Q3 2022 Mastech Digital Inc Earnings Call
Yeah.
Greetings and welcome to the Mastech Digital Inc. Third quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode.
A brief 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.
It is now my pleasure to introduce your host Jennifer Ford Lacey manager of legal Affairs for Mastech Digital Inc.
You you may begin.
Thank you operator, and welcome to <unk> Digital's third quarter 2022 conference call. If you have not yet received a copy of our earnings announcement. It can be obtained from our website at www Dot Mastech Digital's Dot com with me on the call today cause that Gupta, Mastech Digital's, 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 concerning the business cash flows costs and the markets in which we operate without limiting the foregoing the words believes anticipates plans.
Expects and similar expressions are intended to identify certain forward looking statements. These statements are based on information currently available to us and we assume no obligation to update these statements as circumstances change.
There are risks and uncertainties that could cause actual events to differ materially from these forward looking statements, including those listed in the company's 2021 annual report on Form 10-K filed with the Securities and Exchange Commission and available on its website at Www 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.
Typically we will provide non-GAAP net income and non-GAAP diluted earnings per share data, which we believe will provide greater transparency with respect to the key metrics 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, which can be obtained from our website at www Dot Mastech digital dotcom as.
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 Vivek for his comments on several recent noteworthy events.
Thank you Jennifer good morning.
Everyone.
First let me address the press release that was issued last night related to a change in leadership in our data and analytics services business segment.
In Asia Bank produced with them resigned yesterday from the company as the CEO of the data and analytics services segment onboard accepted his resignation with immediate effect.
I will serve as the chief executive of the DNS services business until donation successor is in place.
Secondly, as mentioned in this mornings third quarter earnings release, we experienced a cyber security breach involving a single employee email account and reaching directly impacted two mastic and full trellis clients.
Alrighty team identified the point of entry decommission, the effected laptop and email address and change logins in past quarters for this email account.
W. W shoulder and I was good business practice, we also engaged external advisors to validate our findings and remedial action steps.
As part of this engagement. These experts are assisting us with forensic analysis to determine whether there are any one study identifiable information also known as <unk> II was compromised as a result of this breach.
For any P. I argued that determined through have been compromised. These advisors will be assisting us in determining the appropriate compliance steps required with respect to such B II data.
We have accrued a pretax loss reserve of $450000 in the third quarter 2022 related to this event, which reserve includes the cost of engaging our external advisors as well as an estimate of other potential losses relating to the breach.
Finally in third quarter 2022, we made a decision to close our underperforming operations in Singapore, and Ireland and to rationalize our operating cost structure in the U K Accordingly, we reserved a $120000 of severance expense related to these actions.
Let me now turn the call over to Jack for a detailed review of our third quarter 2022 financial results.
Thanks, Vivek and good morning, everyone during.
During the third quarter of 2022 revenues totaled $63 $2 million compared to $59 $5 million and a corresponding quarter of 2021.
It's 6% year over year increase reflected an 8% increase in the it staffing services segment and a 4% decrease in our data and analytics services segment.
The 8% revenue improvement in staffing reflected a higher level of consultants on billing and a higher average bill rate during the 2022 third quarter compared to the corresponding quarter a year ago.
Before the 4% revenue decline in data and analytics comes after a 26% year over year improvement during the previous quarter and largely reflects the timing of workable orders available in the second quarter versus the.
Third quarter of 2022.
Gross profits in Q3, 2022 totaled $16 $3 million compared to $16 $6 million in the third quarter of 2021.
Gross profit as a percent of revenues in Q3, 2022 was 25, 8% compared to 27, 9% in the 2021 third quarter.
The decline in Q3 2022 gross margins was largely due to lower utilization and the data and analytics services segment as we were unable to fully deploy the second quarter ramp up of global resources.
Additionally, we incurred a project overrun of approximately $300000 on a fixed price assignment schedule get complete at year end.
GAAP net income for the third quarter of 2022, with $2 $4 million or <unk> 20 per diluted share compared to $3 $4 million or 28 cents per diluted share in Q3 2021.
It should be noted that reserves for our cyber security breach and severance expense associated with the closure of our Singapore, and Ireland operations as well as the <unk>.
