Q1 2022 Computer Task Group Inc Earnings Call
Greetings and welcome to computer Task Group, Inc. First quarter fiscal year 2022 financial results conference call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Craig Mahalik with Investor Relations. Please proceed sir.
Yeah. Thank you and good morning, everyone. Certainly appreciate your time today and your interest in CTG joining.
Joining me I believe P J, our president and CEO and John Law Baker, our Chief Financial Officer.
We released our first quarter 2022 financial results. This morning before the market opened.
You can access that release at our website C. P. G dotcom.
After a sleep and John's formal discussion. This morning, we will open the line for Q&A.
Let me first mention as you are likely aware, we may make forward looking statements during the formal discussion as well as during the Q&A session.
These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today's call.
These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed with the Securities and Exchange Commission.
These documents can be found on our website or in S. E T Dot Gov.
During today's call. We will also discuss non-GAAP financial measures, which we believe are useful in evaluating our performance.
You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP we.
We have provided the reconciliation of non-GAAP measures with comparable GAAP measures in the tables in today's release and SEC filings.
I'll now turn the call over to Felipe to begin Felipe.
Okay.
Thank you Greg and good morning, everyone. We appreciate you joining us today.
The first quarter of 2022 continued to demonstrate our success.
Capitalizing on the market demand for digital transformation solutions.
Well as a strong testament to the disciplined execution of our strategy to.
Should we increase the business mix of like eat solution.
And ultimately drive profit margins Haas.
Our GAAP earnings per share grew 50%.
Improving margins drove earnings dollar does.
Despite revenue being down from lower margin nonstrategic technology services and foreign currency.
As a reminder, last quarter, we introduced our new financial reporting structure, its three business segments.
Hi Tech solutions and services are disclosed for each of North America and Europe .
Within our higher margin services.
We are only making investments in D. Students.
And during the quarter, we achieved strong earnings growth you can win continuing to invest in our business development solutions and selling resources.
We also continued to disengage from the lowest margin staffing business.
Which can be seen in our nonstrategic technology services segment.
Revenues decreased $6 2 million in the quarter as compared with the prior year.
Okay.
We strive to be a leader in the delivery of digital solutions and services that creates opportunities for our clients to succeed.
Fight the headwinds they matrix.
This includes finding more efficient ways for our clients to operate like.
Digitizing their processes and us.
As an example of the steady progress we are making.
During the first quarter, we won our largest digital solutions development contracts in the company's history in North America.
The contract will spend five years and provides a significant foundation for us.
Just drive digital lighting solutions in the future.
When just like that are a result of our people who are our most important asset and are critical to our success.
And it's tough and competitive labor environment, we have been successful I think problem.
And continue to advance our colleagues in support of our strategy.
We look to strengthen our team to meet the ever changing needs and challenges of Robert right.
Recently promoted BREDS funds through a newly formed position of Vice President of solutions and delivery called North America.
Brett joined CTG in July 2020, after 20 years with H B.
In his new role.
Brett will be responsible for executing and continuing to evolve ctg's solutions and deliberate strategy in North America.
I am extremely encouraged with the progress we are making on executing our strategy despite macroeconomic headwinds.
Our pipeline of organic opportunities in digital solutions continues to expand.
And it has grown significantly over the past year.
Equally important is our focus on acquisitions.
Or do you have a well defined process that is producing a solid pipeline of opportunities.
We believe we have the financial flexibility to execute and acquire companies.
As always we will be prudent with our capital allocation.
Our acquisition criteria are focused on businesses that provide digital expansion opportunities.
Have accretive margins and earnings and are good cultural fits.
As we mentioned on our last earnings call, we anticipate that the soft coat before right.
Due to the timing of engagements.
Your utilization due to higher rates of illness from Covid variance.
At the beginning of 2022 on our lease.
Resources.
Based on current project timing and opportunities in the pipe.
We expect our quarterly revenue cadence.
