Q2 2022 Computer Task Group Inc Earnings Call
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Yeah.
Greetings and welcome to the computer Task Group, Inc. Second 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.
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Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Ms. Deborah Pawlowski from Investor Relations. Please go ahead.
Thank you Ryan and good morning, everyone. We certainly appreciate your time today and your interest in CTG.
Joining me on the call are Felipe today are president and CEO and John <unk>, Our Chief Financial Officer.
We released our second quarter 2022 financial results. This morning before the market and you can access that release at our website CTG Dot com if you do not have it.
After Felipe and John formal discussion. This morning, we will open the line for Q&A.
Let me mention first that as you are likely aware, we may make some 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 Securities and Exchange Commission.
You can find these documents on our website or at SEC Gov.
Also during today's call, we will discuss some 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 have provided a reconciliation of non-GAAP measures with comparable GAAP measures in the tables in today's release as well as in the SEC filings I will now turn the call over to Felipe to begin.
Felipe.
Thank you Dan and good morning, everyone.
We appreciate you joining us today.
I would like to spend a few minutes on our progress and then highlight the current environment and our focus for the coming quarters.
Our second quarter performance was much like the first quarter.
Our top line reflected the continued engagement.
Margin loans.
<unk> technology services business.
That's more or less continued foreign exchange headwinds.
As our European business is nearly half of our business and.
While significant depreciation in value of the Euro Julien.
Despite decent.
Strong execution against our well defined strategy.
Drove our performance.
Margin profile continue to improve.
Measurable expansion okay.
Gross and operating levels on a consolidated basis.
Our gross margin increased year over year to 23, 9% of revenue.
Our highest margin and more than 10 years.
Our operating income improved to over 13% from the prior year.
These items drove improved profitability with 8% growth in our GAAP EPS to 13 cents.
Or on a non-GAAP basis to 15 cents per share, which represents 15% growth.
This impressive performance.
Okay.
Our strategy to become a leader in the delivery of digital solutions and services.
More importantly.
As we continue to execute our plan.
I believe we have further earnings power to engage.
As a reminder, we.
We report our financials within three business segments.
Solutions and services aren't disclosed each of North America, and Europe and represents our higher margin services.
And the third segment is our non strategic technology services.
Which we continue to disengage from at a fairly rapid space due to the slower margin contribution.
For the second quarter of 2022.
We saw strong topline growth of 21% and our North American segment.
As our teams continue to win new business from existing and new clients.
Although in the early stages, we continue to be very encouraged as we ramp up the large multi year contracts. We won in this segment earlier this year.
In our Europe segment.
Strong execution helped offset inflationary and labor pressures.
Contribution margins remains comparable with the year ago period.
Finally, we have also seen a strengthening of our non strategic technology services segment margins.
<unk> consistently been disengaging from the most margin business first.
As a reminder, we are only making investments in our it solutions segments in North America and Europe .
We then those investments we continue to focus on business development.
Including expanding our digital solutions offerings, and adding highly skilled talent at all levels to our global teams.
The labor environment remains very competitive.
And while we have been successful in adding talented geography areas.
Wow.
Levels, we are increasing our delivery head counts in both Colombia, and India sensors.
Looking forward to expanding our offshore capabilities through targeted acquisitions.
As we have mentioned in past communications, we have had a well defined process for evaluating potential acquisitions.
To reiterate our criteria.
And are primarily located in North America.
As we look forward you recognized that there are underlying pressures and uncertainties that may impact <unk> economic development.
Hi, I'm encouraged with the progress and pipeline of organic opportunities in digital solutions, which continues to expand.
And thats grown significantly over the past year.
From a segment perspective.
Top line comparisons in the second half of the year will be difficult in our North American segment.
Given the large project related work from a year ago.
So we are encouraged with our stronger core business, which has continued to advance.
In Europe , we expect to continue its headwinds, it's foreign currency labor constraints and the unrest in Ukraine.
Got to have confidence in our team's ability to meet those challenges in support of our long term objectives.
Overall, we are on plan to realize our 2023 goal of adjusted EBITDA margins, increasing 272, 8% of rate.
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. Thank you for joining us on today's call.
Consolidated revenue in the second quarter was $82 8 million down approximately 10% or $9 4 million of which $6 1 million was a non strategic technology services business, primarily resulting from our deliberate disengagement from lower margin staffing services the other.
