Q4 2022 Computer Task Group Inc Earnings Call
Greetings and welcome to the CTG fourth quarter fiscal year 2022 financial results 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.
A reminder, this conference is being recorded it is now.
Now my pleasure to introduce your host Craig Mahalik Investor Relations. Thank you Craig you may begin.
Yeah. Thank you and good morning, everyone. We certainly appreciate your time today and your interest in PPP.
Joining me our fleet today for President.
And John <unk>, our Chief Financial Officer.
We released our fourth quarter and full year 2022 financial results. This morning before the market fell for it you can access the release on our website.
Dot com.
After Felipe and John's formal discussion. This morning, we will open the line for Q&A.
Just let me first remind you that 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 uncertainties and other factors are provided in the earnings release as well as with other documents filed with the Securities and Exchange Commission.
Which can be found on our website or at SEC Gov.
During today's call 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 have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables in today's release.
And that's G SEC filings I'll now turn the call over to Felipe to beget fleets.
Thank you Greg and good morning, everyone. We appreciate you joining us today.
The fourth quarter capped off another excellent year for CTG.
We accelerated our transformation into a digital solutions and services business.
You can see the results of our efforts in our it solutions and services segment results.
<unk>, both North America and Europe .
Our fourth quarter gross margin expanded 590 basis points.
Q1, 8%.
Our highest level in recent years.
The performance within our North America segment, which includes the acquisition of <unk> higher.
Highlighting the potential of our transformation.
We achieved gross margin so 43, 9%.
Our European segment also drove higher margins from improved utilization and a greater mix of digital solutions.
As we complete the first phase of our transformation by the end of 2023.
<unk> digital.
Digital solutions and services based business.
Our strategy is based upon several key.
First <unk>.
Our focus on becoming a global provider of digital solutions by capitalizing on the compelling trends of digital transformation.
Leveraging the CTG brands built on a foundation of reliability speed of delivery and results.
And delivering solutions, primarily into the healthcare finance manufacturing government and energy sectors.
All of which are areas of strength for CTG.
As part of our digital solution strategy.
We are focusing on providing software engineering services.
Which includes designing testing operating and enhancing digital products and platforms.
We provided more than $100 million of these services in 2022.
And the gross margin on the services was greater than 34% in the fourth quarter.
We are excited by the success.
Forward to increasing these results even more in the future.
The second element includes completing acquisitions that can become seats toward growth.
We have three main criteria.
Each opportunity.
First the company must be a well established organization that is profitable.
Thank you.
Scale trip stay have missed accelerate our digital transformation strategy.
And Kurt.
Air solutions and people must be highly synergistic to our strategy.
These criteria were met with the acquisition of <unk>.
It was previously a privately owned digital transformation company.
As a reminder, this acquisition closed at the very end of the 2022 third quarter.
And while small from a revenue contribution standpoint.
<unk> has brought significant digital expertise in areas, such as AI machine learning and intelligent proclamation.
While expanding our capabilities in cloud migration mobile application development and other technologies, such as blockchain and best in class SaaS platforms.
To date, the integration has gone exceptionally well.
And is exceeding our expectations.
You can see the early benefits of the strong margin profile and our North America results during the quarter.
Overtime, we will.
Look forward to further driving sales synergy and delivering even greater value for our clients.
The third element of our strategy is to focus on lowering our delivery costs.
<unk> also brings this element of CTG.
They increased our offshore delivery center capacity and flexibility.
The addition of established teams in Chennai in Coimbatore, India.
Additionally, our expertise in artificial intelligence and robotic process automation will also allow us to automate a number of functions when we deliver services to our clients.
Further reducing our cost of delivery.
Another important aspect to accelerate the execution of our overall strategy is our most important asset our people.
We continue to add highly experienced colleagues to outerwear.
During the fourth quarter, we added a new global position of Chief people Officer.
To ensure we have consistent policies and practices worldwide.
And our continuously improving employer in our recruiting and retention of today's leading digital services and solutions.
Our goal is to make CTG, a destination of choice for highly talented digital transformation.
Yeah.
The disciplined execution of our strategy led to improved operating results.
For the fourth quarter, our adjusted EBITDA margin was six 2%.