And in the second half of the.
As we look further out.
Our objective is to grow our it solutions and services revenue in the mid to high single digits organically.
And the Liberal contribution margins for these segments in the mid teens.
We expect this will enable us to achieve our goal over the next two years of adjusted EBITA margins, increasing to 72, 8% up right.
Yeah.
With that let me turn it over to John to review our results in more detail.
Sure.
Thank you Felipe and again good morning, everyone and thank you for joining us on today's call.
Consolidated revenue in the first quarter was $89 4 million down approximately 8% or $7.7 million of which $6 2 million was attributable to the planned disengagement from our non strategic technology services business.
Foreign currency also had a material and more than substantial unexpected unfavorable impact on the quarter totalling $3 1 million.
First quarter revenue from North America, It solutions and services increased nearly 11% to $20 4 million as this segment captured new customers and opportunities in digital solution.
During the five year contract that Felipe previously mentioned.
Revenue from our Europe , It solutions and services segment was $42 5 million down $3 5 million largely due to a client internalizing a project for about 20 resources during the quarter and.
And the continued impact of unfavorable foreign currency translation.
Excluding foreign currency revenue for this segment would have declined approximately 1%.
We expect the impact of the client internalizing a project to totaled more than 1 million euros by the end of 2022.
This change does not indicate a problem or concern with the client, but rather the clients desire to internalize the resources.
As a result of the changing revenue mix largely driven by North America, our margin profile and profitability improved measurably during the quarter.
Consolidated gross profit was $20 6 million, which equaled to 23% margin.
This was 160 basis points higher than last year's first quarter, and 340 basis points higher than the two year ago period.
<unk> solutions and services North America gross margin increased 100 basis points to 33, 6%, while your gross margin expanded 30 basis points to 24, 7%.
Both segments reflect the increased mix of higher margin solutions and services revenue.
While we continue to disengage from the lowest margin projects and non strategic technology services that segment has also seen a steady improvement in margins.
SG&A expense in the first quarter of 2022 was $17 4 million or 19, 5% of revenue, which represented a nominal increase of 30 basis points versus the year ago period.
GAAP operating income increased 52% to $3 2 million or an operating margin of three 6% up 140 basis points.
non-GAAP operating income would.
Which includes 262000 of acquisition related expenses was $3 5 million or three 9% of revenue, which was up 110 basis points.
We achieved net income of $2 2 million or 15 cents per diluted share in the quarter compared to $1 5 million or 10 cents per diluted share in the first quarter of 2021, that's a 50% increase in earnings per share year over year.
non-GAAP EPS was <unk> 16 per diluted share compared with 13 cents from the year ago period.
And keeping with our improved margin profile of the adjusted EBITDA margin improved 100 basis points to four 8% in the quarter.
Ctg's total headcount at the end of the quarter was approximately 3250 of which 89% was billable. This.
Paris with 90% billable during the prior year period.
Turning to our balance sheet and cash flow.
Cash and cash equivalents were $38 7 million up $3 1 million or approximately 9% from year end 2021.
Cash provided by operations was $4 4 million nearly double last year's comparable period.
There was no outstanding debt at quarter end.
As we noted in the release macroeconomic conditions in the European Union have significantly decreased the value of the euro and we do not see this reversing in the short term.
As a result, we are reducing our annual revenue guidance by $15 million solely due to foreign currency exchange.
We now expect our revenues for 2022 to range from $360 million to $380 million.
This revised level still reflects the approximate 25 to 35 million impact from the disengagement.
Non strategic technology services this year.
Importantly, we remain on track to achieve our earnings growth. This year is a continued transformation of the business mix to higher margin solutions is expected to drive non-GAAP diluted earnings per share ranging from 64 to 72 cents per diluted share.
That completes our prepared remarks Maria could you. Please open the call for questions.
Thank you at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key.
One moment, please while we poll for questions.