Negative impact on revenue with a continued foreign currency exchange headwind, which reduced revenue by $4 9 million in the quarter.
Second quarter revenue from North America, and it solutions and services increased 21, 3% to $20 3 million, which reflected solid new core business development and opportunities in digital solutions with existing clients.
Revenue from our Europe , It solutions and services segment was $37 2 million down $6 9 million largely due to the foreign currency exchange impact.
Excluding foreign currency revenue for the segment would have declined approximately 5% we.
We have not seen any significant loss of business other than the contract that was internalized by the court by client during the first quarter.
However, there is business that we have not been able to capture purely due to labor constraints in the region as.
As Felipe mentioned the war for talent is intense and our recruiting teams are working hard to compete for resources. We are diligently working to leverage our global delivery centers to provide the needed resources to meet client requirements.
As expected and in line with our strategy, our margin profile and profitability improved measurably during the quarter as we continue to optimize our revenue mix towards solutions.
Consolidated gross margin was 23, 9% up 180 basis points over last year's second quarter, and 290 basis points higher than the two year period.
Again as Felipe mentioned this was our highest gross margin more than 10 years.
<unk> solutions and services North American gross margin decreased 140 basis points to 34, 8%, reflecting a change in mix of existing projects in process during the quarter as compared with the prior year. Overall. This margin. This gross margin was 280 basis points higher than the margin in 2020.
In Europe , the gross margin expanded 140 basis points to 25, 8% despite the lower segment revenue.
Finally, while we continue to disengage from the lowest margin projects in our non strategic technology services segment. There is a steady improvement in margins compared with the prior year.
SG&A expense was $16 6 million or 20% of revenue, which represented an increase of 90 basis points versus the year ago period, largely due to the loss of operating leverage from lower revenue.
SG&A expense decreased $1 million from the prior year quarter.
GAAP operating income increased 13, 3% to $3 2 million for an operating margin of three 8%, which increased 80 basis points year over year.
non-GAAP operating income, which excludes 290000 of acquisition related expenses was $3 5 million.
Or four 2% of revenue, which was up 100 basis points from the prior year.
We reported net income of $2 million or <unk> 13 per diluted share in the quarter compared with $1 8 million or <unk> 12 per diluted share in the second quarter of 2021.
That's an 8% increase in earnings per share.
non-GAAP EPS was <unk> 15.
Compared with 13 from the year ago period are up 15%.
And keeping with our empower improved margin profile. The adjusted EBITA margin improved 70 basis points to five 1% in the quarter.
CTG as total head count at the end of the quarter was 3200 of which approximately 90% was bill.
This compares with 90% billable during the prior year period.
Now turning to our balance sheet and cash flows.
Cash and cash equivalents were $35 5.100 million less than year end 2021, and there was no debt outstanding at quarter end, nor have we made any borrowings on our revolving credit agreement this year.
Cash provided by operations was $2 8 million for the year to date period.
As you've heard US say a number of times acquisitions are key part of driving our digital solutions strategy.
We're looking for a good fit to meet our criteria. We will continue to exercise a diligent capital allocation strategy when assessing acquisition opportunities as they arise.
Our strong and flexible balance sheet will provide the leverage we need to accelerate our pace of growth in the future.
As we've noted a number of times on today's call. We are not immune to the challenging foreign currency translation impacts given the significantly devalued Europe .
Additionally, as mentioned we are seeing headwinds related to the availability of resources, primarily in our European operations.
Finally, the macroeconomic environment in both North America, and Europe has somewhat slowed our clients' decision making process for it services as a result, we are reducing our annual revenue guidance and now expect our revenue for 2022 to range from $330 million to $350 million.
This revised range includes the approximate 20 million to $30 million reduction from the disengagement of lower margin staffing services.
From the non strategics technology services segment.
Importantly, despite the topline decrease and macroeconomic headwinds.
We expect operating margins to improve over the prior year, given the positive ongoing changes to our business mix towards solutions.
We expect the lower revenue will be offset in part by improving operating margins and will result in 2022 GAAP diluted earnings per share ranging from 48 to 58.
And non-GAAP diluted earnings per share ranging from 53 to 63.
Despite the headwinds facing the business, we are energized by the significant improvement in our margins and look forward to continuing our progress in the future.
Our long range vision remains unchanged as we plan to drive our adjusted EBITDA margins to 78% of revenue within the next two years.