Up 40 basis points over last year's period.
130 basis points higher over a two year period.
We continue to make incremental steady progress towards our goals.
We approach the end of the first phase of our transformation.
These achievements would not have been possible without the hard work and dedication of our 3000 colleagues across the globe.
We response to constantly evolving trends.
Its value for our clients every day.
Our clients turn to CPG as their trusted digital transformation partner.
And our outstanding employees of the very key to that success.
We believe we are well positioned as we head into 2023.
Leveraging our strong foundation breadth of capabilities culture of innovation.
<unk> workforce.
<unk> confidence that we can continue to navigate underlying pressures and macro uncertainties.
We achieved our near term goal of approximately 7% adjusted EBIT margin by the end of 2020.
Yes.
With that let me turn it over to John to review our results in more detail.
John .
Thank you Felipe and again good morning, everyone.
We thank you for joining us on today's call.
Consolidated revenue in the fourth quarter was $77 $9 million.
The change in revenue year over year reflects last year's fourth quarter.
Fitting for more than $25 million from our major health system engagement in North America, and a $9 $3 million decrease related to the intentional disengagement from lower margin nonstrategic business.
Specifically in North America, we are generating solid leads and closing new customer engagements and we benefited from the incremental contribution of Louisiana.
Europe , which has faced greater macroeconomic headwinds, including labor constraints executed well to drive new solutions based business and generate a slight increase in revenue year over year on a constant currency basis.
Full year consolidated revenue of $325 1 million was in line with our expectations.
Also impacted by these two items.
The significant engagement and disengagement from low margin non strategic projects.
As we highlighted today, our margin profile improved during the quarter and year as we continued to optimize our revenue mix.
Consolidated gross margin was 27, 6%.
530 basis points over last year's fourth quarter and.
630 basis points higher over a two year period.
Okay.
As Felipe mentioned, the combined North America, and Europe , It solutions and services segment delivered a fourth quarter gross margin of 31, 8%.
Further highlighting our continued transformation to a digital solutions company.
Our focus going forward will be on the combined results.
Our it solutions and services segments is that is the core of our strategic focus.
And as we expect the non strategic segment to have less of an impact on our overall results going forward as it continues to decrease in size.
For the full year, 2022, which reflected similar results with fourth quarter gross margin on a consolidated basis was up 260 basis points to 24, 6% as each segment drove gross margin expansion.
This increase was more than a 10% increase year over year.
SG&A expense for the quarter and full year saw declines on an absolute dollar basis, but as a percentage of revenue were both up largely due to the continued investments in business development resources.
And the loss of operating leverage from lower revenue.
For the fourth quarter GAAP operating income was $2 $5 million with a margin of three 1%.
When excluding $696000 of acquisition related expenses and 838000 of severance.
non-GAAP operating income was $4 million or five 1% of revenue up 30 basis points.
The full year had comparable results with a GAAP operating margin expanding 20 basis points, three 4% and the non-GAAP operating margin expanding 70 basis points to four 3%.
We recorded net income of $1 2 million or <unk> <unk> per diluted share in the quarter compared with 58 in the prior year.
non-GAAP diluted EPS again, excluding the acquisition related costs and severance was <unk> 14.
Compared with 25 in the year ago quarter.
Of note the effective tax rate was elevated in the quarter at 37, 5%.
Due to a number of non deductible items, we expect in the long term our tax rate to be between 30% and 35%.
For the full year of 2022 net income was $6 6 million or <unk> 44 per diluted share and on a non-GAAP basis was <unk> 56 per diluted share slightly exceeding the midpoint of our expectations.
Lastly, our net income margin was one 6% in the quarter and two 8% for the full year.
Adjusted EBITDA margin improved to six 2% in the fourth quarter.
Which was up 40 basis points from the year ago quarter and was five 3% for the full year up 70 basis points from the prior year.
Approximately 86% of our total head count in the fourth quarter was billable paired with 90% in the prior year period.
We continue to maintain a strong and flexible balance sheet that can be leveraged to accelerate our pace of growth in the future.
We generated cash from operations during the year of $11 9 million.
Cash and cash equivalents were $25 1 million at year end compared with $35 6 million at year end 2021.
