Q4 2021 Mastech Digital Inc Earnings Call
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Greetings and welcome to Mastech Digital Inc. Fourth quarter 2021 earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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Under this conference is being recorded its now my pleasure to introduce your host 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's fourth quarter 2021 conference call.
You have not yet received a copy of our earnings announcement. It can be obtained from our website at www Dot and I think that's all dotcom.
With me on the call today are Vivek Gupta Classic digital Chief Executive Officer, and Jack Cronin, Our Chief Financial Officer.
I would like to remind everyone that statements made during this call that are not historical facts are forward looking statements.
These forward looking statements include our financial growth and liquidity projections as well as statements about our plans strategies intentions and beliefs.
Turning to the business cash flows costs and the markets in which we operate.
Without limiting the foregoing the words believe anticipate plan expect and similar expressions are intended to identify certain forward looking statements. These statements are based on information currently available to us and we assume no obligation to update these statements or 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.
W. W Dot SEC dot Gov.
Additionally, management has elected to provide certain non-GAAP financial measures to supplement our financial results presented on a GAAP basis.
Specifically, we will provide non-GAAP net income and non-GAAP diluted earnings per share, which we believe will provide greater transparency with respect to key metrics used by management in operating the business.
Reconciliations of these non-GAAP financial measures to their comparable GAAP measures are included in our earnings announcement.
Yeah.
Excuse me.
Yeah.
Which are.
Included in our earnings announcement, which can be obtained from our website.
At Www Dot Mastech digital Dot com.
As a reminder, we will not be providing guidance. During this call nor will we provide guidance in any subsequent.
One on one meetings or calls I will now turn the call over to Jack for a review of our fourth quarter and full year 2021.
Yeah.
Thanks, Jen and good morning, everyone.
I'm pleased to say that fourth quarter of 2021 with a continuation of our strong financial performance.
While we came up slightly short.
Feeding our third quarter 2021 record results.
We're well positioned to continue our growth trajectory in 2022.
Our major assumptions of course.
Markets remain Gil Yang.
Hello.
COVID-19.
Addressing fourth quarter, two guys into 'twenty, one financial results consolidated revenues totaled $59 million, representing an organic increase of 21% compared to $48 $7 million in Q4 2008.
Got it.
This revenue performance was a half million dollars lower than our record revenues in Q3 2021 largely.
Our utilization.
Elective seasonal holiday and vacation schedules in Q4.
Our data and analytics services segment contributed revenues of $10 $1 billion, our second consecutive quarter, where revenues exceeded the $10 million threshold.
And representing organic growth of 13% over last year's revenue.
During Q4, we generated order bookings.
$2014 $4 million inorganic and analytics services segment.
Which included two significant multiyear multimillion dollar assignments.
Health care space.
Both of these new awards were expected in Q3 that gave me they didn't close.
So late Q4, which did impact our fourth quarter revenue.
Additionally pipeline opportunity.
<unk> to show promise as we enter 2022.
And our Ikea staffing services segment revenues of $49 million essentially matched our record revenues in Q3, 2021 and represented a year over year increase of 23%.
Activity levels remain elevated in Q4.
Seasonal holiday and vacation disruptions as well as normal high levels of December assignment at.
Gross profit in the fourth quarter of 2021 totaled $15 $7 million compared to $13 $1 million in the fourth quarter of 2020.
And increase of 20%.
Gross margins as a percent of revenue in Q4, 2021 was 26, 6% compared to 26, 8% in the 2024th quarter.
This slight margin variance was primarily the result of Q4 2021, having fewer business days in December than Q4 two.
2020.
Due to the timing of December holiday.
GAAP net income for the fourth quarter of 2001, with $3 $9 million or 32 cents per diluted share compared to $2 million or <unk> 17 per diluted share in Q4 2020.
non-GAAP net income for the fourth quarter of 2021 with $40 million or <unk> 34 per diluted share compared to $3 $4 million or 29 cents per diluted share in the fourth quarter of 2020.
SG&A expense items not included in non-GAAP financial measures net of tax benefits are detailed in our fourth quarter 2021 earnings release, which is about Warner website.