That completes our prepared remarks, Ryan could you. Please handle our question and answer period.
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 is from the line of Kevin Liu from K Lu and company. Please go ahead.
Hi, good morning, guys.
First question Kevin.
Okay.
Terms of some of the labor constraints in Europe , and the impacts there can you just talk a little bit more about how that kind of manifest itself in the quarter was this project has already won that you weren't able to SaaS. So this is more of a delay or were there other sort of impacts from labor.
That we should consider.
Yeah.
Yes.
Pleasure.
We see that it.
It is hard to.
Get used SaaS into the company.
If we look at the staffing we are very strong in the retention part because of the fact of our great places to work our culture and our HR environments.
We tend to have a strong retention.
It looks like it comes down to the growth and the additional projects.
You need additional people and there the competition is extremely shares.
So.
It's not a project that we signed in that he cannot.
Executes its projects that are coming and Thats, we are obviously trying in.
Conversation with declines to delay that.
Obviously when clients now decide they take more time to decide on before that's when they decide they really want to start immediately.
So it's it's.
On the execution of our portfolio as such.
Some of the additional projects.
We see coming.
Understood and so far you guys have done a good job managing.
Margins pretty effectively even with some of the revenue headwinds as you look, particularly in Europe now and some of the labor challenges. There can you just talk about your strategy to get through this period for.
For instance are you guys expecting more significant wage inflation there.
And also.
What do you think about your ability to kind of pass some of those costs on to your clients.
Yeah well.
You can see in the numbers also for Europe .
Making progress in our margin profile.
Not only in Europe doing it every arnaud and I think that's the important message that our strategy of moving to solutions and moving away of the low margin business is really working and we're still executing diligently so our margin profile, even with the labor shortage even.
With the wage inflation.
Continuing to improve.
Yeah, I mean, it's part since that's wage inflation that we can platform to clients of course, but there is also becoming more efficient in the delivery.
Automating parts of our delivery.
Obviously also do retention people.
Burk with CTG of course, you need to have fair and competitive.
Compensation, but there is a lot more in our employee experience that people will stay for at CTG their development possibilities their career.
Individualized career plans on so long so.
Wage inflation is there.
Yes.
I think with boats with clients and internally, we're able to manage that.
I'm still.
Kris hour Mark.
I appreciate the color there and then maybe one for John just on the adjustment to the revenue guidance could you speak to how much of that was from FX versus other challenges.
In Europe .
Thanks, Kevin.
As we talked about in the.
Prepared remarks about $20 million to $30 million of that is the disengagement from the non strategic.
<unk>.
For over a year over year, and then approximately we estimate right now $20 million of the reduction year over year.
<unk> basis would be from foreign currency it really is.
<unk> been something thats been difficult to measure we've looked at a lot of different resources and talked to a lot of people and I'm not sure anybody three months ago expected euro to basically fall to par, but it has continued to fall and I see predictions, where it may fall below one to one hour and May hang out just over one to one where it is today. So we've estimated within that new guide.
Since Kevin about $20 million of foreign currency.
Very helpful personal line for now thanks.
Thanks, Kevin.
Thanks Shannon.
Thank you our next.
Next question is from the line of Marc Riddick.
From Sidoti. Please go ahead.
Hey, good morning.
Good morning.
Sure.
So I was wondering if you could touch a little bit about the the changes in client activity that you've seen more recently given macro.
Issues and currency and what have you I was wondering if you could touch a little bit on the sort of what has that how thats evolved maybe over the last few weeks and what what changes you're seeing there if any and then as a follow up I was sort of thinking about the the the timing of.
The exiting of the low margin business and sort of.
How we might think about how that timeframe plays out going forward and when we get to the point of Anniversarying. The initial.
Started that process.
Okay.
Changes in client activity.
We are seeing more detailed discussions with clients.
The somewhat slower decisions.
So that is obviously given the high let alone the global inflation.
And the other pressures around it.
And when we look at.
The environment or the conflict in Ukraine and.
We do not have any business directly in Ukraine.
Conflict created a very difficult economic environment in Europe .
Driving inflation and then it's also slowing.
Client decision, making processes, because we see the clients are pausing.
And rethinking their priorities.
Including spending for it services, including determining once projects are really strategic and putting the not so strategic projects a little bit further down the road.
So I cant see whats.
We are noticing it's not very different from what we saw in the first Florida.
Continuing to.
Do you happen to be.