Reflecting the cash used to acquire Alleviant.
Also at the end of the year, we had no outstanding balance on our revolving line of credit facility or any other long term debt.
We provided our initial top and bottom line guidance for fiscal 2023.
I wrote in a range of $300 million to $350 million includes a reduction of $35 million to $40 million.
From the prior year as a result of the intentional disengagement from the lowest margin business and a non strategic technology services segment.
Slightly offset by a full year revenue from our acquisition of <unk>, which only had one quarter of revenue in 2022, because the acquisition was completed at the end of the third quarter and.
And high single digit growth for the rest of the business.
We also provided guidance for our it solutions and services revenue.
Ranging from $245 million to $295 million for about 83% of our total revenue at the midpoint.
We expect 2023 GAAP diluted earnings per share to range from 34 to 46.
And non-GAAP diluted earnings per share to range from 56 to 68.
As also noted in today's earnings release, we are kicking off an ERP system implementation.
To enhance our core operating systems in order to create additional efficiencies capabilities and flexibility.
The total project cost is estimated at 8 million to $10 million and we are largely spread out over two year period with a completion date targeted around the end of 2024.
A significant portion of these costs will be expensed over the course of the project are GAAP EPS estimates for 2023 take this project into consideration that we plan to add back those costs as part of our non-GAAP EPS disclosures the.
The difference in our GAAP and non-GAAP EPS will be larger in 2023 as compared with prior years as we account for the amortization of intangible assets created by the acquisition of Alleviant.
And this ERP implementation.
Ultimately, we continue to expect our strategy to.
To drive improved margins and are on track to reach our adjusted EBITDA margin goal of a run rate of approximately 7% by the end of 2023.
Yeah.
This completes our prepared remarks, Paul could you. Please open the call for questions.
We will now be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You May press star two if you'd 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.
Thank you. Our first question is from Kevin Liu with K Liu <unk> Company. Please proceed with your question.
Hey, good morning, guys and very nice finish to 'twenty two here.
Okay.
Was just what are you seeing in general in terms of the pipeline and conversion rates. It seems like the commentary there.
Business activity was more positive coming out of the year.
And obviously your guidance on I'd solutions kind of implies mid teens growth.
At the midpoint, even with some of that coming from the acquisition of course, but.
In general it seems like a very positive outlook when a lot of other folks out there.
A little bit more conservative in terms of some of the growth aspirations for this year or so.
What have you guys seen in terms of overall improvements in the pipeline conversion rates that sort of stuff and what's kind of built into your guidance for this year.
Alright, well, Kevin we are.
Extremely encouraged I must say with the progress we're making on executing our strategy. Despite those macroeconomic headwinds and we acknowledge that they are there.
But we are looking at our pipeline there, we see a large number of opportunities.
We see win rates that are solid.
Renewables expansions continue at a high pace.
We actually even see throughput on the pipeline improving.
Where have you remember had that for some time during the pandemic.
And.
Of course with <unk>, we also expect to drive <unk>.
Sales synergies and deliver even greater value for our clients.
The thing that alleviate as adding to our mix trying to make our puzzle.
A more complete or almost complete so.
I think.
We have made that a really good decision.
And the acquisition of <unk>.
And that is the expectation there is that we will see that.
During the remainder of the year and an increasing pipeline.
Jonathan.
Comment on the on the guidance.
Yeah. Thanks Ali.
Hi, Kevin how are you.
The guidance itself, we've really we really feel good about the guidance.
Just to interpret right at the end there you had said you had talked about mid.
Mid teens.
The increase in revenue, including the acquisition and so when we think about.
Alleviant and $10 million run rate in sort of a normal natural increase our high level increase actually is the expectations for that business.
The rest of the business will increase we think at high single digits.
Around 8% at the midpoint of the guidance and so from our perspective feeling.
Sealing really good that thats about it.
In most markets Thats about <unk>, what the market is growing at this time and so feel really good about that.
Great appreciate that and just with respect to Europe , obviously, a nice sequential rebound there seem like utilization was better can you just talk about the overall environment has some of the labor issues you cited in the past few quarters abated here.
When rates started to improve on new projects just wondering how.
How positive you are continuing that.
Sequential improvement as we move into 'twenty three.
