Q4 2022 Mastech Digital Inc Earnings Call

Greetings and welcome to the Mastech Digital Inc. Fourth 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.

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As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Jennifer Lacey manager of legal Affairs for Mastech Digital Inc. Thank you you may begin.

Thank you operator, and welcome to Mastech Digital's fourth 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 dot com.

With me on the call today are Vivek Gupta, Mastech Digital's, Chief Executive Officer, Jack Cronin, our Chief Financial Officer, and Michael Placement, our recently appointed Chief Executive Officer of the company data analytics services business segment.

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.

Right.

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 FCC stock up.

Additionally, management has elected to provide certain non-GAAP financial measures to supplement our financial results presented on a GAAP basis specifically.

Specifically, 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 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 2022 results.

Thanks, Jen and good morning, everyone fourth quarter 2022 was clearly a difficult quarter for Mastech digital.

Both of our business segments negatively impacted by economic uncertainty, including customer concerns regarding inflationary conditions and a possible recession.

Revenues for the quarter totaled $57 $2 million, representing a 3% revenue decline compared to $59 million in Q4 2021.

Our data and analytics services segment contributed revenues of $9 $1 million in Q4, 2022, compared to $10 $1 million into 2021 and fourth quarter as order bookings in the second half of the year came in short of expectations and has it.

So utilization rates were well below our historical norm.

Q4, 2022 revenues and our it staffing services segment totaled $48 $1 million compared to $49 million in the fourth quarter of 2021.

Customer demand declined during the quarter, which when combined with seasonal high levels of assignment ends resulted in our lower revenues.

Consolidated gross profit in the fourth quarter of 2022 totaled $14 $2 million compared to $15 $7 million in the fourth quarter of 2021.

Gross margins as a percent of revenue in Q4, 2022 was 24, 8% compared to 26, 6% into 2021 and fourth quarter.

This margin decline was entirely related to our DNA services segment and was attributable to lower utilization and reduced margins on several long term assignments largely due to compensation increases in today's inflationary environment.

GAAP net income in the fourth quarter of 2022 was $1 5 million or <unk> 13 per diluted share compared to $3 $9 million or <unk> 32 per diluted share in Q4 2021.

non-GAAP net income for Q4, 2022 was $2 $8 million or 23 cents per diluted share compared to $4 million or <unk> 32.

34 per diluted share in the fourth quarter of 2021.

SG&A expense items not included in Q4, non-GAAP financial measures net of tax benefits are detailed in our fourth quarter 2022 earnings release, which is available on our website.

Highlighting our full year 2022 results revenues were $242 $2 million, which were up 9% year over year as both of our business segments achieved revenue growth.

In 2022.

Our it staffing services had 10% revenue growth in 2022, and DNA services had 6% revenue growth.

Consolidated gross profit grew to $63 $2 million in 2022.

Up 6% compared to $59 $4 million in 2021.

GAAP diluted earnings per share were <unk> 72 in 22 compared to $1 <unk> in 'twenty one.

And non-GAAP diluted earnings per share were $1 13 in 'twenty, two compared to $1 19 in 'twenty one.

During 2022, our liquidity and overall financial position remains strong.

Today, we are 100% debt free we have cash availability of approximately $32 million under our revolving credit facility. Additionally, our credit facility's accordion feature can provide us up to an additional $20 million in term loan capacity for M&A.

<unk> activity and our day sales outstanding measurement at December 31, 2022 improved to 59 days from 61 days a year ago.

I will now turn the call over to Vivek for his comments.

Good morning, everyone. Thank you Jack for the detailed financial review of our operating results for 2022.

Let me start by saying the obvious are 2022 financial results didn't end up.

The way we started in the first half of the year.

Concerns over a possible recession high inflation and an acceleration of interest rates have led to many of our clients, taking a conservative posture with respect to spending which clearly impacted our demand curve in the fourth quarter 2022.

However, despite the fourth quarter's underwhelming performance for the full year 2022, we achieved 9% revenue growth, 6% gross profit expansion and solid profitability and.

And I believe that our businesses and their future prospects remains fundamentally strong.

Let me point out a number of positives heading into 2023.

First we have on board, a new Chief Executive Officer for our data and analytics services business, Michael Fleishman, who I will introduce to you in a few minutes.

Our board of directors has authorized a share repurchase program of up to 500000 shares of the company's common stock over the next two years.

As described in our earnings release repurchases will be dependent upon market conditions regulatory requirements and other considerations.

Turning to our balance sheet has never been stronger. We currently have no bank debt, we have access to approximately $32 million of borrowing availability and up to an additional $20 million for M&A activity.