Two.
Yeah, it should be there.
Talking about the timing for exiting low margin business.
In the last couple of years, we have been exiting.
Proximity $60 million the last two years.
Hum.
Our plans at this moment is that we estimates.
Approximately $25 million to $35 million.
In 'twenty two.
Kind of written in the next couple of years so.
I think we're exiting at an increased pace.
And that is obviously.
Having a very positive impact on our margin profile.
Sure.
If you would like to add on that.
No flip I think that was well said mark.
That $50 million pace over the last two years or $25 million or so on average the last couple of years.
Just that we really see that that <unk>.
Decreasing over time, we expect it to be at least that much this year.
And.
Expect that as Felipe said that rather than to be pretty ratable over the next couple of years and so it'll be a fairly diminished part of the business here within a couple of years.
Okay, Great and then I was wondering if you could talk a little bit about it as far as those and I really appreciate the commentary as to what Youre seeing in the client behavior adjustments given the circumstances I was wonder if you could talk a little bit about are there particular.
Hi.
Customer's particular industry verticals that are maybe a little more advanced in making those decisions and actually acting on them.
And maybe as opposed to maybe some folks that might might be lagging in that process and I. Just you got to be very specific but I just mean as far as general industry vertical wise are you seeing differences in the rate of change of activity.
I think the difference.
We still see a lot of difference between different vehicles.
That is also an understanding looking at digital transformation projects.
All over.
Different industries. So everybody is working on digital transformation and everybody is seeing the same inflation and the same.
The same tension in the markets.
I think I would say, we see more tension in Europe at this moment.
And frankly, I don't know if that's because of the proximity.
So the conflicts because my current.
Ts and lessons and so.
Distance doesn't mean that much anymore.
But there must be some effects.
And obviously and that's the one sector that I would say is a little less impacted.
Governments.
Government still is making decisions.
Steve that they were doing before and we have a good size of government business in Europe .
Which is obviously helpful.
Okay and then the last thing for me I was sort of curious as to whether you've seen much in the way of change.
As far as travel activity, either you know what you're hearing from your customers how much they are engaging in those kind of discretionary expenses, whether that's begun to lift a bit or are folks going to consume.
Are you willing to sort of.
Gradually make those those adjustments I would imagine there would be an economic you know.
Macroeconomic Ah.
Impact from that as well, but I was wondering if you're beginning to see a little bit of that loosen up or or maybe it's too early because of the seasonality.
We have been seeing more travel.
Also last quarter.
Though it's still still very slow.
Clients are deciding very consciously.
Went to even fights or allow a potential vendor or supplier to come in.
Brian we see more and more for the real important projects. The oracles. The final presentations that it starts to come back which for US obviously is a positive.
There is no better way to make.
Make an impact on our clients then by being in front of him and really engage in that conversation.
In person.
But yeah, it's a combination of.
Yes, there is a there is an expense and obviously, we need to or clients need to control the expenses.
And also there is a.
Currently I'm looking at the meeting.
Making more conscious decisions on what do we do.
Teams or zoom and what would you do physically and when so.
It's not coming back to the level that it's once before that this uncertainty also from a practical perspective.
Yeah.
Traveling at this moment by plane isn't very nice experience at all of the cancellations delays in DC.
Difficulties revenue there so.
All right.
Yes.
Unfortunately, I couldn't agree more there.
Thank you very much.
Thanks, Mark Thanks, Mark.
Thank you.
Our next question is from the line of George Melas from MK edge. Please go ahead.
Thank you good morning, Filip and John Hi.
George Good morning, Joe Good morning.
Just looking at North America.
If we exclude the fourth quarter of last year.
Very special project, we've seen a very good and steady growth there.
The first half of this year versus last year was up 16%.
'twenty one over 'twenty was up 21%, so really seems like very good execution there.
Help us understand what drove what has been.
Have been executing to get that growth.
And whether you see that growth be sustainable.
And we.
We have been executing this right.
Well, just focusing on our strategy EM.
Acting with discipline execution.
If you look to what's happened in the last couple of years in North America is that we have totally reshaped organization.
There is now one sales organization, there's one delivery and solutions organization.
Everybody is very much in line, we've hired a lot of talent.
In the last two years, we have a new vice president since delivery and solutions direct tons.
And just last quarter, we announced the new VP of sales.
We added a number of very talented solution architects.
As to how do the solutions for each client.