Mhm.
Yes, we have an excellent fourth quarter in Europe .
Our teams did a fantastic job in driving the revenue and the profits in the quarter. There are some headwinds going into 2023.
The government requires automatic indexation to compensation for our employees.
In Belgium and Luxembourg.
And that happens automatically in Belgium on January one.
Luxembourg, its February April and maybe even a third prime and 23.
So for the employees of our clients. So it means that it's at.
A sudden increase of our costs on January one in Belgium.
So means that our clients have the same increase of the cost and obviously have less.
Spending possibilities.
We are able to pass part of these costs onto the clients.
Through higher bill rates at the beginning of the year.
But it will take probably will take the first half of the year to pass along most of those costs.
The level of labor constraints is still there.
The.
The resources that are needed to flow client opportunities, our scanners are difficult to recruit.
We are.
Looking only looking but also hiring.
Fresh from school and training them through our CTG Academy to make them.
Make them bring them to the level that they can participate in client projects.
We also of course counts on our global delivery centers.
We now have more capacity and flexibility to add to this or to help solve this problem of labor constraints.
But all in all an excellent fourth quarter and we're hoping we're going to continue.
At the same pace.
That's great to hear and then just lastly for me I don't know if you can quantify the impact Alleviant had on your North America. It solutions gross margin in this quarter and maybe just speak qualitatively to how.
How much of the improvement there just from the acquisition versus also just the improving mix of solutions work.
On the organic side I mean, as we look forward to 'twenty three is it your expectation that you can kind of sustain North America margins.
North of 40% here.
John would you like to take that question.
Sure. Thanks Felipe.
Great question Kevin.
Was outstanding in the fourth quarter, we have not specifically quantified that.
Gross margin contribution, but we have said and indicated that their grosses.
Over 50%, that's really it's been a fantastic.
Addition to the CTG portfolio of companies and we just feel great about understanding their business and expanding it as we cross sell of the Ctg's clients, having said that we had a really really good quarter from gross.
Gross margin perspective throughout our North American organization as well.
Fantastic job by the teams.
Executing as well as they could drive margins to a very high level.
From that perspective, I would not expect us to continue.
Almost a 44% gross margin in North America, but certainly you mentioned, 40% I would have a very high expectation that we would be.
We have a high expectation that we would be in the high <unk> are pushing 40% pretty consistently as a gross margin in North America. So I think I think Q4 was a little higher than normal.
But we have expectations that it will be.
Hi, 30 to 40 ish going forward.
Okay, well that all sounds good congrats again on the results for the quarter and good luck here in 'twenty three.
Kevin.
Kevin.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue.
Our next question is from Marc Riddick with Sidoti. Please proceed with your question.
Hey, good morning.
Hey, Mark Good morning, Mike March.
So I was wondering if you could talk a little bit about the ERP coming upcoming and maybe what we should be thinking about from a timing perspective and sort of maybe the geographic slow perspective, maybe we should sort of be thinking about that.
We're going to be seen.
John do you want to comment on that sure.
Hey, Mark.
ERP implementation is going to be a global project. So this is a.
Worldwide consolidated all parts of CTG.
Improvement in all of our all of our core systems globally.
We've done an amazing amount of.
Planning up until this point in time, so much of the planning for the go forward in 'twenty three has been done in late 'twenty, one and all throughout 2022, and so we're ready to hit the ground.
Running here in 'twenty three we started the project and so all of the planning phase.
Up to this point is pretty much out of the way and you always do some planning as you get into it as you revise your course in your method, but most of that's behind US we are starting to implement now we do think that as a global company. It will take two years will take all of 'twenty three 'twenty four to sort of get to endgame on each individual piece of the implementation itself. So thank you.
ERP and core accounting systems think recruiting.
I think resource management and development.
With some ancillary type systems, and then think globally around a north American organization and a European organization, where we've got operations in a number of different countries as well. So I think it will be very consistent throughout 'twenty, three and 'twenty four.
But I do think it's a full two year project at this point in time.
Okay, Great. That's very helpful. And then I was wanted you to talk a little bit about the.
I really appreciate it.
Once released.
So the inclusion of the sort of what youre seeing in some of those industry verticals, maybe you can talk a little bit.
