul will provide more color on the DNA segment in a few minutes.
I just thought of IP staffing services segment. It continues to hit the ball out of the park, but 22% year over year growth gross margin expansion and record non-GAAP operating profits in Q3 of 2021.
Our master more service offering continues to gain traction and we have successfully expanded this offering to include India based offshore consultants.
We believe customers will become comfortable with the work from home model already today to enjoy material cost savings by embracing offshore staffing.
We continue to think this concept of both method and great potential.
With respect to our financial position, we believe we have a solid balance sheet with the linchpin being high quality accounts receivables, which means a strong and predictable cash flow conversion metric.
In addition to reliable internal cash generation.
We currently have access to capital sufficient not only to support our existing businesses, but also to capitalize on acquisition opportunities that we believe can better position us in our respective markets.
As we have said many times and also demonstrated in the bust inorganic growth is a key element of our overall growth strategy for the future.
I'll now turn the call over to ball for his comments on our data and analytics services segment.
Thank you Vivek and good morning, everyone Q3 represented a discontinuous jump in performance for data and analytics $10 5 million in revenue was $1 $5 million higher than the previous quarter and in my opinion represents a bending of the growth curve.
As I said in my previous earnings calls this year bookings were for voting of revenue that come with strong bookings in the first half set up our Q3 very nicely and that can be seen with the results. We report today.
Although Q3 bookings were below this year's Q1 and Q2, they were still strong and when you consider that two large deals slipped into Q4 because of their complexity. We remain bullish on revenue over the short to medium term Jen.
Generally we're finding good acceptance of our data and analytics offerings in the market, especially when they are positioned in the context of our emerging cloud capabilities. This has allowed us to continue to sign a high value long term contracts with our clients as well as augment existing long term contracts, we believe that our capabilities in advisory cloud need.
Application development and managed services, along with data and analytics all in the cloud. These things these things present, a strong market opportunity for us and our focus on capturing it could not be stronger we are striking at the heart of our clients digital transformation dilemma and in so doing helping them deliver real impact to their business overall I'm quite happy.
He is DNA continues to become a proportionately larger percentage of overall mastic revenue and especially operating profit we expect us not only to continue but to accelerate as our investments in SG&A and new offerings continue to bear fruit.
Operator. This concludes our prepared remarks, we can now take questions.
And at this time, we will be conducting a question and answer session.
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One moment, please while we poll.
Questions.
Yeah.
My first question is from Josh Vogel with Sidoti and company.
Please proceed with your question.
Sure.
Thank you good morning, guys. Thanks for taking my questions.
Certainly strong quarterly results could work there.
I have a couple of questions for you here.
I wanted to start with Paul.
<unk>.
We're seeing consistent improvement in margins at DNA.
This sustainable even as you ramp new engagements and I know that you were we were in the mid fifties last year, how should we be thinking about the margin profile of DNA going forward, even in an environment, where you're winning new business at a healthy clip.
Yeah, I don't expect the erosion in margin going forward.
Margins to be gross margins to be about where there are some slight improvement the reason I say that is.
If we go if we goes up gross margins at $55 60 per cent in that area, which is possible by the way.
Then it prevents us from investing the cash back in the business that we need for growth. So I'd be quite happy with gross margins in the 50% to 52% range and pushing the excess back into the business for growth. So I would expect gross margins to stay pretty much where they are at maybe improve a little bit.
But our objective is not to you know to jump margins out of the partner objective is to apply the cash back into the business for growth.
Yes understood.
<unk>.
When we think about the the recent wins earlier this year in Q3, you guys first those two that our projects are engaged that slipped into Q4 was that.
Just the uncertainty around Covid.
Maryann.
That resulted in that and then also when we just about the build in the business and the business won year to date is it is it fair to assume we see a nice sequential step up in DNA revenue and of course similar to what we saw in Q3.
With respect to the two projects that are slipping in or it did slip into Q4 didn't have anything to do with the.
Like our Delta it was purely a matter that they received.
Additional approvals with <unk>.
Clients, which is a good thing to have it's a high quality problem that.
As you might guess.
In terms of Q4 revenue I, certainly can't predict or put out as guidance for Q4 revenue, but I don't see a problem with Q4 right now.
Okay.
A question for Jack.
How do we think about SG&A going forward, you've noted that you're wired for scale now we saw that last quarter, but what level of spend you need to have on a quarterly basis to sustain the growth you see ahead and understanding that you may need to add headcount in certain areas from time to time, where do you think those investments will be focused.
Hi, Josh.
I think in the short term.
The spend that we having in SG&A.
In Q3 is about the spend that we're going to have in Q4.
We may be up or down.
100000 or for Don a couple of hundred Boston, but it's not going to be a material difference.
I really don't even want to comment on two.
2022.
We go through we get Covid budgeting process and it will be.
Okay, where we wanted to spend.
SG&A dollars if any so.
That's sort of where I think we're going to hit in Q4.
And.
So more to come on in 2022.
Okay, and while I have you.