Rationalization of our cost structure in the U K had a negative impact.
GAAP diluted earnings per share of approximately four cents.
non-GAAP net income for the third quarter of 2022 with $4 million or 33 cents per diluted share compared to $4 $6 million or <unk> 38 cents per diluted share in Q3 2021.
Yes.
SG&A expense items not included in Q3, non-GAAP financial measures net of tax benefits are detailed in our third quarter 2022 earnings release, which is available on our website.
Addressing our financial position on September 32022.
Our cash balances on hand of $3 $5 million.
Outstanding term loan of $2 $2 million.
No borrowings under our revolving credit facility and cash availability of $36 $4 million. In addition to a term loan capacity of up to an additional $20 million under our revolving credit facility's accordion feature.
Okay.
During the third quarter, we elected to early pay $7 $6 million $7 $6 million of our outstanding term debt with excess cash balances on hand.
Given our term loan.
Repayment schedule, we expect to be debt free in early January of 2023.
I'll now turn the call back over to Vic first either comments.
Thank you Jack.
Clearly, we're not happy with the third quarter performance of our data and analytics services business segment and view declining year over year revenues and sizable gross margin shortfalls as unacceptable.
Moving forward, we need to focus more on new business development activities strengthen our relationships with existing clients, allowing our billing workforce with secured walkable orders, which we believe will in turn improve utilization and proactively monitor all fixed price assignments.
We will endeavor to focus on these issues immediately in an effort to award such occurrences in the future.
Our it staffing services segment continued to grow in the third quarter of 2022 and improved gross margins and at higher Bill rates. We did however, see some weakness in demand due to the ER during the quarter, which resulted in a total billable consultant head count decline.
We will continue to monitor activity levels in Q4 to assess if this was an aberration or the beginning of a shift in market dynamics.
Lastly, I would like to mention that during the 2022 third quarter with the Central Bank continuing to increase interest rates. We made the decision to early paid $7 6 million of outstanding term loan in July This action will lower our quarterly interest expense by approximately 100 K as we continue.
To deleverage our balance sheet in today's uncertain environment.
Operator. This concludes our prepared remarks, we can take questions now.
Thank you.
We will now be conducting a question and answer session if.
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 keys.
One moment, please while we poll for questions.
Yeah.
Thank you. Our first question comes from the line of Lisa Thompson with Zacks. Please proceed with your question.
Good morning.
Hi, Lisa.
Hi, there you folks have certainly had a busy quarter.
Yeah.
Oh for sure yes, thanks, [laughter], Okay. So I think.
We'd be interested in getting a little bit more clarity on.
What you think might be happening at DNA <unk>.
You certainly have a lot of cash to make an acquisition.
Is that something you could do and then bring in that business to run your current business.
And do you think that.
The weakness there is.
You, possibly the people raining in their plans do.
To a recession or is that just me.
Missteps.
Elaborate a little more.
And then can you just repeat the last part I didn't quite get that part of the question.
Do you think that debt.
Say the pipeline drying up or whatever is due to your own missteps or is that from.
A recession.
Where customers are pulling back their plans.
Okay. So Alicia let me try and answer that.
The second one first.
The second one is I think the when I had mentioned about the DRAM demand, reducing a bit it's more on the it staffing side we.
We've not seen evidence of that on the data analytics side. So far it doesn't mean it may not be there, but we haven't seen evidence of that so far.
Now coming to the first part of the question. There is clearly some work to be done on the data analytics piece.
As I mentioned that there is there a bunch of things that we have identified that we need to focus on including new business development and making sure that we are able to maximize what we can from our existing relationships with our existing clients and then making sure that we align the workforce.
To actual orders, we did a bit of a building up of resources in Q2, but we were not able to fully utilize them.
And then the last one which happened again.
Coincidentally with the.
Project overrun that we had in our MD&A. So these things really contributed to what turned out to be a not so good quarter for data and analytics in Q3, but we are pretty confident are we off I'm confident we remain confident in the long term growth prospects.
The segment and the value of the solutions that we deliver to our customers and I'm confident that our team is really effectively beat the current challenges and emerge as a better company as a result of these efforts.
Okay does that answer your question Lisa.
Yes, yes. Thank you did you book any new orders in that business this quarter.