Highlighting our full year 2020 results revenues were a record $222 million.
Each were up 14% on a year over year basis as both of our business segments achieved double digit growth.
Consolidated gross margins grew to a record 26, 8% for the <unk>.
Full year 2021.
GAAP diluted earnings per share was $1 <unk> compared to 83 in 2020.
And non-GAAP diluted EPS was a record $1 19.
Yes.
Lastly, I do want to say a few words about our financial condition.
After closing a very successful 2021.
During the year, we continued to pay down debt and improve our leverage ratios.
This occurred even while we investigate nearly.
$12 million in operating working capital to support our revenue growth and to repay $22 $3 million related to the COVID-19 payroll tax deferment program of 2020.
Our day sales outstanding measurement at December 31, 2021, with 61 days versus 60 days a year ago, which.
Which we believe is a good position for us given the increase in project.
Business in 2021, which generally carry a higher DSO a nation.
In fourth quarter.
Our credit facility with PNC bank, extending or facility term date through 2026.
Increasing our credit capacity and lowering our cost of borrowing.
We believe this amendment gives us further flexibility to support our business, both on organic and inorganic basis.
At December 31, 2021.
We had outstanding bank debt net of cash balances on hand.
$6 5 billion.
No borrowings under our revolving credit facility.
And cash availability of $32 4 million.
Our new credit facility also includes a term loan accordion feature which can provide us with additional term loan capacity of up to another $20 million.
Doing the math, we are potentially sitting with access to over $15 million of capital resources today.
I'll now turn the call over to <unk> for his comments.
Good morning, everyone. Thank you Jack for the detailed financial review of our operating results for 2021.
Let me start by saying that I'm very pleased with both our Q4 and full year 2021 financial performance.
21 was a pivotal year for both of our business segments as we recovered from the effects of the onset of the pandemic in 2020.
During the year, we continued to execute on our strategic priorities by deepening new and existing relationships in the markets that you serve.
Continue to invest in both SG&A and capital expenditures to expand capabilities and take advantage of the positive trends that we are seeing in both of our business segments.
Notwithstanding some disruptions and economic activity from COVID-19 variance throughout the year, our financial results for 2021 included including the achievement of our record revenues record gross margins and a solid earnings performance.
Additionally, we believe our strong 2021 order backlog.
<unk> segment and record billing head count it staffing segment.
Position us well for growth as we enter 2022.
So let me share a few of our 2021 operational highlights.
First our data and analytics services segment.
Bookings totaled a record $55 million in 2021, despite experiencing some order delays during the year.
A multiyear multimillion dollar center of excellent service offering recovered nicely in 2021 after the downturn in the pandemic impacted 2020.
Additionally, order backlog at December 31, 2021 was at an all time high and our pipeline of opportunities continues to show promise.
Proliferation of COVID-19 variance continues to be a global macroeconomic concern, but currently these concerns have not appear to materially impact our clients' willingness to start new assignments.
We're looking for improving conditions on the Covid front in 2022.
Our global partnership with IBM showed revenue improvement in 2021 from depressed global activity levels of 2020.
Our pipeline of opportunities in the second half of 2021 strongly suggests that this improvement should continue into 2022.
International subsidiaries.
Our cloud services and customer experience services, our rights to potential as we enter 2022, we are finding good acceptance of these innovative new offerings in the marketplace.
Our objective for 2022 is not only to accelerate revenue growth, but to also strengthen gross margins in both of these offerings.
And lastly during 2021, we entered into a new operating lease in Chennai, India.
This new lease expands our office capacity to nearly two times, our prior capacity as updated upgraded amenities and modernizing the look and feel of this key DNA delivery center.
Now looking at our it staffing services segment.
Our record 2021 financial performance in revenues gross margin and profitability is the result of some very exciting achievements during the year.
We expanded relationships with most of our key clients. We had one of our best years with respect to capturing new logos and our offshore recruitment center in Noida, India strategically expanded staff ahead of the growing demand and at the same time improve significantly on its productivity metric.
By fully embracing the work from home model.