Can you just talk a little bit about the your total liquidity you mentioned $30 million available cash how much of that as dry powder to explore M&A activity in and then also just some comments around the cost of your debt what average interest rate you have today. Thanks.
Sure.
We have $30 million under our revolving credit facility.
Unused.
All of that is in play for applications.
We have a good relationship with our lead bank PNC.
Should we do an acquisition I would suspect that we'd go to PNC and.
Trying to get an increase.
I don't need to revolver.
I'll show an increase in the term loan.
As far as our interest expense.
Our term loan is priced a little bit higher than our revolver or our revolver is no color.
Lateral lives with receivables show the the risk profiles.
Right right and our term loan.
It is priced at three 5%.
Interest rate, our revolver is a little bit leverage in that 3%. So today since we're not borrowing under the revolver.
Our average cost of debt.
Free cash at about three 5%.
That's helpful. Thank you and if I could sneak in one more for Vivek.
Okay.
Are we getting to a point in the staffing cycle, where we might start to see the recovery revert back to more historically seen patterns. For example, where we tend to see Q4 step down a little from Q3 or is this.
Enough pent up demand out there and structural shifts in the marketplace and people as you mentioned being.
More comfortable in remote work and certainly offshore.
Should we expect to see this build in Q4 at least for this year.
So Josh the demand of course.
It is continues to be really good at this moment, but are we at all of them are getting signals from our customers that the seasonal reduction which happens towards the end of December on account of Christmas holidays.
Some forced furloughs and numerous engagements, which just logically come to an end on the 30 <unk> of December because the butchers autozone out or whatever the planning processes. So that seasonality will still show up in.
In Q4.
But on.
The other hand, the demand still continues to be a pretty good and.
As I have said before in my last call as well.
The market is hard so even the a.
The ends.
Alright. So in Q3 for instance, we had record earnings and of course, we also had record starts that's how we were able to show with a 5% growth, but that kind of situation continues to be bad.
That's helpful. Thank you for taking my questions.
Thank you Josh.
And our next question is from Lisa Thompson with Zacks investment Research. Please proceed with your question.
Good morning.
Good morning, Lisa.
That's an excited team here, what's going on over there because this entire new dystopian world, we live in where everybody's quitting are getting fired.
And I thought this stuff staffing business must be hub.
Having unusual times.
Are you are things accelerating as far as demand.
Oh people shifting to more remote than do you think this is going to keep going on because I mean, I, just keep reading more and more crazy stories about people getting fired from new jobs and hired back it staffing agencies into the same place.
So can you talk about that and do you see this continuing for some while.
Sure. So I mean, maybe well, although the market as I mentioned earlier was is hog the demand seems to be pretty good and you know.
I'll be honest cap.
Capitalizing on that we are prioritizing the ones the opportunities that we can convert the opportunities that can give us better margins the opportunities that can give us about the volume. So that continues to be that we haven't seen evidence of that what you just mentioned, which is people getting fired and then they are being hired back of.
You know total contracts that we haven't really seen but we.
We haven't seen any change from what we were seeing in the last quarter. The demand continues to be high yes.
It will be.
The consultants have even better opportunities today in terms of maybe getting better pay or being closer to their family or doing more exciting projects et cetera, and that is the thing that enticing them to leave and move on.
But then at the same time, we are able to attract them as well.
Almost the same kind of.
I attribute so it seems to be going well, we don't see any immediate signs of this tapering off.
And do you feel that you can hire as many consultants see Q4 as you did this quarter.
Oh I see.
Seasonally the demand in Q4 was a little less than Q3 as Q2 and Q3 are usually the best quarters. So we will we are going to see a bit of that and the demand will come down, but I'm not saying, it's a huge kind of falling off the cliff. It's just a little tapers down a little bit and then the end start picking up and as we can.
Say that net growth of an equation you know starts minus Ams is equal to net growth. So it's picking up I don't know, whether we'll be able to get that kind of net growth as we've had the you know before we could even have a you know.
Remain flat, but maybe you could even be a tiny but that's seasonally what is expected and we expect this AR Q4 to be no different.
Okay, and can you talk a little bit more about the remote.
You'll note workers' based in India, how is that right.
Plain old Massimo is it just that they're living in India.
Is that work.
Well master most basically the concept that people can be anywhere in the world and we know it.
Initially master modal launch does as a concept we have consultants could be anywhere else in the United States, but you can easily extend at a global level and that's what has happened.
So there is.
There are customers oftentimes have requirements of killers, because it's pretty complex me call them purple squirrels, they're very hard to find over here in the U S. At times and we are able to find them out of this large pool of ITV sources that India has so by opening master mode.
All up to the Indian consultants, we've been able to bring those high quality purple squirrels to the customers and the cost arbitrage also works to the.
The customer's advantage if they are able to get someone.
Cheaper and they were able to save some money and get the right kind of skills and we are finding that this concept they will.
Customers will not amenable to this you know couple of quarters ago, but with the the world becoming comfortable with working from anywhere.
That is beginning to become attractive and we are having numerous conversations with customers on those lines.
That sounds great and I love that term purple squares.
All right.