Fourth we have a business model that historically generates free cash flows that should strengthen our balance sheet, even further as the year progresses.

And finally fifth we.

We have high quality accounts receivables with a days sales outstanding measurement of 59 days.

Let me now introduce to you Mr. Michael Fleishman, our new Chief Executive Officer of the data and analytics services segment.

I won't steal Michaels Thunder, but I have to say, but she has a very strong addition to our management team with an impressive background and I believe Michael will be a difference maker and our ability to execute our business plan more effectively and accelerate revenue growth over to you Michael.

Thanks.

On my background I have a little over 26 years of enterprise experience with close to 14 of it being with IBM, where I held sales and sales leadership positions across the majority of Ibm's portfolio at the time hardware software and services, both consulting as well as traditional.

It outsourced services.

Unless IBM in 2010 to pursue roles as a P&L owning GM as well as sales leadership roles across several well.

Services providers.

That have strong delivery capability out of India.

Before joining Mastech, Iran digital transformation for capital markets in North America at cognizant.

The majority of my 26, plus years I've been spent driving strong levels of sales growth across multiple verticals, both across North America as well as globally for the company as I was with.

I joined Mastec late last year, because I saw a company with excellent capabilities across data modernization, especially in data management and data warehousing warehouses lakes and lake houses with a strong customer base of marquee logos that had not fully capitalized on their opportunity for growth nor on their compare.

Differentiation and data monetization.

I think it's not just a dream of mine, but a dream that many leaders to <unk>.

Have the opportunity to work for a company that has mastec strengths and capabilities not to mentioned existing customer base with so much upward mobility in front of them in our market space, where the demand is expected to exceed three trillion.

By 2026.

Mastec has capability to deliver our competitive differentiation and the significant opportunity for growth in front of US were the primary reasons why I joined Mastec I'll turn the call back to you Vivek.

Thank you Michael.

Operator. This concludes our prepared remarks, we can take questions now.

Thank you we will now be conducting a question and answer session.

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Please while we poll for questions.

Thank you. Our first question comes from the line of Lisa Thompson with Zacks Investment Research. Please proceed with your question.

Good morning.

Good morning, Lisa.

Welcome Michael It sounds like you have a excellent background for this position.

Citing here from you.

It's exciting to be heard from thank you.

Okay.

So I guess, what the number one question is after last quarter's call with your record.

<unk> revenues it seems like everything fell apart quickly and I know, it's not your first time through business cycles. I was wondering if you could like go into a little detail of.

What happened.

So Lisa.

Hum it staffing.

Got impacted because of the drop in revenue that I mentioned in the last earnings call that happened in Q3 and it continued into Q4.

So we had a drop in demand.

And that impacted this number of starts that we have on the staffing side.

And then we also had a much higher than the seasonally expected and that we expect in Q4 Q4 is always a low quarter from a mill or.

From a <unk> point of view, there are more <unk> in that quarter seasonally than other quarters.

But this time they were even.

More than usual so it's really that same kind of equation, which is not enough starts and higher number of earnings and that ended up impacting all of them.

<unk> business.

B.

The positive note that I can share is that the demand seems to be better. We only had five weeks into this quarter, but the demand seems to be better this quarter than what we saw in Q4.

So we are optimistic, but it's still too early for that.

This quarter, but I guess, that's that's how the market is.

Panning out.

Yeah.

So is there any bright side to this are you having.

So everybody getting laid off in Silicon valley is easier to find.

The idea of people for your needs.

Yes to some extent the areas.

Larger pool.

Available now because there are so many companies which have let go of.

Large numbers of.

Our resources.

But for us to be able to fully leverage that we also need to have greater demand and right now customers are being cautious.

In light of the recessionary conditions.

What's happening elsewhere.

Other IP companies.

So the demand needs to pick up but definitely there is the pool is becoming a little larger right now to finish strong.

Alright.

Totally makes sense.

How do you feel this is going to flow through the next year is it just.

You think it's going to be a down year for revenues.

Just because of the economy.

At least I would note we are not taking that attitude or approach. We are as I said, it's only the first few weeks, we are seeing some signs of demand picking up but we still have to see how the yields were a pan out, but we are preparing for.

Growth rather than you.

You know preparing for any shrinkage. So we will of course be very careful with our costs, we will keep a very close eye on the demand.

And take a quick action as we did in 2022, when Covid hit us and we got adversely impacted than we did a pretty decent job. The first couple of quarters controlling our costs. So we will keep a keen eye on this and see if that needs to be done.

We are actually preparing.

For some growth rather than a shrinkage.

Tim.

Well the ones left logical question is.

Given.