Our first question comes from Kevin Leary with cable. Please proceed with your question.
Hey, good morning, guys and nice job on the margins here.
Good morning.
Wanted to touch on Europe .
First you mentioned the client that's internalizing some resources there can you talk about whether the full impact of that 1 million euros was recorded within the first quarter or if that's kind of spread out over the course of the year and then maybe more generally it seems like most of.
The revenue that is it just purely due to FX. So if you could just speak to the broader demand environment, you're seeing in Europe , given some of the macro noise. That's out there and whether you expect to maybe returned to growth on a constant currency basis. Later this year that'd be helpful.
Hi, John .
Sure.
Kevin I'll address the financial pieces, then Felipe if you want to talk about the macro environment.
Would be great, but the.
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Internalization of the projects that we had where client really just decided to internalize those resources, we expect that to be a million throughout the year. So that is not well it's not all in the first quarter, but started in Q1, and then sort of distributed evenly we think throughout the rest of the year. So that's something that 1 million euros reflects the entire.
We're certainly not just in the first quarter.
Relative to growth overall, and just just the numbers themselves as you know part of our plan has been over the past couple of years is to strategically disengaged from the lowest margin staffing projects and so we've got 25 to 35 million, we think within our guidance as far as a revenue.
It'll come out of the process from where it has been last year that number Kevin has been 20 to 30 million over the past two years and that's sort of what guides us to say 25 to 35 overall.
For this year.
Yeah actually I was just focusing more so on the Europe piece it doesn't sound like you guys see.
Too much going on.
A macro standpoint, it seems like it's all FX.
So maybe if we look on a constant currency basis or on an operating basis.
Expecting to be able to return to the European business to growth in the back half of the year or are there I mean is there any sort of concern that the macro kind of hindered our demand for the services there.
Well.
Regarding the macro economic.
Headwinds and of course, the Russia, Ukraine conflict.
We have as you suggested you were saying and we have not experienced any significant impact.
We don't have.
Any delivery center in Ukraine.
Oh, that's right is there has been a popular place for near shore delivery centers in Europe that we were not affected as much as we do see some some headwinds.
As a result of two things first the high inflation.
The cost for energy to name one but.
The inflation. This is everything is on labor too.
The uncertainty associated with the conflict.
At this moment is Kevin I can only say that our pipeline is solid.
When we're saying that so we see our revenue cadence pick up during the second half of the year and that's definitely true for Europe to those are our expectations.
That's great to hear and then wanted to touch on the Big win you talked about for North America.
Maybe.
If you can give anything in terms of besides perhaps on an annual basis that you would expect you know how much you got here in the first quarter and whether there are similar sorts of opportunities youre seeing in the North American pipeline.
Well.
Yeah.
Two the largest swing we have started in North America more generally.
Just when you guys talked about or announced on this call okay.
Well the difference.
Actually a very nice win and it offers a lot of respects instruments.
It should be just total application development.
And so using Dev ops and agile.
Principles.
It's in the core of the client's business, it's in the manufacturing industry and it's really about transforming the way dish clients.
Shifts its products to their clients.
We have had with clients for a number of years.
She is now about modernizing the technology transforming the business processes and extending for us the scope of services, we will use to deliver two declines.
We will also utilize this project to expand and drive our offshore capabilities and digital solutions.
So there's definitely use this knowledge and experience we gained here to sell and deliver similar services to other plants.
So really a very important win in our transformation to a digital solutions company.
Okay.
Typical of the deals youre seeing in the pipeline today as well and maybe just talk about the overall size of that and your confidence level in converting those two deals over the course of the year.
And we see a lot of digital transformation.
In our pipeline.
Almost in all of our areas that you're focusing on agile and that hopefully is definitely the area.
That hasn't really gets traction.
The same is true for intelligent automation.
You can't really think of digital transformation, we don't clash confusing when you say that that helps them and development modernization.
Also talking about automated testing, so where we see good solid.