As far as some of the thoughts that you have as to how youre looking at those industry verticals and maybe what Youre seeing now and then sort of how that played into the setting up guidance.
Sure Mark.
Well.
Let me first by saying our.
The focus on digital transformation services and more specifically on software engineering is not.
Our focus on one or two industry focused on a number of verticals.
We said health.
Health care finance manufacturing government energy.
We know for instance that health care sector.
<unk> is under pressure.
Not a lot of financial.
Room for especially the provider.
Yes.
Sure.
Better shape.
But we also see that.
As an opportunity.
Because health care provider sat for a long time being very reluctant to look at offshore delivery centers.
We think.
This situation at all.
Probably change their attitudes and we will be able to capitalize on what we're doing with <unk> also in that sector, which as you know is very important to us.
The financial sector.
Focusing on digital transformation, even more on the insurance side.
And on the banking side.
But we see good opportunities there too.
Government in Europe is solid.
We have.
Presence both in National governments, and then in the European institutions.
We see solid.
Our contracts there we see good opportunities.
And our energy sector.
<unk> is growing we are investing also more.
In Seo Sem and solution architects that are focused on our energy sector, and we see that our pipeline in that area to grow.
So all in all.
Say a positive view.
We see our industry.
Okay, Great and then I wanted to circle back.
To make sure that I heard correctly and interpret this properly I think.
John you had a commentary as far as the tax rate being in the I think you said, 30% to 35% if I misheard that please correct me and then I was wondering if you could talk a little bit about that.
A function of sort of kind of where we are now with geographic footprint.
And and the like.
Yes, Mark I'm not sure in the first part of the question.
Specifically.
I just wanted to make sure I heard the attach rate commentary.
Okay.
Tax rate, 30%, 35% it has been a little bit higher in the last two quarters is there's been a number of <unk>.
Non deductible items that we've worked our way through but don't expect that to happen in the future I really do think it will be between 30 and 35% going forward.
From that perspective relative to the to the globally and the pieces of the business when you sort of look at it overall.
We expect good growth from our European organization. This year, they had a really really fantastic fourth quarter, great performance from the teams great focus expect good things from them throughout 2023, we do expect our North American.
Solution services segment to grow as well.
Well during the year and we've got Alleviant.
Working closely with that team and so we've included leaving at the acquisition. We did included in that bucket. So we think it will grow well.
But from a geographical standpoint, we had talked about.
Well from a segment standpoint that non strategic we will have we think a very significant decrease.
Rob.
$23 $35 million to $40 million is what we're estimating is part of our guidance most of that to North America. So I really expect at the end of the year that Europe will be over.
It kind of flipped from just under 50% to over 50% of the business going forward.
And then it'll be a friendly competition within the organization see who can grow the fastest.
Maintain that lead in the total revenue.
Excellent and then the last one for me a little bit housekeeping I, suppose where do we finish on Capex. This year and what are we expecting for 'twenty three.
Yes, let me just get that.
For you.
Capex was.
Yeah.
Here It is total capex.
<unk> was only $1 5 million for the year, which included.
Additions to the.
Capitalized software.
I would expect it to be a little bit higher in 2023, as we grow the business.
We do have some real opportunities from the great products that alleviant brings to the table to capitalize some cost there. So I think it'll be a little bit higher but they don't expect it to be more than say $2 million to $5 million.
In 2023.
Excellent. Thank you very much.
Thanks Mark.
Thanks Mark.
Thank you there are no further questions at this time I would like to turn the floor back over to management for any closing comments.
Thanks, Paul.
As demonstrated this past year.
We are making excellent progress executing our digital solutions transformation strategy and we expect that to continue in 2023.
As we complete the first phase of our transformation.
We look forward to reporting on our success throughout the coming year and sharing our improved operating results expectations for our second phase in the near term.
Thank you for participating in our teleconference today.
As always please feel free to reach out to us anytime.
We look forward to talking with all of you again after our first quarter of 2023 and results.
We hope you have a great day.
Paul you may now disconnect the call.
Yeah.
This concludes today's conference.
Connect your lines at this time, thank you for your participation.
Yeah.
<unk>.
Okay.
Okay.