The economy and the opportunities are you going to be more likely or less likely thank you.

M&A.

Okay.

I think the honest answer Lisa is that.

Nickel has just come onboard.

Yeah.

The other is because there's a lot of.

Changes that Michael is bringing into the organization I think we just have to give ourselves a little bit of time for him in the organization to settle down.

But we are not we have not shown the idea of M&A. We are still going to go back to it it may be a little later in the year.

Later quarters, but it's definitely on the on the cards, we will get back to the strat.

Our strategy of inorganic.

Inorganic acquisition.

Hi, I guess my final question has been what how many consultants did you end the quarter with.

Jack can you have a look at that.

So at the end of the quarter.

Sure.

We had 1002 OE.

Great. Thank you that's all lines.

Right.

Thanks, That's all my question.

Thank you.

Our next question comes from the line of Timothy call with the Capital Management Corporation. Please proceed with your question.

Alright.

Good morning.

Given your history of accretive acquisitions, and the last one amber leaf.

Roughly $10 million.

Do you consider the $52 million.

Uh huh.

Potential.

Crowings for acquisitions to be.

<unk>.

Exceedingly high.

Would you ever.

Well have multiple acquisitions or acquisitions that large and are your disciplines for ACA.

Acquisitions still the same where they will be.

<unk> immediately accretive and additive to the company.

Yeah.

So I think Tim.

We don't have any targets right now in front of us, but it could be a one.

One large acquisition it could be you know.

Oh Wow.

Multiple off maybe to a smaller.

Acquisitions, it will depend what kind of.

Companies are out there and what kind of.

Pricing.

They'll be able to come on but I think distorting the largest that we have which Jack mentioned of about 52 million plus.

We think is adequate for what we need we may not even need all of it all we may need a backbone at all is a function of what kind of company we find out there.

And in the interim given your free cash flow and $7 million of balance sheet cash and zero debt.

Uh huh.

Do you expect to actually repurchase some stock in the upcoming year.

Jack do you want to take.

The board approved a 500000 share.

Repurchase program.

So yes clearly.

We our goal is to is to buy back some of our shares.

Well, it's a terrific price so an acquisition one way or another but.

You know your company well and know how good it is so that makes sense and.

In the interim.

Thank you very much.

Thanks Kim.

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, everyone.

Hi, Mark.

Michael Welcome aboard looking forward to working with you going forward.

Thanks Mark.

So I wanted to talk a little bit of some of the some of the basics.

The way you talked about the pacing around the client demand slowdown and then.

I'm wondering if could talk a little bit about.

Some of the things that you were seeing maybe around bill rates and pricing dynamics of what you are working with and then also if you can sort of give a little bit of color around whether or not that demand or are you getting the sense of bed demand as a matter of just delayed activity by clients or or projects that are.

Going away for.

A period of time.

Sure Mark let me in the multiple.

Sort of many questions embedded in your question. So let me try and address those one by one so on the on the Bill rate front, we've actually not seen.

Any major what shall we say pressure at this point in time.

To the contrary.

Over the last few quarters, we've been able to.

Steadily increase our bill rate.

Talking more on the staffing side.

And.

The pricing is always a function of.

What is the market demand for that kind of offering and also what is it that we need to pay to our resources. So we've been able to maintain our gross margins and manage our pricing accordingly.

So that's that's how it is.

In terms of demand.

It's slightly different between staffing and data and.

Political and maybe I'm going to give Michael Johnson to talk about the data analytics parked in a minute, but on the staffing side.

There is actually I'm pretty close correlation between the state of the economy and the demand for staffing.

And.

The.

Behind the difference between the two the reaction time is actually pretty small so.

Just a couple of quarters ago. There was the what are you about the recession was extremely high it's still there, but it's to a lesser extent right now.

And that's probably what's going what maybe.

Using the drop in the demand that we saw so.

Im hopeful that we will see a pickup in demand over the next few quarters of course, nobody has a crystal ball, but.

At least early indications are.

That's what's going to happen.

So that's all on the staffing side and on the data analytics side. The dynamics are slightly different so Michael would you like to comment on that.

Sure.

While a recession.

Alright, rather I should say the fear of a potential recession is causing some customers.

Not so much the slow down but to be a little leery.

Until they see the actual impacts to their bottom lines. So we are seeing some small percentage budget cuts.

Into customers' it budgets in 2023 over what they had in 2022 that being said digital transformation.

Not to be impacted by a recession for a couple of years at least at a minimum.

That spend is still ongoing and a lot of our customers have locked in a multiyear spend budget for their digital transformation initiatives, whether youre talking application modernization legacy modernization or data modernization all of which play into digital transformation.