Opportunities in all those parts of the pipeline.
And yes, we are.
We see our pipeline healthy and significantly improved from just a year ago and last quarter I told you that he saw the throughput.
Moving up increasing in speeds.
And now we see the pipeline increasing on the longer term. So that's why we're.
Optimistic about second half of the year.
That's great well, thank you for taking the questions and good luck here as you went through the year.
Thanks, Kevin Thanks, Kevin.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Marc Riddick with Sidoti. Please proceed with your question.
Hey, good morning.
Hey, Mark.
So I was wondering if I just wanted to sort of follow up on that I was wondering if could talk about what the with with the with what you're seeing in the pipeline can you talk about how about maybe what that looks like for your visibility for you know for what you're seeing now versus maybe a year or two ago.
Well normally marking in any given year, we have them.
Very high percentage of repeat business and normally 80%.
The business, we have it's repeat into next year, that's not all on a contract basis.
But that's just on loyalty.
It's a testament to the good work our people are delivering with our clients. So our visibility to the business going forward this way.
Solids because of that repeatability.
Looking at the pipeline.
And like I said, we did see.
A little bit of headwinds in Europe because of the.
Because of the uncertainty of the conflict in the inflation.
But it's a it's growing.
You see it's been a lot bigger than it was last year at this moment.
Which obviously increases our visibility to the revenue up the remainder of the year.
Excellent and then I wanted to shift gears as to the revenue mix by vertical it and.
Putting aside for a moment.
The the new contract win and in manufacturing I was wondering if you're seeing much of a other shifts in activity, but you know with any any.
The verticals that are maybe being a little more aggressive than others are at this point.
I wouldn't say so mark.
The beauty about digital transformation is that it is valid for all industries.
Solid tour industries, it's solid for the government.
You know we have a strong focus.
Healthcare energy on.
Government European government, specifically in financial services.
That now together, which is a major win in manufacturing is giving us a good spread over a four five fairly important industries.
I couldn't say that Theres one specifically.
Advent yogurt to smoke.
Okay, Great and then shifting gears to a potential for hiring and adding head count what should we be thinking about for.
Two of the year and you know potential target areas.
Well hiring obviously focusing them on hiring column in.
In the digital space focusing on experts, but also solution architects and solution architects on those people that are helping our clients to design.
There are new processes, they're new.
Our ways of Oh.
Like in manufacturing shipping then the goods to the clients.
So that is definitely a focus.
We know that the war for talent is only getting.
Harder.
Yeah, that's just the facts.
Looking our current position in fact, I think we're very well positioned.
We have a great places to work certification.
Every location we are working.
Which is a huge factor in recruitment.
Two ways it attracts new people.
People because they like to work for a company that's striving to be a great place to work, but also it makes that our own staff he's referring their.
Their friends and colleagues to us.
And those are just the best hires you confine all.
You know the people aren't coming towards a culture you know they are being supported by somebody who is already there.
And we received that the retention of those people is just so much higher than average.
That's we're focusing very hard to know.
Grow our own problems.
Your classes.
We're hiring people from fresh out of school, putting them through our CTG had proud of me.
It could be interesting could be endeavor could be.
Robotic process automation that it's different curriculum.
Sure.
Yeah, and obviously also looking at our global delivery network.
Growing our presence in both India, and Colombia, and not to forget our crowd testing capability.
We have acquire.
Through the acquisition in 2020 of start ups.
Having a network of more than 3000 testers all over the world.
So it's not easy it's very competitive, but I think are in a good position.
Great and then one last one for me I know that certainly the revenue makes them is improved to boost margins, which is certainly moving into right direction for the strategy. I was wondering can you talk a little bit about maybe what you're seeing with discretionary expenses are you beginning to see more and more are more travel a war.
Yeah, you know needed to generate business are or how does that sort of begun to happen or not really as of yet.
Well Luckily, we see travel is happening.