You did $10 million last quarter.
Yeah, I think it was of a similar audio Jack you'll have to see I think it was.
A little bit over 8 million.
Okay, Great and I know that Q4 is typically a weaker because of the holidays can you give us a feel for what to expect going on in Q4.
So Q4, indeed is always seasonally a lower quarter because there are lots of holidays and there is also a tendency for some customers to.
Port Port folks on furloughs, and this is actually impacts our it staffing specifically.
So we do expect.
Some amount of depression decline I can say it in Q4, but that's typically see with them.
And then also a lot of assignment ends happen in the it staffing side virtually on the last day of the last week of the quarter.
Which are have a little bit of impact of carrying forward into Q1.
And this is the seasonal view, our objectives or anything else that I mean, I just wanted to make at least I just want to make one comment on DNA.
Okay.
There's no denying that.
Third quarter was a bit disappointing.
We get we get revenues of 10.
$10 1 million.
Hum.
Well below what we were hoping for it but you got to remember that in second quarter.
Our revenues were $11 3 million and in the first half of the year, we were averaging about $10 million. So.
Yeah, Yeah third quarter was a disappointment, but it's not like the business is falling off a cliff.
So do you expect it to cross it.
This quarter or not.
I I would yeah I.
I would say that I think it would be flat to slightly up in Q4.
Okay. That's all.
And I know you've gone you know I've been in this rodeo quite awhile here as far as recession is coming up is there any actions you take if you start seeing weakness.
Globally.
Yes, so Lisa we are already.
Need to tighten.
Our belts as they say.
We are seeing that are almost all our clients and I'm talking more on the it staffing side at all being extra cautious in there you know in the.
Current uncertain conditions, and they're likely possibility of a recession now.
While the large scale projects are not being cut or large large scale head count reductions are not happening.
Customers and partners are definitely tightening their cost structure and they are pushing out are shrinking or even canceling some projects. Some iot projects. So that's what we are seeing but in anticipation of you know that sort of are happening on the recession.
Really happening and customers, taking some drastic steps we will already started tightening.
Abouts and.
In terms of anything that is can be deferred in terms of our costs are we looking looking at ways of doing that.
Great. Thank you that's all my questions.
Thanks Lisa.
As a reminder, if you would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of Marc Riddick with Sidoti. Please proceed with your question.
Hey, good morning.
Hi, Mark.
So I was wondering if we could start.
If you could talk a little bit about the decision as far as the closing of our Singapore, and Ireland and in some of the financials or some of the details that we.
We might need to address.
With that decision.
Yeah sure Mark Jack.
Jack has been personally driving that initiative, so I'm going to let Jack talk to you about this.
Sure Mark go back about two plus years ago, We established Singapore, Ireland, and the UK subsidiaries unexpected.
The strength of our global partnership that we had with a major client and shortly thereafter, COVID-19 hit and the business really never took off as we expected.
In 2021, we made some gains in the U K, but the other two entities continue to underperform. So.
We entered 2022 and you know the Singapore operations and the Ireland operations continue to operate.
At a loss and recently, we decided that it was it was really time to cut date. We had you know other areas in the U S to spend our money rather than trying to.
Grow a couple of subsidiary debt.
We just couldnt grow.
The UK has gained some traction.
In both 2021 and 2022, but we really haven't been turning the profits that we expected and Thats why we made the decision to sort of rationalize our cost structure in the U K.
As we get as we go into 2023.
So that's sort of the.
The short of it.
Okay, and then could you just sort of remind.
Remind us so the head count was sort of growing going into the summer there was a ramp up on staffing. So you can sort of bring this as to where we are at the end of the third quarter, and where we might be as far as head count and stuff.
Sure Mark.
So as I mentioned that we had a Turkey billable consultant headcount declined in Q3.
Point to be noted is that our assignment starts.
Continued to be very high I would say even in this Q3. It was probably one of the top five or six quarters since I guess last six seven years.
So they are sort of not at the record level of that for a couple of quarters ago, but they're still pretty high.
The problem isn't this equation when you're doing the net growth is just the number of starts minus the number of assignment ends the assignment ends have been high.