This is a pivotal accomplishment for the recruitment centre and one that we believe will improve our business model for years to come.
Our master more service offering continued to gain traction in 2021, and we have begun expanding this offering to include India based offshore consultants.
We believe customers will become comfortable with the work from home model and not ready to enjoy material cost savings by embracing this offshore staffing model.
We are excited about this offering growth potential in 2022 and beyond.
On a final note as most of you know Paul Burton, our chief executive of the data and analytics segment decided to leave Mastech digital in December .
During all study or with our company. He did an amazing job of taking our DNA business to the next level in terms of our ability to compete in today's global marketplace.
For that we thank Paul wholeheartedly and wish him the best in his new endeavors.
With respect to our search for bulk successor, I can tell you that the candidates that we have looked at have been very very impressive I feel comfortable saying that we should have a new chief executive further data and analytics services business onboard in the not so distant future.
This concludes our prepared remarks, operator, we can take the questions now.
Thank you.
Ladies and gentlemen at this time, we will be conducting a question and answer session.
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One moment, please while we poll for questions.
Our first question comes from Josh Vogel with Sidoti. Please proceed.
Thank you good morning, Vivek and Jack Thanks for taking my questions.
And congratulations on a very impressive 2021.
I have a couple here for year end.
Can you can you I guess first start with what expectations should we have for staffing and DNA mix this year as well as.
What kind of gross margin expansion, we can expect.
Just the overall gross margin profile of the business going going forward from here.
So hi, Josh its always nice to hear your voice.
It's.
As you know, we don't give guidance so its.
I wouldn't want to go into specifics, but our plan for the year is to keep the momentum going in both the businesses.
There's clearly demand for staffing services, which is.
And we are trying to maximize what we can in terms of.
Exploiting that demand to the fullest.
As I've said.
My earlier comments.
The customers are now opening more open to signing up for new assignments on the DNA side.
So both of the businesses should grow how will the mix change it's hard to say at this stage.
But.
And we are obviously always looking at ways of improving the gross margins every year every quarter.
So again this should be some improvement, but I wouldn't want to be very specific on that as we don't give guidance.
No I understand and thank you for those insights.
When we look at your bookings number in Q4, how much came from those two significant healthcare assignments that were pushed into the quarter.
Those two are.
Correct me if I've got my numbers wrong, I think they were a little more than $8 million all of that was from these two.
Orders would there be right Jack.
Yeah, I think it was a little softer at $8 million.
Okay great.
And you mentioned that those were pushed late into the quarter and saw.
A little seasonality in DNA from Q3 to four I was just curious about how I should think about that business going forward given the demand and bookings pipeline is is it going to be something like a steady build quarter to quarter with some seasonal decline in Q4.
Given that there was the.
Later bookings of those healthcare assignments should we expect to see.
Revenue in the segment and I know youre, not giving guidance, but you know directionally should revenue pick up in Q1 versus Q4.
So Josh yes.
With our healthy order backlog that we have and having sign some new deals we do expect some sequential improvement.
In the current quarter, the Q1 quarter.
But.
Of course, the intent is to see how we can continue to keep growing and improving.
Improving quarter on quarter.
So yes, that's I guess the best I can say at this point in time.
Yes, those deals which came in in Q4 will definitely be helpful in the future quarters.
Great and.
You've obviously done a great job protecting pricing.
Throughout the pandemic and today I was just wondering if you can share any comments with regard to pricing in the bill pay rates that youre seeing.
And I in staffing.
On the staffing side, yes.
<unk> is something that we have been able to manage quite nicely.
But on the other hand. It also means the market is as you know is very hot demand is far more than supply.
So as a result of that.
<unk> prices.
Bill rates are going up across the board.
Any way to to some extent so the tricky, though not to the <unk>.
Come to pricing pressure downwards and at the same time to see what you can how you can benefit from the upward pricing pressure, which is coming you know.
And the industry in general.
So yes, it should all be.
Yes. It should result in positive outcomes as a result of that.
Alright, great and just last one and I'll, let some others ask.
Jack you mentioned.