A little bit again, it's still very limited.
But as we know them to be very active in.
And in the sales process and selling there is nothing that replaces an in person meeting with the clients.
But we also see the clients are still.
Mount hesitant or maybe looking at it.
Adopting a new model for that so it's not happening.
Frequently as it has happened before and I don't think it will come back and finally.
On the other side looking at our own internal.
Travelling to collaborate.
We have some offsets.
With all of that.
Tools and that's the whole beach to resolution with our own sector went through.
We are very aware of lots of spine and the expenses that is of course, we've talked traveling so we use that very wisely.
Mark that's going to.
Well.
That's definitely going to be coming back to half of what it was before I don't see that stopping.
And we're going through a hybrid that.
Yeah, we see deaths for many of the meetings.
There are different solutions.
Right right that makes sense I appreciate it thank you.
Thanks, Mark Thanks, Mark.
Our next question comes from George Melas with <unk> management. Please proceed with your question.
Thank you good morning.
Good morning, Charlie.
Good morning, I bet, you reported market strategy with a greater clarity about your strategy focusing on Nike solutions.
Are you going to market somewhat differently versus let's say a year ago or two years ago.
Getting.
Larger projects more complex projects are new verticals is there some kind of change or has it just been very.
More or less the same.
That's a very good question George Thank you for that and I would say in general that's for going for them.
Not necessarily more complex projects in the technology.
Obviously, it's different technology now than it was a couple of years ago.
But for now going more into project that starts at the business flat.
Okay, we need to take the same.
Examples of that launch when we need to totally transformed the way we ship our goods to our customers and how do we do that.
So we start to project some.
On the more business.
Objective level than before where we were staying more in the technology and the realization on.
That being said.
Also means that we are sticking to the industries, that's been very strong in.
Because to do that you have to know the business knowledge. She has to speak the language of the clients.
That's Florida, having loyal clients and in those four five industries that we're strong in.
Really makes a difference because they know we don't want him to speak the language of their sector, we speak their language and understand them because we have been with them for a long time.
So does this answer your question George.
Yes that does that imply sort of a.
So there's a certain training of your salespeople too.
To talk to more to business people as opposed to tech people.
What what are the challenges to do a transformation a shift like this.
And the challenge or I would say the focused steps we are fulfilling its not its no.
No longer and it hasn't been for a while now already no longer story of SA sells a project.
Its sales together with solution architects, sometimes multiple solution architects.
Working together with declines in designing.
The future of designing the project.
So it's yes, our fans.
Are talking more with business people than before.
But that wasn't that wasn't the major change they were doing that already but now with dose solution architects those experts steps, we're bringing in it's more like a four legged sales school or six legged sales calls.
So it's involves more people in the sales process.
Okay, Great and then just finally on that does that mean, there's a lot of these projects are not paid out by the customer.
Are you involved in the design and then you do the execution.
Or are you involved in the design and then there is still an RFP that you have to bid on them.
And that's it's a combination George.
I wouldn't say I see a difference or a shift.
Moving to more or less RFP.
Clients always tend to have a second or third opinion or some other companies to compare with.
Obviously, if you're designing the future together you're in what we call calling me.
And then the others are coming later in the game dung.
How old the information so it improves our chances to win.
Okay, great. Good luck, thank you very much.
Thank you sure. Thanks George.
We have reached the end of our question and answer session and I would now like to turn the call back over to management for closing remarks.
Thank you Maria.
And thank you for participating in our teleconference. Today.
The first quarter was another demonstration of our continued progress and the execution of our digital solution strategy.
And we believe the journey has just begun.
We certainly appreciate your continued interest and support.
Please feel free to reach out to us at any time.
And we look forward to talking with all of you again, when we report our second quarter 2022 reasons.
We hope you have a great day.
Maria you may now disconnect the call.
This concludes today's conference you can disconnect your lines at this time. Thank you for your participation.
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