And I think that's some of it is you know based on what I mentioned, a little earlier as the customers are trying to tighten their belt, they're really asking themselves. The question do we need you know some of the projects to continue so we've had an.
Exceptionally high number of ends off assignments in the quarter and so so you know very high.
Hi starts, but very high ends sort of ended up making it into a negative 30 kind of number.
We are watching this closely to see if there's something which is sort of a one off kind of a thing or is this now going to be a pattern or the market dynamics going forward.
Okay, and then you made a.
Comments either.
It might've been Bolton.
And in the press release in my prepared remarks around Bill rates give me sort of put a little more to what you're seeing there on the on on bill rates and maybe how that sort of played out through the quarter.
So the bill rates are happy that we've been able to steadily increase the bill rates are over the last three or four quarters and a b.
We've got the benefit of that it's again.
Our market result of demand versus supply.
When the supply was limited demand has been much higher.
All these resources.
That drives up the input price the price that we pay or what we pay our consultants and even done what the customers are willing to pay as well. So that has been to our advantage is really again a function of how this dynamic the demand versus supply changes over the next few quarters.
That means sort of bring some kind of price pressure, but are we so far it's been all very positive and we've got the benefit of it.
Okay, and then can you bring us up to speed I, if I remember correctly sort of the timing of our technology.
Technology.
Spending in implementation that took place earlier in the year and sort of you know could you sort of bring us up to speed sort of where we are there and in the and what what you might be expecting for the remainder of the year.
Yeah, we in our data and analytics services segment.
We <unk>.
Implemented in earlier in the year.
Our Oracle.
Cloud system, and we did an implementation and that concluded at the end of April we.
We spent a little bit of money to get the bugs out in second quarter, but that's pretty much completed right now.
Okay.
Okay, and so what we might be looking at it capex sorry, yeah for Capex for the for the year.
Our capex is going to go I mean compared to what we spent over the last the.
First half of the year Capex is going to go down.
Okay Alright.
So it'll be.
A little less than or about the same as last year.
For for this year.
Hum.
Let me look at the statements real quick here.
Yeah.
Yeah.
So for the first nine months of 2022, we had capex of about eight eight 800000 in 2021 nine months.
It's about the same thing it's about 900000.
So you know I would I would expect if we you know we.
End up the year about a million a million one.
Okay, probably a million.
Okay Gotcha.
And.
So if we could go back to sort of the demand environment that youre looking at on a 90 staffing is can you sort of bring us up to speed, maybe on what you're seeing as far as your customer vertical holes in and are there any sort of standouts either positive or negative that you're seeing there as far as their activity I mean, I understand youre, saying in general as far as you know folks.
A slowing down a bit but are there any particular areas that are maybe more active in that behavior or or vice versa that are noticeable.
Sure Mark actually the drop is virtually across the board. That's really you know dark proppant demand, what we are seeing or the tightening of the belt that I've been saying because across the board. It's really all customers in virtually all vertical. So there is no clear pattern emerging that it's one more than the other although.
Financial services.
Specifically Ah that vertical is showing a lot more concern and we're having a lot more conversations in that space, but every customer is being extra cautious.
These conditions right now and as I mentioned that no major large scale cutting is being seen so far in terms of you know huge head count reduction is something that we saw in 2020 or large projects being canceled, but we are saying.
There's a smaller sort of actions such as pushing out projects not canceling them, but they are shrinking the size of the projects are breaking up the projects into smaller phases.
And then sort of committing to only one phase at a time. So the visit so they have the option of sort of pulling the plug if they need to offer through the whole process and there is been some cancellation of some it projects, but that those have been a few and far in between.
That's what we are seeing at this point in time. So there's no clear pattern. It's everybody is sort of waiting to see what actually happens but.
Based on conversation I can see almost every organization has made there.
Engines, he plans that should things really got bad what are the steps they will take.
Okay and then the last last one for me is it if you can sort of bring us up to speed on maybe what you're I mean, you're you're thinking about for for data analytics as far as the acquisition side of things and this is something that you know earlier in the year with with with the New leadership I know, where you were sort of looking at the pipeline and looking at priorities and.
Obviously, the news is very fresh, but maybe sort of give us some thoughts as to sort of maybe where you are is it what your thoughts are with the potential acquisition pipeline, the health of it and and desirability or or pricing, maybe sort of just sort of I guess I'll just read them.