Lot of potential dry powder.
Can you talk about capital allocation or deployment strategy for 2022 and also.
Our acquisitions on the table and if so.
Where would it be geographic would it be capability.
Any thoughts there thank you.
Acquisitions are a part of our overall strict strategic strategy for sure.
If you noticed in our press release, we had.
non-GAAP expenses.
Yeah.
<unk>.
Acquisition transaction expenses and that was a.
Acquisition candidates that we're looking at spend some due diligence money and back to us So clearly.
In 2022.
We're looking for.
The right candidates with respect to applications.
Based on the acquisitions that we've done in the past.
Earn out is.
A big component of our ability to find an attractive acquisition. So we're sitting there with.
Roughly $15 million of dry powder.
That bodes well for.
The type of acquisition that we can we can take on.
That's helpful and are you seeing.
And candidates that Youre looking at are valuations still really inflated or are they starting to come down a little bit.
You know, what Josh I really can't.
Look at the history of some of these spaces that we're looking at right now.
The valuations are.
On the high end.
Understood well, thanks for taking my questions and again congrats on a great 2021.
Thanks, Josh.
Yeah.
Our next question is from Lisa Thompson with Zacks investment Research. Please proceed.
Good morning.
Glad to see.
Things are going so well.
First.
A question on how many billable consultants did you end the year with.
Right.
Jack do you have the number handy.
I guess I do have the number handy. It's one time it was I'm going to ask.
I knew you were going to ask.
1061.
262, well you said it was record so I thought you'd want to brag about it.
I agree.
Our records in 2021, so we did a lot of Frac.
Yes, okay.
If I may just.
Add to.
We added 199.
Consultants.
Okay.
And we started the year with if I memory serves me right something like 1060, or so so it's almost a 19% increase in head count.
<unk> 1068, you're good.
Do you plan that again for this year or do you want to try to beat that what's what's the objective.
We do want to obviously keep the momentum going but.
I'm not sure whether 19% kind of growth can happen again.
Another year.
<unk>.
We shouldnt forget that 2020, we lost a lot of.
Head Count and then we were building back, but what's happening is as the whole year has gone by a lot of those assignments are coming to an end. So now it's getting more into a business as usual kind of mode, where you are going to constantly be back filling the ones, which are ending and trying to scale at the same time. So I think it should still be good we should still do much better.
Other than the industry as we've done for the last so many years, but I don't know whether its you know 19% kind of head count growth.
Is going to be practical.
So has anything changed recently as you said this is getting back to normal and staffing.
Churn going down or get back to where things usually or is it still crazy.
Hi.
I think the Crazy is the right word it is right now the ends as we call them are at record levels.
But then we are doing a great job of having starts which are even greater than the and so even starts at a record level as well and the equation always who starts minus ends is equal to net growth. So to achieve a net growth of 199, we've had unprecedented number of starts.
While we are also facing with at all.
A record number of events and I think that kind of environment will continue. So we are constantly trying to gear up our team.
In terms of numbers productivity et cetera to be ahead of the co and that's the only way we will be able to keep growing so this and does not want to come back.
Come down the market is still hot.
The trick really used to see that all starts far exceed the ads.
And then are there any externalities it'll change this is it just is.
More job openings for peoples.
People or is there anything else going on out there.
Well, it's it's primarily that it's also things businesses.
To spend more so a lot of the projects that they have put on hold in 2020, and they were being a little cautious in the early part of 2021, and I think they're beginning to spend.
That means projects.
It will require more people. So one of the shortage of people, which we know is there in the country and on top of that constantly customers are wanting to do more and there aren't enough people available and they need.
The help from companies like ours and Thats why they are also being much more open to matter more.
As I've mentioned in my comments, even working.
Out of India offshore staffing is also becoming something more real for customers, because it's very difficult for them to find people.
Okay, so they're kind of making up for lost time in addition to business as usual.
Alright.
Oh.
So you've.
You've talked about you have $50 million in dry powder.
And beliefs, I guess didn't quite live up to it.
It's high expectations of what they thought they could do.
Are you more gun shy or are you still willing to go after big acquisitions.