I think George its a combination of.
Aligning everybody and getting really talents.
And then working very hard and disciplined execution I think the way we approach our clients.
Fairly customized approach and looking to really understand well.
Core of their issues are and how we can build solutions around that though.
Solution architects together with our sales are doing a perfect chance.
That said because it's fundamental from within the organization.
Within the fee pool in the organization.
I strongly believe that's where we're going to continue that growth and.
And that's also what we said.
When we first looked at the segment reporting.
The mission for North America is to scale.
And I think we're seeing.
What could be the beginning of a very nice growth track in the next couple of years.
Great I think the thing.
That was very helpful.
Maybe just adding a little color there have you been able in this last two or three years to get.
Meaningful new clients or has it been driven primarily by sort of working with existing clients.
The mix of how much is the mix of growth roughly sort of the new clients versus existing clients.
Well the biggest.
Difficult way of presenting it because.
So new clients normally starts with the first projects.
And then you you build and build around it.
So you expand your presence within declines so when you're at an existing client growth potential.
He is.
Faster and bigger than when you make an entrance with new clients. There. They always want to evaluate how good you are performing end up first projects.
So naturally.
Most of the growth is with the existing clients.
We have in the last year year and half.
Creates or Havent, a number of very promising new clients I'm.
I'm, saying a year on year in the house because in the first year of Covid 2020, it was extremely difficult to.
To go out.
Not physically but it's easy to go out.
Virtual lead to new clients and build new relations when you could only only see on the screen.
So 2020 was definitely a year, where our strong customer base.
<unk> has helped us.
This continues to help us because that's how we look at customers it's not.
Project and then we're moving all no.
Growing and helping the clients in different areas.
With that said thanks.
Example, last quarters.
Projects, that's V announced launching digital projects.
$2 million over several years.
But it's a combination.
Seeing more.
New clients, Jimmy both in North America and in Europe .
Okay, Great and then.
I know, it's a big picture question, but can you try to give a somewhat similar profile to Europe , how different is Europe than it was two years ago, and where you hope it to go.
It's a more complex organization, but.
But maybe you can help us.
No.
Get it.
Given some handle on that.
Hum.
Yes, youre right George or complex.
In our situation because.
Europe is.
I know, it's tempting to look at Europe from the states well their countries and in the states we have different states, but it really is a very different mechanism.
Each country is very independent Stu and some come through its own sound its own priorities.
So it's almost impossible to give you an answer.
Overall.
Looking at CTG, we Didnt Europe .
I think from.
Couple of years ago, you can see our margin now improving.
And that is exactly what we asked Europe to be doing.
And so structurally the business is getting.
Answer we are moving to digital we're starting to implement offshore.
We're also making our deliveries so the margins are getting better.
Retention, so salary inflation is still under control compared to what I hear from other places.
Sorry.
That's all.
I've lost my expected my answer Im sorry.
On the.
On the business perspective.
We see on the growth perspective, we see Thats foreign exchange.
Well obviously.
Within Europe , but we see that shortly.
A shortage of people the labor constraints are more severe than what we see in North America.
That's also looking back to the question about some growth in North America.
Why we see that growth.
And it's a higher percentage than we see it in <unk>.
Europe , because in North America, we still are able to staff our projects together with offshore.
In Europe .
Staffing new project for growth.
A lot more difficult.
Kind of the same over for all countries.
Great.
Thanks, a lot for this.
And Sir I appreciate it good.
Good luck and good execution. Thank you.
Thank you George.
Thank you.
Ladies and gentlemen, if you wish to ask a question.
Press Star one on your telephone keypad.
Since there are no further questions.
I would hand over the conference to Filip, you'll CEO and president for closing remarks.
Thanks Ryan.
Thank you for participating in our teleconference today.
The second quarter was another demonstration of our continued progress and the execution of our digital solutions strategy.
Although we know we will experience headwinds in the second half of the year.
We continue to be excited about our success in significantly improving our gross margins and operating results.
For those of you interested we will be participating in the Midwest ideas conference in Chicago on Thursday August 26.
Otherwise as always please.
Please feel free to reach out to us at anytime.
Look forward to talking with all of you again after our third quarter 2022 results.
We hope you have a great day.
You may now disconnect the call.
Thank you.
Conference off Computer Task Group, Inc. Has now concluded. Thank you for your participation you may now disconnect your lines.
Okay.
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