What we have actually seen.

Because of the.

The issue around attrition and the ability to retain it.

Professionals as well as the inability to fulfill demand for it professionals that we experienced in 2022.

It's actually driving it's actually driving rates higher.

Versus having to cut rates and the digital transformation space people are having to pay more to get the same skills that they that they had to pay less for in previous years and it is because the attrition is so high the.

The average attrition across it services in 2022 was 25, 2% for example.

That's actually one of the competitive differentiation that Mastec info trellis has over the market because of our attrition in 2022 was 9% I've been waiting for an opportunity to say that.

So that's that's what we're seeing in the DNA space I hope that answers. Your question, if not I'm happy to go into more detail.

No. That's certainly that's certainly helpful. Thank you and then I was wondering if you'd talk a little bit about it.

<unk> done this already as far as the.

The timing of.

Targeting acquisitions, and that's certainly understandable.

Given the timing of your joining the firm I was wondering if we just sort of just confirm I would imagine that the.

The prior organization remains.

Within our within DNA, that's why you can sort of talk about.

Just overall.

<unk> of acquisitions, and whether that has changed at all and or if you.

Have any particular views on just the general pricing environment. That's out there that you think you might be able to take adventure.

Okay.

<unk>.

So so.

Mark I don't think there's any change in our thinking our strategy.

Regarding the acquisitions.

He will probably fine tune it.

You know just giving Michael a little bit of time to settle down and then <unk>.

Tuna.

Requirements and initiated the search.

So right now there is really no change to what our thinking has been our acquisitions will be on the data analytics side and not on the staffing side, that's something I've said.

Multiple times before and that remains.

Unchanged.

Okay, Great and then just two.

Confirm so at least you finished finishing the year with the head count of just over 12 1200.

Are there any thoughts as to sort of where you would like that to be through the year or any thoughts at least in the near term as to where that can go.

So Marc obviously the plan is always in.

Two to grow that number.

<unk> not let it stay at this number are reduced and.

That's what the entire organization is working towards.

As I said, it's difficult to give a first of all we don't give any guidance, but it's also there directionally also it's difficult to predict how the next few quarters are going to pan out, but we are encouraged with what we have seen in the first few weeks not a dramatic increase in demand, but better than what we saw in Q4.

So that's sort of Directionally tells us and we are hopeful that we will be able to.

Grow over the year.

Okay and then the last thing for me I was sort of curious as to whether or not you've seen any were.

Were there any differences in behavior or any standouts, either positively or negative when it comes to client verticals.

Were there any just any particular groups that maybe were a little more cautious than others or vice versa.

Yes, actually it's interesting this time around it's unlike the 2020 Covid times when it was focusing I guess you know there was positive on the healthcare side.

Dream negative on the entertainment and hospitality side. This time, it's a BBB.

Verticals are fairly similar in their behavior, I think everybody is being cautious and trying to control spend and not make any big investments on new initiatives and that seems to be across the board, but clearly two verticals do stand out, whereas I think the caution has been a little more one is on the <unk>.

Info Tech side, the technology side, and we hear that news every day from these big organizations and the other one is maybe to a lesser extent the financial services banking financial services, but all the other industries are just almost equally being cautious.

Okay and then the last one for me I'm sort of curious if you could touch a little bit us to the I mean, I can imagine you're wanting to take advantage of the opportunity, but maybe sort of talk a little bit about sort of the board's thinking around the implementation of the share repurchase.

Program, the authorization and maybe sort of.

So talk us through a little bit about sort of how that seem to be maybe the timing there. Thank you.

So Jack would you take that the repurchase.

Timing.

Yes.

Well I mean, the program is in effect so.

We can.

We can execute it at any time and.

We're going to be a little bit.

Constrained by daily.

Volume because they think we can only purchase so I think it's up to 25% of our daily volume so.

We're going to monitor that.

Volume and get into the market when we think it's most appropriate.

Right, but I'm, sorry, I said I should have clarified it but I think the press release that it was a two year period. So I just want to know where it's a two year period.

Right.

But the last time, we did a share repurchase program. We had I think it was a two year period and we extended it until we can always extended but.

Yeah.

It's a two year period you are correct.

Okay, great. Thank you very much.

Thanks, Bob.

A final reminder, if you would like to ask a question press star one on your telephone keypad. One moment, please while we repo for any additional questions.

Mr. Gupta. It appears we have no further questions at this time I would now like to turn the floor back over to you for closing comments.

Thank you operator, if there are no further questions I would like to thank you for joining our call today and we look forward to sharing our first quarter 2023 results with you in early may 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.

Yeah.

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