Maybe what your thoughts are there.
Sure Mark I mean acquisition is definitely on our plan.
We will as I've said before we would be doing the acquisition on the data and analytics side.
Specifically what are the areas that that is something that in some ways. We would not want to wait for the new leader to be on board and make sure that the.
The selection criteria for the <unk> acquisition aligns with the strategy after new leader. So I think what this really means is that probably the for US we have to put this sort of on the backburner for a couple of quarters.
And then we will at the first.
Opportunity once the new leaders settles down we would want to reactivate our plan and go back to it so not not much has changed it's just the timeline has extended a little bit.
Gotcha. Thank you.
Thanks, Mike.
Our next question comes from the line of Ross Davidson with Vantage on capital. Please proceed with your question.
Hi, good morning, Jack.
Hey, Ross.
Hey, So I was just curious if you could just talk a little bit more about data analytics, specifically and if I recall correctly it seemed like.
You know with Q2 results you had ramped up some head count and you alluded to sort of the under utilization of that income.
The increase in staff, if I understood you correctly for this quarter.
Curious if you could elaborate on maybe what changed or sort of how that.
Median balance happened because it seemed like demand and expectations were a little bit more robust in Q2.
Seems like maybe you're expecting some growth and I'm curious what changed more specifically through the quarter that led to that.
Shortfall, if you will.
Sure Ross So in Q2, we had ramped up.
Resources in anticipation of <unk>.
Some projects to be started in Q3.
And we didn't quite get all the projects are signed in time and we've had a situation where we had we had excess resources than what could be used against cable orders, it's really as simple as that.
And.
It's we have to me.
Keep keep the engine running at we got to make sure that the order booking that we have from this point onwards aligns with our other the resources that we have aligned with the orders that we are expecting.
So I guess within that.
This step is something that we are already working on correcting so that we don't have this drop in utilization as a result, and also again, the lumpiness, which has come in in the revenue.
How do we make sure that the revenue revenues don't drop.
So it's it's a bit of these are multiple things that have happened I guess rich contributor to do.
Good analytics.
Okay. That's helpful.
It sounds like you characterized it as I missed that in retrospect hindsight is of course 2020, but.
Do you feel like there's some idiosyncratic risks is always going to be there where youre going to have to make some judgment calls about staffing up but do you feel like maybe.
It sounds like you feel like that you could have done better in terms of anticipation is that a is that a fair kind of takeaway of how you would characterize it.
Yeah, I would actually say that's correct I mean, we maybe we shouldnt have ramped up that much and at the same time, we should have had an order book or pipeline.
Robust enough to be able to sustain that.
Had an issue on both sides.
We've we've identified that and we are already working on.
Addressing those.
Great. Thanks on that and then I just wanted to ask you about the fixed price overrun.
Just to understand.
What high level kind of leads to that overrun and then is that he said he was going to expect it to end at the end of the year is that something you can take it or you expect to recur or any sort of any sort of like systemic thing youre watching related to that that overrun.
So suraj the good news is that the overall this is over we don't want to have that carrying forward.
Yeah, that's correct and and the other thing that I want to really stress.
When we do fixed price projects or any organization does fixed price projects. There's always the Arctic project, which you know gives you a little bit of refurb, you underestimated or for some other reason you end up spending more resources.
Our resources on that project.
One point, which is really important is that this is the second project.
In the last five years since we acquired in for Chinese, which has given us which have gone into an overrun.
And I would say that.
The last one was actually many years ago. So I would say, while it's not going to have any project going into this one.
Having just had two in the last five years speaks volumes about the quality of delivery that we have in the organization of course, we will look at this closely we are already looking at all fixed price projects very closely to see that we are able to spot them identify.
Any other ports.
Potential problem project very early.
But.
This is Matt.
Great. That's helpful. Thanks, That's all I had I appreciate it.
Thank you Ross.
Thank you we have no further questions at this time I would now like to turn the floor back over to management for closing comments.
Thank you operator.
If there are no further questions I would like to thank you all for joining our call today and we look forward to sharing our fourth quarter 2022 results with you in early February .
Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Okay.