What's your thinking now.
So no we're not gun shy, we are looking at acquisitions.
Acquisitions, which are kind of in our range. So.
Big and small.
But at the same time, we've also.
Sort of waiting for the new chief executive to come onboard because the end of the day any acquisition, we do in this year will be.
Sort of owned and managed by the new leadership.
So.
So just answering your question by.
We are keeping the powder dry we definitely want to go down that path, but.
We are going to just wait for I guess, a little bit more for the new leader to come in and then take a call directionally, where we're going but.
Political definitely is the focus area for any acquisition.
Hey, Lee I, just want to make one comment on <unk> you clearly.
You know their revenue is happening.
Form to expectations, but they are profitable.
We liked there.
Service offerings, we're still keen on customer experience so.
I wouldn't change it as a bad application and.
When they don't make their revenue numbers, even though they still bring in a nice amount of change you wind up on the bottom line.
Essentially it helps us a little bit because theyre not going to make the earn out but yet we're going to win.
Some nice bottom line profitability and again, we're still keen on their service offering.
Yes of course, great. That's why that earn out is so wise to put into the Wil acquisition.
Great.
And one other thing on the health care customers that you just signed are they already generating revenue does that happen the daily side, how does that work.
Yes, they have already started.
Bringing in revenue.
I think one of them was already an existing customers. So we can kind of signed a large deal with an existing one of the other one is a new customer and they both started moving.
Alright, great.
One other thing you kept talking about improving margins in data analytics and getting amber leaf.
Margins are you there now at steady state, where you pretty much got them to where they're going to go.
Yeah.
I mean, they still have improvement.
I mean, they've improved from where they were when we took them over.
Alright.
They're not close to.
Our core DNA margins.
There is still some some upside that we see.
Alright Thats great.
Okay sounds good I think that's all my questions. Thank you so much.
Thank you Lisa thanks for that.
Our next question is from Timothy call with Capital Management Corporation. Please proceed.
Congratulations on such strong bookings.
Seasonally as it to experience such strong bookings in the fourth quarter.
Sorry I.
Voice broke up could you just repeat the last sentence.
Is it odd to experience strong bookings in the fourth quarter from a seasonal standpoint.
Well [laughter].
It's not ours, but yes happy news, yes bookings sometimes.
Seasonally where bookings tend to be a little less in Q4, and then pick up in Q1.
Yeah.
I'll leave the site of the sales engine firing well.
Did having fewer days in the fourth quarter.
Negatively affect revenue versus last year.
Okay.
Yeah.
<unk> revenue and it also affected gross margins.
You know that you know that extra holiday. If you will in 2021 was you know.
The recognition of the holiday around.
New years, because in the new year holiday is generally in January .
This year because of the holiday cut being on a weekend.
The celebration of it.
Ways.
At December 31, so.
There was a higher benefit load.
And.
December .
2021, compared to 2020 and.
The good news is in Q1, it will just be the.
The reverse we will have one less holiday in Q1, but we normally have.
That makes sense.
Yes, yes, it does.
Given the strong global demand for our.
New product offerings, including cloud services.
Are you in a position to handle.
Continued large increases in customer signings.
Yeah.
Yes.
Hi.
<unk>.
We've spent a lot of time.
Effort and money last year.
Building our capabilities in various areas of our portfolio of offerings and cloud services is definitely one of them and yes, we are able and willing and we are actively.
Marketing those offerings. So yes, the answer is yes.
Well congratulations on the strong orders and being prepared for.
To take advantage of what you've built good job.
Thank you. Thank you.
Thank you.
Minder, if you'd like to ask a question.
Please press star one on your telephone keypad, a confirmation that a launch date that your line is in the queue.
Ladies and gentlemen, there are no further questions at this time I would like to turn the call back to Vivek Gupta for any closing remarks.
Thank you operator, so if there are no further questions I would like to thank everyone for joining our call today and we look forward to sharing our first quarter 2022 results with you in late April Thank you.
This concludes today's conference you mentioned disconnect your lines at this time. Thank you for your participation.
Yeah.
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