Thank everything says Oh, just one last question about the two deals that you said slipped into Q4, well did those close.
Not yet again the reason they flipped into Q4 was they required additional approval because of their size.
And we're expecting them to close in Q4.
Okay, great. Thank you that's all my question.
And our next question is from Tim call with the Capital Management Corporation. Please proceed with your question.
Thank you.
Just to follow on the <unk>.
One of the biggest fears in the last six months.
Was disruption because of the.
The pandemic affecting foreign workers, even though they were working from their homes I guess.
With the pandemic.
Subsiding, a little bit in places like India.
Do you think.
That's no longer a concern and do you find because there are.
Many of them working from their homes.
Got it.
Yeah.
In hindsight wasn't.
Yeah.
A huge uncertainty or.
Do you think because of the pandemic is subsiding in those geographic regions, it's not as big of a uncertainty today.
Thank you for your question Tim.
We actually.
We were prepared for the worst we were sort of expecting maybe the third wave to come to India as well and after the second wave we actually once again went back into shutting down offices and asking everyone to work from home.
And even today, although the D.
The virus issues seems to be on the way and at the moment our teams in a bolt of locations, where we have these centers in India, Chennai and annoyed at near Delhi.
Everyone is still working from home.
And we are encouraged by.
The the outlook on the Corona front, and we are seeing signs of companies coming back and.
Having their employees coming back to the offices. So we are going to be looking at that in any case, we don't expect even in the long term and we have made that announcement to our employees last year itself. We don't expect everybody to be coming back full time.
To the offices.
Probably going to be 20% of the people working in the office is 20% of the time and that will be sort of the future. We are looking so.
Think of even if it's not completely over at the moment, but the signs are very positive at the moment.
With some businesses requiring vaccinated workers.
As I get a round of that to have remote workers or contract workers.
Who are not salaried onboard, but the hard through an agency.
To fill those jobs.
That are left open with people, who may or may not be vaccinated.
You don't have them at all when we look at our entire.
Customer base, I mean customers have different positions on this.
Situation and.
It could well be.
One of the reasons why they are more they are happy with the remote working because they're able to address this issue or maybe a wide. This issue in the process.
But you know clearly it's a every every customer that has a different position on this.
Another.
Fear over the last.
Six months was that as you staff up for business, returning that expenses were going to be Frontloaded and hopefully revenues would eventually follow with op margin recovery.
Do we see most of that theory behind us as.
<unk> staffed up and revenue has started growing and so we should not fear.
A large margin degradation because of that.
Staffing up that that occurred earlier this year.
I'm going to ask Jack to comment.
Comment on the exact when do you take this question.
Sure.
Tim I think the ramp up.
In DNA.
It's pretty much behind us.
Q4.
We may be here.
A minor amount higher.
But.
Keith.
The impact of the austerity measures.
In 2021.
Or pretty much baked came too.
Our Q3 results. So I don't think you're going to see.
An additional.
Thanks Blake.
And SG&A going forward.
Well, congratulations on a strong quarter and strong outlook and all of your hard work paying off.
That's terrific. Thank you.
Thanks. Thanks.
And the next question is from Josh Vogel with Sidoti and company. Please proceed with your question.
Yes. Thank you I just had a follow up I was looking at your 10-Q filing last quarter and saw revenue.
From India, basically doubled sequentially and it was more than all of 2020 combined. So I was just curious how much revenue came from India in Q3, and what percent of mass remote volume is current I know, it's still early days, but what percent of that volume is currently being done with India based consultants.
So Josh I'm going to ask Jack to respond to the first one the second one about how much of the master more volume is coming from India. This actually.
<unk> at the moment in the larger scheme of things because it's only just picking up we've had you know.
Probably a 1%.
<unk> of our workforce right now looking out of India. So it's not very significant but the larger question about what is the revenue.
Jack can you address that.
Okay.
Yeah, we do have a kind of work.
In order to delivery center Andi Andi got yeah.
Syed and and Youre right or revenues are.
So much higher.
In 2021.
20.
In third quarter.
Yeah, I would say, we're going to be probably a little wonder in yoga and in third quarter from for more kind of India.
And.
If you look at 2020.
The healthy increase.
Great and and it seems like an exciting opportunity to leverage the talent pool over there and I understand that it brings.
Lower pay rates that you can basically market to clients with lower bill rates, but.
Is there an opportunity for you to capture a greater spread over time by utilizing overseas to consultants.
Yes, Josh I mean, that's a that's an exciting.
Possibility and we are looking at.
Waves of fueling the engine more so.
I think I think if more is going to come over the over the next few quarters, but we definitely want to add.
Appeal to this.
This this fire which is burning.
Burning quite nicely now.
Great well, thank you again.
Okay.
And again as a reminder, if anyone has any questions you May press star one on your telephone keypad doing so when you show your spot.
Thank you.
And your peers.
At the end of the question and answer session now I'll turn the call back over for.
For closing remarks.
Thank you operator.
If there are no further questions I'd like to thank you all for joining our call today, and we look forward to sharing our fourth quarter of 2021 results with you in early February.
Yeah.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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